Detroit

[imoldernu]

The decision on bankruptcy eligibility is planned to be announced on Tuesday Dec. 03.
While it will go little noticed by most people, the decision may well set the framework for Supreme Court decisions in the future.
Public pensions, public property, and the continuation of government as we know it, may see the first attempt at legal definitions to affect the future of large cities.
Something to watch. One of many articles that will follow.

Retirees fight Detroit's proposed loan - MarketWatch
USA Today overview:
http://www.usatoday.com/story/news/n...uptcy/3823451/

[imoldernu]

An ulterior motive for looking at the future of Detroit.
The city has gone from a population of 1.8 million in 1950 to 700,000 today, and in addition to the problem of pensions that may not be paid, an infrastructure that is so severely damaged, that even the most optimistic backers know it will never be repaired in this lifetime.
While for most people, this problem is far away, and not likely to directly have an affect on them personally, maybe not...

The question is, "What does this have to do with me?" Except for future tax increases, maybe nothing, except a decline in services. On the other hand, if you plan to move, your choice of places to settle could have an effect on your later years... especially if you are looking forward to 10, 20 or more years of retirement.

We live in a Central Illinois small town, which is surrounded by many small communities, and much farmland. In some ways, we are seeing signs of a mini-Detroit... with older homes, a shrinking population, and tax base. So far, signs of deterioration of quality of life, is limited to the consolidation of school districts, larger class sizes, bussing where a three minute walk was once the norm, and a shifting of Police and Fire protection from local to county. Small businesses are rapidly closing, and main streets becoming empty shop windows.

So, don't choose a small town. But... it's happening on a wider scale... not just in small towns, but in larger municipalities, and where most people don't even realize that their future is being compromised.

One way to check on the financial status of the town is to look at the Municipal Bond Rating... (google - Moodys Municipal Bond Rating Yourtown NY), this should give an indication of the borrowing power that might be needed to keep the services intact. In addition, knowing the state of the cash reserves, is a good indicator of stability.

Quote:

Cash reserves are necessary to fund the City’s day to day operations as well as fund capital improvements, and help ensure that the City can keep operating in case of an emergency. Under current economic conditions, these reserves are particularly important in case revenues for the City decline. In addition, many operations of the City, particularly within the water, sewer and electric utilities, require significant cash reserves because equipment operated and maintained by the City, which is crucial to maintaining each utility, can cost hundreds of thousands of dollars to replace.

I doesn't take very long for a financially strapped municipality to begin having problems. Even with an A+ credit rating, the loss of services and the effect on infrastructure is becoming apparent in many cities. A reduction of force in Police Departments, a shift from paid to volunteer Fire Departments, closing of public pools, and larger class sizes is becoming common.

Even in my own town, which is financially stable, the problems of an aging infrastructure (sewers) is becoming very costly, and the unforeseen shutdown of a county incinerator has left a larger than expected debt burden.
A long expected referendum on a new school, just narrowly passed... where only a year ago, it was an accepted and foregone conclusion. Our local mall has lost 25% of the smaller stores in just the past 3 years.

True... not Detroit. The streetlights still work, the roads get repaired and the Police, Fire and Ambulance services are in minutes, not hours. Pensions, while not well funded, can be repaired, and the schools still have gym, music and sports teams. Trash pick up is good, if a little more expensive, and fall leaf pick up is still offered. Our local parks are still maintained and downtown is still attractive even with many empty stores. As of now we're doing well.

Not meant as a downer, but as a reality check... and for anyone looking towards a future move, or looking at a multi year timeline, not a bad idea to check out the municipal finances... not just for possible tax increases, but more importantly, for the quality of life in the years to come.

[2B]

Several years ago I began my comments that reliance on the government for your future has risks. No one seemed to question that changes to SS could be made that wouldn't necessarily be pleasant but public pensions were taboo. I had a snarky response back then that "their" public pension was guaranteed by the state constitution. I don't hear anyone with that much confidence anymore. Here in relatively solvent Texas, our larger municipalities have substantial underfunding for their pensions although not generally as bad as California and Illinois. In Houston's last mayoral election, the incumbent was challenged by a candidate of the same political party on these pension issues. The mayor suddenly found fiscal religion and vowed to clean up the mess. She was re-elected but it's still to be seen if she actually does anything.

We could go through the whole litany of "becauses" like fireman and police are heros, the pensions are part of their compensation, public employees are paid less than in the private sector so the higher pension is justified, etc. However, I won't go there other than to say these really don't need to be discussed. If the government entity doesn't have the money, something has to give. Case law will be written on how this will be worked out. Detroit and other states and municipalities are showing us that ultimately taxpayers will vote with their feet.

[imoldernu]

Decision made... City CAN file bankruptcy. While the case will drag on, the Pension part doesn't look good for the future.
Will definitely go to the Supreme Court.

Municipal employees across the country will be taking notice.

http://www.freep.com/article/20131203/NEWS01/312030084/

Quote:

The city of Detroit today officially became the largest municipality in U.S. history to enter Chapter 9 bankruptcy after U.S. Bankruptcy Judge Steven Rhodes declared it met the specific legal criteria required to receive protection from its creditors. The landmark ruling ends more than four months of uncertainty over the fate of the case and sets the stage for a fierce clash over how to slash an estimated $18 billion in debt and long-term liabilities that have hampered Detroit from attacking pervasive blight and violent crime. Rhodes — in a surprise decision this morning — also said he’ll allow pension cuts in Detroit's bankruptcy. Rhodes emphasized that he won’t necessarily agree to pension cuts in the city’s final reorganization plan unless the entire plan is fair and equitable. “Resolving this issue now will likely expedite the resolution of this bankruptcy case,” he said.

