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Officials: Detroit bankruptcy's impact on Pittsburgh should be minimal

| Friday, July 19, 2013, 11:54 p.m.
REUTERS
Detroit Emergency Manager Kevyn Orr addresses the media with Michigan Gov. Rick Snyder on Friday, July 19, 2013, during a news conference about the city’s bankruptcy filing.
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A store owner in downtown Detroit uses his electronic sign on Friday, July 19, 2013, to show he has faith in the city, despite its bankruptcy filing.

Pittsburgh and other cities likely will pay more to borrow money as a result of Detroit's bankruptcy because anxious investors might shy from investing in municipal bonds, financial experts said on Friday.

The impact on Pittsburgh, which avoided bankruptcy by seeking state oversight of city finances, should be minimal, officials said.

“People who invest in municipal debt kind of know what's going on. They know that some cities are better off than others,” said City Controller Michael Lamb.

Cities depend on the nearly $4 trillion municipal bond market to fund critical projects. Detroit, which owes creditors about $19 billion, filed bankruptcy on Thursday — a move likely to trigger investor anxiety and rising interest rates on municipal bonds, experts said.

“It's one of the things that scares investors, and so we could see a little bit more selling going forward and a little more reluctance to buy general obligation bonds,” said Tim Davis, vice president and director of the fixed income and municipal bond department for Downtown-headquartered Hefren-Tillotson Inc.

Municipal bonds long have had a reputation as a safe investment. What investors decide about the fallout from Detroit stands to have a huge effect on the municipal bond market, said Bill Larkin of Cabot Money Management.

Municipal bonds have carried yields that are about 85 percent of those of Treasurys, offering a huge cost benefit to cities, he said. If the Motor City's bankruptcy causes investors to demand more protection, they might bid muni bond yields closer to that of Treasurys, forcing cities to pay more interest costs.

Still, other cities have debts nothing like that of Detroit, whose bankruptcy is the largest municipal bankruptcy in U.S. history.

“It seems to me the effect on cities like Pittsburgh would be minimal, if at all,” Lamb said.

Pittsburgh sought state fiscal oversight in 2004, avoiding the bankruptcy proceedings that Stockton, Calif., and Jefferson County, Ala., also have filed.

Harrisburg, under a state-appointed receiver, is working to resolve a debt problem caused by the sale of the city's incinerator and lease of its parking assets.

Though Pittsburgh suffered from loss of steel mills, other industries and corporate headquarters, Detroit for decades has been the worst of the worst since the collapse of its once-mighty auto industry.

Unlike Detroit, Davis said, Pittsburgh rebounded, attracting new industries in technology, education and health care, though its city government remains under the fiscal oversight of two state-appointed agencies.

Ten years ago, Pittsburgh's credit rating was at junk bond status. It since has risen to an A rating from the nation's leading rating agencies. Its population bottomed out at 305,704 in 2010 and has increased to 306,211, according to 2012 U.S. Census estimates.

During his midyear financial update this week, Lamb said the city still has more debt, $612 million, and unfunded pension obligations, $700 million, than assets, but its revenue is exceeding expectations. He believes the city will report its fourth surplus in five years in 2013.

Debt payments are scheduled to decrease by more than half in six years, from $87 million to $38 million, Lamb said.

The city in 2012 borrowed for the first time in six years when it issued $80 million in bonds for capital improvements. It plans to borrow again in 2015.

Finance Director Scott Kunka said Detroit's case is isolated and should not have any impact on Pittsburgh's next bond issue.

“We were able to stabilize ourselves, and we're moving forward,” Kunka said. “I think if we went out in the market tomorrow, or Monday, I don't think it would have any impact on our ability to borrow.”

Still, Davis said, Detroit's bankruptcy could touch off a domino effect among ailing cities.

“It used to be absolutely taboo,” he said of municipal bankruptcies. “Now we have Harrisburg in default and Detroit filing for bankruptcy. Maybe it's becoming a little bit more of a trend.”

USA Today contributed to this report. Bob Bauder is a Trib Total Media staff writer. Reach him at 412-765-2312 or bbauder@tribweb.com.

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