CHICAGO -- Standard & Poor’s pushed Allen Park, Mich. deeper into junk territory when it lowered its rating on the Detroit suburb’s debt to B-minus from B on March 1.
The Detroit suburb is already under state-controlled emergency financial management.
City officials told Standard & Poor’s that bankruptcy is “not an immediate consideration.” But the ratings agency notes that the path to a bankruptcy for the city of 28,000 will become easier in late March when the state’s new law for distressed local governments takes effect. A Chapter 9 filing would still require the governor’s approval.
The city’s challenges are due in part to the issuance in 2009 of $31 million of debt for a failed film studio project. The city has been forced to repeatedly dip into its depleted general fund to pay debt service on the bonds as the project failed to generate expected revenue. Voters have twice rejected tax increases aimed specifically at paying off the debt.
“The city’s overall financial health remains extremely poor, in our view, given a persistent structural imbalance due to declining revenues without corresponding expenditure cuts,” the ratings agency said in the downgrade report. “Exacerbating this scenario is the city’s need to pay debt service on lease revenues from the general fund, due to insufficient lease revenues, which has further pressured general fund operations.”
For the first six months of the year, the city’s budget gap is estimated at $3.7 million -- $2 million of which comes from a debt-service payment on the film studio debt.
The most recent audit, released in December 2012, said the city’s challenges “raise substantial doubt about the city’s ability to continue as a going concern.”
Gov. Rick Snyder took over Allen Park in October 2012, and appointed Joyce Parker as EFM. Parker last month submitted a deficit elimination plan to the state. The plan includes a proposal to refinance the film-studio debt and sell the property where the studio is located. Other proposals include asking voters for tax increases, reducing public safety positions, reducing wages for all city employees, and insurance changes, according to Standard & Poor’s.
“Our view of the EFM’s plan is that it is comprehensive and ambitious, but we also believe that more time may be required before the city’s structural imbalance is closed, that city residents may be resistant to another property tax increase, and that some of the solutions are one-time in nature,” S&P said.
The plan for fiscal 2013 also defers the city’s $2.6 million annual pension payment.
Allen Park has an $140 million other post-employment benefits liability. Its pension liability totals just under $100 million, and the fund is 70% funded. Retiree benefit costs totaled just under 30% of governmental fund expenditures in 2012, and if the city had made its annual required contribution for both OPEBs and pensions, it would have eaten up 53% of total governmental fund expenditures, according to Standard & Poor’s.
The outlook is stable at the lower rating. “The stable outlook reflects our view that although the city’s credit quality is extremely weak, we do not expect it to worsen during the next year due to the state’s appointment of a temporary EFM,” analysts said. “We believe it will likely take many years for the city’s finances to substantially improve.”
More downgrades could come if the city cannot address its short-term cash issues -- it began delaying vendor payments in February -- or if the deficit elimination plan is not implemented.
A piece of taxable debt issued for the film studio with a 7.25% coupon and 2039 maturity was yielding 11.9% as of March 1, according to the Municipal Securities Rulemaking Board web site.