| Common Sense Rules to Halt Runaway Union Benefits; What You Can Do To Help Posted: 13 Dec 2010 06:59 PM PST Montgomery County, Maryland proposes an arbitration rules change that would require arbitrators to place the highest priority on the county's ability to pay without hiking taxes. It also would require the arbitrator to weigh other factors, such as the interest and welfare of county taxpayers. I propose statewide rules that would mandate just that. Please consider Montgomery looks to tackle budget woes with fresh ammunitionThe Montgomery County Council looked to tighten its fiscal belt this week equipped with a fresh analysis of the county's budgetary plight and a plan to ensure that an arbitrator, if called in to break an impasse, would first and foremost consider the county's ability to pay union contracts.
The proposal comes as a study by the county's Office of Legislative Oversight reports that the primary driver behind a 71 percent increase in spending by the county over a decade was a 64 percent increase in personnel costs.
The average Montgomery County employee salary increased 50 percent and the cost of benefits rose more than 120 percent during the 10-year period, according to the study by OLO.
The report, requested by the council, is "a message to the executive branch and county employee unions, ... that somewhere there has to be a balance met," said council Vice President Valerie Ervin (D-Dist. 5) of Silver Spring, who has proposed changing county law to make affordability the "priority" consideration in arbitration.
Ervin's proposed bill would require an arbitrator to give the highest priority to the county's ability to pay. It also would require the arbitrator to weigh other factors, such as the interest and welfare of county taxpayers.
During OLO's presentation to the council Tuesday, Councilman Philip M. Andrews (D-Dist. 3) of Gaithersburg said, "I believe the message is going forward that the council needs to see agreements that are not only affordable in year one, but sustainable in years three and four." Containing Runaway SpendingThe Washington Post chimes in with New bill would help contain runaway spending in Montgomery CountyPUBLIC WORKERS in Montgomery County have enjoyed a spectacular run over the last decade, thanks to munificent politicians, powerful unions and a badly tilted playing field that favors workers over management. Many workers who were on the county's payroll in 2000 have seen their salaries double, in addition to receiving ever-improving benefits. Since salaries and benefits amount to 80 percent of county spending - and almost 90 percent of school spending - the fruit of the county's profligacy is a structural deficit that has proved impervious to repeated tax increases.
A bill before the County Council would provide officials with a lever to restore some balance. It was introduced by the new council chair, Valerie Ervin, a product of years in the labor movement. That Ms. Ervin would sponsor legislation to trim the power of public-worker unions is a hopeful sign - and a telling one of how tilted the field has become.
The result is that Montgomery has the fattest and least affordable contracts in the region and is now cutting services to pay for them.
In the event that an impasse in contract negotiations leads to arbitration, Ms. Ervin's bill would require the arbitrator to give priority consideration to the county's ability to pay without resorting to tax increases. This is common sense. Montgomery, County Facts and FiguresHere are a few interesting facts about Montgomery County. Montgomery County is a county in the U.S. state of Maryland situated just north of Washington, D.C. and southwest of Baltimore. It is one of the most affluent counties in the nation, and has the highest percentage (29.2%) of residents over 25 years of age who hold post-graduate degrees. The county seat and largest municipality is Rockville. Most of the county's approximately 971,600 residents live in unincorporated locales, the most populous of which are Silver Spring, Germantown, and Bethesda, though the incorporated cities of Rockville and Gaithersburg are also large population centers. It is a part of both the Washington Metropolitan Area and the Baltimore-Washington Metropolitan Area.
