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Detroit Financial Advisory Board A 'Credit Positive,' Says Moody's

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Michigan Gov. Rick Snyder, a Republican, pushed for the creation of a financial advisory board to ward off bankruptcy.
Michigan Gov. Rick Snyder, a Republican, pushed for the creation of a financial advisory board to ward off bankruptcy.

A month after Moody's Investors Service downgraded more than $2.5 billion of Detroit's debt to below investment grade, the city is still under review for further hits to its credit score. But an analysis released by the rating agency on Monday did say that the signing of a consent agreement creating a financial advisory board to oversee city finances was a "credit positive" for Detroit.

"The agreement averts the state’s appointment of an emergency financial manager, which would have increased the risk of a Chapter 9 bankruptcy filing. Moreover, it creates a formal state role in the city’s fiscal affairs in a challenging political environment," the analysis stated. It also noted that the board and other parts of the city's consent agreement with the state "reduce the city’s near-term risk of a bankruptcy."

If Detroit is downgraded further, that will make it even harder for the city to borrow money from lenders when issuing bonds. But the analysis today provides a rare note of optimism.

Moody's spokesman David Jacobson said Monday's analysis, while positive, was not the same as upgrading the city's rating or even altering the agency's outlook on whether the rating would change.

"There's quite a bit of other things happening there," Jacobson noted. Moody's will make a further decision on whether to downgrade Detroit debt even further by June 20.

The agency's brief analysis signals that it thinks the board and the extensive powers that go along with the consent agreement will be good for bondholders.

Clayton Gillette, a professor the New York University School of Law who studies such boards, said it's a little too early to tell who the board will serve best: the city trying to provide for its citizens, the state trying to prevent financial contagion, or the bondholders trying to recover billions of dollars in debt.

The tug-and-pull between those interests, said Gillette, was a central theme in his research on financial advisory boards. In the Detroit consent agreement, he said, while "it's not clear to me who is served, it's clear to me what some of the agenda is."

"It's certainly tilted in a manner that purports to induce or require the city to change the way in which it deals with public sector unions," he said. "There's a sense that the agreements with public sector unions are largely responsible for the negative financial position of municipalities today. That seems endemic in here."

More indications of where the city is headed -- whether, for instance, it tears up contracts with those unions or slashes city services -- should become clearer once the city and state appoint their board members, Gillette added.

According to the consent agreement, the financial advisory board's work will begin in earnest on July 20.

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