Detroit Debt and Pension Funding – First in a Series of Domino’s to Fall

From the website: Slums in the USA at www.nairaland.com

The City of Detroit declaring bankruptcy should not come as a shock to the nation nor the people who live in Motor City – the signs of a problem that was out of control were there for all to see. As recently as May of last year, the City of Detroit cut the street lights to the highest crime areas in an effort to cut some of the budget(Degrees). In that case, the argument was that the City was unable to attract private businesses – in essence depending upon what was left of the tax base to bolster up the massive public employees pensions, and the mismanagement that had taken place for decades.

Now, as the City tries to get out from under, by eliminating payments to pensioners, it appears that the media has finally gotten wind of the fact that there may be a problem – by looking at the human interest side of the “story”.

The Washington Post headlines: “After Detroit bankruptcy filing, city retirees on edge as they face pension cuts”. There are 20,000 retirees about to lose their pensions, with no other recourses available. The reason:” Of Detroit’s overall debt, about half — $9.2 billion — represents pension and health benefits that the city has promised retirees but that it now says it does not have enough money to fully pay.”

The Washington Post, somewhat erroneously blames fear and prejudice for the fiscal nightmare facing Detroit – In an op-ed “White Flight and Detroit’s Decline”, the premise of race riots in the 1960’s, and the resultant flight of “white” residents either due to fear or prejudice is partly to blame. However, one might want to take a look at the fact that the City has been bleeding jobs and businesses for decades, one of the chief elements in maintaining some sort of balancing act. One might look to Massachusetts, where the unemployment rate is rising again; taxes are on the docket, again, and those residents that are packing up for more tax friendly, employment friendly environments. Texas being the first destination, as well as border states such as New Hampshire, where personal taxes are lower and there is more opportunity. It makes sense that when opportunities are not available, regardless of race or ethnicity, individuals move.

What might have helped Detroit? What might help the other cities across the U.S. that are headed in the same direction? The answer: reasonable pensions and possibly a state appointed budget overseer for cities that show the first sign of decline. The Detroit Free Press names a few in its article: ”Detroit not alone under mountain of long-term debt” in which the following cities are discussed as being in the “same situation” as the Motor City: Cincinnati and Baltimore, along with LA and Chicago: “Chicago recently saw its credit rating downgraded because of a $19-billion unfunded pension liability that the ratings service Moody’s puts closer to $36 billion. And Los Angeles could be facing a liability of more than $30 billion, by some estimates.”.

The years of public officials promising hefty pensions in return for votes has finally come home to roost – and unfortunately, so many of those who rely solely on public pension funds, are now facing severe hardships. Each city that is faced with public employee pensions that are not in line with the public sector, regardless of size, should look towards renegotiating union contracts going forward, in order to stop the bleeding – and insure that their employees are offered a 401K or similar vehicle, not only as an addition to their “promised pension” but as a safeguard in the event that the City goes “bust” and can no longer fund the pension.

It is the same story as that being played over in Europe, Greece in particular, where public pensions destroyed the economy. The fact of the matter is that without private enterprises, and seven years of skyrocketing unemployment, one might think that the Federal Government, and those legislators and Senators which the people have sent to DC, would be looking closely at any programs that overly burden the private sector –either now, or in the near future (see: disaster that is Obamacare).

One might also suggest seeking advice from the management of cities, perhaps not that large, where there is a business friendly environment (See Texas), where there are jobs, as well as fiscal responsibility of the part of the City government.

In the case of Detroit, the writing was on the wall, yet, the proverbial can kept on being kicked down the long road to bankruptcy. Playing Monday morning quarterback, had the City government offered the alternative of a 401K to those union members, (and regardless of the brouhaha it would have caused), cut local business taxes, and sought the advice of solvent Cities, this would not have occurred. One wonders where, as those who are facing a loss in pension, would have recourse, given a bankrupt City – without the income from private enterprise, they simply don’t have the tax base to break even, let alone fund pensions.

Detroit – Running out of Money – The Corruption, the Waste and the Rocky Road Forward.

The City of Detroit, not unlike cities across the country, taking on increasing debt, has reached its limit. According to the New York Times , the City of Detroit has been found to be fiscally unsustainable, and yet, somehow suggests that the City, with a majority African American Population and run by Democrats for Decades, is somehow a race issue, as the State as a whole has a “ population is nearly 80 percent white and Republicans, including Mr. Snyder, control the capital.”. (NY Times). That said, The City’s finances, reviewed by a State panel, and found to be dismal, to the point where the Govenor may appoint a City Manager – appears to have a rather long history of financial struggles – mostly based on corruption, incompetence and the cost of running a City, all under the supervision of those same Democrats that the NYTimes suggests are somehow victims.

