CHICAGO — Pontiac, Mich., became Fitch Ratings’ lowest-rated U.S. city Tuesday after the agency downgraded the city’s general obligation debt to CCC.
Like the automobiles that once carried its name, the city known for its General Motors manufacturing plants has fallen on hard times.
Fitch cut its ratings on $8 million of Pontiac GO debt and $29 million of tax-increment finance authority bonds to CCC from B, and dropped $5.8 million of water and sewer bonds to B-minus from B. The outlook has been revised to stable. A CCC rating is a warning default is possible.
Fitch is the only credit agency to rate Pontiac, a struggling Detroit suburb that is located in Oakland County. The city has been under state-mandated emergency financial management since early 2009.
In its downgrade reports, Fitch warns that the emergency financial management process does not seem to be working for Pontiac.
Michigan Gov. Rick Snyder announced plans last week to introduce a bill overhauling the emergency financial management law, the state’s primary tool for distressed units of government.
Hamtramck officials and other experts in fiscally stressed cities say the law may be inadequate to address severe financial stress and that bankruptcy needs to be an option. Current law prohibits a local unit of government from filing Chapter 9.
“Everybody is waiting to see what the new administration wants to do,” said Fred Leeb, a turnaround consultant who served as Pontiac’s first emergency financial manager starting in March 2009. He left in June 2010 amid a political dispute with the city’s mayor, and was replaced by current EFM Michael Stampfler.
Leeb — whose tenure featured a Fitch upgrade of the city’s bond rating — said he has been working with a handful of groups advising Snyder about the changes needed in the emergency financial management law.
“We’re trying to prepare for what the future holds,” Leeb said. “Everybody believes a lot of change will be necessary” to deal with growing fiscal stress among local governments, he added.
Like Hamtramck officials, Leeb believes bankruptcy should be an option, chiefly because it’s the only way to break existing labor contracts when unions are unwilling to renegotiate them.
“The bankruptcy lever is something that’s necessary,” Leeb said. “The more real it is, the more people will negotiate carefully and in a more cooperative manner.”
It’s unlikely that Snyder’s bill will allow bankruptcy. Likely changes include allowing for earlier intervention in stressed school districts, clarifying — or increasing — the authority of state-appointed EFMs, and selecting managers with previous turnaround experience. A governor’s spokesman did not return calls by press time.
Fitch said the downgrades were due to Pontiac’s very weak financial position, which has failed to improve under the two EFMs and the limited chance the city’s finances will improve in the near future. Analysts also said they have had a difficult time getting financial information from Pontiac, which may lead to a withdrawal of ratings in the future.
“Fitch anticipated that the presence of the EFM would provide a degree of stability to the city, but turnover in this position and an apparent lack of progress in stabilizing financial operations has led to concerns regarding management’s ability to take the needed actions,” analyst Ann Flynn wrote in the report. “These concerns are compounded by a very weak revenue picture and questions about both management’s and Fitch’s ability to obtain consistently accurate and timely financial information.”
The city has been shifting money from its water and sewer funds to its general fund to cover expenses.
Mayor Leon Jukowski was poised to hold a news conference Wednesday announcing that the police union had rejected an offer by Oakland County to take over its services.