It's "Half Time" in Detroit

 

Where Detroit stands among top 50 US cities in muni debt

 
Chicago, IL, May 6, 2013
 
This year Chrysler sponsored a Super Bowl ad, "It's half time in America", featuring Clint Eastwood and its hometown of Detroit. It was a very touching narrative. Lately, Detroit made news again. The State of Michigan is poised to take over Detroit because the city is buried in a sea of deep red. Local politicians, understandably, are resisting the move. How does Detroit stack up against other major cities in America? What does this all mean for municipal bond investors? We took a look at these questions using our newly released Atlas Muni Database.

Demographics headwind

 
To gain a basic understanding of the situation in Detroit, we pulled some demographics information for top 50 US cities by population (Appendix 1).
 
By these measures, Detroit indeed has a lot of fighting to do. Among its peers, Detroit has the lowest per capita income average ($14,075) and median housing value ($71,100). It also has the highest poverty rate (36.16%), unemployment rate (18.15%), and housing vacancy rate (27.27%). Detroit's neighbor across Lake Erie, Cleveland, OH, is struggling similarly. But at least Cleveland boasts an unemployment rate of 9.42%.

Total Muni Debt Analysis

Detroit as an Atlas Issuer

 
According to publically available data, the City of Detroit directly issued debt under 8 issuers, each with a unique 6-digit CUSIP. Some of these issuers issue General Obligation debts, while others issue debt backed by specific revenues. But all of them is shouldered by the same people living in the city. To understand the full extent of its debt load, Atlas Muni Database groups all of them under a new concept, Atlas Issuer (AT00024925).
 
 
As we can see from the table above, the city issued debt backed not only from its general fund, but also from special revenue sources like sewerage, water supply, convention facility, and etc. In total, the city has about $3 billion of general debt outstanding, and $7 billion of revenue based debt. All together, it has about $10 billion direct debt outstanding. Note the debt amount here is already adjusted for those that are matured, early redeemed, or called.

Overlapping muni debt

 
The second part of muni debt analysis for the City of Detroit is to look at any other municipalities or government agents that have geographic overlap with the city. These entities also provide services to all or part of the residents within the city limit. For example, Detroit City School District serves all the residents in the city. Wayne County serves the residents within the county boundary. Since the City of Detroit overlaps with the county, about ¼ of services the county offers are actually for the residents in the city. Although the city government itself does not have direct obligation to these debt, the city residents still finance part of these obligations through either taxes or fees. The chart below shows the top 5 entities that overlap with Detroit.
 
 
Detroit City School District has $1.5 billion debt outstanding. It is the obligation of the residents in the school district, which covers the same geographic area as the city. Any additional debt load from the school district ultimately comes from the same city residents through additional taxes and fees, thus has an implication on the capability of the city to raise additional debt.
 
By the same token, since Wayne County and Wayne County Airport Authority geographically overlap with the City of Detroit, their debts are partially financed by the city residents. As an example, based on geographic overlap area, population, and economic conditions of the city and the county, it is estimated that 25% of the debt issued by Wayne County and Wayne County Airport Authority are considered as “overlapping” debt for the City of Detroit. The same approach is applied to all other entities that geographically overlap with the city.

Total muni debt summary

 
In some states, the state government itself is loaded with debt heavily, while in other state, local governments are more loaded. So far we already have the local municipalities and government agents overlapping debt. The same logic is applied to the state level governments. The debt amounts for the City of Detroit are shown in the table below. As we can see, the city has about $10.2 billion debt outstanding. If we include the “overlapping” debt from local municipalities and government agents, but excluding the debt from state level government and agents, the total debt amount will be $12.9 billion. If state level government and agents are included as well, the total debt amount for the City of Detroit is ballooned to $14 billion.
 

Debt over Demographics Ratios

 
Since we have total debt amounts, now we can compare them against local demographic and economic indicators, such as population, household income, housing value, estate tax, and so on. The calculated ratios make it possible to compare municipalities of different sizes and locations.
 
This type of analysis used to be done through expensive custom research efforts. For the first time ever, Atlas Muni Database provides this information to every Atlas Issuer in the marketplace. In this study, we use 6 ratios to see what we can learn about Detroit and its peers.

Direct general obligation debt over medium per capita income ratio

 
Direct General Obligation (GO) debt is the total GO debt issued by all issuers under an Atlas Issuer. No overlapping debt is included. By definition, it is has the most binding effect on a government entity like Detroit. The ratio is per capita Direct GO divided by medium per capita income.
 