Put aside the race baiting and the partisanship and one finds this City’s problems are a fiscal issue, one where , regardless of what has taken place in the past, attempting to fix the problem is the only way out, even if that means a State Manager is necessary (See City of Springfield, MA under the guidance of the Commonwealth). When Cities spend too much on City employee pensions and salaries, (those that are above the medium for private and public sector works in a given state), that is a starting point, but not the entire problem, there is the unchecked and rampant fraud committed by the City employees and elected officials, there is the exodus of city residents, where fewer tax-paying residents are able to support the aforementioned and eventfully, something has to give.

A timeline of Detroit’s decent into ruin by Reuters: suggests the problems began in 1973 under a long-term Coleman Young, who ran the city until 1993 (some late highlights from Reuters follow: read the entire article here at reuters.com:

In September 2008, Kilpatrick left office after pleading guilty to obstruction of justice charges, and City Council President Kenneth Cockrel became interim mayor.

The U.S. Census reported in March 2011 that Detroit's population fell in 2010 to 713,777 - a 100-year low and a 25 percent decline from 2000. The drop threatened key tax revenue sources that were tied to a population of at least 750,000.

Michigan Governor Rick Snyder in June 2011 signed legislation allowing Detroit to continue collecting income and utility taxes. Bing warned in November 2011 that Detroit faced a projected cash shortfall of about $150 million by the end of March 2012.

In March 2012, about half of Detroit's unions accepted pay cuts and other concessions to save the city $68 million annually. The Michigan Court of Appeals allowed the review team to continue working on a potential consent agreement with the city. An interim bond issue to raise $80 million for Detroit's near-empty coffers was sold.

In June 2012, Detroit's top lawyer asked a state court to void the consent agreement on the basis that the state owed the city money. The lawsuit postponed plans for a bond sale to replace the March interim borrowing and raise a total of $137 million for Detroit. Bing, meanwhile, warned the city could soon run out of cash, putting a debt service payment on $1.5 billion of pension debt in peril. As a result, Detroit's credit ratings were cut further into junk.

In July, Bing imposed 10 percent pay cuts on workers.

Michigan voters on Nov. 6 repealed the state's emergency manager law.

The governor on Dec. 27 signed a new emergency manager law to take the place of the law repealed by voters in November. The new law, which takes effect in late March, gives fiscally struggling cities and school district options for dealing with their problems.

An audit released on Jan. 3 showed Detroit's cumulative deficit jumped to $326.6 million at the end of fiscal 2012 on June 30, from $196.6 million in fiscal 2011.

Bing announced on Jan. 25 that the approval of more goals by the city council would allow Michigan to send $20 million of the bond proceeds to the city.

As the formal review of Detroit continued, Snyder revealed on Feb. 11 he had a "short list" of candidates to fill the job of Detroit's emergency financial manager if he decides the city needs one.(Reuters)

Therefore what took place in Detroit began with one city administration followed by others, who kept pushing the increasing public employee debt “can” down the road, The City lost 25 percent of its population over a 10 year period, which eroded the already stressed tax base, and by not dealing with the problem at any time between the 1980’s to 2012 – the current Mayor, Bing, is trying to stop the bleeding with band-aids – but, that began in 2012 with a City Union agreement. The state’s voters passed a bill that took the States ability to help failing cities away, the State’s Govenor signed a new law reversing that bill, in order to step in and save Detroit, but it’s Detroit’s call.

Looking at Detroit’s Demographics is an eye opener: Based on 2009 census data the population of Detroit was 711,700, noting a loss of 25% over the prior census, medium income in Detroit was $18,614, with a medium rent of $749., (City Data),

Compared to a similar metropolitan area in terms of population in the Midwest, with a population of 807,584, the Medium Household income was at$40,278 and the medium rent at $715. (City Data).

That suggests a majority of those living in Detroit were in poverty, with a high rental costs, and those that could, left the City and possibly the State.

Now what?

A former Chief of Communications from the City of Detroit suggests the only option for the City is a managed bankruptcy. Commenting on the report released Karen Dumas, suggests Detroit’s woes, began a decade ago (contrary to Reuters findings), and follows with a short laundry list of issues that should have been corrected:

The city's long-term liabilities surpassed $14 billion, what it cost American taxpayers to bail out the entire auto industry.

The city charter is structured in a way that shackles the city and keeps it from making changes needed to survive.

And the city broke the law -- a lot -- by not amending its budget to prevent deficit spending. It kept paying for things that it could not afford. For instance, it paid last year for 285 employees at 36th District Court. The court has 350 employees, not counting judges. And the court owes the city $199 million.

The city did not balance its checkbook every month, just once a year.