As of 2008, Montgomery County is the second richest county per capita in the State of Maryland and 8th richest in the nation, with a median household income of $91,440. Calling Chris ChristieIt's rather late in the game but we must applaud common sense whenever and wherever it is found. I like this proposal. It's a small down payment of what needs to happen. The ultimate goal is to kill public union collective bargaining entirely, scrap Davis-Bacon, dump prevailing wage laws, and legislate mandatory right to work laws that would be binding across all 50 states. Those things will not happen soon, and some of them cannot happen at the statre level. However, the proposal for arbitrators to place the highest priority on ability to pay without hiking taxes looks like something that can be accomplished en masse at the state level, for all public union negotiations within a state. Send a Message to Chris ChristieIs anyone on Chris Christie's staff tuned in? If so, please take this taxpayer-friendly idea and run with it. To ensure the message gets through, please Contact Governor Chris Christie, no matter what state you live in. If he acts on this idea, other governors will follow. That link opens up a form, so select a topic of Pension and Retirement. The sub-topics for labor make no sense. Put in a subject line something like "Common Sense Rules to Halt Runaway Union Benefits". Write in your own words what you think needs to be done. This is what I wrote. Dear Governor
I applaud your efforts to rein in public union graft, untenable wages, and especially untenable benefit packages wildly out of tune with wages and benefits in the private sector.
I came across an article in the Washington Post about how Montgomery County, Maryland proposes arbitration rules change that would require arbitrators to place the highest priority on the county's ability to pay without hiking taxes. It also would require the arbitrator to weigh other factors, such as the interest and welfare of county taxpayers.
Here is a more detailed link from the Maryland Gazette.
http://www.gazette.net/stories/11252010/polinew173515_32533.php
Instead of having each county tackle these issues on their own, I believe you should tackle this at the state level REQUIRING that all public union arbitration boards "place the highest priority on ability to pay without hiking taxes".
Such laws would allow county boards to proceed with confidence in arbitration disputes. Currently many boards will not go to arbitration because arbiters nearly always side with unions.
Thank you very much.
Mike "Mish" Shedlock
Whether you live in New Jersey or not, please contact Christie. Whatever he can accomplish other governors will consider. However, please don't stop with the state of New Jersey. Pass this idea on to the governor in your state as well. Here is a complete list of Email addresses, phone numbers, and Fax numbers for US Congress and GovernorsIf enough people respond, we will see change, one state at a time. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
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| Philly Fed Research Paper Concludes Loan Modifications Counterproductive and "May Increase Strategic Defaults" Posted: 13 Dec 2010 12:16 PM PST To all those who insist lenders are not doing enough loan modifications, a Federal Reserve Bank of Philadelphia research paper suggests that current loan modification programs may have unintended consequences for consumer behavior, specifically, "loan modifications may increase borrowers' incentives to default on their first mortgage while remaining current on their second mortgage." Please consider Strategic Default on First and Second Lien Mortgages During the Financial Crisis by Julapa Jagtiani and William W. Lang. While the change in priority of defaults between mortgage and non-mortgage debt has received a good bit of attention, this paper focuses on an issue that has not received much attention: priority of default between first mortgages and second lien mortgages on the same home.
Why might households default on their first mortgage but not default on their home equity loans? One explanation for this behavior is that households do not act strategically but rather default because they are unable to make loan payments – the "inability to pay" hypothesis.
An alternative explanation suggests a more strategic approach to default. Some households that anticipate ultimately going to foreclosure may wish to stop paying their largest debt payment, which is typically their first mortgage payment. However, since foreclosure can be a slow process, these borrowers may decide that they are better off continuing to make their home equity payments to allow them to maintain some access to credit (e.g., unused HELOCs, unused credit card lines, additional credit card or card loans). This explanation would suggest that consumers with high unused HELOCs would be less likely to default on their home equity loans, even though they have defaulted on their first mortgage.
Loan modification programs may provide incentives for homeowners to default as homeowners are not likely to be approved for a modification unless they have missed their mortgage payments. In some cases, borrowers may need to be as late as 90 DPD for their accounts to be handed over to the modification department so that their loans could be renegotiated. Since most loan modifications are modifications of the first mortgage, the availability of a loan modification may provide incentives for borrowers to stop paying on their first mortgage while staying current on their second.
