| Central Falls Bankruptcy Update "All Contracts with Municipal Workers and Retirees Including Police and Fire Workers Immediately Voided" Posted: 01 Aug 2011 08:05 PM PDT In an update to my post earlier today and as expected, but sooner than expected (less than a day) Central Falls Collective Bargaining Contracts Voided In Bankruptcy. The state-appointed receiver overseeing cash-strapped Central Falls filed for bankruptcy Monday morning on the city's behalf in an effort to help it get back on its financial feet.
Receiver Robert G. Flanders announced the step at City Hall Monday. He was joined by Governor Chafee, who says the move is needed to address Central Fall's finances.
All contracts with municipal workers and retirees, including the fire and police departments, are immediately voided.
Retirees must begin to pay 20 percent of their medical coverage effective immediately, as Flanders proposed when he met with the city's retirees July 19.
"Everything was done to avoid this day," Flanders said.
"Services have been cut to the bone. Taxes have been raised to the maximum level allowable.
"We negotiated with Council 94 and the police and fire unions, without success, attempting to reach voluntary concessions, and we tried in vain to persuade our retirees to accept voluntary reductions in their benefits."
In papers filed with the bankruptcy court, Flanders said, "the city's to the point where it is insolvent. The overwhelming pension obligations and the slowing economy, among other factors, have significantly decreased revenues while the city's operational costs have increased."
Deficits are expected to grow in each of the coming years, he said.
"On or before August 21, 2011, the city will lack sufficient revenues or cash flow to pay its bills as they become due, and then will not be able to pay its debts as they become due in every succeeding month for the remainder of the fiscal year (which ends on June 30, 2012) except for the month of October 2011... In addition, the city is no longer able to access capital markets."
Flanders says that through the Chapter 9 proceeding, "the city seeks to develop and implement a plan of debt adjustment that will return the city to solvency and viability. To do so, the city must modify its debts and obligations so that they do not exceed the city's projected revenues.
"The motion to void the city's three collective bargaining agreements," Flanders states, "is a critical step toward achieving that objective.
"Simply stated, the city cannot restore balance to its budget unless it restructures its labor costs as a critical element of any plan to debt adjustment. In FY 2012, the largest city expenditure is the cost of labor, and the largest portion of the city's labor costs is paid to union employees."
"Given today's action," General Treasurer Gina M. Raimondo said in a news release, "the governor and I are even more resolved to pursue comprehensive pension reform this fall to protect other state and municipal retirees and employees as well as taxpayers from the heartache of the drastic measures being taken in Central Falls. None of these groups did anything wrong and allowing this to happen again is unacceptable." The above is an update to my post earlier today Central Falls Rhode Island Files Chapter 9 Bankruptcy; Court Asked to Negate Collective bargaining Agreements; Vallejo PrecedentCentral Falls was bankrupt years ago and I said so repeatedly. The costs on taxpayers to delay this bankruptcy have been severe. Once states realize that bankruptcy is not tantamount to statewide Armageddon, there will be a flood of city bankruptcies. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
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| Cuts, What Cuts? Deficit Bill Has No Cuts, No Revenue Either, Just Hot Air; "Sugar-Coated Satan Sandwich?" Posted: 01 Aug 2011 01:08 PM PDT Democrats are unhappy about alleged cuts to social programs. Republicans are unhappy about alleged cuts to military spending. With everyone seemingly unhappy, including President Obama, is the deficit bill a good compromise? Before deciding, please consider a few choice comments regarding budget cuts from Debt and spending deal picks up momentum in Senate- Sen. John McCain conceded as much, saying he'd have to "swallow hard" to vote for it because of cuts in defense spending. But the Arizona Republican said lawmakers had little choice in the face of the specter of default.
- Fellow Republican Lindsey Graham of South Carolina said he was a no vote. "Simply stated, it locks us into more debt, bigger government and most devastating of all, a weakened defense infrastructure at a time when we face growing threats."
- Rep. Elliot Engel, a liberal Democrat from New York, said he was leaning no because the plan could lead to cuts to Medicare and other benefit programs.
- "This deal trades people's livelihoods for the votes of a few unappeasable right-wing radicals, and I will not support it," said Rep. Raul Grijalva, D-Ariz.
Whip Count QuotesHere are some more quotes from WHIP COUNT: House leaders in both parties seek votes to pass debt-limit deal- Emanuel Cleaver (D-Mo.) – Head of the Congressional Black Caucus called it a "sugar-coated Satan sandwich."
- Donna Edwards (D-Md.) – On Sunday, she tweeted, "Nada from million/billionaires; corp tax loopholes aplenty; only sacrifice from the poor/middle class? Shared sacrifice, balance? Really?"
