Bond Defaults Stalk Michigan’s Wealthiest as Home Prices CrashDarrell Preston and Jeff Green
Michigan’s auto-industry collapse, which led to the worst home-price drop among U.S. states, has forced some of its wealthiest and fastest-growing communities to seek state aid to prevent municipal bond defaults.
Detroit, slammed by the state’s 74 percent housing-price decline, warned of bankruptcy when it borrowed in March to cover part of a $280 million deficit. Now, nearby communities in Livingston County such as Hartland Township and Howell Township may need legislation to help make bond payments.
Falling property values and job losses stripped away the ability of communities to repay debt after auto-industry bankruptcies and the worst recession since the 1930s left the state with 13.6 percent unemployment, the second-highest rate in the U.S. after Nevada’s.
“We’re trying to stem the bleeding,” said Representative Bill Rogers, a Livingston County Republican and cosponsor of some of the legislation. “There’s no way they could pay these with no income coming in.”
As Detroit struggled to close its deficit, the city’s school system and three cities, including Pontiac, have had emergency financial managers appointed by Governor Jennifer Granholm since 2008. Taxable property in the state fell 9.2 percent to $385 billion this year, said Caleb Buhs, spokesman for the Michigan treasury department. The lower values are reducing property tax revenue and forcing municipalities to cut spending.
Local governments have sold about $1.5 billion of bonds backed by special tax assessments, said Eric Scorsone, senior economist with the Michigan Senate Fiscal Agency, a nonpartisan legislative group. The debt is typically backed by property tax assessments for sewers, water lines and other infrastructure for new housing developments.
Legislative staff members and local finance officials have created a committee to try to figure out how much of the debt may face default because of the declining assessments, Scorsone said. The first meeting is set for this week.
“It’s developed into a problem in newly developed areas,” said Bill Anderson, legislative liaison for the Lansing-based Michigan Townships Association. “Everybody is trying to figure out how to get through this.”
The automotive industry’s downward spiral that led to bankruptcy reorganizations of General Motors Co. and Chrysler Group LLC cost the state 230,000 jobs last year, the largest decline in 53 years of published data, according to a report by University of Michigan economists. The state has lost 837,600 jobs since employment peaked in June 2000, according to data compiled by Bloomberg.
Livingston County, marked by rolling hills and lakes in Michigan’s Lower Peninsula west of Detroit, is dominated by farming and auto-related manufacturing, according to the county’s Economic Development Council. It was Michigan’s fastest-growing county from 2000 to 2009, when the population expanded 16.7 percent, according to U.S. Census data. Livingston was also one the wealthiest, with a median household income of $72,090, about 48 percent higher than the state average of $48,606, the data show.
Livingston’s townships sold assessment-backed bonds during the decade it was the state’s fastest-growing county, said Dianne Hardy, the treasurer, in a telephone interview.
‘It Just Stopped’
“As soon as they would fill one development they’d start another, and then one day it just stopped,” Hardy said. “Now the ground is not worth what it cost to put the infrastructure in.”
The number of property-sale related paperwork jobs handled by Hardy’s office has fallen to 200 to 300 per month from 600 to 700 before the recession, she said.
A record $14.6 billion of obligations defaulted in 2008 and 2009 in the $2.8 trillion U.S. municipal bond market, according to Distressed Debt Securities, a newsletter in Miami Lakes, Florida. About $1 billion more has defaulted through May.
Michigan’s housing market didn’t experience the same rise in housing prices as the rest of the U.S., said Alex Villacorta, senior statistician with Truckee, California-based Clear Capital, which tracks real-estate values. Michigan’s house prices fell 74 percent from their peak in late 2005 to early 2009, the most for any state, followed by Nevada and Arizona, which had seen some of the largest increases.
“Michigan has been the hardest-hit state,” Villacorta said. The median price of a house fell to $72,000 in January from a peak of $140,000 in 2005, according to Clear Capital.
Livingston County housing prices have plunged 49 percent from their peak in 2005, according to Clear Capital. Some developers that owned lots haven’t paid assessments and few new residents have moved in to generate property tax revenue, Hardy said.
The county said in its 2010 budget that it might have to bail out townships. Some Hartland Township property tax payments “will ultimately be uncollectable,” according to the report.
“Concern must be raised regarding the ability of a number of townships to meet annual debt service obligations,” county officials wrote in a budget document released Nov. 5. “Livingston county may very well find itself in a position where it must fund the debt in order to preserve its credit rating.”
Hartland Township, with about 15,000 residents 50 miles (80 kilometers) northwest of Detroit, came up $951,000 short in collecting special assessments last year, representing 40 percent of what it is owed on debt service, according to a April 2009 report by Standard & Poor’s.
Livingston County’s median home price fell to $136,000 earlier this year from a peak of $240,000 in the second quarter of 2005, according to Clear Capital.
“The township’s very weak sewer system operations could have a negative effect on general fund operations if it does not collect a large portion of special assessment delinquencies,” S&P said in its report.
Trading in some of the communities’ debt hasn’t fully reflected the weakening tax base.
The price of a Hartland Township special assessment water bond sold in 2001 and maturing in 2021 fell to about $100 on June 21, from $101.32 in January, according to Bloomberg data. The bond, insured by Financial Guaranty Insurance Co., yielded 4.59 percent, which compares to a yield of 3.25 percent for top-rated municipal debt with 11 years to maturity, according to Municipal Market Advisors data.
FGIC, which is no longer rated, was ordered last year by the New York Insurance Department to stop paying claims because of its statutory deficit, according a company financial statement. The company is attempting to restore its capital, according to a financial statement.
Livingston County may find out how much it will collect from unpaid taxes in coming months when property with delinquent taxes will be auctioned by the state, said James Wickman, Hartland township’s manager.
While the county advances the municipality money for delinquent property levies, the township must repay the sum, as well as its bond obligations, if property sales don’t generate enough to cover the loan.
“We still have to make the bond payments,” said Wickman. “It may be an issue that we don’t have enough money to make that payment.”
Hartland Township will use loans from reserves to cover bond payments if taxes don’t generate enough revenue to cover debt service, he said.
In Howell Township, also in Livingston County, “stalled development projects have also negatively affected” property tax collections, Fitch Ratings said in a 2009 report.
Howell Township Treasurer Larry Hammond didn’t return a telephone call seeking comment.
County officials began meeting with state lawmakers last year, which led to the package of bills that would help townships with debt, said Rogers. The legislation would create ways to help the municipalities pay debt service, such as creating a revolving loan fund for districts that haven’t been able to collect property taxes to repay debt holders.
“The legislation would put counties in a position to help municipalities,” said Wickman.
The legislation has been assigned to a House committee. Rogers said he’d like to see the four bills pass this year.
Cities are also pushing legislation that would let them refinance bonds to extend their maturity and spread out debt-service payments over five to 10 years, said Summer Minnick, director of state affairs for the Ann Arbor-based Michigan Municipal League. At least a dozen cities are supporting the measure, she said.
The legislation might help Standish, a city of 1,954 in northern Michigan, where a state-prison closure last year cost the community 300 jobs. The facility accounted for 45 percent of water and sewer revenue.
“The rest of the ratepayers will have to pick up the tab, forcing them to raise rates by 40 percent,” said Representative Jeff Mayes, a Bay City Democrat, who sponsored the measure. “In the long run it may cost more but it will help them avoid big rate increases.”
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