The recent press release by Fitch Ratings (“Michigan Statutory Lien Bill Would Raise Recoveries”, Oct. 21, 2015) highlights the virtues of the proposed Michigan bill to extend an express statutory lien to Unlimited Tax General Obligation (“UTGO”) debt of Michigan municipalities.
Fitch correctly notes:
- Failure to enact this legislation will be a credit negative for Michigan municipal issuers.
- Recoveries on UTGO debt in bankruptcy will be more clearly defined under the proposed legislation.
- A statutory lien does not guarantee payment of UTGO debt during the pendency of a bankruptcy case - - although as a practical matter, municipal debtors maintained such payments throughout the bankruptcy cases in both Detroit and Stockton, Calif.
It should also be pointed out, however, that the purpose of the proposed legislation is to clarify the intent of existing Michigan law, not radically change it for the benefit of bondholders. Importantly, the proposed legislation does not guarantee that ultimate UTGO bond recoveries will be higher than recoveries on other claims, and does not pit bondholders against employees.
Under existing Michigan law:
- Voter approved taxes are assessed for the sole purpose of paying UTGO debt service.
- Such taxes are required to be segregated from the general fund and are not to be used for any purpose other than payment of UTGO debt.
The proposed Michigan bill reinforces these existing principles of Michigan law by extending an express statutory lien on the taxes to the UTGO bonds.
While having the benefit of such a statutory lien for UTGO bonds in the Detroit case would have avoided much litigation and shortened the case, the main driver behind the settlement of UTGO claims by the bond insurers was not the absence of an express statutory lien – it was the fact that evidence raised serious doubts about the collectability of the UTGO tax levy. And not even a statutory lien could have changed that stark fact.
Kenneth R. Epstein is a Managing Director in the Restructuring and Remediation Group of MBIA Services Corporation. Lawrence A. Larose is a partner in Chadbourne & Parke’s Bankruptcy and Financial Restructuring practice and heads the Firm’s municipal restructuring group. The views expressed in this article are the authors’ own and do not represent the views of MBIA or Chadbourne & Parke.