- Raúl Grijalva (D-Ariz.) – Co-chairman of the Congressional Progressive Caucus has ripped deal, saying on July 31 that it was crafted for "right-wing radicals."
Cuts? Where the Hell are the Cuts?Republicans and democrats alike are screaming about cuts. I would like to know where those cuts are. When a Cut is Not a Cut Ron Paul has the answer in When a Cut is Not a CutOne might think that the recent drama over the debt ceiling involves one side wanting to increase or maintain spending with the other side wanting to drastically cut spending, but that is far from the truth. In spite of the rhetoric being thrown around, the real debate is over how much government spending will increase.
No plan under serious consideration cuts spending in the way you and I think about it. Instead, the "cuts" being discussed are illusory, and are not cuts from current amounts being spent, but cuts in projected spending increases. This is akin to a family "saving" $100,000 in expenses by deciding not to buy a Lamborghini, and instead getting a fully loaded Mercedes, when really their budget dictates that they need to stick with their perfectly serviceable Honda. But this is the type of math Washington uses to mask the incriminating truth about their unrepentant plundering of the American people.
In reality, bringing our fiscal house into order is not that complicated or excruciatingly painful at all. If we simply kept spending at current levels, by their definition of "cuts" that would save nearly $400 billion in the next few years, versus the $25 billion the Budget Control Act claims to "cut". It would only take us 5 years to "cut" $1 trillion, in Washington math, just by holding the line on spending. That is hardly austere or catastrophic.
A balanced budget is similarly simple and within reach if Washington had just a tiny amount of fiscal common sense. Our revenues currently stand at approximately $2.2 trillion a year and are likely to remain stagnant as the recession continues. Our outlays are $3.7 trillion and projected to grow every year. Yet we only have to go back to 2004 for federal outlays of $2.2 trillion, and the government was far from small that year. If we simply returned to that year's spending levels, which would hardly be austere, we would have a balanced budget right now. If we held the line on spending, and the economy actually did grow as estimated, the budget would balance on its own by 2015 with no cuts whatsoever.
We pay 35 percent more for our military today than we did 10 years ago, for the exact same capabilities. The same could be said for the rest of the government. Why has our budget doubled in 10 years? This country doesn't have double the population, or double the land area, or double anything that would require the federal government to grow by such an obscene amount.
In Washington terms, a simple freeze in spending would be a much bigger "cut" than any plan being discussed. If politicians simply cannot bear to implement actual cuts to actual spending, just freezing the budget would give the economy the best chance to catch its breath, recover and grow. Senators John McCain and Lindsey Graham are complaining about cuts to military. Bear in mind the US spends more on defense than the rest of the world put together. The US has troops in 140 countries. The wars in Iraq and Afghanistan are "supposed" to end, yet various Republicans bitch about "non-cuts" to military spending. "Sugar-Coated Satan Sandwich?"The quote of the day goes to Emanuel Cleaver, Head of the Congressional Black Caucus who called the deal a "sugar-coated Satan sandwich." Cleaver is exactly correct, but 180 degrees wrong as to why. This deal does not cut a damn thing. It is an illusion. Republican hypocrites screaming about "excessive cuts" are a pathetic sight to behold. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
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| Recession is "Real Risk" According to Dow Jones ESI Indicator Posted: 01 Aug 2011 11:48 AM PDT Further adding to the evidence of a huge US slowdown, a Dow Jones Sentiment Indicator says Return to a Recession is a Real Risk
Economic sentiment level drops to 41.5 in July; Troubles on Main Street and in Washington drag indicator down.
As Washington focuses on the debt ceiling, there are signs that the rest of the U.S. economy is running into trouble, according the Dow Jones Economic Sentiment Indicator. In July, the ESI dropped to 41.5 from a reading of 44 in June. The indicator has now fallen for two consecutive months for a cumulative decline of 5.1, the worst two-month drop since the fall of 2008.
"It would be easy to blame the dip in the ESI on the U.S. debt crisis, but much of the gloom stems from Main Street rather than Washington," says Dow Jones Newswires "Money Talks" columnist Alen Mattich. "The readings this summer have fallen enough that it seems to suggest a slide back into recession is a real risk."
Coverage of the need to raise the national debt ceiling was a factor in the decline, but a detailed analysis shows a substantial number of reports on problems beyond the Beltway. The proposal to close 10% of post offices, disappointing corporate earnings reports and a lagging housing market aresome of the themes that contributed to the darkening mood.