We investigate the role of loan modification further by examining default behavior both before and after (re-default) the modification. Focusing on modified loans only, we find that, on average, about half of these modified loans were delinquent (at least 60 DPD) prior to the start of the modification and most of them returned to the current status after the completion of modification. However, a large portion of these loans actually re-defaulted within six quarters after the modification – specifically, 47 percent of these loans became at least 60 DPD and 38 percent became at least 90 DPD within six quarters following the modification.
Conclusions and Policy Implications
Interestingly, there is little evidence that many borrowers have decided to strategically default on second liens while maintaining payments on first mortgages. Instead, our results indicate a significant declining trend (for 2008-2009) for defaulting on the second lien while keeping the first lien current, controlling for risk characteristics of the borrowers and loan types.
We also find that negative equity, proxied by LTV and/or CLTV exceeding 90 percent, has been the primary reason for homeowners to default on their mortgages overall. Negative equity is a necessary but not sufficient condition for strategic mortgage default. While some of these homeowners default on both first mortgages and second lien home equity lines, a large portion of the delinquent borrowers actually keep their second lien current. This behavior is generally more common with people who have HELOCs (rather than HELOANs) and is more common when there is a larger unused line of credit.
Our results overall suggest that people default strategically as their home value falls below the mortgage value; they exercise the put option to default on their first mortgage. However, they tend to keep their HELOCs current in order to maintain the credit line available to them, particularly for those who have already used their credit card lines. Credit quality as reflected in the types of mortgages (prime, alt-A, or subprime) does not seem to play a significant role in determining this behavior. In addition, we find that loan modifications may increase borrowers' incentives to default on their first mortgage while remaining current on their second mortgage. Overall, our empirical findings provide a better understanding of consumer strategic default behavior and implies that current loan modification programs may have unintended consequences for consumer behavior. Default Rates Across Financial Products click on chart for sharper imageNote: LPS Applied Analytics (McDash), consists of all mortgage loans issued by nine of the top ten mortgage servicers in the U.S., covering approximately 75 percent of outstanding mortgage loans as of year-end 2009.
Home Equity Loans vs. Home Equity Lines of Credit click on chart for sharper image
One look at that second chart tells you all you need to know about why second lien holders (specifically, HELOC lenders) do not want to speed up foreclosures or accept any modification agreements that would wipe them out. People would rather give up their house than their autos or their credit lines. Moreover, the longer the delays, the more incentive there is for homeowners to make strategic defaults on their mortgage. The proper conclusion is that efforts to delay foreclosures by loan modifications simply makes matters worse, a position I have taken since the beginning as a matter of plain common sense. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
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| Obama's Health Care Legislation Ruled Unconstitutional Posted: 13 Dec 2010 10:32 AM PST The centerpiece of the Obama health care legislation was a provision that required everyone to buy health insurance. The idea behind that provision, which I always thought unconstitutional, was to force those in their 20's and 30's to buy health care at inflated prices to help lower prices of those in retirement who would need more services. Recall that various health care providers supported the legislation only because Congress mandated everyone to buy in. Today, a Virginia Federal District Judge swatted that provision and recommended the Supreme Court hear the case, bypassing the Circuit Court of Appeals. Please consider Virginia health-care ruling strikes down key provision of Obama's planA federal judge in Virginia ruled Monday that a key provision of the nation's sweeping health-care overhaul is unconstitutional, the most significant legal setback so far for President Obama's signature domestic initiative.
U.S. District Court Judge Henry E. Hudson found that Congress could not order individuals to buy health insurance.
In a 42-page opinion, Hudson said the provision of the law that requires most individuals to get insurance or pay a fine by 2014 is an unprecedented expansion of federal power that cannot be supported by Congress's power to regulate interstate trade.