[2B]

Quote:

Originally Posted by imoldernu Decision made... City CAN file bankruptcy. While the case will drag on, the Pension part doesn't look good for the future. Will definitely go to the Supreme Court. Municipal employees across the country will be taking notice. Judge rules Detroit eligible for historic Chapter 9 bankruptcy, says pensions can be cut | Detroit Free Press | freep.com

I'm not sure there is any real new issue here except the size. I'm not sure what here is really going to make it all the way to SCOTUS except possibly some procedural issues. The caveat is that this is big enough to not be able to dismissed with a wave of the hand. This will set the stage for other big, to big to pay, public pensions.

Municipal pensions have been cut before. Cities have gone through Chapter 9. Rhode Island and Mississippi have had municipal pensions cut. The California cities have avoided any pension cuts so far but some of the "works in progress" there don't seem to have the resources to make even CALPERS happy. California has centralized most of their pensions from what I've heard. That will immediately make it a state-wide issue.

[travelover]

I've lived my whole life within 25 miles of Detroit. One of the really bad parts of this fiasco is the prospective selling off of the art works at the Detroit Institute of Arts. While technically it is a city asset, the DIA is regionally supported with millages from the three surrounding counties and visited by residents all over the state. On any visit, you are much more likely to see suburbanites there than Detroit residents. So, to residents of the metro area, it is like Washington D.C. going broke and selling off the Washington Monument or the Lincoln Memorial. The DIA is a regional resource like the zoo or other museums.

That said, the pensions of retired city workers are in jeopardy and these workers were opted out of Social Security. They will also likely lose any heath care benefits.

Rock and a hard place. In my case, this may just bump up my timing to move out of the area.

[ERhoosier]

Having grown up in Detroit area I find the long downhill course to be very sad indeed. After series of bad decisions by city leaders (not only politicians, but unions & voters too) it will likely be a long, tough road back. Unfortunately, Detroit is not a unique situation and perhaps a harbinger of many future muni bankruptcies across the nation. Local gov'ts are not exempt from principles of fiscal responsibility.


Proposal to sell off DIA assets is likely to spark another round of nasty court fights potentially affecting the entire US fine art market, and DIA has already hired counsel to defend itself.

[HFWR]

Unfortunately, governments beholden to winning the next election suck at long-term planning. Even here in Stepfordville, roads are in disrepair and capacity is forever a few years behind the growth...

[imoldernu]

In a post decision interview, the AFSCME rep mentioned the average pension being $19,000... and that the loss might be 1/2 of that, based on previous discussions.

As Travelover mentioned, the municipal employees were opted out of social security... $9500/yr would be a difficult retirement income... 20,000 employees.

While the size of the deficits are not comparable, the Detroit Pension Fund deficit is $3.5 Billion... The Illinois pension fund has a current shortfall of over $100 Billion...

Illinois is Broke - News and Updates

The Judge in the Detroit decision stated, in essence, that the pension funds would receive the same treatment as other debts/assets... in ongoing negotiations.

My buddy said... If you ain't worried, you ain't listening!

[2B]

Quote:

Originally Posted by imoldernu The Judge in the Detroit decision stated, in essence, that the pension funds would receive the same treatment as other debts/assets... in ongoing negotiations.

The big question I'm waiting to hear the answer to is whether all of the city debt will be treated equally. Revenue bonds have been treated differently than those guaranteed by the "full faith and credit" of the government entity up until now. The current filing lumps them all together. That will definitely get pushed to SCOTUS but there's no guarantee it will be heard.

If prioritization of bond classes is eliminated, it will have significant impact on bond ratings, insurance costs and how muni bonds will be looked at going forward.

[2B]

Quote:

Originally Posted by imoldernu In a post decision interview, the AFSCME rep mentioned the average pension being $19,000... and that the loss might be 1/2 of that, based on previous discussions. As Travelover mentioned, the municipal employees were opted out of social security... $9500/yr would be a difficult retirement income... 20,000 employees.

I've seen this $19,000 average pension thrown around. Coincidentally, that is almost the amount of my combined pensions. Of course, I don't get the "13th month" or "Christmas bonus" that Detroit pensioners had received. What isn't ever presented is what was the formula used to calculate the pension. There may be a massive number of people with 5-10 years of service drawing pensions that reduces the $100,000 25 yr pensions to the $19,000 average. The proper choice of statistics can always be used to show whatever your argument is in the best light.

[imoldernu]

Interest in the subject is beginning to spread, as reality sets in and decisions come closer.

http://www.nytimes.com/2013/12/04/us...Y&ei=5065&_r=0

[imoldernu]

Interest in the subject is beginning to spread, as reality sets in and decisions come closer.

http://www.nytimes.com/2013/12/04/us...Y&ei=5065&_r=0

Quote:

Pension Ruling in Detroit Echoes West to California A judge’s decision in Michigan is resonating all the way to California. Judge Steven W. Rhodes, presiding in Detroit’s bankruptcy case, said pensions may be cut. The ruling by Judge Steven W. Rhodes, who is presiding in Detroit’s bankruptcy case, that public pensions are not protected from cuts could alter the course of bankrupt cities like Stockton and San Bernardino, Calif., that had been operating under the assumption that pensions were untouchable. Stockton’s bankruptcy case, for instance, is further along than Detroit’s, and until Tuesday it seemed likely to leave public pensions fully intact. Stockton sought bankruptcy protection last year and has already filed a plan of debt adjustment with the bankruptcy court in Sacramento. Its plan, which is subject to court approval, would leave city workers’ pensions unchanged: They would continue to accrue benefits at the same rate as they did before the bankruptcy. (A new state law does permit Stockton to provide smaller pensions to workers hired after Jan. 1.)

The rest of the article points up the two sides that will eventually go through the courts...
Pensioneers and Bond Holders...