| Indiana Bill Would Allow Cities to Declare Bankruptcy; Gary, Lake Station, Georgetown Likely Candidates; Hands Tied in Rhode Island Posted: 27 Dec 2010 09:01 PM PST A bill in the Indiana legislature would allow local governments to declare bankruptcy. Given Governor Mitch Daniels is backing this plan, I expect it to pass. Best of all, the bill gives an emergency manager the ability to renegotiate labor contracts, and approve or veto contracts, expenses, loans and hiring. Please consider Bill would allow Indiana cities to declare bankruptcyA plan backed by Gov. Mitch Daniels would allow local governments in Indiana to ask for a state takeover and declare bankruptcy if necessary. Daniels says he hopes there won't be many local governments that seek bankruptcy, but says the state needs to have the law clarified and on standby in case it happens.
Republican state Sen. Ed Charbonneau of Valparaiso is sponsoring a bill to outline the procedure. His bill would allow a local government in financial trouble to ask the Indiana Distressed Unit Appeals Board to appoint an "emergency manager" to run the government.
The emergency manager would have the power to cut the budget, renegotiate labor contracts, and approve or veto contracts, expenses, loans and hiring.
The bill states that if the emergency manager can't turn around the local government's finances, the unit would be allowed to seek federal bankruptcy protection.
The State Board of Accounts in recent audits has questioned the abilities of the city governments in Gary and Lake Station to "continue as a going concern" because of continued high city spending despite significantly reduced city revenues because of statewide property tax caps. I salute this bill and look forward to the bankruptcy of a handful of Indiana cities. Gary has a population of around 100,000 and is Indiana's fifth largest city. Lake Station has a population of about 14,000. Georgetown, Indiana Headed for BankruptcyThe Indiana Law Blog reports Southern Indiana town may file for bankruptcy protectionMonday, July 27, 2009
Facing a debt of $1.45 million over a long-delayed sewage plant project, the Floyd County town of Georgetown has taken the first step toward what would be an unprecedented move for an Indiana municipality — filing for bankruptcy protection.
Whether Georgetown could do that, however, is in dispute. State officials say Indiana law doesn't authorize a town to declare bankruptcy.
Georgetown's leaders "have no authority" to declare the town bankrupt, said Brian Bailey, general counsel for the Indiana Department of Local Government Finance.
Bailey cited a 1994 update to the federal bankruptcy code that says a municipality "must be specifically authorized" by state law to be a debtor, and no Indiana law does that. (Kentucky law authorizes its local governments to file for bankruptcy, but none have ever done so.)
Georgetown Town Council President Billy Stewart said there may be no other option.
"There's no way for Georgetown to pay" its debts, he said. "We don't have it." Look for Georgetown, Indiana population approximately 3,000 to see bankruptcy protection if allowed. Details of the Bankruptcy BillInquiring minds are reading Law would let cities declare bankruptcy for details about the bill. State Sen. Ed Charbonneau, R-Valparaiso, is sponsoring Senate Bill 105, which would repurpose the Indiana Distressed Unit Appeals Board from providing property tax cap relief to supervising direct management of a local government.
Gary twice has won DUAB permission to charge the highest property tax rates in the state to bring its city budget into balance.
Under Charbonneau's bill to restructure DUAB, the council and executive of a local government could jointly seek to be designated a "distressed unit" if it meets one of eight financial criteria. Or, a coalition of a government's creditors owed more than 30 percent of the unit's anticipated annual revenue could ask DUAB to declare a local government distressed.
If DUAB agreed the local government were distressed, DUAB would appoint an "emergency manager" with the powers of both the council and executive, who could slash the budget; renegotiate labor contracts; review salaries; approve or veto contracts, expenses, loans and hiring; and audit the books -- all independently of the government's elected officials.
