In a nutshell
- All large cities use municipal bonds to fund capital improvements such as construction of roads, bridges, schools, highways, water and sewer systems and for other purposes.
- In 2019, total U.S. local government debt outstanding was $1.9 trillion, equating to $5,787 per person.
- Out of a sample of five cities, Atlanta has the lowest debt per capita with Detroit having the second lowest debt per capita. Cleveland has the highest debt per capita.
Following up on our previous blog regarding Detroit’s bonded indebtedness, this blog provides a comparative analysis of Detroit’s debt to that of some of its peer cities. Peer cities that were selected for comparison include those that are experiencing similar trends, challenges, or demographic characteristics as Detroit. This analysis compares Detroit against similar cities’ bond ratings and creditworthiness as a way to understand debt sizing relative to a municipal tax base and local government spending.
Detroit’s Plan of Adjustment
Prior to filing for bankruptcy in 2013, Detroit had approximately $18 billion in total liabilities, consisting of $11.9 billion in unsecured debt and $6.4 billion in secured debt with more than 100,000 creditors. The difference between secured and unsecured debt is the collateral promised to the lender by the borrower. This placed a huge burden on Detroit’s taxpayers to pay in a city that was consistently losing its tax base.
Detroit went through a few negotiations and court orders to unburden some of its debt during bankruptcy. The city’s Plan of Adjustment reduced the city’s estimated $18 billion debt burden by approximately $7 billion, and created a framework for the city to adhere to going forward.
The city returned to the bond market on its own credit in 2018 selling $135 million in general obligation bonds, marking the first time in more than 20 years that the city had tapped the municipal bond market on its own credit. These general obligation bonds were used to finance a series of capital improvement projects including maintenance to transportation infrastructure, neighborhood parks, recreation facilities and museums. In 2020, voters approved Proposal N which allowed the city to sell $250 million in unlimited tax general obligation bonds to remediate blight.
The city also has water and sewer debt from the issuance of revenue bonds that provide financing for improvements to the local water system paid through dedicated revenue streams. In 2017, the city issued additional revenue bonds to finance transportation infrastructure.
Bonded Debt of Peer Cities
All large cities use municipal bonds to fund capital improvements such as building roads, bridges, schools, highways, water and sewer systems. In 2019, according to the U.S. Census Bureau, there was a total of $1.9 trillion of U.S. local government debt outstanding, equal to $5,787 per person.
Comparisons of debt loads among cities may differ because the allocation of responsibilities between cities, counties, and states vary across states. Computations of debt loads may also differ because some local governments include schools which are directly responsible for education and the infrastructure that provides those services. Lastly, the use of special authorities for major services and infrastructure also vary among cities creating differences in the computation of debt loads.
Nonetheless, it is possible to compare the debt outstanding of peer cities using the most recent data available. Debt per capita measures the debt burden placed on the population supporting the debt. This measure must be considered taking into account the variability of the metric over time. A city’s debt might have been incurred at a time when the population was larger or smaller. In other words, debt per capita tells us the story about how much debt is owed at a particular time.
If a city is experiencing population loss, as has occurred in Detroit, the per-capita burden for financing the debt will grow as the required annual principal and interest payments are spread across a shrinking base. The table below provides comparative data for Detroit and some of its peer cities.
City Government Expenditures and Outstanding Debt for Detroit Peer Cities, 2020
|City||Total Expenditures (in millions)||Outstanding Debt(in millions)||Debt as a Percent of Expenditures||Estimated Population||Debt Per Capita|
Source: Munios Reports
Atlanta has the lowest debt per capita with bonded debt equaling out to $1,508 per resident, with Detroit having the second lowest debt per capita at $3,105 per resident. Cleveland has the highest debt per capita with bonded debt equaling $5,375 per resident.
Detroit’s debt per capita is nearly twice as large as Atlanta’s with a tax base that is somewhat similar in size. This means taxpayers in Detroit have a higher tax burden to carry for capital improvements compared to Atlanta. With a larger debt load than Detroit or Atlanta, Cleveland has the highest debt per capita among all five cities with the lowest population indicating a higher per-capita burden for financing their debt.
Cities that have growing tax bases are at an advantage to finance their debt burden, allowing for the city to continue to borrow money for capital improvements and infrastructure maintenance. Growing population and/or tax bases could be causes for cities to issue more bonds to invest in capital improvements because the needs of the community grow as the population grows.
Another way to quantify the relative size of the debt load, debt as a percent of expenditures, reflects the ratio of a city’s outstanding debt to the size of government’s spending. It reflects debt relative to the responsibilities of the cities.
Cleveland and Chicago still have high amounts of debt using this measure. Detroit ranks third in the debt to expenditure ratio out of the five cities sampled.
General Obligation and Revenue Bonds
The table above shows the total amount of bonded obligations in 2020. A breakdown of each city’s indebtedness by type provides a sense of how much debt is tax supported or paid from a dedicated revenue source versus general tax receipts.
