LANSING – Governor Rick Snyder’s proposal to help protect Detroit pension holders by using $350 million in state funds over 20 years was criticized Monday by a top Wall Street rating agency as not showing enough protection towards bondholders and creating an “us versus them” attitude in terms of repaying debt.
The short assessment by Fitch Ratings also said the company worried that actions taken by the state and Snyder regarding the Detroit bankruptcy did not keep to the state’s traditional conservative management practices.
Fitch said in its comments that the state’s actions, related to numerous aspects of the Detroit bankruptcy have been contrary to Fitch’s prior expectations of the benefits to local government bondholders that such a program provides.”
A spokesperson for Snyder in effect agreed in part with the company’s analysis, but said the proposal is critical for those Detroit pension holders most in need.
“The $350M settlement offer is not about bailouts or helping Wall Street and banks, it’s about helping reduce and mitigate pension cuts and the impact on retirees, especially those most vulnerable,? said press spokesman Sara Wurfel. ?A settlement will help resolve the bankruptcy process faster, help ensure the city stays on its path to revitalization and save millions in taxpayer dollars – and would be in best interest of Detroiters, Michiganders and others across the country.?
She said the state would continue to show strong and conservative fiscal management practices.
Amy Laskey, managing director for Fitch, wrote in the opinion that the agency, “recognizes the delicate political situation surrounding the Detroit bankruptcy and that there are still many decisions to be made before the proceedings come to a close.”
But “rhetoric” that could be seen as suggesting that “bondholder rights are not an important consideration” will “continue to damage market perception of the state and its local governments,” Laskey wrote.
Fitch is one of three main Wall Street rating agencies, the others being Moody’s Investors Services, and Standard & Poor’s. The other two agencies have made no public comment on Snyder’s proposal at this point.
Snyder last week proposed using $350 million over 20 years, possibly tapping the state’s tobacco settlement funds – which the state began receiving in 1999 – to help finance the proposal. The proposal would help shore up funds for public pensions, as well as help protect city-owned art at the Detroit Institute of Arts from sale.
It is by no means certain that Snyder’s proposal will win legislative muster let alone be approved by the federal bankruptcy court. While House Speaker Jase Bolger (R-Marshall) and Senate Majority Leader Randy Richardville (R-Monroe) have expressed support for the proposal, it has already run into a tepid legislative reception. It has also been blasted by some individuals and groups as a “bailout” for the city, a term Snyder has staunchly rejected.
There have been other criticisms of the proposal from other companies involved in public bond offerings. But because Fitch is one the three companies that sets the credit rating for virtually all public and private entities on the planet that want to issue bond debt, the comments released Monday are arguably the most significant to date, and could make Snyder’s task to win approval of the proposal far more difficult.
In the Fitch opinion, Laskey said Snyder’s proposal shows “continued weak support for bondholder support.”
Saying that pensioners’ claims on limited resources should be given priority, Laskey said, “Could establish a troubling precedent, at least in Michigan and perhaps beyond, given the paucity of significant municipal bankruptcy filings historically.
In one of her strongest comments, Laskey charged that, “Moreover, the governor’s comment that state funds will not bail out bondholders or Wall Street but are going to Michiganders suggests an ‘us versus them’ orientation to debt repayment that undermines willingness to pay public debt in Michigan.”
She was particularly critical of the proposal coming as it did after Detroit Emergency Manager Kevyn Orr’s decision to hold some of the city’s unlimited tax general obligation debt as unsecured debt, putting it far down the rank of debt that could be paid. Fitch had already blasted that move, pointing out that it the exact opposite of how Rhode Island handed general obligation debt in dealing with the bankruptcy of Central Falls when that city declared bankruptcy.
And she took note that in outlining the proposal, Snyder said the funds raised would not go to bondholders.
Wurfel said Snyder was confident there would be a mediated resolution and that it would be part of the plan approved by the bankruptcy court.
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