Will the Default in Detroit Affect Me?
So Detroit defaulted on it’s debt obligations. Do does that impact you? Well, that depends on whether you are a utility looking revenue bonds, a city looking for general fund bonds or some combination. The issue in Detroit with debt is that they pledged the full faith and credit of their taxing authority to repay the debt. Their taxing ability was insufficient to accomplish this goal, which means that there could now be distrust in that promise for other cities. So if you are a city and you are making this pledge, Detroit could impact you, or at least create more review on your balance sheets. If you are a utility that is pledging revenues that have no limitations on amount, the concern is likely less. Of course in either cases, the question is what the rest of your balance sheet looks like. If you have no reserves, do not charge the full cost for service, have a heavy debt load, have high rates already, or send a lot of funds to the general fund, that could be a problem. If you have avoided these pitfalls, the bond market will see much less of an issue.
Keep in mind that Detroit is not the only default – another big one is the Birmingham and several other create questions about general fund uses of funds, which makes it of greater importance to keep our financial house in order. IN part this can be done by creating the appropriate enterprise funds and remove those services from the general property tax fund. That permits local focus on the true cost of general taxing users and creates a delineation between general fund and enterprise costs. That can help elected officials focus on the true general fund issues: police, fire, EMS, administration without hiding those costs with subsidies from other funds.
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