Thread: Detroit Bankruptcy Detroit Files Largest Municipal Bankruptcy In Hist

Detroit's Fallout: Muni Illiquidity And Full-Faith-And-Credit Failure

Submitted by Tyler Durden on 07/25/2013 18:56 -0400

Municipal finance is in sharp focus after Detroit filed the largest municipal bankruptcy in history. Detroit’s filing is arguably an isolated case and its fiscal problems are not indicative of the broader municipal credit landscape; but, the outcome of the bankruptcy process will dictate whether the value of the full faith and credit pledge backing GO bonds will be diminished going forward. The global hunt for yield has probably chased new investors into the Muni market who may not fully understand that in recent years it has become an ‘ownership not rental’ market. In other words, it is unlikely holders of Munis can sell what they own, as liquidity in the secondary
market is almost non-existent.



Via Guy Haselmann (ScotiaBank),

Municipal finance is in sharp focus after Detroit filed the largest municipal bankruptcy in history and with analyst Whitney warning of more to come. At the moment, Detroit’s (relatively small) $18 billion in GO (general obligation) bonds have had few ripple effects on the $3.7 trillion US municipal market, or on the $100 trillion of global fixed income securities. However, this bankruptcy could eventually lead to significant reappraisals of credit risk, higher funding costs, and legal precedents pertaining to debt creditors and pension ‘guarantees’.

Many fiscal stresses have roots originating from the duplicitous incentive system of elected officials who over the past several decades promised future perks to state and local public employees, but who leave the fulfillment of those promises to successor governors or mayors. In New Jersey for instance, Governor Chris Christie inherited an underfunded pension, mostly caused by 22 years in a row of preceding Governors not paying into the pension system the full amount allocated in the State’s annual budget. Part of Christie’s high popularity in NJ and across the US is due to his plan to save the pension system – a plan that passed the state legislature with bi-partisan support.

Most US cities and states have not made much progress in addressing the legacies of those future promises. Making matters worse is the fact that municipal finances (in recent years) have run deficits despite constitutions that require balanced budgets. Reduced federal subsidies and low economic growth rates after the 2008 financial crisis have further impaired budgets. To bridge the gap, spending cuts are often made to basic social services such as education, road and park maintenance, infrastructure projects, or police and fire. Cuts to pensions or bond creditors are typically skirted due to legal protections.

Michigan’s governor appointed an emergency manager who proposes paying Detroit’s GO bondholders less than 20 cents on the dollar. As for the pensioners, the state constitution refers to accrued pension benefits as “contractual obligations which shall not be diminished or impaired”; yet, with a $9 billion underfunded gap, pensioners expect cuts. At some point, a judge is likely to make a ruling on the legality of cuts to creditors or pensions which could have an impact on market premiums and other public pensions. (The PEW Research Center estimates US pension underfunding as high as $3 trillion).

GO bonds are viewed as relatively safe securities because they are seen as being in the first lean position and ‘guaranteed’ by the taxing authority of the municipality. When problems develop, cuts in services happen, even as taxes rise. The combination drives out residents and businesses. The erosion to basic social services often leads to drops in home values and rising crime, further setting off a negative feedback loop. Therefore, the ability to tax or cut service has its limitations and should not be seen as a solution to ‘guarantee’ creditors, because they destructively undermine the sustainability of the city or state.

The global hunt for yield has probably chased new investors into the Muni market who may not fully understand that in recent years it has become an ‘ownership not rental’ market. In other words, it is unlikely holders of Munis can sell what they own, as liquidity in the secondary market is almost non-existent.

Via George Friedlander (Citi),

The Detroit bankruptcy filing is no surprise, given that its financial distress can be traced as far back as 1992, when Moody’s downgraded the City’s debt to junk. While ratings did bounce back to IG levels for brief periods, the City has essentially faced worsening budget deficits and liquidity challenges over the last decade.

The Detroit Emergency Manager’s proposal for creditors was unprecedented, at least as far as municipals are concerned, as it essentially tried to flatten the debt priority structure by attempting to impose the same treatment for GO bonds as other forms of debt which are deemed unsecured, including pension obligations, OPEBs, leases and COPs.

