Washington — One of the three main credit rating agencies calls Gov. Rick Snyder’s proposal to use $350 million to defray Detroit municipal pension losses “troubling” and could damage the state’s image with investors.
Fitch Ratings said in a report Monday that it “believes that the Michigan governor’s recent proposal to contribute $350 million towards Detroit’s unfunded pension liabilities demonstrates continued weak support for bondholder security and repayment stemming from Detroit’s bankruptcy. In Fitch’s opinion, 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.”
Snyder said last week his administration is considering whether to borrow $350 million to pump into Detroit’s pension funds or set aside $17.5 million in annual payments for the next 20 years from the state’s tobacco lawsuit settlement fund.
“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,” Fitch said.
Snyder’s office on Monday defended the “settlement” offer as a way to speed Michigan’s largest city out of bankruptcy court.
“The $350 million settlement offer is not about bailouts or helping Wall Street and banks, it’s about helping reduce and mitigate pension cuts and the impact on retirees, especially those most vulnerable,” Snyder spokeswoman Sara Wurfel said in an email. “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.”
Detroit filed for a record-setting municipal bankruptcy in July, citing $18.5 billion in long-term debt and other obligations, after the state appointed an emergency manager to run the cash-strapped city. Emergency Manager Kevyn Orr has said he’ll propose a debt-cutting plan of adjustment by mid-February, but it is not clear how much pension recipients stand to lose under a restructuring of the city’s debts.
The governor has pitched the state aid as a settlement with retirees and labor unions over all legal claims against the state. The money would be pooled with another $330 million that nine local and national foundations have pledged to bolster pension funds and shield the Detroit Institute of Arts’ city-owned collection from a bankruptcy asset sale to satisfy creditors.
Last month, U.S. Bankruptcy Judge Steven Rhodes ruled Detroit was eligible for Chapter 9 bankruptcy protection and said Michigan’s state constitutional protections for pensions didn’t apply. Rhodes said pension recipients could see their pensions reduced in bankruptcy, and that the payments were simply a contractual obligation like any other that could be set aside in bankruptcy.
Wall Street has raised concerns about Orr’s decision to treat Detroit’s small amount of unlimited tax general obligation debt as a general unsecured obligation.
In contrast, other cities that filed for bankruptcy paid those bills in full. In the 2011 bankruptcy of Central Falls, R.I., the state moved to protect general obligation bondholders by applying a statutory lien to all such local government debt in the state.
“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,” Fitch said.