Detroit Recovery Plan Threatens Muni-Market Underpinnings

[Purveyor]

By Brian Chappatta and Martin Z. Braun - Jun 17, 2013
Emergency Manager Kevyn Orr’s plan to suspend payments on $2 billion of Detroit’s debt threatens a basic tenet of the $3.7 trillion municipal market: that states and cities will raise taxes as high as needed to avoid default.

Orr, appointed by Republican Governor Rick Snyder to oversee Michigan’s largest city, proposed a deal last week that included skipping a $39.7 million payment on pension-obligation debt. The city is also set to default on unsecured unlimited-tax and limited-tax general-obligation bonds as it grapples with $17 billion in liabilities to avoid a record bankruptcy.

By calling into question the safety of any security backed by a government’s general obligation to pay what it owes, Orr, 55, imperils similar debt across Michigan, the eighth-most-populous state. As local governments strive to rebound from the longest recession since the 1930s, they may confront higher borrowing costs.

“It definitely sets a precedent, and there’s definitely going to be a penalty going forward for the city and the state,” said Dan Solender, director of munis at Lord Abbett & Co. in Jersey City, New Jersey. The company oversees $19.5 billion of local debt.

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http://www.bloomberg.com/news/2013-06-17/detroit-recovery-plan-threatens-muni-market-underpinnings.html

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