The emergency manager would not be allowed to raise taxes and would be required to work with elected officials to develop a financial plan for the future, according to the legislation. Hallelujah! Raising taxes to meet untenable union wages and pension benefits has to stop. Criteria for "distressed" designation (one of eight needed):- 1) Default in payment of principal or interest on bonds or notes
- 2) More than 30 days late on payroll or two consecutive payrolls missed
- 3) Failed to pay judgment creditors more than 30 days after judgment
- 4) More than 30 days late any of the following: sending taxes withheld from employees, sending employer or employee contributions to Social Security or Medicare, depositing minimum obligation payment to a pension fund
- 5) Accumulated a deficit in total government funds of more than 5 percent of current year revenues
- 6) Seeks renegotiation of payments owed that are more than 30 percent of annual revenues and more than 90 days overdue
- 7) The state is intercepting local government funds to make required payments
- 8) Uses interfund loans to support the same fund for two years in a row
Tax Free Does Not Mean Worry FreeThe Financial Sense article Muni Bonds: Tax Free Doesn't Mean Worry Free has a list of 26 states (up from 21 in 2007) that currently do not allow bankruptcy. | Alaska | New Hampshire | | Delaware | New Mexico | | Georgia | North Dakota | | Hawaii | Oregon | | Illinois | Rhode Island | | Indiana | South Dakota | | Iowa | Tennessee | | Kansas | Utah | | Maine | Vermont | | Maryland | Virginia | | Massachusetts | West Virginia | | Mississippi | Wisconsin | | Nevada | Wyoming |
The most recent addition to the above list is Rhode Island which just passed a law outlawing bankruptcy after the City of Central Falls disclosed it would seek bankruptcy. Do the governors that signed such legislation really think problem will go away if the one possible solution is removed? Sheeesh? Look for Indiana and Michigan to come off the list. In addition, Wisconsin governor-elect has proposed decertification of public unions, so I believe he would be agreeable to local bankruptcies if such a bill was presented to him. Please see Hardball in Wisconsin; Massive Defeat for Unions in Lame-Duck Session for more about Wisconsin, governor-elect Scott Walker's showdown with state union employees. Central Falls Prohibited From BankruptcyThe only thing that makes any sense for Central Fall is bankruptcy, but that option is currently missing. Please consider Receiver to city: Financial ruin nearCENTRAL FALLS — The city's financial problems are so profound that the only way to solve them is through a merger with Pawtucket or a regionalization of city services, the state-appointed receiver said in a report Thursday to the Carcieri administration.
"Central Falls, in my judgment, cannot remain a stand-alone community as it presently is, unless the state wants to subsidize this into the future," said retired Superior Court judge Mark A. Pfeiffer, the man appointed by the state Department of Administration in July to run the city, with elected government officials in advisory roles, after those officials had earlier declared the city insolvent.
The underlying, built-in problems in the city's finances — with sizable operating budget deficits projected well into the future — require significantly changing how municipal employee contracts and retirement benefits are handled under state law, he said.
Senate President M. Teresa Paiva Weed said underfunded municipal pensions have been the subject of a special Senate study commission, and Central Falls — with a $48-million unfunded pension liability, according to Pfeiffer — would put even more focus on that work.
"This will be a priority for the Senate in the upcoming legislative session," she said. "TheSenate agrees that there is a need for swift but prudent action by the state."
The state is already heavily involved in the city. It took over financing the local school system in the last big state fiscal intervention in 1991 and has spent $604 million on the city's schools since then. Despite that effort, improvement has been difficult: this year, the city's high school was rated one of the six worst-performing ones in the state.
In the short term, Pfeiffer said the city will need about $2.1 million in some form of state support authorized by the General Assembly, a grant or some kind of bond guarantee, to close a deficit in the current budget. Beyond that, he said more substantial changes were needed.
The major problem is the city, with an annual operating budget of about $16 million, is facing about $32 million in promised after-retirement health-insurance costs in addition to the $48 million in pension obligations.
"That's $80 million for a city that has 19,000 citizens, approximately," he said. "That's a huge problem." No city would merge with Central Falls in a foolish attempt to save it. It would mean their own financial ruin. Furthermore, why should Rhode Island taxpayers in general have to fund Central Fall's pension obligation? Massive Teacher Absenteeism at Central Falls High SchoolCheck out the morally corrupt Central Falls Teachers union: Central Falls teacher absences still on the riseSince the school year started Sept. 1, there has not been a single day when all of the 88 teachers at Central Falls High School have shown up for work.
On that first day, two teachers called in sick and a third took a personal day.
And there have been only five days — all in September — when administrators were able to replace all the missing teachers with substitutes.
Last week alone, there were at least 19 teachers out every day, 10 to 13 of whom called in sick each day.
The severity of the problem came to light last week when The Journal reported that more than half of the high school's 840 students didn't receive a grade in one or more classes for the first quarter.
The school's leaders, Deputy Supt. Victor Capellan and co-principals Evelyn Cosme-Jones and Sonn Sam, said 453 students did not receive solid instruction in several classes, and therefore no grade could be given.
