CHICAGO — Detroit, Flint, Pontiac and other urban areas in Michigan have their share of problems, but failing special-assessment debt is not one of them.
That’s a problem tied to the exurbs and bedroom communities located around Detroit and other older cities in southeast Michigan, according to a new report by Michigan State University to be released tomorrow.
Much of Michigan escaped the worst of the fallout from the housing collapse because it did not participate in the boom that swept the rest of the country. But some of those counties that did enjoy a boom are now facing problems paying off debt that was issued to finance infrastructure for new residential or commercial developments that have failed since the collapse of the real estate market.
Most affected are Livingston County — where nearly half of the townships have outstanding special assessment debt — Washtenaw County, Clinton County, Traverse County, and parts of Oakland and Genesee counties, the report said.
“There is a lot of stress coming in from new and different places than your traditional problematic cities,” said Eric Scorsone, one of the authors of “A Review of Municipal Bond Issues in Michigan,” and a MSU professor who focuses on local debt and fiscal stress.
“It’s true of a lot of states, especially in the north, where the suburbs have kind of gotten in over their heads,” he said. “It’s maybe a problem that is not as severe as inner cities, but it’s coming out of nowhere. There are the chronic problems of the inner cities and then this new source of stress related to the housing bubble.”
The problem is growing in Michigan, where a general obligation pledge backs much of the borrowing done for many special assessment districts.
Many stressed issuers are crafting plans to help make payments over the next year or two.
But after that it’s unclear — and the risk of default could continue to rise, peaking in two to five years, the report warned.
During the Great Depression, local government bond-default rates peaked eight years after the market crash, Scorsone noted. Following that timeline, and due to inherent lags built into the property tax system, default rates on special assessment debt issued before the housing collapse would peak in 2015.
The report comes as fiscal stress and predictions about increased risk of default have grabbed the national spotlight. Scorsone and others say one of the biggest problems is finding accurate information on the amount and type of debt issued, and what revenue sources back it.
“We’re trying to get objective, fact-based information in Michigan to inform the debate and avoid the hyperbole,” Scorsone said. “We’re trying to provide some good information for people to assess without causing undue panic. It’s a national issue, and Michigan unfortunately is a bellwether.”
The report’s authors developed a new model using debt as a key indicator to measure a local government’s level of fiscal stress. The model is designed to complement the Michigan treasurer’s current government-stress model, which includes only one debt measure.
Local governments have issued $175 million of direct special assessment debt, but indirect special assessment debt — where a county, for example, issued on behalf of a township — amounts to double or even triple that. Overall, there is about $1 billion of outstanding water, sewer, and road debt, the report estimates.
The team examined 728 local governments across Michigan, of which 456 have some kind of outstanding debt and 175 have direct or indirect special-assessment debt.
Of the 728 local governments, just over 10%, or 78, are considered to be at medium or high stress with regards to debt service capacity, the report said.
The team contacted 18 stressed local units to serve as case studies, talking with officials about their plans to avoid default. Scorsone declined to name the issuers.
Actions varied and included one-time measures, increasing fees or taxes, budget cuts, and refunding existing special assessment bonds.
“You don’t know the risk of default unless you really know what’s going on in that unit,” Scorsone said. “Our basic sense was that over the next year they did have a sense of how they were going to make payments, but beyond that it was potentially more problematic, depending on the economy and future revenues.”
The biggest obstacle for investors, state officials, and academics is the lack of a comprehensive system that tracks how much debt has been issued and by whom, according to Scorsone.
The paper recommends that various entities, such as the Municipal Advisory Council of Michigan and the state treasurer create a system for tracking municipal bond issuance.
The report is a kick-off for a national conference MSU will host later this year on the municipal bond market, Scorsone said.