The Emergency Manager’s restructuring plan was unlikely to succeed via bilateral agreements and just on the face of it, the Chapter 9 filing could be viewed as mild positive for GO bond holders (especially unlimited GO bondholders) as now more control rests with the bankruptcy judge and standard Chapter 9 rules could apply.

However, the Emergency Manager retains the exclusive rights to file an adjustment plan (unlike Chapter 11, there is no provision in Chapter 9 for creditors to end this exclusivity or propose a competing plan). Thus, the original restructuring plan could serve a baseline for the ultimate settlement and recovery process.

It is still early in the process to predict recovery rates but the unlimited tax GO bond structure provides creditors with a stronger lien on the issuer’s resources and thus recovery rates on this class of debt could be somewhat higher vs. limited tax GOs and other forms of debt which are deemed unsecured. Again, it’s early in the process and there is no precedent for a large city with this level of financial distress.

Detroit’s filing is an isolated case and its fiscal problems are not indicative of the broader municipal credit landscape, in our view. But, the outcome of the bankruptcy process will dictate whether the value of the full faith and credit pledge backing GO bonds will be diminished going forward.

http://www.zerohedge.com/news/2013-0...credit-failure

Ron Paul On Gold And Why "We'll See More Detroits"

Submitted by Tyler Durden on 07/25/2013 17:06 -0400

• Detroit
• Ron Paul

In a brief but perfectly succinct interview on CNBC yesterday, Ron Paul shared his opinion on the need to own gold (and the physical demand for the manipulated metal) and the Detroit bankruptcy ("we're going to see more Detroits"). He concludes that "long term, you can expect governments not to change" and that they’ll keep taking on more debt and printing more money until people lose confidence in both the U.S. dollar and the U.S. military, both of which will be shake the foundation of a fiat/dollar system.

Video at the Page Link: http://www.zerohedge.com/news/2013-0...-more-detroits


http://www.zerohedge.com/news/2013-0...-more-detroits

The Democrats Destroyed Detroit

July 23, 2013 by Ben Crystal

PHOTOS.COM

Don’t look now, kids; but while you were laughing at the irony of the same Democrats who ignored the bloodcurdling murder of Baby Antonio Santiago gathering to demand “justice” for Trayvon Martin, Detroit provided one of the greatest “teachable moments” in American history. Despite enjoying the better part of a century’s worth of compassionate, caring and community organized leadership by the best Democrats money could satisfy — in combination with a primary industrial base shot through with the very soul of Big Labor — Detroit skidded through the safety cones of taxpayer-funded bailouts and slammed back into the bridge abutment of bankruptcy.
And let’s be clear about this: The Motor City isn’t dying. It’s dead. Sure, there are still residents skulking around the once-proud burg; but census figures show that their numbers are nearly 60 percent lower than they were a half-century ago. What remains is an urban zombie, a hollow-eyed corpse shuffling along in a mindless search for taxpayer funds.
But this isn’t news. Detroit’s demise didn’t sneak up from behind us while we were distracted by exploding Chevy Volts. Actually, in a sense, it did. We were told that Detroit had put its troubles in the rear view mirror. Thanks to a government takeover led by President Barack Obama, the worthless executives were expunged from the model line like Pontiac Azteks. In their place, even more worthless bureaucrats whose private-sector experience extended to coffee with the Undersecretary of Commerce’s scheduler joined hands with Big Labor to continue churning out the mind-numbingly depressing fleet cars that combine none of the competitors’ pizzazz with none of their quality control. Case in point: Pre-bailout, the Chevy Malibu versus the Toyota Camry. Post-bailout, the Chevy Malibu versus the Toyota Camry.
In truth, Detroit’s downward spiral began decades ago. Following the post-World War II boom; the Nation’s industries underwent an inevitable downturn. Since the Federal government had yet to get into the “saving union thugs from their own incompetence” business, companies like Packard shuttered their plants. Not long afterward, as the city reeled from the economic blow, a police raid of an illegal speakeasy so enraged the patrons that they started a race riot, which would ultimately hold the “burning down our own city” title until South Central Los Angeles claimed it a quarter century later. Not only did damages exceed $80 million (about $560 million in 2013 dollars); but they sent 2,500 businesses to “quitsville,” 43 people to the morgue and a huge portion of the productive population to the suburbs. Universally respected economist Thomas Sowell noted:

Before the ghetto riot of 1967, Detroit’s black population had the highest rate of home-ownership of any black urban population in the country, and their unemployment rate was just 3.4 percent. It was not despair that fueled the riot. It was the riot which marked the beginning of the decline of Detroit to its current state of despair.