Some municipal bonds do not clearly fall into any one category, but the types of revenues and obligations roughly reflect the two general categories of bonds that are listed: general obligation and revenue bonds.
General obligation bond debt is composed of both unlimited tax and limited tax general obligation bonds paid either from dedicated millages or from the city’s general fund.
Revenue bonds are issued to finance capital improvements to self-supporting public services and the annual principal and interest payments are paid from system revenues. The dedicated revenue stream that is paying for the revenue bond debt must have its rates and charges set at an amount sufficient to pay for operations, maintenance, and debt service. Residents pay off revenue bond debt by charges for services consumed, such as water, sewerage.
Looking at the makeup of debt across the peer cities reveals different needs for capital financing. About 65.3 percent of Chicago’s $11 billion bonded debt consists of general obligation bonds. Another 34.5 percent of this debt consists of revenue bonds issued by the city and repaid through specific revenue sources. Chicago has issued general obligation bonds to finance street construction and resurfacing projects, street lighting and transit projects, and bridge and viaduct reconstruction. Revenue bonds were issued primarily for the purpose of financing improvements to the Chicago Midway International Airport.
Atlanta’s $752 million total bonded debt is made up mostly of general obligation bonds accounting for 84 percent of the city’s total outstanding debt. Most of the general obligation bonds were issued for the purpose of renovating existing municipal buildings and facilities, and paying certain costs of issuance. Revenue bonds made up 3 percent of the city’s bonded obligations and the remaining 12 percent are other liabilities. Revenue bonds were issued for the purpose of financing improvements to public safety, judicial facilities and waste management.
Philadelphia’s $6 billion total bonded debt is composed mostly of revenue bonds making up 65 percent of the city’s bonded obligations. These revenue bonds were issued for the purpose of financing capital projects for the city’s water and sewer, gas work, and airport systems. General obligation bonds make up 35 percent of Philadelphia’s bonded debt. These bonds were issued for the purpose of funding a variety of capital improvements to transit, streets and sanitation, municipal buildings, recreation, parks, museums, stadiums, and economic and community development.
Cleveland had $2 billion of bonded obligations. About 17 percent of Cleveland’s bonded debt are general obligation bonds, while the other 83 percent consists of revenue bonds. Revenue bonds were issued for the purpose of providing funds for the city’s waterworks, airport, electric grid, parking, and water pollution control systems. The city’s general obligation bonds were issued for improvements to municipal parks and recreation facilities, renovating municipal buildings, improving roads, and providing housing for individuals and families.
Lastly, Detroit had approximately $1.98 billion of total bonded debt in 2020. About 76 percent of that debt was made up of tax supported unlimited tax and limited tax general obligation bonds, while 23 percent of the city’s total obligations were revenue bond debts and debts from other projects.
Chicago, Detroit, and Atlanta all had a majority of their bonded obligations consisting of general obligation bonds which are backed by the credit and taxing power of a city rather than a dedicated revenue stream. Most of Philadelphia and Cleveland’s bonded debt is made up of revenue bonds meaning they are to be repaid through specific revenue sources.
Credit rating agencies rate city governments and other public and private entities on a number of criteria designed to measure their ability to repay bonded debt, and assign ratings that signal the credit risk associated with the outstanding debt. The “big three” rating agencies are Standard and Poor’s, Moody’s, and Fitch Ratings; each has its own system for rating borrowers.
Lower bond ratings indicate higher credit risk and justify investors’ demands for higher interest rates on those bonds. The chart below shows that compared to the four peer cities, Detroit has the lowest bond rating categorized as speculative.
Bond Ratings for Peer City Governments, 2020
|Philadelphia||Upper medium grade|
|Chicago||Lower medium grade|
Source: Munios Reports; S&P Global; Moody’s; Fitch Ratings
The cost of a lower bond rating is the higher interest rate at which a municipality is charged for borrowing money. Higher interest costs increase the amount necessary to repay the debt. With Detroit having a relatively low bond rating compared to the other cities in this sample, it costs more for Detroit to borrow.
Each city has borrowed money for a number of purposes, including to provide cash for operations, to construct and maintain infrastructure, and to finance capital improvements. This borrowed money encompasses each city’s bonded debt. Evaluating each city’s bonded obligations provides insight into the types of bonds cities issue offering perspective into their needs and priorities. Some cities have more general obligation bonded debt compared to revenue bonded debt (and vice versa) indicating a need to finance certain projects over others.
Comparing Detroit’s debt to that of peer cities, we see that Detroit has primarily invested in the remediation of blight and maintenance of city infrastructure that will provide taxpayers with a better quality of life. Not only will current residents enjoy these capital investments, but future residents will also benefit from the investment and perhaps be attracted to the city because of it.
Bonds that were issued out by other cities reflect the needs of those cities and their taxpayers. Some cities, like Philadelphia and Cleveland, invested more money into projects that would improve the delivery and function of important city services. The investment and spending decisions of each city allows us to assess the impact on residents and the taxes or costs they will inherit in the future.
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