"Neither the Supreme Court nor any federal circuit court of appeals has extended Commerce Clause powers to compel an individual to involuntarily enter the stream of commerce by purchasing a commodity in the private market," he wrote. "In doing so, enactment of the [individual mandate] exceeds the Commerce Clause powers vested in Congress under Article I [of the Constitution.] Leave it to the Obama administration to ram down everyone's throat a bill whose centerpiece is unconstitutional. Whether the president would just forge ahead without that provision is unclear, but the health-care industry who wrote the legislation will not like it one bit. The provision does not kick in until 2014, but we should not wait until the last minute to decide what to do about it, given there are 25 other objections to the bill including a joint filing by 20 states. We need a quick ruling. If the administration asks the Supreme Court to hear the case, most likely it would. It might anyway, regardless of what the President wants, based on the recommendation of District Judge Henry Hudson. Clearly the case is headed to the Supreme Court, so why not send it there right away? Should the mandated buy provision be struck down by the Supreme Court, the entire bill will need to be reworked. A replacement bill in the next Congress would not look anything like this one. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
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| Time to Kill Build America Bonds (BABs) Posted: 13 Dec 2010 08:45 AM PST In response to Exceptionally Strange Bedfellows; More Cookies! Oh Boy! I received an email from a former municipal bond trader "FMBT" for one of the largest municipal bond issuers in the US stating many reasons why it's vital to put an end to Build America Bonds (BABs) From "FBMT" on Killing BABs Hello Mish,
I have been an avid reader of your blog for over 3 years now, and was a municipal bond trader for over 5 years. I wanted to write to you today about the about the need to contact our representatives and block any extension of Build America Bonds. These bonds were sold to us as a "costless" way to help municipalities get financing. Well, there are two major problems with that logic:
1. They are extremely costly.
The logic suggested when BABs were first introduced was that the federal government would pay 35% of the coupon, and investors would be taxed 35% ordinary income so the subsidy would be a wash. In theory, this makes sense. However, in practice, the large majority of these bonds have been sold to tax-exempt and overseas investors, who pay no US taxes.
Many overseas investors view municipal debt as a diversifying asset class, but until BABs it was very difficult for them to gain exposure to the market. Articles have been written on Bloomberg and the Wall Street Journal about how BABs have opened up the municipal market to overseas investors, quoting many municipalities and brokerages who underwrote the debt so this is a point that cannot be argued against
Assuming that a majority of the investors are tax-exempt and taking the following facts into account:
a. Roughly $250 Billion of BABs have been created
b. Most of the BABs are long-dated obligations so the value of the bonds is mostly in the coupon, not the principal
c. The Federal Government provides 35% of the coupon
d. This program has cost US Taxpayers as much as $250*35%=$87.5 Billion over the past year-and-a half. IT IS NOT A WASH.
2. These Bonds are assumed to have an implicit guarantee in the Municipal Market.
BABs are the first time that the federal government was directly responsible for payments from a state or local government. Municipal market professionals will argue (and the letter of the law would suggest) that only the municipality is the only credit on the hook in the case of bankruptcy, not the federal government.
We have heard this before with the implicit guarantee of GSE debt. Fannie and Freddie will end up costing US taxpayers $100s of billions if not trillions.
The end game is the same for many municipalities. They are bankrupt, they are broke, and BABs is the first step towards federalizing that debt. How many municipal professionals sell these bonds to their overseas clients on the basis of "there is no way the federal government will not step in"? The moral hazard in these instruments is very high.
We must contact our representatives and tell them to kill any attempt to add BABs to the tax agreement. These instruments are dangerous, unnecessary, costly, and a threat to our system. This is an issue of utmost importance, and I'm glad you are one of the few who understands what is at risk. Please phone, email or Fax your legislative representatives, especially your senators, and tell them to make sure to scrap Build America Bonds. Here is a complete list of Email addresses, phone numbers, and Fax numbers for US Congress and Governors. Unfortunately, many senators use a form. It may be easier to call. First, click on their name and see if there is an email address. In addition to emailing or calling your own representatives, Please email House Speaker Boehner Regarding BABs. That link will put in a subject line of "Stop the Build America Bond Program" Here is a sample email. Please use your own words. Dear Senator [Speaker, Rep]
Please vote NO for any extension of the Build America Bond program. The US government should NOT be backing, sponsoring, or guaranteeing state or municipal debt.
