Detroit’s decision to accelerate its plans to file for Chapter 9 last week, marked the largest municipal bankruptcy in the history of the nation.
For Detroit, the bankruptcy is a failure of a municipal government with little to no upside for any city or any of its stakeholders. Thus, municipal bond investors as well as other cities are left wondering if the once-assured asset is the best bet to place.
"The problems that have unfolded in the municipal market are not surprising to those in the industry, the risks have been present for a long time," Municipal Market Advisors founder and CEO Thomas Does told HousingWire.
He added, "Yes, the pension issue is real and the challenges ahead have been exacerbated by the length of the problems evolution — namely 60 years of negotiating generous benefits between union leaders and politicians. The saddest condition is for those union members, non-union member taxpayers and citizens who now must bear the responsibility and costs for egregious behavior at worst and ignorant behavior at best."
With Detroit’s downfall, municipal bond investors are debating if this is specific to the city or if it’s a sign of more trouble to come.
Detroit’s population dwindled over the past 60 years from 1.8 million in the 1950s to less than half that number today.
The biggest concern is the nearly $20 billion of unfunded pension liabilities that is scarring municipal bond investors that other cities may follow suit, explained NewOak president and co-founder James Frischling.
For example, Chicago and Los Angeles carry unfunded pension liabilities of $30 billion and $19 billion, respectively.
"Municipal bond investors have been pulling money from muni market funds for eight consecutive weeks, including nearly $1.5 billion last week. The Barclays Municipal Bond Index is down 2.7% thus far this year and issuance is down 10% from the same period last year," Frischling stated.
He added, "The Federal government could step in with support, but that’s a Pandora’s Box that is too dangerous to open. Detroit filed because they’re on their own and had no choice. Who’s next?"
On the other hand, Does believe the city’s fundamental problem is revenues not liabilities.
While a Chapter 9 bankruptcy will help alleviate at least a portion of its legacy liabilities, it will not correct the revenue issues, weak economy or the issues of livability and governance, he argued.
On a similar note, Anthony Sanders, distinguished professor of real estate at George Mason University, noted that Detroit has a unique position among cities.
"It was reliant on one industry — autos and now it is reliant on gambling revenues," Sanders stated. "With retirees outnumbering workers by a 2-1 margin... and growing, they are the leaders in municipal gorging."
Overall, municipal bond investors are expected to remain cautious as the potential for other cities to follow Detroit's lead remains a silent threat.