Detroit, whose population shriveled by 25 percent from 2000 to 2010, has been rated junk by Moody’s Investors Service since 2009. The city is now Caa3, nine levels below investment grade. By comparison, fewer than 40 of 7,500 local governments rated by Moody’s have a junk rank, said David Jacobson, a spokesman for the New York-based company.
Detroit sought court protection after too few creditors, including bond insurers, investors and city workers, would accept Orr’s offer to repay the $11.5 billion in unsecured debt with $2 billion in borrowed money.
Threat ‘Overblown’
The threat to general-obligation owners nationwide has been “overblown,” said Tim McGregor, who oversees about $30 billion as director of municipal fixed-income at Northern Trust Corp. in Chicago. Most localities have investment grades and won’t miss bond payments because they need access to the market for capital projects, he said.
Last year, three cities in California sought court protection, pushing relative borrowing costs for localities in the state to a six-month high. The yield penalty has since fallen to the lowest since 2008, and the state in January received its first rating increase from Standard & Poor’s since 2006.
Penalizing a neighborhood such as Los Angeles’s Bel Air because of Detroit’s filing is “irrational,” Orr said in a July 25 interview. The community, where Michael Jackson lived, was the fictional setting of the 1990s television show “The Fresh Prince of Bel-Air,” starring Will Smith.
The emergency manager said Detroit raised taxes as high as possible and still doesn’t have the ability to repay investors. That’s not the case for most municipalities.
Cities’ Lifeline
“Most people realize if you buy sound, quality G.O.s that have the ability to pay, you don’t even get to the willingness question,” McGregor said. “Tax-exempt financing is the cheapest source of financing, a lifeline to all their public- purpose needs.”
Some Michigan localities are struggling to borrow in the wake of Detroit’s filing.