Following the riots, an oil crunch took its toll. The auto industry, plagued by Big Labor attacks since the 40s, responded to rising gas prices with a series of incredibly awful automobiles and incredibly bad concessions to the unions. After GM essentially launched the Japanese import market with horrendous cars like the Vega, the United Auto Workers actually managed to exact the infamous GM jobs bank, a program in which laid-off workers were paid nearly full salary and benefits to not work. Over the next few decades, the jobs bank cost GM just less than $1 billion per year.
Note from the Editor: Hyperinflation is becoming more visible every day—just notice the next time you shop for groceries. All signs say America’s economic recovery is expected to take a nose dive and before it gets any worse you should read The Uncensored Survivalist. This book contains sensible advice on how to avoid total financial devastation and how to survive on your own if necessary. Click here for your free copy.
While the city’s major employers desperately tried to keep their heads above water despite the unions’ attempts to drown them, the remaining denizens of Detroit decided to salt the fields they had so badly plowed under in 1967. Given the choice to elect redoubtable stewards of the public trust, the Motor City’s voters elected kleptocrats like Kwame Kilpatrick — twice.
Bad planning, bad production, bad employees, bad politicians and bad people took control of a city named Detroit. By the time they were through with it, Detroit was the city we see now: Democratted to death.
–Ben Crystal

http://personalliberty.com/2013/07/2...royed-detroit/

Saving Detroit From Itself

A federal bailout would only reinforce the city's corrupt political culture.

The AFL-CIO and its friends are mourning Detroit as a victim of capitalism, claiming the government has a moral obligation to rescue the bankrupt city. This is a nice political fable, but the hard truth is that Motown is a victim of its own political vices and a bailout would merely forestall the necessary rehab.

One myth is that Detroit is a victim of the U.S. auto industry. But the city's breakdown preceded the decline of GM, Ford and Chrysler and has continued despite their resurgence. American car makers have been doing better for three years, but Detroit is getting little benefit because the industry long ago left the city. Michigan's jobless rate has fallen to 8.7% from 14.2% in August 2009, and the rate is now 6.2% in suburban Dearborn (Ford headquarters), but still 16.3% in Detroit.

Related Video


Assistant OpinionJournal.com editor Allysia Finley on why Detroit and its workers pensions shouldn’t be bailed out. Photo: Associated Press

Detroit's decline really began with the middle-class migration to the suburbs in the 1950s, which accelerated after the 1967 race riot and election of labor organizer Coleman Young as mayor in 1973. During his 20-year reign, Mr. Coleman ignored crime, inflamed racial tensions and built a patronage machine. (See Steve Malanga's history nearby.)

Local politicians bought union support with generous labor agreements. Pensions were sweetened retroactively. In good investment years, retirement funds issued bonus checks. Until two years ago public-safety officers didn't have to pay a penny to their pensions and could retire at 55 with roughly 85% of their salary, a 2.25% annual cost-of-living increase and nearly free health benefits.

While the average pension is $30,000 for public safety and $19,000 for other municipal workers, these figures are skewed by workers who retire early with reduced benefits or on disability. A quarter of retired officers receive disability pensions, which pay two-thirds of salary. Fifty-four retirees are under the age of 20 and earn pensions that average $23,300, according to a 2011 actuarial report.

The actuaries mention as a footnote that the retirement tables "may include records with defective birth dates." Detroit's pension funds, like most of its municipal agencies, keep sloppy records. About 70% of the city's financial journal entries are booked manually.

