The Difficult Road to Fiscal Sustainability

eBlog

August 20, 2015

The Hard Road to Recovery in Detroit could be paved by state legislative deal-making over the legislature’s efforts to agree on a highway infrastructure financing plan by freeing up state legislation designed to help Detroit collect city income taxes from residents who commute to the suburbs. Mayor Mike Duggan testified yesterday in Lansing in support of legislation to require employers to withhold city income taxes from paychecks of Detroit residents. Businesses with fewer than 10 employees and less than $500,000 in wages would be exempt. An alternative would authorize the state to use audit and penalty procedures when it takes over Detroit’s income tax collection in 2016. The Motor City’s income taxes constitute the city’s largest single source, contributing about 21 percent of total revenue in 2012. The legislature is back in session for a three-day session, with House members debating a still-emerging bill to provide some $600 million a year in additional fuel and vehicles taxes and set aside $600 million in general funds for deteriorating roads and bridges — a compromise between legislation approved by the House and Senate in recent months (indicating that state legislatures—unlike the federal legislature—are actually able to function). In May, voters defeated a sales tax increase that would have triggered more money for roads, education, and municipalities. If the House votes this week, the bills would go to the GOP-led Senate and then Gov. Rick Snyder for his signature. Each penny increase in the state’s current 19 cents per gallon in gas and diesel taxes would raise about $50 million more annually—the un-wooden nickel increase under consideration would generate roughly $300 million. No longer letting registration fees drop in the three years after the purchase of a new car — a component of the failed ballot proposal — and increasing truck fees would pump $100 million more a year into road upkeep within three fiscal years.

To Market, To Market to Finance a Recovery…Detroit’s post-municipal bankruptcy debut in the U.S. municipal bond market yesterday resulted in costly yields for $245 million of bonds, perhaps indicating investors are still leery about prospects for Detroit’s longer term road to fiscal sustainability. Even though the 4.5% rate was lower than anticipated on the city’s bonds maturing in 2029, the rate was significantly higher than for other cities and counties. The city also marketed nearly $110.3 million of taxable bonds maturing in 2022, which were priced at par with a 4.60 percent coupon – a 300-basis-point spread over comparable U.S. Treasuries, according to the deal’s pricing scale. John Naglick, Detroit’s finance director, said the pricing resulted in an overall interest rate of 4.44 percent, which is lower than the 5.75 percent rate assumed in the city’s court-approved plan of debt adjustment—achieving $2.2 million in average annual interest cost savings. Clearly one’s perspective matters—as the sale of the city’s debt was “substantially” oversubscribed, thereby permitting the city to reduce the interest it had initially priced—even though Detroit will have to pay approximately 100 basis points over similarly situated cities—a price some dubbed a “bankruptcy premium.” S&P had given the Motor City’s bonds an investment-grade A rating, in no small part due to the state’s statutory lien on the city’s income tax revenues pledged to pay off the debt, even as it retained Detroit’s underlying credit rating at a B, deep in the junk category, citing Detroit’s “very weak” economy, management, and budgetary flexibility, as well as its previous bond defaults. In the sale, the city including a warning to potential investors: “[T]here can be no assurance the city of Detroit will not file another bankruptcy petition in the future.” Proceeds from the initial $275 million of bonds, which were privately placed with Barclays Capital, were earmarked for retiring a prior $120 million Barclays loan to the city, to pay certain creditor claims from the bankruptcy and to finance city improvements. Detroit has said it was able to reduce the size of the upcoming borrowing by $30 million to $245 million after the city’s bankruptcy consultants reduced their fees.

Gambling on Property Taxes. The Atlantic City Metropolitan area continues to lead the nation in foreclosure activity, with a rate four times the national average, according to RealtyTrac—a serious issue for a city whose property tax base has declined by nearly two-thirds since 2010. According to the new report, however, one in every 258 housing units had a foreclosure filing in July, the worst showing of any statistical area with a population of 200,000 or more. Nationally, new foreclosure starts are down to their lowest level since 2005, even though overall foreclosure activity was up 7 percent from the previous month and 14 percent from last July; Atlantic County starts were up almost 72 percent from last July, even as RealtyTrac noted that “Atlantic City is in for a tougher and longer haul back to a healthy housing market,” adding that it was impossible to predict when the market might return to normal in Atlantic County, noting: “We believe some of the repossessions are still tied to the last crisis, while starts are more likely tied to recent economic problems,” adding that Stockton and Phoenix were both leading the nation’s foreclosure rates about five years ago, but that their respective markets have turned around in both regions—and that they now have foreclosure rates lower than the national average. It is not just Atlantic City, moreover: New Jersey’s statewide foreclosure starts are up 129 percent over last July, with the state posting the third-highest overall foreclosure rate for states, behind just Florida and Maryland.

Arriba! Víctor Suárez Meléndez, Chief of Staff for Puerto Rico Governor Alejandro García Padilla, yesterday said that the exchange of Government Development Bank notes is the most likely approach to Puerto Rico’s liquidity crunch. The issue is apprehension that the government could run out of operating funds prior to the end of its fiscal year: it needs an additional $400 million to $500 million beyond the funds it currently has on hand or anticipates—adding that without additional fiscal measures, Puerto Rico anticipated running out of money in November. Mr. Suárez Meléndez said Puerto Rico is exploring other options besides the notes exchange—options that would not require restructuring of debt. He added that the Government Development Bank’s net liquidity had risen in recent weeks: as of May 31st the GDB had a net liquidity of $778 million.

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