Huge payout to investors would leave city near bankruptcy, analyst says

BY ZACHARY GORCHOW • FREE PRESS STAFF WRITER • January 7, 2009

The City of Detroit’s finances slid into crisis Tuesday after one of the country’s leading credit rating agencies downgraded the city’s rating to junk-bond status, a move one financial analyst said could eventually push the city into bankruptcy

One official expected the move to lead to a substantial increase in the interest the city pays on its debt, which could affect how the city delivers services. The downgrade also enables investors with which the city engaged in so-called credit swap agreements to request a payout from the city totaling $400 million.

Either scenario would rob the city of money from its general fund at a time when it faces a $300-million deficit and by most accounts already is failing to deliver adequate services to residents.

City officials say they are assembling a plan to avoid having to come up with $400 million and instead offer guarantees to the investors, such as collateral.

“We are resolved to ensure that Detroit is financially stable,” Mayor Ken Cockrel Jr. said at a news conference at Cobo Center.

Credit swaps are agreements between the city and investors. In exchange for a lower interest rate on bonds, the city agrees to maintain an investment-grade rating.

City’s options

Joseph Harris, the city’s chief financial officer, said officials are putting together a plan so that holders of the credit swaps will be convinced not to demand their money. He declined to offer details, but said it would involve putting up city assets as collateral or other measures.

“We won’t be able to come up with $400 million,” Harris said. “We don’t expect anyone to ask us for $400 million. What we expect them to ask us for is some guarantees or some assurances.”

Irvin Corley Jr., the City Council’s fiscal analyst, said a $400-million payout could push the city into bankruptcy.

“I would think they would understand that the city is not in a position to come up with $400 million,” he said.

Corley said the downgrade could result in the city’s interest rates rising between 50% and 75%, meaning a 5% rate could rise to 7.5%-8.75%.

Junk-bond status is not unheard of for major U.S. cities. New Orleans, Miami and Pittsburgh all spent time in junk-bond status in the last 10 years. So has the Detroit Public Schools.

Late audits a problem

In a statement, Standard & Poor’s explained it lowered the city’s ratings from BBB and BBB- to BB for two kinds of debt because the city had failed to meet promises to eliminate its deficit and turn in its annual audit on time, because of the local economy and because of perceived instability in the city with multiple mayoral elections this year.

There was no word on whether Moody’s or Fitch Ratings, the other major credit rating agencies, would follow suit.

Detroit has failed to submit its audit on time for years, and is more than a year late in finishing its 2006-07 fiscal year audit, which has caused the state to withhold $42 million in revenue sharing aid and require prior approval to issue any bonds.

Terry Stanton, spokesman for the Michigan Department of Treasury, said the state is not considering an emergency financial manager as a result of the city’s lowered bond status.

“Obviously the downgrade is unfortunate, though not necessarily a surprise,” he said.

The state is in contact with city officials and “will assist in any way we can,” Stanton said. No other Michigan city is in junk-bond status, Stanton said.

Just a year ago, then-Mayor Kwame Kilpatrick had boasted of S&P boosting the city’s outlook from negative to stable. But Cockrel, who became mayor Sept. 19 after Kilpatrick resigned, said S&P officials feel deceived.

Cockrel is expected to unveil his deficit-elimination plan this month and also must present a fiscal year 2009-10 budget to the council in April.

“We’ve got to put together a budget whereby our revenues either equal or exceed our expenditures,” Harris said.

Councilwoman Sheila Cockrel, chairwoman of the council’s Budget, Finance and Audit Committee, called the downgrade “as serious as you can get.”

She said the situation should prompt everyone in the city — elected leaders, business, labor and residents — to make the sacrifices necessary to finally balance Detroit’s budget.

“We as a City Council, as a community and as a group of city leaders are going to have to address the fundamental restructuring of city government,” she said.

Besides the potentially severe financial cost to the city, the downgrade also is a major image blow to the city.

“Ultimately the only way to deal with the problem is to fix it,” Mayor Cockrel said.

Contact ZACHARY GORCHOW at zgorchow@freepress.com or 313-222-6678. Staff writer Naomi R. Patton contributed to this report.

Link to story

Taxpayers Unit. Tell Pres. Obama An Auto Czar .. by lemacks

…..
Moderator Note: I read this insightful and passionate commentary by Tom Walsh of the Detroit Free Press. Please read it and comment on it.

TOM WALSH
Car czar should be named now
BY TOM WALSH • FREE PRESS COLUMNIST • January 6, 2009
This may sound pushy, or even panicky, but President-elect Barack Obama needs to name a car czar immediately to clear the air about the terms and conditions of federal aid to our quasi-nationalized automobile industry.
That’s immediately, as in right now. This week.

The longer Obama waits to name a point person for the overhaul of Detroit, the longer the domestic auto industry will remain stalled and the longer it will take a crippled General Motors Corp. and a crippled Chrysler LLC to stabilize, if indeed they are to avoid bankruptcy.

