Michigan Governor Rick Snyder’s formal declaration that a financial emergency besets Detroit started the clock ticking for city leaders who may want to try to block a state takeover. It gave them 10 days.
The yield penalty on Michigan’s debt has climbed 40 percent in less than two weeks as defaults by Detroit and two school districts lead investors to question the state’s commitment to protect bondholders.
Detroit’s finances will be given a preliminary review by state officials starting Dec. 6, Michigan Treasurer Andy Dillon said, in what may be the first step toward the appointment of an emergency manager.
Michigan’s Finance Authority plans to sell $92 million of one-year notes backed by state aid for Detroit’s public schools in the first deal tied to the city since it sought bankruptcy protection July 18.
Investors’ insistence on a yield 14 times higher than the AAA benchmark on $92 million of Detroit school notes is the latest example of municipal-bond market contempt for Michigan after the city’s record bankruptcy.
Emergency Manager Kevyn Orr’s plan to suspend payments on $2 billion of Detroit’s debt threatens a basic tenet of the $3.7 trillion municipal market: that states and cities will raise taxes as high as needed to avoid default.