Detroit's financial mismanagement has devolved into a political morass, but the latest move by Michigan Gov. Rick Snyder is a ray of hope for its municipal bond investors.
The governor's plan to install a temporary emergency manager to try to fix the mess is good news to those with real skin in the game.
“For bondholders, this stabilizes the situation and also averts the possibility of an immediate bankruptcy filing,” said Eric Friedland, head of municipal credit research at Schroder Investment Management North America Inc.
For muni market wonks, the appointment of an emergency manager is the last and best option for a city with $15 billion worth of long-term pension liabilities and a swelling $327 million deficit.
“It's not great for a city government to have its power taken away,” Mr. Friedland said. “But they have had chances to fix it.”
Each state has its own laws about using emergency managers.
In Michigan, the ability of the state to appoint emergency managers for struggling local governments dates to 1988. A half-dozen cities operate under some form of oversight from Lansing, the state capital.
Although there are plenty of opponents, it is worth noting that many holders of muni debt are praising the state for stepping in where other states simply have let matters escalate to bankruptcy and default.
Just ask the citizens of places such as San Bernardino, Calif., or Jefferson Country, Ala., where the states didn't step in, if they think some sort of intervention could have helped.
“Certainly no other state has been challenged in the way Michigan has, and remarkably, Michigan has had no municipal bankruptcies, which is a credit to the way the state is handling matters,” said Richard Ciccarone, chief research officer at McDonnell Investment Management LLC.
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