A persistent theme in the July was the continuing economic toll of high oil prices. When oil prices spiked last year, coverage was in some cases favourable, portraying the rise as a symptom of global and domestic economic recovery. Now coverage of higher oil prices is much gloomier, focusing on the toll it is imposing on businesses and consumers alike.
The ESI is determined by in-depth sentiment analysis of national news coverage across 15 daily newspapers. It is reported on a scale of 0 to 100; higher numbers represent increasingly positive sentiment.
There is not much to say here other than to agree. I have been talking about the global slowdown for months. Here is a recent snip from Canada GDP Declines .3%, Largest Drop in Two Years - Don't Worry It's "Temporary"; Canadian Apologists Be WarnedIt's Not Temporary
Headline be damned, it's not temporary.
Europe is now in austerity-mode, US cities and states are cutting back, the odds of more fiscal stimulus in the US are roughly zero, the US might (and should) lose its AAA rating, Australia is a basket case on the bursting of its property bubble, Canada has the second or third largest property bubble next to China and Australia, the bond market is targeting Italy and Spain, Brazilian defaults are soaring, China is overheating and needs to slow, yet the average economist is looking for a robust second-half. Go figure.
In aggregate, economists are the most optimistic group on the planet. Also consider Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
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| Central Falls Rhode Island Files Chapter 9 Bankruptcy; Court Asked to Negate Collective bargaining Agreements; Vallejo Precedent Posted: 01 Aug 2011 10:52 AM PDT At long last 'Dire' Situation Forces Rhode Island City of Central Falls Into BankruptcyCentral Falls, Rhode Island's poorest city, filed for Chapter 9 bankruptcy protection as it struggles to meet its pension obligations.
The petition was filed today after state officials failed to persuade unionized police, firefighter and municipal retirees to accept voluntary benefit concessions, according to a statement from Robert Flanders, a judge appointed to oversee the city's finances. Flanders said he asked the court to reject existing collective-bargaining agreements with the unions.
Central Falls, a city of about 18,000 located about 6 miles (9.7 kilometers) north of Providence, is the fifth municipal entity to file for bankruptcy this year, compared with six in all of 2010, according to data compiled by Bloomberg. The filing followed last week's move by lawmakers in Jefferson County, Alabama, to postpone a vote on proceeding with what would be the biggest U.S. municipal bankruptcy.
The Central Falls pension plan was expected to run out of assets by October without additional funding or significant concessions from both current employees and retirees, according to a June 17 report from Moody's Investors Service.
Frank Bailey, a U.S. bankruptcy judge in Massachusetts, will oversee the bankruptcy for the city, according to a court filing. Police and Firefighters Asked to Accept 50% Pension HaircutsOn July 23, 2011 I reported Central Falls Gives Ballots to Police and Firefighters Asking for 50% Pension Reductions or Risk Losing Everything in Bankruptcy CourtIn a scene that is going to play out in scores of cities across the nation, unions are going to come to grips with the fact that pensions are not sacrosanct. Please consider Rhode Island city asks retirees to cut their pensions
Simple Rule
What cannot be paid won't. Taxpayers have had enough. Central Falls is a small and troubled city, but this same scene is going to eventually hit Pittsburgh, Oakland, Houston, Detroit, San Francisco, Los Angeles, Chicago, and most likely every major city in the country.
Benefits are untenable. The sooner something is done, the better off everyone will be.
Things That Must Change
- Defined benefit pension plans for government workers must end
- Davis-Bacon and prevailing wage laws that drive up costs of Federal projects and clobber city and municipal governments must come to an end
- National right-to-work laws must be enacted
- Collective bargaining of public unions must end
- Existing pension benefits must be renegotiated
Unions will not like any of those but they are all going to happen.
I am disappointed that Rand Paul and others in the Senate did not take up points 2 through 4 in the budget negotiations. Small tax hikes in return for those items would have been well worth it. Vallejo Precedent: Union Contracts Can Be Voided Central Falls retirees said no, and now it is up to the courts. Please recall there is already precedent in Vallejo, California for union agreements to be tossed out in bankruptcy. Flashback March 17, 2009: Judge Rules Vallejo Can Void Union ContractsIn a groundbreaking ruling as well as a rare victory for common sense and the overall good of taxpayers, Bankruptcy Judge Rules Calif. City Can Void Union Contracts.
