Monday, January 27, 2014

Fitch Rating Blasts Michigan Legislative Proposal to Assist Pensions

Bond rating agency blasts Snyder's $350-million Detroit pension rescue plan

7:45 PM, January 27, 2014

By John Gallagher and Mark Stryker
Detroit Free Press Staff Writers

A Wall Street bond-rating agency has blasted Gov. Rick Snyder’s $350-million rescue plan for Detroit pensioners as unfair to bondholders and likely to set a troubling precedent.

Amy Laskey, managing director of Fitch Ratings, wrote in a statement released Monday that any “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, given the paucity of significant municipal bankruptcy filings historically and the resulting focus on the Detroit case.”

She added, “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.”

Those and similar comments from Wall Street analysts and investors show that Snyder’s plan faces a likely court challenge before it may win final approval from U.S. Bankruptcy Judge Steven Rhodes, if in fact it gets that far.

Snyder announced last week that he hoped to use $350 million of state money, possibly by borrowing against its annual tobacco settlement funds, to raise the money to shore up Detroit’s underfunded pension plans. Legislative leaders in both houses expressed provisional support for the plan, but its passage is not assured.

The state money, if approved, would be added to $330 million pledged by Detroit and national foundations for the rescue fund. The Detroit Institute of Arts is expected to come up with a pledge soon as part of a grand bargain that would help pensioners, prevent DIA art from being sold to pay city debt, and spin off the museum from city ownership into a separate nonprofit. Pension fund concessions are also expected as part of a deal.

DIA leaders are trying to find a way to contribute enough to satisfy all of the parties involved — the city, foundations, Snyder — without sacrificing their ability to raise hundreds of millions of dollars in critical endowment dollars and annual operating funds over the next decade.

“Negotiations are continuing and making good progress,” DIA Chief Operating Officer Annmarie Erickson said today. “We’re looking at our lists very closely and trying to develop a fund-raising plan.”

Sources close to the negotiations have told the Free Press that the city considers $100 million over 20 years a reasonable target for the DIA. Museum leaders have rejected $100 million as not feasible but have not said publicly what they believe to be a more realistic figure.

The grand bargain wrapping up all these issues eventually would have to be approved by Rhodes in bankruptcy court before it would be final. But many questions remain. Among them: Will the city’s municipal unions agree in exchange for the cash to give up further claims even though promised pension payments mostly likely would still be cut somewhat?

The opinions of Laskey and other Wall Street analysts could signal that bond-rating agencies will take a harder line with Michigan cities and counties that issue bonds to pay for all types of civic projects, such as road building, sewer projects and the like. If Detroit’s creditors receive what they consider to be unfair treatment in the bankruptcy case, that could make the debt of other municipalities suspect in the eyes of rating agencies. And lower bond ratings would drive up borrowing costs for municipalities.

But not all Wall Streeters viewed Snyder’s rescue plan as a negative. Some viewed it as a step toward a final settlement.

“It’s a major commitment from the state and from the foundations, and from my perspective that’s good for the bondholders, because the more money that you can provide to close the gap for the pensions, the easier it is politically to give more to bondholders,” Richard Ciccarone, president and CEO of Merritt Research Services, told the Bond Buyer, a Wall Street trade publication.

“I think you can take what appears to be a lemon and turn it into lemonade if everybody comes from the standpoint that more has to be done to take care of all the creditors.”

But others agreed with Laskey that Snyder’s proposal seemed to treat bondholders unfairly.

Lisa Washburn, managing director at Municipal Market Advisors, told the Bond Buyer, “Gov. Snyder’s comments could be interpreted to suggest that the state views pension claims as a higher priority among unsecured creditors, effectively subordinating others, including general obligation bonds.” She added, “We’ll need to see how this impacts city-creditor negotiations.”

In her statement, Laskey noted that Michigan has long been recognized for conservative management of its own finances and its proactive involvement with distressed local governments. But the state’s actions related to “numerous aspects” of the Detroit bankruptcy have disappointed the ratings agency.

“Fitch recognizes the delicate political situation surrounding the Detroit bankruptcy,” Laskey wrote. But she warned of the consequences of bailing out pensioners first. “As the state and city continue down what could be a long road,” she wrote, “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.”

Meanwhile Michigan Attorney General Bill Schuette filed a motion with the U.S. 6th Circuit Court Monday requesting that the court expedite its decision on whether the state’s constitution protects pensions while the city is in bankruptcy.

At issue is whether the city is duty-bound to comply with Michigan’s constitutional protection of vested pensions while in federal bankruptcy, or can it set aside those obligations.

Schuette’s office says it’s the former, arguing that “even in bankruptcy, the city must obey” state law, and that the “bankruptcy court should have recognized filing bankruptcy does not relieve the city’s obligation to follow Michigan’s Constitution.”

“The city can no more discharge these debts than it can suspend civil liberties, seize the property of former employees, or cancel elections – all fundamental violations of Michigan law,” Deputy Solicitor General B. Eric Restuccia wrote in the filing.

And it’s not about the bankruptcy filing, he stressed, but about protecting pensions from unwarranted cuts, as dictated by the Michigan constitution.

Contact John Gallagher: 313-222-5173 or Follow him on Twitter @jgallagherfreep. Staff writer Tresa Baldas contributed to this report.

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