Detroit’s decision to file for bankruptcy rocketed across desks at city halls around the nation Thursday, including some in our area.
Finance officers are nervously watching the process.
They don’t fear bankruptcy, at least not yet. They do fear an escalating cost for municipal debt.
Not everyone thinks it will be a problem
Others, though, say investors will now demand a premium for buying what has always been considered a rock-solid investment: public debt.
What impact, for example, will the Detroit filing have on any debt issued for a new single-terminal Kansas City airport? Orany
refinanced city debt?
If public debt becomes more expensive, it will make it harder for cities to finance routine operations. And even a small escalation in borrowing costs could mean millions of additional dollars for major projects like the airport.
The Detroit bankruptcy may also increase pressure on the city to reach a full agreement on pension benefits and funding.
In February,Fitch rated $450 million in Kansas City general obligation bonds
as AA. “The city has generated break even or positive general fund operating results for the past several years and reserve levels are adequate,” the agency said.
But: “The city’s inability or unwillingness to initiate a plan to increase funding of its annual pension liability could place negative pressure on the rating.”
(Ratings agencies, by the way, are also worried about the every-five-year renewal of the earnings tax.)
Detroit’s bankruptcy was prompted by many things, including loss of population, the decline of the manufacturing base, and incompetent government.
But expensive public pensions were also a contributor. So cities — including Kansas City — may be slightly nervous this morning, and may decide to push forward with final agreements on pension reform.