The Examiners: Lisa Donahue on Municipal Distress

As Detroit nears a crucial point in its restructuring, what lessons does the city’s historic bankruptcy offer troubled municipalities?

Facing issues head-on is difficult, and it’s tempting to put off until tomorrow what should be done today. But it’s unwise. That’s perhaps the No. 1 lesson from Detroit—and one that applies as much to cities and other municipalities as to companies.

Lesson No. 2: With Michigan Gov. Rick Snyder recently signing the “grand bargain” that officially pledges $195 million in state money to aid Detroit’s pensioners, it’s worth keeping in mind that, as with corporate turnarounds, there’s often a big difference between fixing an organization’s balance sheet and actually fixing its underlying operations, which will be the next big step for Detroit. However, it’s encouraging to see what appears to be a new spirit emerging in a grassroots way among Detroiters themselves—reflected, many think, by the election last fall of businessman Mike Duggan, who was a write-in candidate in the primaries, as mayor.

Lesson No. 3: Detroit reinforces the fact that municipal lenders nationwide are navigating dangerous, uncharted waters. For instance, only about a third of U.S. municipal bonds are supported by a general taxing authority. And in the past decade there’s been a sharp decline in the proportion of muni bonds insured or “enhanced” by monoline insurance companies or similar backstops—just 9.2% in 2013 versus an average of 37.9 percent for the decade prior.

Horror stories abound: Las Vegas Monorail bondholders taking a 98% haircut. Bondholders in the Clare, a Chicago senior-housing development, recovering just 17 cents on the dollar, despite having a mortgage as a security. Widely different recoveries for municipal airport leases in airline bankruptcies.

All of which leads to lesson No. 4: No matter what kind of municipal stakeholder you are, it pays not only to be proactive but to be very, very thorough in accessing all your options, risks and opportunities. And it’s a lesson all involved with Detroit are learning as it hopefully carves a path toward a successful restructuring and a brighter future.

Lisa Donahue is global leader of the turnaround and restructuring services group at business-advisory firm AlixPartners LLP and is based in New York. Follow her on Twitter at @LisaJDonahue.