Thursday, March 7, 2013

Flat Broke in Detroit, Stockton and Lots of Other Cities ... The Unfunded Public Pension Problem

Many American cities are in effect broke. And the numbers are growing by the day.

To a considerable degree, this is due to a lack of sufficient funds on hand to pay retiring public sector employees, such as teachers, generous pensions which often begin as early as age 50.

Of course, the taxpayers then have to pay retiring workers' replacements as well. Double dipping by paying twice for the same work, however accomplished, has become very expensive for many cities' taxpayers. Downright unaffordable in fact.

Some city and state officials have gutted up and officially acknowledged this sorry financial state of affairs and its causes, but most still haven't. And hardly any have taken the necessary steps to address this untenable situation. To repeat, that's a large part of the reason why municipal bankruptcy or its equivalent is becoming commonplace.

There's something immoral about all this.

In any event, the drill usually goes something like this. After denial and delay are no longer feasible options, the city gurus first look to the state gurus for help and the state gurus in turn 'petition' the federal government gurus for help. That means the non-gurus, aka some portion if not all of the American taxpayers, will get the bill in the end. At least that's the idea.

The problem, as we're all beginning to recognize, is that any lasting solution to the financial issues of particular cities and states, along with those of the federal government, will require payments by already overburdened and reluctant taxpayers.

And that brings us to the apparently insoluble ongoing financial debacle and fiscal emergency in Detroit. Yesterday the local politicians made an already extremely bad situation in Detroit even worse by opposing both the positions of the city's Democratic Mayor and the state's Republican Governor.

Detroit City Council Fights Governor's Decision has the latest on the growing fiasco:

"Detroit's City Council voted Wednesday to contest the decision by Michigan's governor to put the state's largest city under the control of an emergency financial manager, defying the mayor's call to forgo the appeal and work with an incoming state overseer.

The council's decision came as Mayor Dave Bing said he would not endorse an appeal of Gov. Rick Snyder's decision, calling it a "fight we cannot win at the 11th hour."

Since the City Council requested an appeal, a hearing likely will be held on Tuesday in the state capital of Lansing before an official designated by the governor, a spokeswoman said late Wednesday.

But it appears unlikely that the result of the appeal will have much sway with the governor, who had earlier defended findings by a state review team that the city was in a financial emergency without a credible plan to fix its finances. Mr. Snyder has also said that he already has a top candidate for the manager post, which he could fill as soon as next week. Underscoring his position, a new website launched by the governor's office to explain the state of Detroit's finances bears the heading "Detroit Can't Wait."

Meanwhile, and depite the city council's appeal of the Governor's decision to appoint an emergency financial manager, Motown's Fiscal Reckoning maintains that Governor Snyder is indeed Detroit's best hope.

{NOTE: And I would add that Snyder is probably the city's only realistic hope, even though the local pols are obviously hoping that President Obama will come to their rescue with federal bailout money as he did with GM and the UAW.}

"(Governor) Snyder has been doing his utmost to assist an incorrigible, deadbeat government beholden to public unions. And as thanks, he is vilified as an imperialist.

Last week the Republican Governor declared a financial emergency in Detroit, paving the way for a state takeover that he tried to prevent last spring. Rather than appoint an emergency manager last year as was the protocol under state law when a city or school district can't pay its bills, Mr. Snyder negotiated a consent agreement with city leaders, giving Mayor Dave Bing power to redo labor agreements.

The state also helped refinance $33 million in bond debt and placed $104 million in an escrow account with tranches of aid tied to reform benchmarks. Notwithstanding austerity measures—slashing the workforce and wages by 10%, reducing pension accruals and freezing cost-of-living adjustments—Detroit has burned through all of the cash.

That left Mr. Snyder with three options. He could allow the city to continue operating under a consent agreement, which would essentially require a blank check from the state. Republican lawmakers cashiered that idea. Alternatively, he could let Detroit file for Chapter 9 bankruptcy. Or he could appoint an emergency manager.

Bankruptcy would instigate a long, messy brawl between creditors and unions, which is playing out on the small screen in Stockton, Calif. Under Chapter 9 bankruptcy, the city dictates its restructuring terms, and the U.S. Treasury Secretary can intervene. Thus, bankruptcy could tee up another bailout of Detroit's labor unions at the expense of bond holders. An emergency manager, on the other hand, is accountable to Governor Snyder and can accomplish nearly everything the city could in bankruptcy and more.

The state-appointed receiver can rewrite labor agreements, eliminate retiree health benefits, merge government departments, lease assets and outsource services—all without consent from city leaders, who have delayed or blocked all of the above. But in order to rescue Detroit, rather than merely manage its decline, Governor Snyder's point-man will have to contribute to reviving its economy.

Detroit's population has shrunk by 25% in the last decade and by nearly two-thirds since 1960. A decline in manufacturing, rising violence, poor schools, high taxes and political corruption have driven businesses and the middle-class to the suburbs. The unemployment rate approaches 20%. Housing values have plummeted, causing foreclosures and reduced tax revenue.

The Detroit News reports that nearly half of property owners are delinquent on tax bills in part because the city has inflated property assessments to squeeze more money out of its shrinking tax base. . . .

It's tempting for the rest of the country to think of Detroit's ills as unique and a product of the auto industry's decline. But the car companies are recovering, while Detroit isn't. Today dozens of cities in Michigan and hundreds across the country such as Los Angeles are slouching toward bankruptcy due to soaring labor costs and retirement obligations. They can't all be bailed out.

Detroit's city council, state and Congressional representatives, labor unions and community activists want more forbearance from the state and aid from the feds. Some have even urged Attorney General Eric Holder to intervene on the pretext that the white Governor is subverting self-governance in a predominantly minority city.

Mr. Snyder seems to realize that he'll get no political credit for trying to save Detroit from self-destruction and won't be hailed as its savior if he succeeds. But he's the best hope the city has."

Summing Up

Detroit is in really bad shape financially.

Michigan is as well.

Ditto for the U.S. government.

Yet the various Democratic politicians and their allies the labor unions seem to think the feds will somehow come to their rescue.

And why shouldn't they think that? After all, Washington bailed out the UAW and stiffed the creditors in the GM saga.

My guess, however, is there will be no such luck this time in the Motor City. America is "sequestered."

How this all gets solved I have no clue except for this one: Nobody has the money to save Detroit from itself. Not GM, not the city, not the state and certainly not the federal government.

But Detroit and Michigan aren't the only city and state in such a precarious situation.

Lots of other American cities and states have very similar and apparently insoluble financial problems in need of a solution.

Stay tuned.

Thanks. Bob.

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