8.14.13

The Cost of Municipal Bankruptcy. Financial records from Detroit indicate that financial restructuring consulting services <!–more–> could cost Detroit and the state of Michigan as much as $1 billion. As of May, six consulting firms had been hired by the city for its turnaround estimated to cost up to $1.44 million a month. At that time, the city was paying more than $800,000 and the state paid the remainder of the tab. The records provide a rare perspective of the costs being picked up by the city and state, a breakdown city council members and other critics have argued has been hidden amid Detroit’s historic bankruptcy. Nevertheless, a spokesman for Emergency Manager Kevyn Orr’s office defended the spending, saying the hourly amounts were negotiated by the city as flat rates within job classifications to save money, noting, in addition, that the main consulting firm, Conway MacKenzie, has given the city a 25 percent discount off its bills. Conway MacKenzie’s contract allows it to bill up to $400,000 every two weeks for its work, which was first approved by Mayor Dave Bing and the Detroit City Council last January.

Fiscal Surroundings. Fitch Ratings yesterday downgraded Wayne County, Mich.’s general obligation bonds five notches to junk-bond status, citing the county’s rapidly deteriorating fiscal condition. Wayne County, of which Detroit is the seat, is the most populous county in Michigan and the 18th most-populous county in the U.S. In addition, Fitch warned of the potential for further negative action by placing the ratings on negative watch due to Wayne County’s need for additional cash flow as local governments in the state struggle with affordable market access in the wake of Detroit’s filing for municipal bankruptcy. Fitch lowered the county’s $196 million of limited tax GO bonds to BB-minus from BBB-plus in a five-notch downgrade that puts it three levels below investment grade. Another $210.6 million of building authority bonds issued by Wayne County Building Authority were lowered to BB-minus from BBB-plus and the county’s implied unlimited tax GO rating fell five notches to BB from A-minus. Fitch reported that contrary to its previous expectation, the unrestricted accumulated deficit grew in fiscal 2012 and is expected to deepen again in fiscal 2013 despite significant cuts. Fitch analysts remain concerned even deeper cuts planned for fiscal 2014 may fall short given other budgetary pressures: “The downgrade stems from the county’s considerably narrowed liquidity position, the deepening of the general fund accumulated deficit, and Fitch’s concern regarding the limited options for elimination of the negative position.” The downgrade came in the face of apprehensions as the county needs to issue $100 million of tax anticipation notes in the fall to cover day-to-day cash flow: “Inability to access the market in an economically-feasible manner, given recent challenges, experienced by other Michigan issuers, could negatively affect liquidity and would likely result in a downgrade.” (Wayne County’s limited tax GO bonds carry the county’s GO ad valorem tax pledge, subject to applicable charter, statutory, and constitutional limitations.) Wayne County expects a $30 million general fund net operating deficit for fiscal 2013. The recommended fiscal 2014 budget beginning Oct. 1 projects balanced operations, including a $16 million appropriation for deficit reduction. The county’s final audited results, however, have materially weakened from its original budget expectations in recent years, Fitch warned. Now Wayne County is considering requesting a new millage, which could generate up to $75 million annually, on the November ballot. Political support for the measure, however, is uncertain.

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