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What is the effect of the Detroit Bankruptcy?

Part 1

So what happens now? That’s the question at the front of every construction contractor’s mind that has been working on a project for Detroit.

For those who are currently working on a Detroit project, your first step is to immediately seek legal counsel. For everyone else, this is a time to review all of the implications of a municipal bankruptcy and how it applies to you.

A municipal bankruptcy has a huge effect on everyone involved in construction contracts for the municipality. This includes virtually every department in the city, from Parks and Recreation to Water and Sewer to everything in between.

How are you getting paid?

The first that needs to be determined is how you are getting paid. Are you getting paid directly from the municipality (commonly referred to as the full faith and credit of the city)? Or are you getting paid from a general bond that is backed by the municipality? Maybe you are one of the lucky ones that are getting paid pursuant to a specific bond stream.

Special Assessment Bond. This is a bond secured by a compulsory levy of special assessments, as opposed to property taxes, made by a local unit of government on certain properties to defray the cost of local improvements and/or services that represents the specific benefit to the property owner derived from the improvement (e.g. a sewer bond). In California, these are typically referred to as 1915 Act or 1911 Act Bonds.

General Obligation Bond. This is a bond secured by a pledge of the issuer’s taxing powers (limited or unlimited). More commonly the general obligation bonds of local governments are paid from ad valorem property taxes and other general revenues. This has historically been considered to be the most secure of all municipal debt (but, as the Detroit Bankruptcy shows, not anymore).

The effects of a general obligation bond or direct payment from a municipality is discussed in Part 2.

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