The week in Michigan politics: Detroit bankruptcy and bonds
This week in Michigan politics, Jack Lessenberry and Christina Shockley discuss Governor Rick Snyder's agreement to answer questionsabout the Detroit bankruptcy filing to union lawyers, how the bankruptcy has affected borrowing abilities in other Michigan cities and a new investment program to impact social programs.
Snyder to answer questions about bankruptcy filing
Governor Rick Snyder has agreed toanswer questions under oath from union lawyers about his decision to let Detroit file for bankruptcy. Attorneys for Snyder and other state officials had been resisting testifying based on executive privilege.
Unions opposed to the bankruptcy say Snyder's sworn testimony is important. They say Detroit is ineligible for Chapter 9.
Lessenberry says unions have a lot at stake in the bankruptcy.
“The Detroit unions are very concerned about their member’s benefits and pensions and how all of this will play out for them. There’s some suspicion that bankruptcy was in the cards from the very beginning,” Lessenberry says.
Lessenberry says the questioning will allow for a better understanding of Snyder’s thinking before the Detroit bankruptcy filing and his communications with Detroit emergency manager Kevyn Orr before the filing was announced.
Bankruptcy affects borrowing in other cities
The Governor has said that Detroit is an “incredibly unique situation,” and its bankruptcy shouldn’t affect other Michigan cities. But, Michigan cities and school districts sold only$71.5 million worth of municipal bonds last month. That’s the lowest monthly amount since 2003.
Shockley wondered if this was a sign that the Detroit bankruptcy is affecting the rest of the state.
Lessenberry says there’s no way the bankruptcy couldn’t affect the rest of the state.
“What got investors spooked was the emergency manager said they were not going to honor general obligation bonds ahead of other debts, they were going to be like all other creditors,” Lessenberry says. “And people who invest in bonds, it’s seen as a conservative and safe investment and this sort of unnerved people in other cities.”
Social impact bonds
Michigan is part of an experiment in bonds called social impact bonds.
Lessenberry says it has been tried in other places including England. He describes how it works.
“The idea was you would invest in a bond and the rate of your return or if you got any return at all would depend on the success of the program,” Lessenberry says. “It might be something to build some kind of innovative new facility to deal with youth offenders, and if it had a great rate of reforming or rehabilitating them or preventing recidivism you would get a payoff.”
But Lessenberry says while it sounds like a nice idea, he is skeptical the average investor would want to invest that way.