Build America Bond have already cost taxpayers $87.5 billion because the bonds have primarily been sold to tax-exempt and overseas investors who pay no US taxes.
The worst part however is the Federal guarantee.
We have gone down that road one time too many already. Taxpayers are already on the hook for hundreds of billions of dollars of Fannie Mae and Freddie Mac debt because of it.
We cannot afford to make the same mistake again. Please vote NO for any extension of Build America Bonds.
Your Name
Your City, State, Zip Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
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| Detroit Mayor Plans to Halt Garbage Pickup, Police Patrols in 20% of City; Expect Bankruptcy, Massive Municipal Bond Turmoil in 2011 Posted: 13 Dec 2010 01:09 AM PST Detroit has been bankrupt for years. It simply refuses to admit it. Detroit's schools are bankrupt as well. A mere 25% of students graduate from high school. Yet, in spite of hints and threats from mayors and budget commissions, and in spite of common sense talk of bankruptcy, Detroit has not pulled the bankruptcy trigger. In a futile attempt to stave off the inevitable one last time, Mayor Bing's latest plan is to cutoff city services including road repairs, police patrols, street lights, and garbage collection in 20% of Detroit. Bing to Cede 20% of Detroit to Gangs and HomelessCity officials suggest this will not shrink the size of the city. Perhaps it won't shrink Detroit on Google Maps. However, Bing's plan would effectively surrender 20% of the city to gangs and the homeless. Would you want to live in one of the gang war-zones that his plan would create? Would you want to live in a bordering neighborhood or in a bordering city? Regardless of your answer, Bing's plan cannot and will not work and I believe Detroit will, sometime in 2011, file for bankruptcy. If so, expect massive turmoil in municipal bonds. Less Than a Full-Service CityThe Wall Street Journal discusses Bing's plan in Less Than a Full-Service CityMore than 20% of Detroit's 139 square miles could go without key municipal services under a new plan being developed for the city, with as few as seven neighborhoods seen as meriting the city's full resources.
Those details, outlined by Detroit planning officials this week, offer the clearest picture yet of how Mayor Dave Bing intends to execute what has become his signature program: reconfiguring Detroit to reflect its declining population and fiscal health. Yet the blueprint still leaves large legal and financial questions unresolved.
Mr. Bing's staff wants to concentrate Detroit's remaining population—expected to be less than 900,000 after this year's Census count—and limited local, state and federal dollars in the most viable swaths of the city, while other sectors could go without such services as garbage pickup, police patrols, road repair and street lights.
Karla Henderson, a city planning official leading the mayor's campaign, said in an interview Thursday that her staff had deemed just seven to nine sections of Detroit worthy of receiving the city's full resources. She declined to identify the areas, but said the final plan could include a greater number.
"What we have found is that even some of our stronger neighborhoods are at a tipping point with vacancy," Ms. Henderson said. "Vacancy adds to blight and blight is a disease that takes over the whole neighborhood. So the sooner we can get those homes occupied, the better for the city."
Officials bristle when their efforts are described as downsizing, saying their aim is to repurpose portions of the city, not redraw its borders. "We will not be shrinking the city," Ms. Henderson said. "We are 139 [square] miles and we'll stay that way."
Repurpose or Abandon?Of course the Mayor's office did not say they would abandon sections of the city to gangs. But how the hell can repurposing as described above possibly mean anything else? What's next? Barbed wire? Oh wait a minute, Detroit already has tried that. Razor-wire too. Here's a picture of Detroit's clearly abandoned repurposed Michigan Central Train Depot.  Image courtesy of the Journal and the AP. Detroit's Tax Collection Process The Detroit Free Press points out Detroit botched Packard plant tax collectionThe City of Detroit has failed for nearly four years to send property tax bills to the owner of the Packard plant, costing the city badly needed cash.
