Motor City Meltdown: Detroit Gets An Emergency Manager

On Friday, the governor of Michigan, Rick Snyder, announced that the State of Michigan would seek to take over the financial management of the City of Detroit within two weeks. The governor would appoint an emergency manager, selected by a three-member state panel called the Emergency Loan Board – also appointed by the governor. The city has options to appeal this decision to a court.

Why is this happening?

The state would like to prevent what could be the largest US municipal bankruptcy to date. The city has a deficit over $300 million and has over $14 billion in long-term liabilities such as pension and health-care costs, much of it built up during the headier days of the auto industry.

What is the benefit?

The benefit is that the municipal bond market in general would view this in very favorable terms. An active approach from the state is viewed as a more proactive way to stabilize a city which has problems that have been very long in the making. Most of the credit problems in the bond market in the last two years have happened in states like California that take a more detached approach to local governments within the state. The bond market’s view of state-overseen management is that, longer term, it should improve the financial position of the city.

What is Detroit’s position?

As with any decision of this magnitude, there are political overtones. You have a Republican governor appointing a manager to a city that is overwhelmingly Democratic. However, Mayor Dave Bing has said he will weigh the options. The city itself has begun to make strides in the past five years and has recently seen a pickup in families moving into the inner city. But Detroit’s situation is more a case of large legacy costs just dragging on a community that is struggling to rebound.

What is Cumberland Advisors’ position?

Cumberland has not owned any bonds issued by the City of Detroit in a number of years. We have owned the water and sewer bonds whose service area is really all of southeast Michigan. We will be watching developments accordingly, but we think that a proactive approach is in the best interests of Detroit. It should stabilize finances and help the city with liquidity issues. It also serves to contain headline risk for smaller southeast Michigan towns in a state that has, overall, weathered the Great Recession better than many other states.

BY John Mousseau