Republican Governor Rick Snyder, who appointed Dillon, will decide within two weeks on naming an emergency manager for Detroit (9845MF), the state’s most populous city. It would join municipalities including Flint, Pontiac and Allen Park that have surrendered control to appointed officials. No Michigan (STOMI1) localities have sought protection under Chapter 9 of the U.S. bankruptcy code.
“What can be done in a Chapter 9 can be done outside of a Chapter 9, so why would you go there if you didn’t have to?” Dillon said in an interview before speaking at a conference in Fort Lauderdale, Florida, sponsored by the Bond Buyer newspaper. “There’s not a clear path of predictability.”
Jefferson County, Alabama, filed the largest U.S. municipal bankruptcy in November 2011, involving $3.14 billion of bonds. Stockton, San Bernardino and Mammoth Lakes in California sought court protection last year.
Detroit has amassed more than $14 billion in debt and long- term liabilities for pensions and post-employment benefits for municipal workers, according to a report ordered by Snyder. Dillon said he has been told the city would become the biggest municipality to declare bankruptcy.
The interest rate on some city debt fell after Dillon’s comments. A taxable Detroit general-obligation bond maturing in 2025 traded at 3:01 p.m. to yield 9.52 percent, according to data compiled by Bloomberg. That’s down from 9.76 percent at 12:03 p.m. The securities traded the most since Jan. 29.
A Chapter 9 filing isn’t the best option for Allen Park either, Dillon said. The Detroit suburb of 28,000 sold $31 million of bonds about three years ago for a movie studio project that left the city with partially leased buildings that aren’t meeting costs. Joyce Parker was appointed emergency manager in October.
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“We have what we think is a plan for Allen Park, which we would rather pursue before we would consider a Chapter 9,” Dillon said. “It’s not impossible, but I don’t see a need for it right now.”
At the end of next month, a law signed in December by Snyder, 54, will give emergency managers more authority, including renewed power to cancel union contracts. Voters in November repealed a similar law that critics labeled as undemocratic, anti-union and too protective of bondholders at the expense of government services.
An emergency manager would probably need to oversee Detroit for less than two years, Dillon said during a presentation. A state appointee would be met “without a lot of consternation” from the city, he said.
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