Municipal Bankruptcy & Governance in Transition

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September 25, 2014
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Bankruptcies, Double Standards, & Bailouts. The U.S. Treasury Inspector General yesterday released a Treasury special inspector general report finding that top executives at General Motors and Ally Financial, corporations which each—unlike host city Detroit―received double bailouts (both cash― GM received $49.5 billion from U.S. taxpayers; Chrysler received $10.5 billion; Detroit received $0. Moreover, both private corporations were able to transfer their respective pension obligations to the U.S. Pension Benefit Guaranty Corporation) from the federal government in the wake of the Great Recession. In contrast, the unique and unprecedented efforts by Michigan Governor Rick Snyder, bipartisan Michigan legislative leaders, foundations, and federal Judge Gerald Rosen combined in the case of Detroit to create an unprecedented “grand bargain” to partially offset a significant reduction in Detroit’s pension obligations—all of which will continue to be borne not by the PBGC in Washington, but rather by the taxpayers in Detroit and Michigan, and by the city’s retirees. In its special report, the Inspector General reported that the automobile executives were paid excessively even as U.S., Michigan, and Detroit taxpayers lost money. The report criticizes the Treasury Department for loosening its own restrictions on executive pay for G.M. and Ally year after year. These limits had been imposed on the companies in exchange for the federal bailout funds they received in the wake of the financial crisis from the Troubled Asset Relief Program, or TARP, that was started by President George W. Bush and continued by President Obama. The U.S. Treasury, for example, last year signed off on at least $1 million in pay for each of the top 25 employees at both G.M. and Ally, and approved $3 million in pay raises for nine G.M. employees, according to the report. The department also allowed the tripling of the number of G.M. and Ally financial employees who received cash salaries exceeding $500,000 from 2009 to 2013. No employee of the State of Michigan or City of Detroit receives comparable compensation. The U.S. Treasury Department holds a 13.8 percent stake in Ally Financial; the Treasury sold the last of its G.M. shares in December. The special inspector general’s office reported that U.S. taxpayers had lost $11.2 billion on G.M.’s rescue, as well as $1.8 billion on the sale of some Ally Financial common stock. U.S. taxpayers have lost $0 on Detroit’s non-rescue. The report found that the Treasury Department had recovered almost $18.1 billion on the Ally investment, almost $900 million more than the original $17.2 billion investment, but noted that taxpayers are not only entitled to the original investment that the Treasury Department made in these companies, but also to whatever dividends and interest had accrued over the years. The office said G.M., which emerged from bankruptcy in 2009, and Ally Financial had not repaid the bailout money in full because the Treasury Department had to sell some of its shares in the companies on the open market at a loss.

Essential Municipal Services. Hillary Flynn of the Bond Buyer this morning writes of the challenges for municipalities in raising capital—both critical issues for Detroit and Chicago, noting that municipal bond investors have “flocked” to purchase offerings “because the bonds’ association with the two fiscally troubled cities boosted their yields, while their ratings remained higher than the cities’ general obligation bonds.” She wrote, however, that both municipalities have had to offer higher returns to attract investors for a reason, quoting Dan Heckman of U.S. Bank: “‘The problem with these issuers are that they are financially challenged especially in those locations…They are in an area of the country that is economically challenged and will remain so for the time being, even though [the cities] are making great strides.” She notes that the $1.8 billion Detroit Water and Sewer deal last month and the $293.4 million Chicago Wastewater issuance this month were oversubscribed—leading Paul Mansour, managing director and head of municipal credit research at Conning, to describe to her the strategy of buying bonds sold by an essential service issuer linked to an economically troubled area in an interview: “The theme of our [investment strategy] is to look for solid essential service revenue bonds in areas that are a little distressed to get a little bit of yield,” noting his group had been trying to purchase the Chicago Water bonds, but that it had been unsuccessful due to the high demand for the credits. But he added that the bonds “provide a little extra bonus for the investor” in terms of yield, terming them “the best credit” in Chicago: “It’s a fundamentally improving credit, and offers enough insulation from the city of Chicago to offer enough value for the rating,” adding, “Right now our general investment strategy is looking for credit with high capital and low human resource costs; this fits the bill. The percent of expenditures that go to personnel is relatively low versus other credits, and revenues fairly stable.” Ms. Flynn writes: “The investment in these credits from essential services issuers associated with fiscally challenged cities seems to be paying off, as spreads of bonds from the three issuances to Municipal Market Data’s triple-A curve are tightening across the board.”

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