CHICAGO — Sylvan Township, Mich., will likely need to impose a steep property-tax hike on its residents to cover payments on bonds that were issued to support a now-failed special assessment district.

It is a growing problem in Michigan, where a general obligation pledge backs much of the borrowing done for many special assessment districts that have failed or are not generating projected revenue streams since the collapse of the real estate market.

State fiscal officials and credit analysts say they are paying closer attention to bonds issued for special assessment districts, though it is often difficult to distinguish revenue sources that back GO debt.

“Special assessment districts have become a larger issue in the last few years because a lot of those districts are not paying as expected,” said Elizabeth Foos, an analyst with Moody’s Investors Service who covers municipalities in Michigan.

An economist from the Michigan Senate Fiscal Agency said it is nearly impossible to track how much special assessment debt is at risk for default across the state, but estimates up to 10% of municipalities that issued the bonds face possible default. Officials estimate issuers have sold roughly $1 billion of special assessment debt.

In 2001, then triple-A rated Washtenaw County issued $12.5 million of bonds and loaned the proceeds to Sylvan to finance construction of a water and sewer system to support a new residential and ­commercial development on farmland near Interstate 94.

The debt was expected to be paid by a special assessment generated by the district’s revenues, but features the double-A rated county’s GO limited-tax pledge.

The county refinanced $9.775 million of outstanding bonds in April 2010, delaying principal payments until 2014, pushing out the final maturity to 2026 from 2022, and making them noncallable.

Sylvan is under contract with Washtenaw to make debt payments, and typically collected payments from the developer of the failed district. But since last year, the township has been in litigation with the developer, who sued Sylvan over breach of contract related to the new water and sewer system.

Last September, a circuit court judge ordered the township to take over paying special assessments — which could mean up to $3.4 million in future payments — and to pay an additional $1.2 million in back payments to the county. The judge also ordered the town to pay $2.4 million to the developers.

The next bond payment is due in April.

“We can’t pay those judgements and make the required [bond payments to Washtenaw County], so something has to give,” said Sylvan attorney Peter Flintoft from Keusch, Flintoft & Conlin PC. “The township doesn’t have the money on hand, and it pledged its full faith and credit to the county, so that falls on the taxpayers.”

The township has appealed the circuit court’s ruling and the Michigan Court of Appeals is expected to hear oral arguments in February. 

Flintoft estimated that property taxes would need to increase about 20% over the next 15 years to make the debt payments. Residents have been “grim but polite” about the possibility so far, he said.

“The township recognizes that it can’t file for bankruptcy because Michigan law doesn’t allow that, and we have discussed with county officials the possibility of emergency management, but that’s unlikely,” Flintoft added.

The 2010 refunding bonds carry ratings of Aa1 from Moody’s based on Washtenaw County’s GO pledge.

The state treasurer’s office, which keeps a watch list of fiscally stressed ­municipalities, gave Sylvan Township a rating of six in 2009. Communities with ratings from five to seven are put on fiscal watch, while those with ratings from eight to 10 are considered under stress.

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