Toying with Troy

With a default looming next year on nearly $17 million of junk-rated tax-increment financing (TIF) bonds issued by a development authority in Troy, Mich., the bonds’ insurer, a subsidiary of MBIA, is threatening to pursue litigation or state intervention if the city does not step in to ensure the obligation is repaid. Even though the bonds are limited obligations of the Troy Downtown Development Authority payable solely from TIF revenue--they do not have a pledge from the city of Troy, a triple-A rated municipality in top-rated rated Oakland County; nevertheless, the Troy Downtown Development Authority projects it will run out of funding for debt service by a year from November. The subsidiary has advised both Troy and Michigan officials it would file a lawsuit or seek state intervention if Troy or the Downtown (remember the song?) Development Authority does not pledge to repay the insurer over time if it is forced to cover the obligation. Troy officials have indicated they are weighing their options ahead of the default, with meetings on the issue set for the next two weeks. The problem, as with many TIF districts across the country, is that the Troy district has failed to generate projected revenue due to falling property values. The city picked the wrong time in the real estate cycle: the district has seen 12% drops in real estate or property tax revenues over the last two years with more erosion feared in the future. The city’s own five-year forecast has projected that the authority will not have sufficient money to cover the debt by November 2013. The insurer has suggested that the authority put the $6.6 million remaining in its general fund and debt-service reserve fund to help pay down the outstanding debt and refund the remainder, unhelpfully writing: “Unfortunately the DDA sleeps while the city burns;” and the letter threatens it will pursue litigation if necessary to argue its position that if it takes over payments it becomes, in effect, a bondholder that must be paid. The insurer also said it would be forced to go to the Michigan treasurer, where the currently suspended emergency management law allows the treasurer to declare a fiscal emergency and take over the DDA. According to the Michigan Treasurer’s office, however, it is “not clear what authority or obligation the firm is referring to” when it said default could precipitate a state intervention. Troy officials have not responded to the letter or decided their next action; the Authority meets next week to discuss the matter and the City Council will convene Sept. 24.