Muni Credit News October 24, 2014

Joseph Krist

Municipal Credit Consultant


U.S. Bankruptcy Judge Stephen Rhodes announced at this week’s Monday hearing that he expects to announce his decision as to the feasibility of The City of Detroit’s Chapter 9 during the first week in November. This will occur essentially at the same time as Michigan voters render their verdict on whether or not to re-elect Governor Rick Snyder to his post. Snyder currently leads his opponent by an average of 3.5% points in recent polls but this gap is within the margin of error. While the overall Michigan economy is the primary issue, the vote is also seen  as a referendum on the Governor’s appointment o an Emergency Manager in Detroit and the resulting Chapter 9 plan.

Investors must remember that confirmation is a determination of feasibility o the City’s Plan of Adjustment by the bankruptcy judge. Other issues such as fairness and equity have essentially been “settled away” by the City and its major creditors. The judge again urged remaining individual objectors to the plan to settle their issues by the time of his decision. The process of settlement pursued by the City effectively allowed the bankruptcy process to skirt those fairness and equity issues so his decision – especially if it affirms the Plan feasibility – will not provide clear guidance going forward to other municipalities evaluating the potential usefulness of bankruptcy as a “tool” in managing their long term liability issues especially as they pertain to pensions.

In the meantime, private economic efforts to redevelop the City core economically proceed. Mike Illitch, the owner of the Detroit Tigers and Red Wings participated in an official groundbreaking ceremony at the site of the new arena for the Red Wings designed to be the centerpiece of a large  redevelopment scheme. The construction of this facility will facilitate the demolition of the Joe Louis Arena and allow the transfer to and development by major city creditors that is a key component to the achievement of claims settlements in the current bankruptcy proceedings.



The Treasury Department of Puerto Rico reported a mixed bag of results for revenues through the end of September. Total General Fund (GF) revenues for the three months ending September 30 were $1.774 billion. This was $75 million more than was collected during the first quarter of FY 2014, but was short of estimates by some $36.4 million. September collections were $46 million below the Treasury’s original estimate of $755 million at $709 million. The monthly shortfall was the second consecutive monthly miss in actual versus estimated collections.

Many major categories actually increased such as income and sales taxes but collections overall were another victim of congressional inaction. Revenues connected with rum excise taxes were negatively impacted as Congress failed to pass extender legislation which had the effect of reducing the tax take rebated to the Commonwealth from $13.25 to $10.50 per gallon. While this can be addressed retroactively by Congress, it is not required and the Commonwealth is counting on those revenues for budget balance and cash flow. Motor vehicle excise taxes continued to decline for the third straight month but at a slower pace.

A more recent piece of bad news was the decision of a lower court in Puerto Rico which upheld a claim for $230 million of tax refunds from the Commonwealth of Puerto Rico by Doral Financial Corp. If upheld after all appeals are exhausted, the award could be amortized through a $45 million per year payout over five years.  Puerto Rico however, enacted its Fiscal Sustainability Act (Act 66-2014), which provides for all adverse judgments, other than those resulting from eminent domain or court-approved paymentplans, to be budgeted annually after consideration of  the financial condition of the Commonwealth. It also provides that in no event shall such appropriation exceed $3 million for a given year. Puerto Rico apparently expects  Act 66-2014 to applyin the event of a final adverse judgment in the Doral case, but one would expect this tobe contested by Doral. Puerto Rico intends to appeal the case if necessary to the Puerto Rico Court of Appeals and the Puerto Rico Supreme Court.


The political morass at the state level continues to influence the efforts of the City of Chicago to address its looming pension cost crunch. Under current state law, the city will have to pay another $550 million into those funds in 2016. The initial budget proposal does not reflect that in the 2015 budget property tax levy. Instead, Mayor Emanuel hopes that he can get state legislators to restructure those funds after the upcoming legislative elections in a way that reduces that payment. The City cannot make changes in its employee pension plans without legislative action at the state level.

Away from the pension issue, the budget proposal calls for a variety of non-property tax increases totaling $62 million. These increases include a 2% rise in parking taxes at city garages, ( $10 million). Valet parking services also would have to pay that tax on their full fees to customers( $2 million). The mayor also proposes eliminating an exemption in the cable TV amusement tax, typically passed on to consumers by $12 million.

Businesses and individuals who lease office equipment and vehicles would see a 1% increase in the personal property tax on those transactions, bringing the total tax to 9 % ( $17 million). The mayor also would start applying that tax to on-the-go car rental services, like Zipcar, to raise $1 million. The plan also calls for the city to raise an extra $17 million by collecting sales taxes now evaded through rebate deals with distant suburbs — a measure expected to bring in more money from fuel purchases by airlines — and another $4.4 million by eliminating an amusement tax rebate charged on luxury skyboxes at city stadiums.

These increase are on top of previously enacted increases of $1.40 a month of the city’s 911 tax on cell phones and land lines while also raising the tax on prepaid cell phones by 2%. Those fees went fully into effect at the start of this month and are expected to increase city revenue by about $50 million by the end of the next year. These increases free up an equal amount of money to cover the city’s required additional payments into city workers’ and laborers’ pension funds next year, under a restructuring of those funds approved earlier this year by the General Assembly. In each of the four following years, the city will have to come up with another $50 million to pay into those two funds.

These increases would occur in addition to doubling sewer and water fees, increasing vehicle sticker fees, increasing weekday and higher-end garage taxes, raising hotel taxes, boosting cigarette taxes and setting up ticket-issuing speed cameras near schools and parks. And yet the police and fire pension issue still drags on the City’s credit! But is that truly a surprise? While the political outlook for the Mayor has improved in light of the illness of an expected strong opponent, the reality is that meaningful reform is likely to occur later rather than sooner. We would not be surprised to see an additional downgrade of the City prior to the enactment of meaningful reform which is likely not to occur until after the 2015 local elections in Chicago.

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