Clearly Detroit stands out on the US map with a value of 0.31, or it takes everyone in Detroit 31% of their annual income to pay down the city’s general obligation debt. New York City is the next, at 0.20. Washington DC, Chicago, IL and Columbus, OH claim the 3rd, 4th, and 5th place, at 0.17 0.14 and 0.14. The vast majority of the top 50 cities have ratios of less than 0.10, or a third of Detroit's.
 

Direct total debt over medium per capita income ratio

 
Direct total debt is the total general obligation bond and revenue bond issued by all issuers under an Atlas Issuer. No overlapping is included. It is the total obligation a municipality imposed on itself. The ratio is per capita direct total debt divided by medium per capita income.
 
Here again Detroit tops the chart at 1.02, or it takes all the residents in the city all their annual income to pay down the city’s total debt obligation. Cleveland, OH, Washington DC, Atlanta, GA and San Antonio, TX are in the 2nd to 5th place, at 0.71, 0.66, 0.56 and 0.36 respectively. 32 cities fall under 0.20, or about 1 fifth of Detroit's.
 

Total general obligation debt excluding state overlapping debt over medium per capita income ratio

 
Total GO excluding state overlapping debt is the sum of direct total GO issued by the issuers under a given Atlas Issuer, plus the total overlapping portion of direct GO issued by other non-state-level Atlas Issuers that has geographic overlap with this Atlas Issuers. In Detroit's case, it would include the overlapped portion of the total GO issued by Detroit City School District, Wayne County Airport, Wayne County, and so on. The ratio is the per capita of this debt amount divided by medium per capita income.
 
Detroit tops this chart again at 0.46, followed by Chicago, Houston, TX, Denver, CO and Minneapolis, MN, at 0.31, 0.25, 0.24, and 0.23 respectively. Only 8 cities out of the top 50, including these 5, have a ratio of greater than 0.20.
 

Total debt excluding state overlapping debt over medium per capita income ratio

 
Total debt excluding state overlapping debt is similar to total GO excluding state overlapping. The only difference is it includes both GO and revenue bonds of a given Atlas Issuer, as well as non-state-level Atlas Issuers that overlap with it geographically. The ratio is the per capita of this debt amount divided by medium per capita income.
 
Detroit has the top spot here as well, at 1.30. Washington DC, Denver, Cleveland and Sacramento, CA took the next 4 spots, at 1.15, 1.05, 0.92 and 0.87.
 

Total general obligation debt over medium per capita income ratio

 
Total general obligation debt includes direct GO debt, as well as overlapping GO debt from both local and state level Atlas Issuers. It is the most comprehensive general obligatgion meansure of that government entity. The ratio is the per capita of this debt amoubt divided by the medium per capita income.
 
Detroit has a value of 0.47, compare to the ratio of total GO debt excluding state overlapping/medium per capita income at 0.46. The State of Michigan does not add a lot of general obligation debt. Chicago, Houston, Anaheim, CA and Sacramento are next, at 0.40, 0.28, 0.28 and 0.27. Denver and Minneapolis are edged out of top 5 by the two cities from California, suggesting a higher amount of general obligation debt in California, compare to the States of Colorado and Minnesota.
 

Total debt over medium per capita income ratio

 
Total debt is the all encompassing debt for a government entity. It includes direct general obligation and revenue debt, and all overlapping debt amount from both state and local Atlas Issuers. The ratio is the per capita of this debt amount divided by medium per capita income.
 
Detroit tops the pack at 1.40, following by Washington DC, Denver, Cleveland and Sacramento, at 1.15, 1.11, 1.09 and 1.07 respectively.
 

Summary

 
Debt over per capita income average is one of the most telling ratios to understand a municipality's ability to repay its debt. Given the current depressing state of earning capabilities of its population among top 50 cities in the country, Detroit is under more pressure to meet its debt obligations than most of its peers.
 
We all would like to see a better second half for the City of Detroit. However, it is not guaranteed unless the state and/or city government put the city's balance sheet in order first. Something must be done, sooner than later, before the general public and potential investors regain the confidence in the Motor City.

Disclaimer

 
Copyright © 2013 Atlas Investment Research, LLC. All rights reserved. The report is for information purposes only and is not an endorsement of any municipality or security. Redistribution is prohibited without written consent. For licensing or permissions, contact +1(312) 488-4046 or info@muniatlas.com.
 
Appendix #1: Demographics of top 50 US cities by population, sorted by per capita income average.
 
Source: US Census Bureau, US Department of Labor
Atlas: Muni Investment Research Specialist