At 3.5 million square feet, the plant is by far the largest derelict property in Detroit.
It wasn't until the Free Press began making inquiries last week that the city's assessor's office returned the property to the tax rolls -- with an assessed value of nearly $1.6 million. The change came nearly four years after a Michigan Supreme Court decision prompted the city to surrender the century-old plant to Bioresource, a company whose last listed corporate representative is a convicted drug dealer.
Last week, less than 18 hours after a reporter questioned why the property was listed as city-owned, the assessor's office changed its status to "taxable." The property's assessed value ballooned from almost nothing to nearly $1.6 million.
Robin Boyle, professor of urban planning at Wayne State University, said the error underscores "just how challenged the city is in dealing with the fundamental task of title, control, oversight and follow-through" with property throughout the city.
"To me, that is a fundamental problem that leaves Detroit in a consistently weakened position. It can't even do the basics," Boyle said. "This is a huge piece of real estate, and yet, there's still confusion."
Although only one tenant remains on the property, the plant is not entirely neglected. Scrappers prowl it for metal. Graffiti artists decorate its walls. Someone perched TV sets atop pillars standing at least 15 feet tall.
And it can all be yours for $13 million.
David Wax, senior associate with Burger Easton & Co. in Farmington Hills, has listed the property for sale for a couple of years. He said there was a good deal of interest before the world economic crisis and before steel prices collapsed, making the Packard plant less attractive to buy and then demolish for its metal.
"For 13 years it's been vandalized, raped, burned, stripped of anything of value," Wax said. And on any given day, he said, you can hear "people with hammers and cutting torches cutting steel out of the building." Packard Closeup ImagesThe Business Insider has fantastic set of images of the beautiful $13 million Packard property. Here are a couple of those images.   Now that the building has been put back on the active tax rolls to a convicted drug dealer, this is the sequence of events I imagine would transpire were Detroit to stay on its existing path using Bing's plan as the roadmap. 1. Detroit will send a tax bill to Bioresource 2. Bioresourse will not pay the bill 3. Detroit will reacquire the building in a tax sale with no bidders 4. In a couple of years Detroit will realize it once again owns the building 5. Detroit will repurpose the Packard plant with the same success as depicted in the Michigan Central Train Depot image. Detroit Schools BankruptFlashback July 24,2009: The Wall Street Journal reports Detroit's Schools Are Going Bankrupt, TooNow's the time to cast off collective bargaining agreements and introduce school choice.
'Am I optimistic that they can avoid it . . . ? I am not." That's what retired judge Ray Graves said this week when asked whether the Detroit public schools, which he is advising, would be forced into bankruptcy. Facing violence, a shrinking student body, and graduating just one out of every four students who enter the ninth grade on time, the city's schools have been stumbling for years. Now they face a seemingly insurmountable deficit and are expected to file for bankruptcy protection at about the time that students should be settling down in a new school year.
As embarrassing as such a filing would be, it also may be the only thing that can force the kinds of changes Detroit schools need—as the financial turmoil is just the latest manifestation of a system in terminal decline.
Detroit is like many urban school districts—large, unwieldy and bureaucratic, with a powerful union that makes the system unable to adapt to changing circumstances and that until very recently had an indulgent political class that insulated it from reform. That insulation came in two forms. The first was neglect. Mayor Kwame Kilpatrick spent several years distracted by a scandal stemming from his affair with a staffer. He resigned last year, pleaded guilty to obstruction of justice, and was sentenced to four months in jail. Had he been an effective mayor, he might have also been a powerful advocate for students.