Misrule has resulted in the nation's highest violent crime rate, worst schools, blight and corruption. A former mayor, city treasurer and several pension-fund trustees were recently indicted for corruption. The general counsel for the pension funds this year was charged with securing kickbacks for trustees, including a $5,000 check presented as a birthday gift at a soiree, in return for a nice raise.



Associated Press Downtown Detroit

While local politicians and union chiefs got richer, the city became poorer. Businesses and middle-class families have fled, sapping the city of revenues and economic vitality. About a third of residents live below the poverty line.

To make up for lower property and income-tax collections, the state has increased its revenue-sharing with Detroit and allowed it to raise tax rates higher than any other city in Michigan. Detroit collects 50% more tax revenue per capita than Dearborn and receives four times as much money from the state.

In one sense, Detroit has already received a rolling bailout that it squandered. Last year the city received $228 million in federal grants and $137 million from the state. It has also borrowed $1.6 billion to finance pensions over the last decade. Under emergency manager Kevyn Orr's restructuring plan, the capital market creditors who bailed out the unions would be repaid pennies on the dollar. That should teach investors a lesson about enabling deadbeat cities.

Mr. Orr has also proposed slashing unfunded retirement liabilities by 90% and dropping retirees onto Medicare and the ObamaCare exchanges—thus kicking $5.7 billion in liabilities to national taxpayers. He also wants to shift workers to defined-contribution plans, which is what state workers receive.

Unions protest that it's unfair to put pensions under the knife in bankruptcy since pay and other benefits have already been nipped at the bargaining table. But these concessions were cosmetic: a 10% wage cut, reduction in vacation accruals, a pension cost-of-living freeze and elimination of retiree dental care and future sick pay.

In any event, retirees aren't about to be thrown out on the crime-ridden streets. The city's pension funds are between 60% to 85% funded depending on the actuarial assumptions, and Mr. Orr's proposed haircut would affect only the unfunded portion, meaning most accrued benefits will be protected.

For decades the city has turned to taxpayers and capital markets to finance worker pensions, but both are tapped out. So finally workers and retirees will have to pay. There's no such thing as a free pension.
***

Unions say it's not fair for the city to break promises to workers, though it long ago abrogated its social contract with local taxpayers to protect their safety and provide basic public services. What would really be unfair is to make taxpayers in cities like San Jose, California, and Providence, Rhode Island, which have scaled back current worker pensions to avert bankruptcy, pay for Detroit's recklessness.

As history shows, sending more cash to Detroit won't fix its breakdown in self-government. Another bailout would merely support its toxic political culture of neglect and corruption.

A version of this article appeared July 27, 2013, on page A14 in the U.S. edition of The Wall Street Journal, with the headline: Saving Detroit From Itself.



http://online.wsj.com/article/SB1000...inion_newsreel

Exclusive: 4 in 5 in US face near-poverty, no work

WASHINGTON (AP) — Four out of 5 U.S. adults struggle with joblessness, near poverty or reliance on welfare for at least parts of their lives, a sign of deteriorating economic security and an elusive American dream.

Survey data exclusive to The Associated Press points to an increasingly globalized U.S. economy, the widening gap between rich and poor and loss of good-paying manufacturing jobs as reasons for the trend.

The findings come as President Barack Obama tries to renew his administration's emphasis on the economy, saying in recent speeches that his highest priority is to "rebuild ladders of opportunity" and reverse income inequality.

Hardship is particularly on the rise among whites, based on several measures. Pessimism among that racial group about their families' economic futures has climbed to the highest point since at least 1987. In the most recent AP-GfK poll, 63 percent of whites called the economy "poor."

"I think it's going to get worse," said Irene Salyers, 52, of Buchanan County, Va., a declining coal region in Appalachia. Married and divorced three times, Salyers now helps run a fruit and vegetable stand with her boyfriend, but it doesn't generate much income. They live mostly off government disability checks.

"If you do try to go apply for a job, they're not hiring people, and they're not paying that much to even go to work," she said. Children, she said, have "nothing better to do than to get on drugs."

While racial and ethnic minorities are more likely to live in poverty, race disparities in the poverty rate have narrowed substantially since the 1970s, census data show. Economic insecurity among whites also is more pervasive than is shown in government data, engulfing more than 76 percent of white adults by the time they turn 60, according to a new economic gauge being published next year by the Oxford University Press.

