By Mike Scott
Legal News
The City of Southfield is hoping that a $50 million bond issue may be the solution to a projected budgetary deficit over the next few years.
But before a bond is issued, Southfield will require approval from the Michigan Legislature because under state law a municipal bond issue requires legislative approval.
One statute on the books for nearly three decades has allowed municipalities to issue a bond when they are facing immediate financial hardships, such as when the City of Detroit was given approval for a $250 million bond issue in March.
But the Southfield situation is different.
The city is not currently experiencing a budgetary deficit, according to Southfield Treasurer Irv Lowenberg.
However, city officials feel that a bond issue would be a proactive step to address a projected 12 percent reduction in property values in 2011, a 5 percent reduction in 2012, and a 2.5 percent reduction in 2013 before property values are expected to stabilize.
Those property values include not just residential, but commercial, office and industrial. Southfield’s situation is particularly unique because historically it has received a comparable amount of revenue from all types of property.
That makes Southfield home to one of the most diverse tax bases in the area, said Mike McGee, a principal with the law firm of Miller Canfield Paddock and Stone, a firm that has long worked with the city on its bond issues.
While that diversification is normally an advantage, it is currently a drawback because the recessionary pressures on the different types of property have fluctuated.
Therefore, it may take Southfield longer to recover from this property tax “depression,” as McGee puts it, when compared to other municipalities.
“The valuation of office and commercial property declines are actually steeper in Southfield than many other communities, even those with a diversified tax base,” McGee said. “Because of this mix, Southfield (faces the prospect of) accelerated financial challenges.”
Southfield’s goal is to maintain a fund balance that is a minimum of 12 percent of the city’s overall budget. Lowenberg said.
The city currently has a fund balance of $16 million, but it will likely require an increase in revenues and a decrease in expenses to maintain that 12 percent level.
“We anticipate further deterioration of taxable values in the city and we want to be proactive,” Lowenberg said. “Our goal is to make decisions that allow us to cut costs in a seamless matter. We consider this a bridge loan that is a short-term solution.”
McGee’s role is working with Southfield and other city advisers, including lobbyist firm Governmental Consultant Services Inc. in Lansing and financial consultant Robert Baird & Securities in Milwaukee.
Under current statute, Southfield would not be eligible to receive approval from the state legislature to issue a bond because it is not currently dealing with a budget deficit.
“We would have to receive approval from the State Legislature for taking steps to prevent a budget deficit,” McGee said. “The city has a proactive leadership team that wants to get access to revenue before they are in serious financial difficulties, something that could very well occur even with the large fund balance now in place.”
McGee compared the foresight Southfield officials are showing to the move by Ford Motor Co. to secure additional financing to fund restructuring operations before the global economy began to openly falter in late 2008.
That funding allowed Ford to survive without financial assistance from the federal government.
In turn, that has helped heighten Ford’s brand identity and customer loyalty, allowing it to increase market share among domestic and global consumers, according to automotive experts.
“The structure we are looking at is to amend the state law for Southfield to have a multi-year cash financing process that allows them to readjust their costs,” McGee said. “It is a short-term move.”
The city’s fiscal year 2011 began this July but Southfield hopes to have bond revenue by the first quarter of calendar year 2011, Lowenberg said.
It is not expected that the results of mid-term elections would have an impact on whether the state legislature gives Southfield approval. Southfield has experienced a loss of 160 city employees in the last five years, all through natural attrition and early retirements.
But the bond issue could help the city to avoid mass layoffs.
If such approval is granted, it would be provided for multiple communities in similar situations most likely, McGee said.
He has not spoken with other municipalities in strong financial shape who have expressed an interest to proactively go after bond issues.
“State law can’t really be written for just one community, but it would need to be applicable to a broad range of users,” McGee said. “The legislature might have some concern about how broadly the law would reach.”
McGee and Southfield’s other team of consultants hope to show the Michigan House and Senate that receiving the bond funds would allow it to stay out of a deficit situation.
McGee already has been in contact with officials at the Michigan Department of Treasury, which also has a major voice in how such bonds are issued.
The parties also expect to show both the Department of Treasury and the legislature why Southfield should qualify for the bond issue, including the unique property tax diversification it has and how that has been a negative factor in this recession.
“We might have to show a case of good stewardship in how the city has been run the past several years and we can do just that,” McGee said, noting Southfield’s AA+ bond rating and consistently balanced budgets.
While Southfield officials are expecting to receive approval before the end of December, there is no legal deadline for when approval would have to be secured, McGee said.
“The city has their timeline and wants to proceed expeditiously,” McGee said. “Legally we have no drop-dead date, but we are working to support the city’s ongoing needs.”
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