Belmont Club

Sixteen Ton to Sixteen Cents

Everybody has lost wealth in the “last half decade”, according to the New York Times, but especially African Americans. “All in all, Hispanic families lost 44 percent of their wealth between 2007 and 2010, the Urban Institute estimates, and black families lost 31 percent. White families, by comparison, lost 11 percent of their wealth.”

And its about to get worse. The bankruptcy of Detroit, America’s most African American major city, raises the question of how safe those Blue Model public pensions really are.  This was dramatically heightened by a report that the city could only pay sixteen cents on every pension dollar.

“On Friday, city financial consultant Kenneth Buckfire … a Detroit native and investment banker with restructuring experience, later told the court the city plans to pay unsecured creditors, including the city’s pensioners, 16 cents on the dollar. There are about 23,500 city retirees.”

The unions have disputed the low figure, claiming that it underestimates the earning potential of the remaining pension if you assume good times. “Now, as pensions, unions and residents rushed to meet a Monday deadline to oppose the Chapter 9 bankruptcy proceedings—the largest-ever municipal filing—the pensions are saying the emergency manager relied on a report that used overly conservative assumptions on the returns the funds earn on their investments, which led to the ballooning of their projected shortfall.”

But Buckfire says the cupboard is bare. “It’s a function of mathematics”. It was also the consequence of thinking the Good Times would last forever. Detroit was in the habit paying out ‘bonuses’ when the pension returns ticked above normal but not paying in when returns fell below the average. The NYT explained how that worked:

The city’s pension system made extra payments for decades to thousands of people, on the thinking that the base pensions were too small. The pension board thought it found the money for the extra payments by skimming off “the excess” when returns on investments exceeded the plan’s target — 7.9 percent in Detroit.

It was “heads I win, tails you lose”.  But even the coin they used to flip is gone now.  Detroit had been bleeding money from every pore. For example, Detroit is still paying $437.8 million on bond issues on schools that are vacant, derelict or have been demolished and will keep paying it until 2040.

It’s paying for abandoned buildings, grandiose projects that never were,or vacant lots.

Nor were they good custodians of money they borrowed. The Detroit Free Press reports ” A Wall Street deal backed by former Mayor Kwame Kilpatrick that helped push the city into bankruptcy bankrolled a three-year spree of alleged corruption, according to federal court records and pension officials.”

The spending cheated Detroit retirees out of more than $84 million, led to criminal charges against six people and compounded the impact of a money-losing Wall Street deal, which could eventually cost the city more than $2.7 billion.

Two point seven billion. Not much these days as things go, but as they say a few billion here,a few billion there and pretty soon your talking about a pretty deep hole. As if getting pension slashed from $50K to $8 a year  — 16 cents on the dollar — weren’t bad enough, the city employees are in danger of being helped by Obamacare. The pensioners have lost their municipal coverage in lieu of $125 to buy a policy on the President’s premier exchange. But instead of being thrilled and delighted the pensioners are in a state of panic.

Because of the city’s bankruptcy, these former public employees are already on the hook for huge cuts to their meager annual pensions, which average about $20,000 for general workers and $40,000 for police and firefighters.

Now, Detroit’s emergency manager, Kevyn Orr, has announced that to return the city to solvency, effective Jan. 1, he will stop providing coverage to 8,000 retirees under age 65. Instead, they will receive a $125 monthly stipend to use toward private plans from the exchange. (Spouses and dependents don’t get anything.) The hope was that the Affordable Care Act’s subsidies would kick in for unmarried retirees making from $11,490 to $45,960 and married retirees making from $15,000 and $62,040 annually, the cutoffs for eligibility. …

The hitch is that the Michigan exchange, like many of the 35 others run by the federal government after the states refused to build their own, has been beset by glitches. Enrolling has been a nightmare, although some reports suggest that “navigators” — trained professionals who help consumers navigate the website — have been having some luck in the last few days. Even if consumers manage to enroll, however, it’s unclear they will actually get coverage given that the exchange reportedly isn’t providing accurate enrollment information to underwriters….

Should that happen, Detroit retirees who have been kicked off the city’s coverage would have no option. They would have to join the ranks of the state’s 1.3 million uninsured. Unlike pensions, health-care benefits aren’t protected by the Michigan constitution.

Broke and uninsured. Not looking good for the pensioners in Motor City. But the pain may not be confined to them. Calls for the city to repudiate its debts and “let the banks pay for it” may raise the cost of borrowing for everyone. The Detroit Free Press notes.

Don't Pay the Bondholders But Lend Us Money

Don’t Pay the Bondholders But Lend Us Money

The Michigan Finance Authority is planning to sell $92 million of state aid revenue notes for the Detroit Public Schools on Tuesday. Experts point out that this will be the first bond deal to carry the Detroit name since the Motor City’s July 18 bankruptcy filing.

Oakland County’s upcoming sale involving more than $300 million in bonds for refinancing retiree health care debt is expected to be held in September and could be another indicator of the bond market’s sentiment toward Michigan. …

Some of the negative effect has already shown up. Saginaw County ($61 million), Battle Creek ($16 million), and Gennesse County ($54 million) pulled scheduled bond issues this month due to lack of demand and high interest premiums demanded by investors, because of the situation in Detroit.

The market doesn’t like the way Detroit emergency manager Kevyn Orr is treating holders of Detroit’s general obligation bond debt and in some cases are pricing in what they see as extra risk, bond experts say.

A rise in interest rates would have a negative effect on Michigan as a whole because a lot of public institutions have to borrow to keep going.

Moody’s noted that for Michigan school districts, concerns about the safety of municipal debt are emerging at the worst time.

“Every August, many Michigan school districts borrow money, mostly through the Michigan Finance Authority, a financing arm of the state, to cover payroll and other expenses for the coming school year”.

What to do? The problems of Detroit may foreshadow the fate of other Blue Model cities with similarly parlous finances. Not everyone may believe that the era of ‘free government money’ is over. But maybe reality finally doesn’t care what they believe.

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