Comments on: County Gets Input on Bonding, Despite Delay

By: Steve Bean

Steve Bean — Fri, 09 Aug 2013 21:21:33 +0000

@7: interest rates were already rising before Detroit’s bankruptcy was announced. How much of the FRMTX drop is due to each factor is probably impossible to tell. You might look at similar funds in other states for a rough idea.

It’s a good thing for Saginaw County, in any case. They most likely would have put their bond proceeds in to some other fund(s) that would lose much of its value in coming years, putting them in line behind Detroit. Better that they have to watch the developing downward trend (deflation) and rethink their option – holding cash and paying off debts as costs drop being the best of their likely limited choices, much like Washtenaw.

By: Vivienne Armentrout

Vivienne Armentrout — Fri, 09 Aug 2013 11:38:18 +0000

Here is another article from the New York Times on how Detroit's actions are affecting other Michigan communities regarding bond sales: [link] Saginaw recently had to postpone a sale and Battle Creek went on hold with one. Thanks for the pointer to the Franklin fund. According to Bloomberg, the Franklin Michigan Tax-free Income Fund (FRMTX) has shown a rather precipitous drop since May and is down 5% for the year.

By: Alan Goldsmith

Alan Goldsmith — Tue, 23 Jul 2013 18:25:35 +0000

So why does Washtenaw County have a AA bond rating and Macomb and Oakland Counties have AAA ratings?

By: Mark Koroi

Mark Koroi — Sat, 20 Jul 2013 00:16:08 +0000

@Vivienne Armentrout:

The Michigan bond market as a whole is unaffected.

Mutual bond funds typically hold municipal bonds that are insured in the event of default for interest as well as principle.

The Franklin Michigan mutual bond fund has thus far not shown significant changes in its trading price since the Detroit bankruptcy.

By: Vivienne Armentrout

Vivienne Armentrout — Fri, 19 Jul 2013 21:15:35 +0000

Yes, the Detroit bankruptcy is significant to our county situation in two ways. (Here is an excellent analysis from the New York Times: [link]) 1. It is likely to have an effect on municipal bond sales. This is being said fairly universally. In other words, interest that the county would likely have to pay on the bond may go up. 2. As the NYT article comments, it also has bearing on public pension benefits and the special protection that they (appear to) be afforded by the Michigan constitution.

By: Herb

Herb — Fri, 19 Jul 2013 19:55:00 +0000

I would guess that it will be a while before the dust settles from the Detroit Chapter 9 filing and that for the duration it would not be a good time to float a major bond issue.

By: Vivienne Armentrout

Vivienne Armentrout — Thu, 18 Jul 2013 20:13:55 +0000

I do not like Mr. Ranzini's proposal, which involves the county buying an annuity. (In case readers don't know what we are talking about, see here: [link]) I assume that the county would still have to bond in order to come up with the purchase price. Thus, this is merely an alternative investment device. It still involves a long-term risk, merely shifting the risk to the pension fund via an insurance firm that would undertake to deliver payments. Insurance firms are not magic; they also have to invest in order to make payments. The long-term investment risk is still there. There is no free lunch. The error here is that the BOC should not be attempting to settle the long-term issue all at once. Conditions are likely to change in a number of directions over the next 25 years. Any solution assumes a certain investment return, which is fallacious. Actually, I don't see how a single annuity would work in this case. There are employees still contributing to the plan for uncertain periods of time, and I don't see how guaranteed annuities for individuals could be determined at this time.

By: Bob Martel

Bob Martel — Thu, 18 Jul 2013 15:25:31 +0000

I prefer the alternative structure that Steve Ranzini has suggested to the proposal that the County itself invest the Bond proceeds because it more closely achieves the stated objective of eliminating future risk to the County of these unfunded liabilities. I am concerned that if the County undertakes to invest the proceeds of the Bonds, it remains very much at risk to the returns that will be achieved (this is not a reflection on anyone currently at the County, it’s just the facts of investing.) Unfortunately, while the pension and insurance companies may be “hungry” for these types of deals, they are also smart enough to know that future returns may not be as rosy as the projections used by the County in their effort to sell this deal to the public and thus the cost to the County of getting out of these obligations is likely to be much higher than the $295 to $345 million figure that has been bandied about.

This is a mess not unlike the one facing the City of Detroit. All this creative accounting does is to punt the problem down the road.

Hard choices will have to be made, better make them now because the longer you wait, the more it will cost to fix this.