01.28.14

The Indelicate Challenge to the Art of Balancing. In a sign of one way the municipal bankruptcy in the Motor City could affect state and local governments across the country, Fitch rating agency analyst Amy Laskey yesterday wrote: “Fitch recognizes the delicate political situation surrounding the Detroit bankruptcy,” but warned that the new efforts by Michigan Governor Rick Snyder  which she describes as bailing out pensioners first – could mean that “actions and rhetoric that suggest bondholder rights are not an important consideration will continue to damage market perception of the state and its local governments.” Specifying that Gov. Snyder’s bipartisan, bicameral plan to pledge $350 million over the next two decades towards Detroit’s retirees, especially its lowest income retirees, would create the perception of elevating claims of pensioners over the Motor City’s bondholders, Ms. Laskey wrote: “Action that suggests pensions’ claim on limited resources should be given priority to that of bondholders could establish a troubling precedent, at least in Michigan and perhaps beyond, given the paucity of significant municipal bankruptcy filings historically and the resulting focus on the Detroit case.” “Moreover,” she added, “the Governor’s comment that state funds will not bail out bondholders or Wall Street but are going to Michiganders suggests an us-versus-them orientation to debt repayment that undermines willingness to pay public debt in Michigan.” Ms. Laskey further noted that the Governor’s proposed plan comes on top of his previous his support for Detroit emergency manager Kevyn Orr’s decision to treat the Motor City’s unlimited- and limited-tax general obligation bonds as unsecured: “Fitch has previously stated its concern for the lack of priority for GO debt…Fitch recognizes the delicate political situation surrounding the Detroit bankruptcy. As the state and city continue down what could be a long road, actions and rhetoric that suggest bondholder rights are not an important consideration will continue to damage market perception of the state and its local governments.” Governor Snyder’s office, in an email response the Bond Buyer, wrote: “It’s about helping reduce and mitigate pension cuts and the impact on retirees, especially those most vulnerable. A settlement will help resolve the bankruptcy process faster, help ensure the city stays on its path to revitalization and save millions in taxpayer dollars – and would be in the best interest of Detroiters, Michiganders, and others across the country. We are confident that if there can be a mediated resolution — which Gov. Snyder has been and will continue to work hard to achieve — that it will be part of a plan that can be approved by the bankruptcy court. Michigan is proud of and committed to its return to strong fiscal management with structurally sound and truly balanced budgets that also address long-term liabilities and strategically invest in priorities to build a strong foundation for the future.” Richard Ciccarone, the president and chief executive officer of Merritt Research Services LLC, provided a more comprehensive analysis for the Bond Buyer: “It’s a major commitment from the state and from the foundations, and from my perspective that’s good for the bondholders, because the more money that you can provide to close the gap for the pensions, the easier it is politically to give more to bondholders…I think you can take what appears to be a lemon and turn it into lemonade if everybody comes from the standpoint that more has to be done to take care of all the creditors.” Whatever the outside parties perceive, the final decision will be up to U.S. Bankruptcy Judge Steven Rhodes.

Reassessing. Detroit Mayor Mike Duggan yesterday announced Detroit will be reducing residential property assessments 5-20% this year in an effort to address years of complaints about the city’s tax system. The property tax accounted for 13.3% of Detroit’s revenues in 2012, even though the city has the highest property taxes among big cities in the U.S. Perhaps, more than any other city, Detroit’s property tax collections were assaulted by the recession, with assessed valuations declining nearly 46% from 2007 to 2012. But the Detroit property tax revenue problem is also adversely affected by state limitations, as well as a city property tax administration system described as “riddled with errors and waste, and overseen by a pair of double-dipping officials who work just two days a week,” and a singular inability to address delinquencies. The Detroit News last year reported that 47% of property owners were delinquent on their property taxes and fees in 2012—with some delinquency “so pervasive that 77 blocks had only one owner who paid taxes last year.” The News also found yet another property tax problem: high taxes and low values. In the 2011 50-state property tax comparison study, Detroit ranked first among the 50 largest cities in taxes – and last among property values. Detroit taxes on a $150,000 house were $4,885, twice the national average of $1,983. The city’s average house price, $16,800, was nearly 10 times lower than the next lowest, Mesa, Ariz. In his announcement, Mayor Duggan said the changes would reduce annual tax revenues to the Motor City $10-$15 million this year, but provide relief to thousands of homeowners who have been overtaxed for years: ““The assessments in this town have been a source of great anger to a lot of Detroiters, and in the worst case, they have forced people from their homes…I don’t believe many of those assessments have been fair.” Emergency Manager Orr’s office stated the slight reduction in revenue would have “no impact” on the city’s bankruptcy. Last year, roughly half of Detroit’s homeowners were current on their taxes, while 1 in 10 homes fell to foreclosure in the past two years because of unpaid taxes. As announced by the Mayor, the reduction only applies to residential properties. Mayor Duggan described yesterday’s action as only a first step, adding that a reassessment of all city properties is ongoing for the next three years: “That was a fair process to do now, leading up to what will be the next three years (of) going parcel by parcel.” The Motor City’s property values were hard hit in the wake of the Great recession, but, unlike much of the country, continued to decline in the wake of the recession, falling 2.5–to 13% last year. Mayor Duggan noted the changes residents will see will vary. Most residents who live in areas such as Palmer Woods, Sherwood Forest, Indian Village and East English Village are likely to see cuts around 5%, because their neighborhoods have been stable, but homes on the west side where the recovery has been much slower could realize as much as a 20% cut.

Setting a Precedent. Detroit yesterday agreed to allow a Deborah Ryan, whose daughter, a police officer, was killed in 2009 in a murder-suicide by her husband, to proceed with a lawsuit against the Detroit Police Department, provided U.S. Bankruptcy Judge Steven Rhodes permits the case to proceed: with the filing by the Motor City for chapter 9 bankruptcy last year, all 500+ lawsuits against the city were automatically put on hold. Mrs. Ryan’s lawsuit alleges the Detroit Police Department failed to protect her daughter from an unstable husband―who also was a police officer in the Detroit homicide unit. The suit alleges the department went out of its way to protect the husband, when it could have taken steps to prevent the shooting. Mrs. Ryan’s attorney reports the suit also challenges what he believes is a pervasive problem in the Detroit Police Department: officers abusing women, but the department taking no corrective steps. According to the lawsuit, the department canceled an alert that was issued to law enforcement about the husband’s mental status and concerns that he was a threat to her daughter. The police department, however, found the husband to be competent and canceled the alert, so he was never picked up by the authorities, according to the suit. About 30 hours after the alert was called off, the husband shot and killed his wife and himself in a parking lot. In court documents, the city has denied any wrongdoing.

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