The other insulating force was a conscious decision to wall off Detroit from charter schools. In 1993, Michigan's legislature made it difficult to create new charters in Detroit by declaring that only community colleges could authorize charters for primary and secondary schools in "First-Class Districts"—defined as those with more than 100,000 students. Detroit was the only First-Class District. In 2003 the state, under pressure from the Detroit Federation of Teachers, turned down a gift of $200 million from philanthropist Robert Thompson that would have established 15 charter schools in the city. Those charters are needed today.
The net result has been a school system that's been coming apart as the teachers union has dug in its heels. In 2006, the union illegally went on strike, killing a plan to force teachers to take a pay cut to balance the system's books. Collective Bargaining has Morally and Fiscally Bankrupted Detroit SchoolsRead that again. Under pressure from the Teachers' Union, Detroit turned down $200 Million. That was in 2003 dollars. Wow. No doubt the union "did it for the kids". For more on the appalling behavior of Detroit's teachers' unions please see Detroit Public Schools (25% graduation rate) teachers unions opposing highly qualified volunteer teachers. It is time to kill collective bargaining for public unions, every one of them, and nation-wide, not just Detroit. Detroit Bankruptcy LoomsFlashback April 6, 2010: Detroit Bankruptcy Looms with Deficit of $446 Million in Budget of $1.6 BillionDetroit has hit the end of the line. It's budget deficit is between $446 million and $466 million (28% to 29%) of $1.6 billion with few ways other than drastic cuts in wages and benefits to address the problem.
If unions will not give in (and they won't), Detroit Faces Bankruptcy.
With that introduction, inquiring minds are diving into the Citizens Research Council report on The Fiscal Condition of the City of Detroit
The Economic Base
The deterioration of the economic base of the city has accelerated. There were an estimated 81,754 vacant housing units (22.2 percent of the total) in Detroit before the recession; that number increased to an estimated 101,737 (27.8 percent of the total) in 2008.
The average price of a residential unit sold in the January through November, 2009 period was $12,439, down from $97,847 in 2003. Remaining businesses and individuals are challenging property tax assessments on parcels that have lost value and, in some cases, cannot be sold at any price.
More than half of employed city residents work outside the city limits; the metro area has the highest unemployment rate of the 100 major metro areas in the U.S. Detroit Should Embrace Bankruptcy
The only legitimate solution for Detroit is to shed pension obligations, privatize everything it can including the fire department, and dump unions contracts en masse. Since those items can only happen in restructuring, Detroit should openly embrace bankruptcy. Detroit Warns of Bankruptcy as It Prepares Bond SaleFlashback March 5, 2010: Detroit Warns of Bankruptcy as It Prepares Bond SaleDetroit, the largest U.S. city whose debt is rated below investment grade, warned investors of the risk of bankruptcy as it prepares to sell $250 million of bonds to help close its budget deficit.
The city told bondholders in a March 2 preliminary offering statement that while it hasn't taken steps to reorganize under Chapter 9, it may have few other options if its financial condition worsens. Detroit officials also detailed the steps they would have to take should bankruptcy become necessary.
"If the city's financial status were to deteriorate further the city's options to improve its fiscal health may be limited," Detroit said in the statement. Bondholders "should not expect that their rights to payment and remedies will not be adversely affected by filing under the bankruptcy code."
"We are still in a financial crisis but insolvency isn't on the horizon or on the agenda at this time," Mayor Dave Bing said in an e-mail from his spokesman, Dan Lijana. The total deficit this year is estimated at $280 million. Bing Still Pretends - How Long Can It Last?For reasons unknown, Bing just cannot do what is right. He will not come flat out and say what everyone in their right mind knows - that Detroit is fiscally and morally bankrupt and so are its schools. Instead, on December 10, 2010 Detroit Borrows $100 Million for Police and Fire Headquarters. Detroit, whose population has dropped by half since 1950, borrowed $100 million to turn the MGM Grand Casino's former site into a headquarters for the police, fire and emergency-services departments.