Since Nov. 12, there have been at least 20 teachers missing or absent at the high school each Friday. Starting Oct. 21, there were 14 to 19 teachers absent daily for seven straight days. And 453 of the 840 students at Central Falls High School didn't receive enough instruction this fall to earn a grade in at least one class. Like Detroit, Central Falls is fiscally, morally, and educationally bankrupt. The one and only thing that makes any sense for Central Falls is to declare bankruptcy. Please see Detroit Mayor Plans to Halt Garbage Pickup, Police Patrols in 20% of City; Expect Bankruptcy, Massive Municipal Bond Turmoil in 2011 for the problems Detroit faces. I expect Governor Snyder to do the right thing and allow Detroit to file. If it takes legislation, he will get it if he asks. The pending legislation in Indiana appears to be a good model for both Michigan and Rhode Island. Let's hope Rhode Island governor-elect Lincoln D. Chaffee, an independent, has his head screwed on straight and asks the legislature to allow municipal bankruptcies. It is the only hope for Central Falls. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
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| Unemployment Situation in Pictures; Manufacturing, State and Local, Temporary-Help Posted: 27 Dec 2010 12:25 PM PST Inquiring minds are looking at charts of state and local employment, manufacturing, temporary help, and other items in the BLS Current Statistics report. Please click on any chart to see a sharper image. Note how local governments were still expanding mid-recession, all the way up till July of 2008. A year later, starting June of 2009, local governments finally got religion and started cutting jobs. Look for this trend to continue into 2011.  In spite of all the whining by states, they have not yet made any significant cuts in employment.  For all the brouhaha about the manufacturing recovery, employment in the manufacturing sector has dropped four consecutive months.  Total nonfarm employment shows the nature of the jobless recovery. Jobs are expanding barely enough to hold the unemployment rate constant, and it has taken a declining participation rate to do that.  Total nonfarm employment picked up nicely early-to-mid 2010 but most of that was part-time work for census data gathering. The net effect is employment growth was overstated through May, then understated the next few months as those workers were let go.  Total private employment has been growing at a reasonable clip, but not in comparison to previous recoveries that averaged 200,000 jobs a month.  26% of Jobs growth in 2010 has been from temporary help services.  | Net Private Nonfarm Jobs vs. Temporary Jobs |
|---|
| Month | Private | Temporary | Net |
|---|
| Total | +1,171,000 | +307,000 | +864,000 | | Average | +106,500 | +27,900 | +78,500 | | November | +50,000 | +39,500 | +10,500 | | October | +160,000 | +34,700 | +125,300 | | September | +112,000 | +27,300 | +84,700 | | August | +143,000 | +22,500 | +120,500 | | July | +117,000 | -6,700 | +123,700 | | June | +61,000 | +18,600 | +42,400 | | May | +51,000 | +30,400 | +20,600 | | April | +241,000 | +23,300 | +217,700 | | March | +158,000 | +32,300 | +125,700 | | February | +62,000 | +35,900 | +26,100 | | January | +16,000 | +49,200 | -33,200 | The total number of private jobs added in 2010 is 1.17 million. 307,000 of them are from temporary help services. Even including those temporary jobs, the average number of private sector jobs has only been 106,500 a month, not enough to reduce the unemployment rate. The Federal government continues to expand jobs even as local cutbacks pick up. Overall, government jobs are in contraction as local cutbacks exceed federal hiring.  The above graph is from the October report. Previous graphs from the November report. I still see no driver for jobs. Retail spending for clothes is not a sustainable driver. State and local cutbacks are coming, but that is a very good thing long-term. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
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| Food, Fuel Inflation Hits India; Primary Price Index Up 15%, Credit Expansion Up 23% Posted: 27 Dec 2010 10:15 AM PST China is not the only Asian economy that is overheating. Inflation in India is running at a double digit pace as is credit expansion. Please consider Food, fuel prices drive inflation worriesRising prices in India of fuel and food are reviving worries about inflation and sent swap rates to 26-month highs as expectations grew for more rate increases in Asia's third-largest economy.
India's embattled government is expected to decide next week whether to increase state-set fuel prices as international crude oil hovered near two-year highs, a move that would have a broader inflationary impact than a decision earlier this month by state-run fuel retailers to lift the price of petrol.
In the year to Dec. 11, India's food price index rose 12.13 percent, with the price of onions -- the country's most widely-eaten vegetable -- of especial concern, while the fuel price index climbed 10.74 percent. This compared with 9.46 percent and 10.67 percent respectively in the previous week.
"Inflation is becoming a problem now. We expect the RBI (Reserve Bank of India) to hike rates sooner rather than later. Now we expect 50-75 basis points of rate hike in the next year, most of which should happen in the first half," said Manish Wadhawan, director and head of rates trading at HSBC in Mumbai.
Inflation worries are spreading in Asia, with Singapore on Thursday posting November inflation near a two-year high and Chinese consumer inflation for November at a 28-month high.