The gauge defines "economic insecurity" as a year or more of periodic joblessness, reliance on government aid such as food stamps or income below 150 percent of the poverty line. Measured across all races, the risk of economic insecurity rises to 79 percent.

"It's time that America comes to understand that many of the nation's biggest disparities, from education and life expectancy to poverty, are increasingly due to economic class position," said William Julius Wilson, a Harvard professor who specializes in race and poverty.

He noted that despite continuing economic difficulties, minorities have more optimism about the future after Obama's election, while struggling whites do not.

"There is the real possibility that white alienation will increase if steps are not taken to highlight and address inequality on a broad front," Wilson said.

___

Sometimes termed "the invisible poor" by demographers, lower-income whites are generally dispersed in suburbs as well as small rural towns, where more than 60 percent of the poor are white. Concentrated in Appalachia in the East, they are also numerous in the industrial Midwest and spread across America's heartland, from Missouri, Arkansas and Oklahoma up through the Great Plains.

More than 19 million whites fall below the poverty line of $23,021 for a family of four, accounting for more than 41 percent of the nation's destitute, nearly double the number of poor blacks.

Still, while census figures provide an official measure of poverty, they're only a temporary snapshot. The numbers don't capture the makeup of those who cycle in and out of poverty at different points in their lives. They may be suburbanites, for example, or the working poor or the laid off.

In 2011 that snapshot showed 12.6 percent of adults in their prime working-age years of 25-60 lived in poverty. But measured in terms of a person's lifetime risk, a much higher number — 4 in 10 adults — falls into poverty for at least a year of their lives.

The risks of poverty also have been increasing in recent decades, particularly among people ages 35-55, coinciding with widening income inequality. For instance, people ages 35-45 had a 17 percent risk of encountering poverty during the 1969-1989 time period; that risk increased to 23 percent during the 1989-2009 period. For those ages 45-55, the risk of poverty jumped from 11.8 percent to 17.7 percent.

By race, nonwhites still have a higher risk of being economically insecure, at 90 percent. But compared with the official poverty rate, some of the biggest jumps under the newer measure are among whites, with more than 76 percent enduring periods of joblessness, life on welfare or near-poverty.

By 2030, based on the current trend of widening income inequality, close to 85 percent of all working-age adults in the U.S. will experience bouts of economic insecurity.

"Poverty is no longer an issue of 'them', it's an issue of 'us'," says Mark Rank, a professor at Washington University in St. Louis who calculated the numbers. "Only when poverty is thought of as a mainstream event, rather than a fringe experience that just affects blacks and Hispanics, can we really begin to build broader support for programs that lift people in need."

Rank's analysis is supplemented with figures provided by Tom Hirschl, a professor at Cornell University; John Iceland, a sociology professor at Penn State University; the University of New Hampshire's Carsey Institute; the Census Bureau; and the Population Reference Bureau.

Among the findings:

—For the first time since 1975, the number of white single-mother households who were living in poverty with children surpassed or equaled black ones in the past decade, spurred by job losses and faster rates of out-of-wedlock births among whites. White single-mother families in poverty stood at nearly 1.5 million in 2011, comparable to the number for blacks. Hispanic single-mother families in poverty trailed at 1.2 million.

—The share of children living in high-poverty neighborhoods — those with poverty rates of 30 percent or more — has increased to 1 in 10, putting them at higher risk of teen pregnancy or dropping out of school. Non-Hispanic whites accounted for 17 percent of the child population in such neighborhoods, up from 13 percent in 2000, even though the overall proportion of white children in the U.S. has been declining.

The share of black children in high-poverty neighborhoods dropped sharply, from 43 percent to 37 percent, while the share of Latino children ticked higher, from 38 to 39 percent.

___

Going back to the 1980s, never have whites been so pessimistic about their futures, according to the General Social Survey, which is conducted by NORC at the University of Chicago. Just 45 percent say their family will have a good chance of improving their economic position based on the way things are in America.

The divide is especially evident among those whites who self-identify as working class: 49 percent say they think their children will do better than them, compared with 67 percent of non-whites who consider themselves working class.

