CHICAGO — Newly passed Michigan legislation to raise money for Detroit's pensions marks a "lost opportunity" for the city's bondholders and reflects ongoing tensions between bond and pension recoveries in the bankrupt city, Moody's Investors Service said in a report Friday.
The operational reforms and increased state oversight that are part of the legislation, however, may strengthen the city's operations over the long term, which would positive for future bondholders, Moody's said.
"From the bondholder side, it's a lost opportunity," said Moody's analyst Henrietta Chang in an interview Friday. "It's not that this grand bargain, or these nine bills, are taking any money away from bondholders, but the state is providing money to one particular non-bondholder creditor class," she said. "The other provisions, including operational oversight and monetary oversight, do bode well for the longer-term credit quality of the city."
The Michigan Legislature approved the nine-bill package amid high-profile support from Gov. Rick Snyder, legislative leaders and city officials. In a series of press conferences last week, Snyder and others touted the bills as key to Detroit's plan to exit bankruptcy and put it on a path toward long term recovery.
Among other things, the bills authorize a $195 million lump sum payment from the state as part of the so-called "grand bargain" that altogether features $816 million of public and private funds for Detroit's pension funds. In exchange, the Detroit Institute of Arts, which is contributing $100 million, will be allowed to become an independent charitable trust protected from the city's bankruptcy and any future fiscal problems.
The grand bargain restricts the money to pensioners and no other creditors. That was the only way so much private money could be brought into the bargain, supporters say.
"While the legality of directing new state funds to a single creditor group remains a question, the state's clear intent is to prioritize pension claims over other liabilities," Moody's analyst Genevieve Nolan wrote in the report. "By giving priority to unfunded pension claims, the state is highlighting the ongoing tension between recovery for current bondholders and recovery for other city creditors," Nolan wrote. "This tension is likely to continue throughout bankruptcy, and may extend to operational costs as the city faces significant, ongoing expenditure pressures."
The city's plan to spend $1.9 billion on reducing blight, for example, could mean competition for bond payments, the ratings firm said.
A provision in the legislation that calls for the city to make all debt service payments in full and on time after its bankruptcy would benefit investors, Moody's said. The city stopped making nearly all of its debt payments last June.
The bills also limits future employer retirement benefit contributions, which will mean more operating flexibility, Nolan said.
"The operational reforms are likely to benefit the city over the longer term, potentially strengthening the city's overall credit quality once it emerges from bankruptcy with a fair and feasible plan," Nolan wrote. "Stronger oversight of a city's operations, for example, is a credit positive, particularly for future bondholders. More conservative and rigid fiscal management practices could help mitigate ongoing stress, putting the city on better footing to pay its future obligations on time and in full."