The Central Falls' police and fire fighters are taking a big chance. There is no realistic alternative to massive cutbacks in those pension agreements. Raising taxes would drive out homeowners and businesses and that is the last thing Central Falls needs. Expect this type of action to hit major cities within the next few years. The sooner the better because public union pension contracts are untenable. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
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| Gap-and-Crap it Was; ISM Plunges to 50.9, Lowest Level in 2 Years, New Orders Contract; Key Thoughts; Reaction in Gold Posted: 01 Aug 2011 08:22 AM PDT Last evening with futures surging on reports of a fluff debt ceiling agreement, I said " After spending a day in the garden weeding and transplanting I arrive at my computer to see S&P futures up 20 points, 1.5% on news a compromise was reached. Quite frankly this is ludicrous given that anyone not brain dead knew a deal would be reached.It would be fitting if this futures ramp was the mother of all gap-and-craps. This deal solves nothing." Indeed it was an enormous gap-and-crap, and fittingly so, on incredibly weak manufacturing ISM data. S&P futures that were up 20 points last evening are now down 10. Economists who in aggregate cannot see a recession coming until it is half over, once again missed data that says things are slowing considerably, nearly everywhere. Thus I am not surprised that economists are surprised by today's shockingly "unexpected" ISM report. ISM Drops to 50.9, Lowest Level in Two YearsBloomberg reports U.S. ISM Manufacturing Index Drops More Than Estimated to 50.9 From 55.3U.S. manufacturing expanded in July at the slowest pace in two years as new orders shrank and production eased.
The Institute for Supply Management's factory index fell to 50.9 last month from 55.3 in June, the Tempe, Arizona-based group said today. Economists projected the index would drop to 54.5, according to the median forecast in a Bloomberg News survey. Figures greater than 50 signal expansion.
Manufacturers are facing stagnant consumer spending, raising the risk that production will be tempered further even as parts shortages from Japan's earthquake dissipate and commodity costs ease.
Growth cooled in eight of the Federal Reserve's 12 regions, the central bank said last week in its Beige Book survey. Many regions said manufacturing slowed or held steady, according to the report, which covers June and the first half of July. Business activity in the U.S. expanded at a slower pace in July, the Institute for Supply Management-Chicago Inc. said July 29.
Fed policy makers, including Chairman Ben S. Bernanke anticipate the economy will strengthen in the second half of 2011 as "factors that are likely to be temporary" subside.
Dow Chemical Co. (DOW) Chief Executive Officer Andrew Liveris said his company sees "growth continuing to gain traction in developed markets, albeit at a somewhat uneven and jagged pace given persistently high unemployment in the U.S. and sovereign debt concerns in Europe." Temporary BullSweetWhat the heck is with this temporary bullsweet, spreading the globe like a virus? Europe is a basket case on austerity measures, China is still overheating and will slow, the US looks more recessionary every day, yet the Fed and US companies expect to see "traction" in the second-half. Somehow the US is supposed to be immune to "global cooling" even though the US is cooling too. New Orders Contract, Price Index PlungesInquiring minds are reading the July 2011 Manufacturing ISM Report On Business® for further economic clues. The report was issued today by Bradley J. Holcomb, CPSM, CPSD, chair of the Institute for Supply Management™ Manufacturing Business Survey Committee. "The PMI registered 50.9 percent, a decrease of 4.4 percentage points, indicating expansion in the manufacturing sector for the 24th consecutive month, although at a slower rate of growth than in June. Production and employment also showed continued growth in July, but at slower rates than in June. The New Orders Index registered 49.2 percent, indicating contraction for the first time since June of 2009, when it registered 48.9 percent. The rate of increase in prices slowed for the third consecutive month, dropping 9 percentage points in July to 59 percent. In the last three months combined, the Prices Index has declined by 26.5 percentage points, dropping from 85.5 percent in April to 59 percent in July. Despite relief in pricing, however, several comments suggest a slowdown in domestic demand in the short term, while export orders continue to remain strong." Once again, in spite of plunging prices, and contraction in new orders, several commenting thought the slowdown was "short term". Manufacturing ISM at a Glance Last month I reported Manufacturing ISM Weaker Than it Looks; Digging Into the Numbers; Inventory Restocking Accounts for Much of the RiseFor all the excitement over the 1.8 point rise, much of it is restocking inventories in the wake of the tsunami. The effect of inventories is 5.4 divide by five, or 1.08 (1.1) of the overall 1.8 rise.The tsunami effect ended last month and if you failed to catch it then, it should be unmistakable now. Inventories are contracting and supplier inventories are slowing to the point of contraction. Customers inventories do not affect the score. Key ThoughtsEmployment and production are the two categories that kept the ISM positive. Don't expect that to last with new orders and backlog of new orders in contraction, the latter for the second consecutive month. Reaction in GoldGold which had fallen to $1607 is now slightly up for the day. On the inept action by Congress, it ought to be soaring. However, nothing moves in a straight line. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
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