Last November, Obama won the votes of just 36 percent of those noncollege whites, the worst performance of any Democratic nominee among that group since 1984.

Some Democratic analysts have urged renewed efforts to bring working-class whites into the political fold, calling them a potential "decisive swing voter group" if minority and youth turnout level off in future elections.

"They don't trust big government, but it doesn't mean they want no government," says Republican pollster Ed Goeas, who agrees that working-class whites will remain an important electoral group. "They feel that politicians are giving attention to other people and not them."

___

AP Director of Polling Jennifer Agiesta, News Survey Specialist Dennis Junius and AP writer Debra McCown in Buchanan County, Va., contributed to this report.

http://bigstory.ap.org/article/exclu...erty-no-work-0

http://www.alipac.us/f9/sgt-report-d...7/#post1358975

$100M in federal tax dollars for Detroit?

By Detroit Free Press (MI) September 26, 2013 12:15 pm

WASHINGTON -- Obama administration officials could announce Friday in Detroit that more than $100 million in federal and private funds -- some new money, some previously announced -- will be made available for demolitions, policing and transportation, a person with knowledge of the officials' scheduled meeting with state and local leaders said Wednesday.
Two days before the summit, much of the agenda -- as well as the list of all participants -- remained a mystery, though some details have emerged.
Among the possibilities: a $20-million private-sector match for the $52 million in federal demolition funds Detroit received; $10 million in grants to beef up policing around schools; technical assistance from Washington in freeing up as much as $100 million in transportation funds that haven't been put to use because the city hasn't met the qualifications.
-- Rochelle Riley: Detroit emergency manager Kevyn Orr says it's time for state to run Belle Isle
-- Full coverage: Detroit's financial crisis
President Barack Obama's administration is sending at least three cabinet officials -- Housing and Urban Development Secretary Shaun Donovan; Attorney General Eric Holder, and Transportation Secretary Anthony Foxx -- to the summit. They will meet with a group to include Gov. Rick Snyder, Detroit Mayor Dave Bing and emergency manager Kevyn Orr.
"I think they are sending in the cavalry," said U.S. Sen. Carl Levin, a Democrat from Detroit, whose staff, the Free Press reported weeks ago, created a list of more than 200 programs through which the administration could find dollars to help Detroit. Levin said he expects the cabinet members to announce funds that have not been announced. He also said the visit is the first of many.
"These cabinet officers ... will do more than just planning and simply saying, 'There's going to be an effort made,' " he said. "In addition to describing the effort, which is a pretty serious one when you've got three cabinet officers, I'm hoping there will be some announcements made about specific grants, funds that have been found in existing programs that can be used."
"We tried to identify every single program that might be a ... funding source," said Levin, who is also expected to attend, along with Democratic U.S. Sen. Debbie Stabenow of Lansing and U.S. Reps. John Conyers of Detroit, John Dingell of Dearborn and Gary Peters of Bloomfield Township.
Detroit emergency manager Kevyn Orr said that one of the great things the feds could offer is technical assistance to a city with computer technology so outdated that much of the accounting is done by hand.
"If we as a city show we are capable of meeting conditions to get the aid, use the aid, account and report for the aid, different federal agencies ... will feel comfortable giving us aid.
"We have $293 million administered through seven programs, and we're not compliant," he said.
Orr, who has floated the idea of hiring a firm just to ensure the city complies with regulations to get funds, cited the fire department in a specific example of how getting a grant and keeping a grant are two different things.
"We had a SAFER grant to hire 140 FTES" -- or Full-Time Equivalents -- in the fire department, he said. "But the grant has limitations on how much it will pay for overtime. So the administrator over at Fire has to sit there and make these calculations and entries for each FTE. It takes 20 minutes apiece, on average, for each person -- three weeks, without the technology that could take the press of a button. If these were quarterly reports, that means a third of each quarter for an employee is spent on compliance. That's one grant. Without technology, we're actually putting a tremendous burden on both city operations and our own employees, who are trying. I've developed a great deal of respect and admiration for our employees. They're trying to do their jobs with the tools that they have."
Announced last Thursday, Friday's meeting -- the first large-scale gathering of federal officials with state and local leaders in response to Detroit's bankruptcy -- is expected to last from 11 a.m. to 1 p.m. and be held at Wayne State University. It will touch on blight eradication, public safety, transportation systems and the city's capacity to use federal resources. The meeting is by invitation only and closed to the media, though there could be a briefing afterward.
With no wide-scale federal bailout coming, White House officials have been monitoring the city's progress and offering to match local leaders with existing sources of aid through a series of meetings in Washington.
By the time three cabinet members, an economic adviser and their staffs finish meeting Friday with local leaders and stakeholders, they plan to announce new monies and improved ways of ensuring that Detroit gets and spends the more than $200 million it is awarded in federal grants each year.
Much of that money goes unspent because the city fails to comply with rules for handling it.
Rep. John Dingell, D-Dearborn, said the meeting is part fact-finding and part relationship-building.
"They want to establish a working relationship with folks in Detroit. ... They also want to show ... that the administration wants to support the city."
___
(c)2013 the Detroit Free Press
Visit the Detroit Free Press at www.freep.com
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http://www.gopusa.com/news/2013/09/2.../?subscriber=1

