Stewart Nelson

I would like to speak tonight to the possible impact of the mortgage crisis on municipal finance.  In case you have been off the planet for the past two weeks, you no doubt have your fill of the details of the meltdown on Wall Street in the residential mortgage and commercial credit market and the potential ramifications for Main Street (you and I) and our economy.  As U.S. credit markets ground to a halt last week and the resulting shockwave blasted through world financial capitals it became apparent that:

·        A U.S. and maybe a global recession is unavoidable.

·        Businesses are already cutting back capital projects and payrolls.What you may not have noticed is that 80-90% of the municipal bond sales were suspended due to uncertainty in the market. In my forty years as an investor, this is only the second time that I can remember such an event taking place.  Closer to home, in the first nine months of the year 1103 homes were foreclosed on in Washtenaw County compared to 741 in 2007.   Simply put a bad economy is now turning into a terrible economy and the end is not in sight yet.  This  uncertainty in the credit markets convey some negative implications for Ann Arbor, Washtenaw County and the State of Michigan:

1.     The cost of municipal borrowing will certainly increase and with large capital projects already budgeted for 2009-2010 we can expect some nasty surprises in finance costs.   

2.     We also can predict large stock and bond losses in our pension and VEBA plans.   These losses should be made up within the next budget cycle or we run the risk of dropping below recommended funding ratios.  How many CDO’s are in our retirement portfolios?  The City Bank law suit implies at least some.    

3.     Lastly, there is an increased chance of lower revenue sharing with the state as the state’s ability to borrow disappears and lower tax revenues force further budgetary concessions. At the risk of sounding like Chicken Little, as a student of the financial markets I have some suggestions for your consideration:

1.     Like every prudent business is currently doing we should ”hunker down” and examine every expense for necessity.   

2.     Increase the targets on the unallocated reserve for the General Fund to 12-15% from 8-12%.  

3.     Adopt a budget stabilization reserve of 1%. 

4.     Monitor budgets more closely with at least a semi-annual review and possibly monthly review.  You can ignore your personal brokerage account statements as they arrive to put off learning the bad news, but please don’t put your “heads in the sand” and hope and pray that we as a city are going to be immune to the economic “hurricane” that is certainly heading our way.  There is still time to prepare.   Clearly these are extraordinary times.  Please don’t just assume it will be business as usual for the next two years.