Jan 9 Owners of bonds issued by Michigan local
governments face default and bankruptcy risks from provisions in
a new state emergency manager law, Moody's Investors Service
said in a report this week.
The law, which takes effect March 1, gives local governments
and school districts options for dealing with their financial
emergencies, including the appointment of an emergency manager
and the ability to file for municipal bankruptcy with the
approval of the governor.
Moody's said the law could expedite bankruptcy filings by
allowing governments to immediately head to court once a
financial emergency is determined.
Another option, arbitration with a neutral party, can also
lead to a bankruptcy filing with the governor's approval if
mediation fails to produce a resolution in 60 days, according to
the rating agency.
The arbitration process, which would involve bondholders,
unions, pension funds and other interested parties, could also
result in bond defaults, Moody's noted.
"Because the neutral evaluation mediation process is new and
untested, it is unclear whether bondholders, creditors, and
other interested parties would choose to participate, which
could result in a request to file bankruptcy," Moody's said in
The rating agency also said the new law, which was passed by
the Republican-controlled legislature and signed by the governor
last month, may be challenged by groups that opposed previous
emergency manager laws, "creating continued uncertainty for all
Still it said the law will result in increased transparency
and enhanced details of fiscal problems and keeps in place
existing managers and consent agreements that allow for the
suspension of collective bargaining agreements.
"The consent agreement provides local governments the
opportunity to retain control, but holds them accountable for
timely results," the report said. "Any failure to achieve the
consented targets would result in the appointment of an
Detroit, Michigan's largest city, was able to avoid the
appointment of an emergency manager last year by signing onto a
consent agreement that gave the state some oversight. However,
the slow pace of reforms led Michigan officials to use a current
law to launch a new review of Detroit in December that could
culminate in an emergency financial manager and possible
The new emergency manager law replaces a 2011 law that was
repealed by voters on Nov. 6. Until it takes effect, the state
is relying on an older, weaker law. The new law includes
appropriations for administrative expenses, making it ineligible
for a petition drive that could result in its repeal by voters.