bonds

Steve Carmody / Michigan Radio

The Kalamazoo City Commission will consider selling bonds to help cover part of its retiree health care costs tonight. 

City officials are considering a proposal to sell nearly $91 million in bonds to cover part the city’s legacy health care costs.    

Steve Carmody/Michigan Radio

The judge’s decision to let the city of Detroit pursue Chapter Nine bankruptcy protection could have an effect on the municipal bond market.

Municipal bonds have long been viewed as one of the safest investments out there. But bond holders may be among the biggest losers in Detroit’s bankruptcy.

Detroit taxpayers foot big bill for closed schools

Oct 27, 2013
Flickr user/Dave-a-roni (Dark Spot Photography)

Detroit property owners face a quarter century of payments for construction and renovation of school buildings that no longer operate.

The Detroit Free Press says that 110 buildings covered by $2.1 billion in bond issues in 1994 and 2009 are either empty or demolished.

A few days ago, Michigan Radio’s Sarah Cwiek reported a story worth thinking about. The market for municipal bonds has nosedived since Detroit announced its intention to file for bankruptcy in July.

Now, if you would like a clear and concise explanation of how the bond market works … good luck with that. But essentially, communities sell bonds to raise money, bonds they pay off gradually with interest over time. They are a traditional and time-honored way of raising money for civic improvements.

There’s also been an understanding, at least since the Great Depression, that money owed to bond holders -- especially the holders of general obligation bonds -- was sacrosanct. No matter how hard things were, the bond holders had to be paid. Well, that’s not happening in Detroit, which, as all the world knows, has filed for bankruptcy.

Emergency Manager Kevyn Orr isn’t honoring Detroit’s general obligation bonds. And that has investors across the state spooked. Battle Creek and Genesee County have pulled back from plans to sell new bonds. So has affluent Oakland County. In fact, the value of all the municipal bonds sold in the state last month was the lowest in ten years. Something is clearly going on.

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This week in Michigan politics, Jack Lessenberry and Christina Shockley discuss Governor Rick Snyder's agreement to answer questions about the Detroit bankruptcy filing to union lawyers, how the bankruptcy has affected borrowing abilities in other Michigan cities and a new investment program to impact social programs.

It looks like Michigan municipalities are finding the bond market a tough go after Detroit’s historic bankruptcy filing.

Michigan cities and school districts sold just $71.5 million worth of municipal bonds in August.

That’s the lowest amount of monthly bond issues for the state since 2003. And it’s a sign that Detroit’s bankruptcy is hurting municipalities’ ability to borrow money.

Oakland County is going ahead with a planned bond sale next week.

And according to county officials, they won’t be penalized for Detroit’s recent bankruptcy filing.

Oakland County has the highest bond rating possible—AAA. And officials say that’s allowed them to sell bonds at a reasonable interest rate, despite Detroit’s recent bankruptcy.

From the Detroit Free Press:

Steven Depolo / Creative Commons

It’s a question many in local governments across the state have been asking themselves lately.

There are a couple ways Detroit’s bankruptcy could have a bad influence on other local governments.

The simple way: not so good national media attention

The simplest way is all that bad press the nation’s biggest municipal bankruptcy will bring. But Detroit’s finances have been screwed up for decades. That’s not news. Economists that track indicators in West Michigan say it won’t help, but they do not expect this to be a big factor.

The more important way Detroit’s bankruptcy could affect small governments is much more complicated.

The complicated way: “unprecedented” threats to municipal bonds

First, you’ve got to understand these bonds are really important to local governments.