"We will certainly do whatever is required to bring down prices of onions," Cabinet Secretary K.M. Chandrasekhar said.
India's primary articles price index was up 15.35 percent in the latest week compared with an annual rise of 13.25 percent a week earlier, data on Thursday showed.
Last week, retailers raised petrol prices -- which were deregulated in June -- by nearly 6 percent.
Any rise above 2 rupees (4.4 cents) a litre in diesel must be approved by a ministerial panel, India's oil secretary told CNBC TV on Thursday. Whatever It TakesI have to laugh at statements like this: "We will certainly do whatever is required to bring down prices of onions." What it takes is a slowing economy including a slowing of credit expansion. Two or three quarter-point rate hikes will not do it. Nor will price controls. Yet, India's President Pratibha Patil is confident the economy will grow at about 9 percent in the current fiscal year ending March 2011 and would be on a sustained growth path of about 9 to 10 percent in FY12. India Credit Expansion Up 23%Please consider Credit-deposit growth gap behind liquidity crunchThe faster growth in bank credit than deposits is behind the present cash crunch, the Reserve Bank of India (RBI) has said. Year-on-year credit growth was 23 per cent till December 3, while deposit growth was only 15 per cent, as compared to RBI's projection of 20 per cent and 18 per cent, respectively, for 2010-11.
The liquidity deficit, indicated by banks' borrowing from the repo tender of RBI, has been over Rs 1 lakh crore on an average since November.
Low government spending, coupled with slack deposit growth and advance tax outflows, has resulted in the crunch.
On Wednesday, banks borrowed a record Rs 1.7 lakh crore from RBI. Indian Bank targets up to 28% credit growthInquiring minds are reading Indian Bank targets up to 28% credit growthAccording to a top official working with the Indian Bank, the bank has the plans to target the credit growth to around 28 per cent during the current fiscal year as the demand for the credit this year seems to have risen quite a bit.
"We expect a credit growth of 27-28 per cent this year," the Chennai-based bank's Chairman and Managing Director, T M Bhasin, said.
"RBI has always been judicious and its decision to decrease the statutory liquidity ratio by 1 per cent will definitely infuse more liquidity in the system," he said. The sustained growth assumptions of India and China at about 10% each are simply not going to happen. Both countries are overheating and there is a not so little constraint called peak oil that will get in the way. Should India maintain its rate of growth, do not expect to see any containment in price inflation. The same holds true for China. For more on China, please see China Hikes Rates, Ponders Capital Controls to Halt Currency Inflows; Eight Reasons China Faces Hard LandingIndia and China are going to overheat and crash, or their economic growth is going to slow dramatically, quite possibly both. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
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| China Hikes Rates, Ponders Capital Controls to Halt Currency Inflows; Eight Reasons China Faces Hard Landing Posted: 26 Dec 2010 11:32 PM PST Inflation is running at a reported 5.1% in China, a figure most believe is on the low side. Nonetheless, China has been loath to hike rates out of fear of more "hot money" flowing in. Something had to give, and it did. The markets forced China's hand. Please consider China Increases Rates to Counter Highest Inflation in Two YearsChina raised interest rates for the second time since mid-October to counter the fastest inflation in more than two years and more moves may follow.
The benchmark one-year lending rate will rise by 25 basis points to 5.81 percent and the one-year deposit rate will climb by the same amount to 2.75 percent, effective today, the People's Bank of China said in a one-sentence statement on its website late yesterday.
Premier Wen Jiabao is seeking to slow gains in property values and consumer prices that are making it harder for families to buy homes and pay for food. Bank lending and a wider-than-forecast November trade surplus have pumped more cash into an economy already awash with money.
China is tightening after a record expansion of credit to counter the effects of the world financial crisis. The broadest measure of money supply, M2, has surged by 55 percent over the past two years and outstanding yuan-denominated loans have climbed 60 percent to 47.4 trillion.
Residence-related costs, including charges for water, electricity and rent, jumped 5.8 percent last month from a year earlier, the most in more than two years, and consumer goods prices rose 5.9 percent, the biggest gain since August 2008, according to statistics bureau data.
Policy makers are concerned that raising interest rates could "encourage hot money inflows," Paul Cavey, a Hong Kong- based economist at Macquarie Securities Ltd. said. "Raising interest rates has far more implications" than ordering lenders to set aside more of their deposits as reserves, as it may affect the ability of local governments and companies to pay their debts.
State Council researcher Ba Shusong told state television yesterday that the government will step up regulation of capital inflows, without specifying measures that will be taken.