The city sold so-called Recovery Zone Bonds authorized under the U.S. economic-stimulus plan, borrowing at 4.55 percent, the city said in a press release today. The bonds, with the longest term maturing in 2035, were sold through the Michigan Finance Authority by investment banks led by Siebert Brandford Shank & Co., according to data compiled by Bloomberg.
"The financial markets believe in what we're doing to bring fiscal responsibility back to Detroit," said Mayor Dave Bing, in a prepared statement today.
So-called recovery zone bonds were included in the economic-stimulus package signed by President Barack Obama last year to help expand the economy of areas with poverty and unemployment. They're a type of Build America Bond that comes with a 45 percent interest subsidy rather than 35 percent rate under the Build America program, which expires Dec. 31.
The bonds were rated A1, or fifth highest, by Moody's Investor's Service and AA-, or fourth highest, by Standard & Poor's. BABs Set to End December 31, 2010Note the ridiculous rating of those bonds by Moody's and by Standard & Poor's. If the Federal government is backing those bonds, then they are AAA. If not, they are junk. There is no in-between. Thankfully, the extremely ridiculous Build-America-Bond program will expire on December 31. When it does, no one in their right mind will lend Detroit money, and that at long-last will mean "lights out" for Detroit. A new Republican governor takes over in Michigan next year, complete with a new Republican legislature. I believe Governor-Elect Rick Snyder will be amenable to fixing what ails Detroit and numerous other cities in Michigan. Should Mayor Bing not seek bankruptcy assistance, I propose for Governor Snyder to force Detroit into bankruptcy. It is the only hope Detroit has. Mayor Bing is clearly in over his head. Governor Snyder would be a hero if he can turn Detroit around, and outside of bankruptcy that appears impossible. Thus, forced or not, I believe Detroit will file bankruptcy in 2011, the state will accept it, and public unions will be forced to accept massive concessions in bankruptcy court. Look for massive turmoil in the municipal bond market as a result. Addendum:Mismanagement of Emergency ServicesPlease consider Detroit paramedics fear they're losing the battle to save livesOver the past month, the troubled Detroit Fire Department has found itself trying to convince an angry public that it has not abandoned them. The latest debacle was a windblown inferno that torched at least 70 homes across the city. It was so bad that an 11-year-old dressed in a T-shirt and sneakers was pulling hose for the overwhelmed Fire Department. Firefighters from Warren, Dearborn and Grosse Pointe were called in. Mayor Bing passed it off as a natural disaster.
But even before the fires, the competence of the department was called into question after a string of blunders in the past month related to its ambulance service. In August, firefighters from Engine 50 pulled two victims from a burning building. They requested two ambulances. No units available, they were told. A man cut off his toes with a lawn mower. Again, no unit available. Most shocking, perhaps, occurred when a building collapsed on six firefighters, half of whom were taken to the hospital in squad cars and fire trucks because there were no ambulances on the scene. If that is how people in uniform are treated, imagine what it is like for the average citizen in the dark of night.
Fire Commissioner James Mack Jr., who also oversees the EMS system, said the morning after the fires the department's problems aren't a matter of mismanagement but poverty.
"Everybody knows we are under budget constraints, so with those budget constraints we are maximizing the equipment that we have and the manpower that we have," Mack said.
Some city leaders aren't buying it. Consider that today the Fire Department budget is $175 million, more than it was five years ago, even after adjusting for inflation.
"What's wrong with the city?" asked City Councilman Gary Brown, who believes there is room to cut in the Fire Department's $175 million budget. "A vacuum in leadership. It's not a matter of funding. I suspect it's mismanagement."
Brown asked Mack -- who served for six years as the second deputy commissioner under disgraced former Mayor Kwame Kilpatrick -- to deliver within 90 days a comprehensive plan to bring the ambulance response time down to a targeted eight minutes, which is the national standard. That was 170 days ago and Brown is still waiting for the report. The article tells many sad stories of people who died waiting for emergency services. Please read it. I repeat my claim: Detroit cannot be saved from within, bankruptcy is the best hope. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
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