Detroit’s Bankruptcy Postmortem: The Worms Keep Slithering Out

Submitted by Tyler Durden on 09/26/2013 16:46 -0400

Submitted by F.F. Wiley of Cyniconomics blog,

You may have seen recent revelations that Detroit routinely raided its pension funds to award extra cash – including bonuses dubbed “the 13th check” – to both retirees and active employees. These payments were far in excess of the city’s negotiated obligations and hidden from both the public and Detroit’s bond investors.

Here are a few justifications for the payments from an article in the Detroit Free Press:

“Things were always bad for employees,” [former pension board member Sandra Studzinki] said. “It was a way to make up for lots of the years that there were no pension increases.”
...

“Many retirees relied on that check to pay their increased utility bills during the winter,” [General Retirement System Vice Chairman John Riehl] wrote in a trustees report Dec. 4, 2011. “Also remember that the money would go directly into the local economy.”

And more from The New York Times:

[Pension board spokeswoman Tina Bassett] said it was appropriate for retirees to benefit from market upturns because they had paid into the pension fund, so their own contributions had generated part of the investment gains.

“People were having a hard time, living hand-to-mouth, and we thought we would give them some extra,” Ms. Bassett said.

Also from the New York Times, estimates of the staggering amounts:

The outside actuary, Joseph Esuchanko, concluded that the various nonpension payments had cost Detroit nearly $2 billion from 1985 to 2008 because the city had to constantly replenish the money, with interest. It appears that Mr. Esuchanko could not get data for years before 1985.

His calculations included only the extra payments by Detroit’s pension fund for general workers. Detroit has a second pension fund, for police officers and firefighters, which also made excess payments. Mr. Esuchanko could not get the data he needed to calculate those, either.

And how they pulled it off:

Most of the trustees on Detroit’s two pension boards represent organized labor, and for years they could outvote anyone who challenged the payments.

And here’s an opinion from the Detroit Free Press’s editorial board:

It’s a startling sum of money, and it’s directly connected to the fund’s instability, as well as the fiscal health of the city and the threat that bankruptcy might keep Detroit from being able to honor its pension obligations.

There may be no cleaner account of the repercussions of handing power to those who show their compassion with the public purse. However well meaning the union reps controlling Detroit’s pension board may have been, their politics clearly compromised the city’s long-term health.

Don’t get me wrong, I’m not posting this to support today’s mainstream Republican Party. Bush 43 helped ensure that long-term thinking is a thing of the past for those who control the federal government, whether red or blue.

But at the local level, stories like this reinforce an opinion I shared in this post. I showed a strong correlation between political bias and unemployment rates for 218 American cities, and argued that there’s probably some causation in both directions.

Causation #1: High unemployment and related factors are likely to favor political candidates from the left.

Causation #2: Left wing politics encourage the unsustainable spending that eventually leads to what we see today in Detroit.

http://www.zerohedge.com/news/2013-0...slithering-out