CHICAGO — The emergency manager of struggling Pontiac, Mich., last week unveiled a package of tax increases and spending cuts that he said is the only option the city has to avoid going broke by next spring or sooner.
The Detroit suburb has suffered financially for years amid falling property values and declining state aid, its two chief revenue sources. Its unemployment rate reached 26% last October, one of the highest in the nation, and 31% of its 66,000 residents live below the poverty line.
In March 2009, Michigan placed it under emergency financial management.
Fitch Ratings, the only credit agency that rates Pontiac, dropped its general obligation rating to CCC in January, making it Fitch’s lowest-rated U.S. city. The rating signals that default could be on the horizon, said Fitch analyst Jim Mann.
“They are in a very difficult financial position right now, and a default on bonds is a very real possibility,” Mann said. “They have such limited revenue-raising flexibility and they have expenditure pressures.”
The city has $7.5 million of Pontiac General Building Authority limited-tax GO bonds outstanding. In 2006 it issued $21.5 million of fiscal stabilization GOs that at the time carried a AAA rating from Standard & Poor’s based on an insurance policy from CIFG, which has since been downgraded.
The city floated $28.1 million of tax-increment finance district bonds in 2002. The city will be forced to dip into its general fund to cover the debt service if the district does not generate enough revenue in the future.
The current emergency manager, Michael Stampfler, last week presented the $15 million package of taxes and cuts to offset a record $12.5 million structural deficit looming in 2012. The package relies on a steep property tax increase — $400 for the owner of a $100,000 home — to fund the city’s pension and health care payments and a tax appeal refund due to General Motors Corp.
Stampfler warned that without the new money and reductions in spending, the general fund could be depleted by next April or sooner. It is unclear how the city would raise the taxes, as it is already at its millage limit. Stampfler did not return calls for comment.
Officials have publicly considered bankruptcy, but the state has denied it permission to file. No municipality in Michigan has been allowed to file for Chapter 9.
In a July 22 letter to Stampfler, the state encouraged him to take a number of steps, including reducing police and fire staffing — which would mean renegotiating recently inked contracts — and cutting retiree health care costs.
“No one knows better than you do the financial duress the city faces,” deputy state treasurer Roger Fraser wrote. “We believe that aggressive steps to reduce costs must be taken now and that you have the capacity to see this through.”