Monday’s monthly reports of December car and truck sales were stark reminders that outgoing President George W. Bush’s Dec. 19 promise of $13.4 billion in bridge loans for GM and Chrysler was only an emergency transfusion, not a cure for what ails Detroit.

Chrysler sales fell a staggering 53% from December 2007 levels, while GM and Ford Motor Co. sales were off more than 30% each. Sales are not expected to improve during the next three months.

Meanwhile, GM and Chrysler face a Feb. 17 deadline to provide Uncle Sam with updated, detailed plans to achieve viability and profitability by making vehicles with “a product mix that is competitive in the United States.” If the federal government isn’t satisfied with progress by March 31, it can call the loans and force one or both companies into bankruptcy.

Also looming next week are deadlines for GM and Chrysler to provide the first biweekly “liquidity status reports” on their shaky finances, as required by the bridge loan deals.

One monumental problem with this pressing timetable is that key parties to the viability plans — like the UAW and investors in GM and Chrysler bonds — may be balking at the sacrifices outlined in the terms of the Bush bridge loans.

UAW President Ron Gettelfinger has already stated that he plans to appeal to Obama and the new Congress to remove targets from the Bush rescue plan that call for UAW wages and work rules to match those of foreign-owned competitors by the end of 2009.

Bondholders, meanwhile, may be reluctant to exchange two-thirds of their debt for equity in the automakers, even though the bridge loan deal sets that as a target.

In the recent move to convert the GMAC finance unit into a bank holding company, GMAC aimed to convert 75% of its debt into preferred stock but fell well short of that target, convincing less than 60% of bondholders. The government gave GMAC a $6-billion cash infusion anyway, which could make GM and Chrysler bondholders hesitant to trade debt for less-secure equity.

Auto parts suppliers, amid the jockeying, are hurting from production cutbacks and slow payments, while being hounded by their own banks. They could start toppling rapidly, absent signs that somebody is riding herd on the auto industry rescue effort.

Treasury boss Hank Paulson is in charge for the final days of the lame-duck Bush regime. But he’ll be on some tropical island, if he has any sense, before Team Obama has to buckle down and get tough with all the Detroit stakeholders.

Right now is the time to get the future car czar revved up.

Contact TOM WALSH at 313-223-4430 or twalsh@freepress.com

Real Estate

America’s Most Educated Small Towns

Jacqueline Detwiler, 01.05.09, 12:01 AM EST

These 20 towns boast the greatest concentration of residents with advanced degrees.

For decades, most people’s idea of the American small town likely resembled something out of Little House on the Prairie: crumbling farmhouses and one-room schools. By November’s election, with all the talk of Main Street, it was easy to forgive anyone for associating the American small town with rural locales, modest incomes and Joe Six-Packs.

Whether or not that’s true, the best-educated small towns contain just the opposite. Almost all are suburbs near major universities or research centers, and the jobs–from IT in Silicon Valley to government work in McLean, Va.–are anything but blue collar.

In Depth: America’s Most Educated Small Towns

Take the most-educated small town on our list, Bethesda, Md. The city hosts the National Institutes of Health, National Library of Medicine and the Nuclear Regulatory Commission, as well as the corporate headquarters of Marriott (nyse: MAR - news - people ), Lockheed Martin (nyse: LMT - news - people ) and COMSAT. Bethesda also boasts the highest percentage of residents with advanced degrees in the country, with 51.5% of residents over 25 who have master’s degrees or Ph.D.’s.

“Of my friends who are not employed at the NIH, almost all of them have a master’s degree,” says Laura Thomas, Ph.D., a postdoctoral fellow at the National Institutes of Health and a Bethesda resident. “It’s almost like the entire town is the campus of a top-tier research institution.”

Wellesley, Mass., which ranks second, sets the paradigm for many of the other towns in the top 10. It’s home to one of the top colleges in the U.S., Wellesley College, and is close to a major metropolitan area known for its culture and high property values. The remaining top five–Palo Alto, Calif., McLean, Va., and Los Altos, Calif.–post similar profiles. All three are close to a larger city and are within commuting distance of a university or major research institution.

Towns ranking 11th to 20th were also close to universities, which tended to be larger, like State College, Pa., at No. 15, which is near Pennsylvania State University, and Blacksburg, Va., at No. 14, which is near Virginia Tech. Plush suburbs, like Cupertino, Calif., and Brookline, Mass., also figured prominently in the second half of the list.

Behind the Numbers
To determine America’s most-educated small towns, we used data from the U.S. Census 2005-2007 American Community Survey, which polled more than 2,500 regions with 20,000 to 65,000 residents about their educational attainment. The number of graduate degrees–including master’s degrees, Ph.D.’s, professional degrees, bachelor’s degrees and associate degrees–were each divided by the population of the town over age 25 and then weighted to give a final average for each location. High school diplomas were excluded from our analysis since it’s safe to assume that most residents with bachelor’s degrees also have high school degrees.

Because college graduates make about $22,000 more per year than those who stopped after high school, and people with graduate degrees bring home an additional $37,000 to $57,000 per year, highly educated residents are the ones who boost the property values and median incomes in the towns in which they live.

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