The Ministry of Commerce is stepping up supervision of foreign investment in real estate to crack down on speculation after a 48 percent jump in overseas fund inflows to the industry in the first 11 months of the year, spokesman Yao Jian said on Dec. 15. Policy makers may also allow faster gains in the yuan to help curb inflation from higher prices of imported commodities, according to analysts' forecasts. China OverheatingChina was number 5 on my list of Ten Economic and Investment Themes for 20115. China Overheats, Multiple Rate Hikes Coming
China, everyone's favorite promised land, has a hard landing. China will grow at perhaps 5-6% but that is nowhere near as much as China wants, or the world expects. Tightening in China will crack its property bubble and more importantly pressure commodities. The longer China holds off in tightening, the harder the landing. Capital Controls ComingInitially, rate hikes will encourage more "hot money" inflows into China. In hopes of preventing those inflows, China has announced more capital controls. It will be interesting to see precisely what those controls will look like. Currency Sterilization NeededOne thing China should do is sterilize speculative hot money and balance of trade inflows via domestic government bond issuance, hoping to curb money supply growth. However, it is not as simple as that, because in a fractional-reserve credit system, a net increase in lending itself increases money supply. Clearly the Chinese central bank is behind the curve. Will China simply restrict lending? Would it even work? I do not know about the former, but the latter would eventually force a hard landing if China gets serious enough. Actually, there are so many problems that I think a hard landing is coming regardless, and the longer China dallies, the harder it will be. In the meantime, these paltry rate hikes by China of .25 points each pale in comparison to increases in reported consumer price increases. Enormous Property Bubbles Including Vacant CitiesIt is not "consumer price inflation" that is the big problem. Asset inflation, especially property speculation is rampant. In case you missed it please consider The ghost towns of China: Amazing satellite images show cities meant to be home to millions lying desertedSpeculation will continue until China gets serious or until the pool of greater fools buying property at absurd prices dries up. China's Army of Graduates Struggles for JobsExacerbating China's myriad of problems, an Army of Graduates Struggles for JobsIn 1998, when Jiang Zemin, then the president, announced plans to bolster higher education, Chinese universities and colleges produced 830,000 graduates a year. Last May, that number was more than six million and rising.
It is a remarkable achievement, yet for a government fixated on stability such figures are also a cause for concern. The economy, despite its robust growth, does not generate enough good professional jobs to absorb the influx of highly educated young adults. And many of them bear the inflated expectations of their parents, who emptied their bank accounts to buy them the good life that a higher education is presumed to guarantee.
"College essentially provided them with nothing," said Zhang Ming, a political scientist and vocal critic of China's education system. "For many young graduates, it's all about survival. If there was ever an economic crisis, they could be a source of instability."
In a kind of cruel reversal, China's old migrant class — uneducated villagers who flocked to factory towns to make goods for export — are now in high demand, with spot labor shortages and tighter government oversight driving up blue-collar wages.
But the supply of those trained in accounting, finance and computer programming now seems limitless, and their value has plunged. Between 2003 and 2009, the average starting salary for migrant laborers grew by nearly 80 percent; during the same period, starting pay for college graduates stayed the same, although their wages actually decreased if inflation is taken into account.
Chinese sociologists have come up with a new term for educated young people who move in search of work like Ms. Liu: the ant tribe. It is a reference to their immense numbers — at least 100,000 in Beijing alone — and to the fact that they often settle into crowded neighborhoods, toiling for wages that would give even low-paid factory workers pause.
"Like ants, they gather in colonies, sometimes underground in basements, and work long and hard," said Zhou Xiaozheng, a sociology professor at Renmin University in Beijing. Odds for social unrest will mount if China's growth slows. Yet, because of short-term overheating concerns on top of long-term peak oil issues there is no way China can keep growing at the current pace. Eight Problems Facing China- Hot money inflows
- Huge property bubble
- Massive increases in money supply, much of it property speculation and building of unneeded capacity
- Currency manipulation charges from the US and potential trade wars
- Unsterilized trade imbalances fuel inflation
- Slowing Europe
- Dearth of Jobs for new graduates
- Potential social unrest
Case For Hard LandingRisks are enormously skewed to the downside, so much so that the odds China avoids a hard landing are not good. China is far more exposed to a slowdown in Europe than the US and the popping of China's property bubble will extract a huge toll. Those plowing into commodities, foreign currencies, and equities (especially foreign equities), fail to consider those risks. Moreover, given that much of China's growth is overheating and malinvestment, it is not even clear the Renminbi is undervalued. For a look at India, please consider Food, Fuel Inflation Hits India; Primary Price Index Up 15%, Credit Expansion Up 23%Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
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