March 6, 2015
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Stepping into the Fiscal Future. The Michigan Senate Committee on Banking and Financial Institutions has cleared the way—on a bipartisan, unanimous vote, to report legislation to the full body to provide the Motor City a statutory lien to city income tax revenue—creating a key revenue stream to back Detroit’s financial recovery bonds, even as Detroit’s compensation commission is gearing up to determine if the city’s elected officials should receive a pay increase: Detroit’s seven-member Elected Officials Compensation Commission expects to meet several times in the coming weeks—with a 45-day time frame to determine the compensation of Detroit Mayor Mike Duggan, City Council members, City Clerk Janice Winfrey, and members of the Board of Police Commissioners. While Mayor Mike Duggan has made clear he is not seeking a raise, Council President Brenda Jones yesterday testified at a hearing before the commission making the case for higher pay—telling the Mayor’s staff that the compensation issue is “very sensitive: I’m extremely sensitive to it. I don’t have any problem speaking up for myself. None whatsoever.” Council President Jones testified to the compensation commission about her lengthy work days, which she said frequently exceed 12 hours, and she testified that the council has not been awarded a raise since 2001―and took a voluntary 10 percent pay reduction in 2010. In addition, Council President Jones informed the panel that her role and responsibilities have changed as a result of the city’s historic bankruptcy. The pay raise issue comes in the wake of former Emergency Manager Kevyn Orr’s action last year to institute a 5 percent pay increase last year for Mayor Duggan, council members, and other non-union city workers, as well as to implement a five-year agreement with a coalition of city unions that outlined restorations for 3,500 workers who had their wages frozen in 2010 and later reduced by 10 percent. Council members had been making $73,181 and the council president was paid $76,911. With the increase, the totals were $76,840 and $80,757 for Council President Jones. For their part, Commission members—as they seek to understand the revised state role vis-à-vis Detroit under the terms of the city’s federally approved plan of debt adjustment over the next decade, also have sought information from Detroit’s Law Department on the impact of the municipal bankruptcy and whether their decision on raises is subject to the approval of the state-mandated Financial Review Commission. The compensation commission, which meets in odd-numbered years, has a 45-day window in which to act on the requests.
Opening the Door to Investing in the Future. Meanwhile, in the chillier northlands of Lansing, the Michigan Senate Committee on Banking and Financial Institutions voted 7-0 to report and send legislation, SB 160, intended to facilitate Detroit’s first reentrance into the public debt markets since its exit from municipal bankruptcy. Or, as one committee member, State Sen. Darwin Booher (R-Evart) who represents Benzie, Crawford, Kalkaska, Lake, Leelanau, Manistee, Mason, Missaukee, Ogemaw, Osceola, Roscommon, Wexford counties, said in an email to the irrepressible Caitlin Devitt of the Bond Buyer: “I sponsored SB 160, because I believe this is common sense legislation and we should be encouraging ways to save the taxpayers money…Even though I am from a small town in northern Michigan, I recognize how important the recovery of Detroit is to the entire state of Michigan.” The bill is limited only to Michigan cities with a population of more than 600,000―thereby restricting the benefits to a club of one: Detroit. As reported, the bill would give a statutory lien to city income tax revenue backing Detroit’s financial recovery bonds. That revenue source reflects that Detroit, which has one of the broadest tax bases of any city in the U.S., has the income tax as its largest single source, contributing about 21 percent of total revenue—a key source for Michigan municipalities, where state law prohibits cities from increasing revenues by adding a sales tax or raising residential property tax rates more than inflation. It is, as a result of the unprecedented so-called grand bargain, a more healthy revenue source, because the state, as part of its increased partnership in working with the city on its municipal bankruptcy plan of debt adjustment, agreed to changes in state law to address non-collection: a Detroit city-commissioned study by McKinsey and Company reported three years ago that an estimated $6.6 million of municipal income taxes on commuters who work in Detroit, $21.8 million in corporate taxes, and $155 million of income taxes on residents were not collected in 2009—or nearly 50 percent of the taxes owed from people living in or working in the city. The report also determined that 54 percent of city residents who worked outside the city did not pay; in Michigan their employers are not required to withhold city taxes—resulting in a shortfall of an estimated $142.3 million. As reported, however, the legislation would essentially apply only to a $275 million municipal bond that the Motor City privately placed with Barclays last December on its final day in bankruptcy; it marks the only time the city has tapped its income tax revenue to secure bonds. The bonds, now in a variable-rate mode, are to be resold on the public market in a fixed-rate mode within 150 days of the December placement date, unless Barclays grants an extension. Supporters believe SB 160 will boost investor confidence in the bonds with a statutory lien that is expected to make the bond revenue fully protected in the event of another bankruptcy or default by Detroit—it also marks the first time the city has gone to the public markets since its formal exit from chapter 9 municipal bankruptcy. Fiscal analyst Elizabeth Pratt with the Michigan Senate Fiscal Agency said in a fiscal note that the city could see debt-service savings of $2 million to $3 million a year with the lien―estimates derived from the Motor City’s own figures. The revenue would enjoy the lien and be held in a trust for the benefit of the bondholders regardless of whether the city directly collects the revenue, a third party collects it, or anyone else, according to the legislation.