The city sometimes recorded expenses in the wrong place, wrong account or the wrong year.

Some information about city workers did not match information in the personnel files.

When the city paid some insurance claims, they kept a record of the payments, but not of the claims that forced them to make the payment.

The city had no process for anonymous reporting of ethical or fraud violations.

The city used restricted funds to pay for things those funds could not pay for. That's why they're called restricted funds. As a matter of fact, some funds shared the same bank accounts.

The city sometimes determined weekly paychecks without computers and without having the amounts verified by managers. So some paychecks, perhaps many paychecks, were wrong.

And the city kept breaking the rules and operating like it was the 1950s until it accumulated $13 billion in bond debts and a $326-million deficit.

(Detroit Free Press)

On Pensions and the City Management:

From the Detroit Free Press: 2010: “Risky bets cost Detroit pension funds $480 million”, reviews the mess pension fund managers made out of Detroit’s City Pension fund. Detroit’s Mayor Bing, responded to the Free Press: Asked about the losses, Mayor Dave Bing said in a statement: "The current obligations of the city's two pension systems are unsustainable."

He did not elaborate.

On City Pensions:

From the New York Times: an article entitled “Public Pensions, Once Off Limits, Face Budget Cuts” reviews the City of Detroit as well as other cities nationwide as to Union pensions. On Detroit specifically:

The struggles of Detroit, of course, are extreme. The report by the arbitrator, Thomas W. Brookover, noted that although the city’s unemployment rate was officially 28 percent, there was evidence that less than 37 percent of the city’s residents were actually working. The population had crashed. Property tax revenues were dwindling. Detroit had drained its rainy day fund, reduced overtime, offered property-tax amnesty, sold public assets, borrowed money, allowed casinos to set up shop — and still its deficits kept growing.

The average pension for retired police officers in Detroit is not especially rich: it is $28,501 a year. But with more than twice as many retirees as active workers, Mr. Brookover wrote, the costs of paying for the pensions “threaten both the city’s fiscal viability, as well as its wherewithal to provide public safety for its citizens.”

Detroit’s efforts to cover those costs through aggressive investing have not helped. In a 2010 report, an auditor warned that $103 million of alternative investments were unaccounted for. The city’s bets have included Tradewinds Airlines, which went bankrupt for the third time in 2008, and a luxury hotel in Detroit. The Securities and Exchange Commission is investigating.

The city initially sought to freeze its pension fund immediately, which is almost unheard of in the public sector. The arbitrator rejected that proposal, but agreed that the city could reduce the rate at which lieutenants and sergeants earn pension benefits from 2.5 percent of their salary per year to 2.1 percent. Although rare, the reduction is not particularly large, given the magnitude of Detroit’s problems. The arbitrator did not try to find a solution to the fund’s imbalance. (Read balance of article here

(New York Times)

What happened in Detroit is obvious, a long standing and unchecked, systematic destruction of a once great city, by those in charge for decades at the City level. From corruption to incompetence, to downright criminal activity, the City has found itself on a precipice. As it is obvious why this occurred, fixing the problem is also obvious, not only for Detroit but for any municipality or town across the nation. If elected management is in any way, shape or form, incompetent or corrupt, there should be a mechanism in place to remove said individuals though a City recall, Union contracts should be reviewed and adjusted to the public sector in each individual municipality. Above all, the taxpayer to City obligations should be considered for all budget projections, and those findings should determine city wages, and services. Federal intervention is not an option, as the National debt and budget reads like Detroit’s. (Which makes one wonder, why, the President on budget cuts, is suggesting that firefighters, teachers, etc. will be laid off or fired, when the City hires, and fires, these employees, based on what the City has in its coffers, rather than the Federal Government? What has possibly worsened the situation (most likely), was the stimulus and job bills during the administration that was given to Cities and Municipalities to increase their employees, and create jobs. The problem arose when the funds ran out, and the City, now straddled with unemployment compensation, ran into deeper debt as a result of the Federal Aid.) It is unfair to those teachers, firefighters and police officers and all working for the City of Detroit, who have retired from any City System, to have to live in fear of a City going into bankruptcy, and the result, a loss of all benefits. It is now a human rights issue as well. If now is not the time to bring fiscal sanity to the table, across the country, when?

New Hampshire House Seeks to Override Bill Allowing Unions to Collect Fees from Non-Union Members: Right To Work in New Hampshire

New Hampshire State Motto: on Licence Plate: Live Free or Die - image Moonbattery.com

From the Boston Globe: The New Hampshire Legislature will be voting to override a veto by the Democrat Governor John Lynch, on a bill that would bar unions from “collecting a share of bargaining and administrative costs from non-members.” NPR notes that the “Right to Work” law was approved by the Republican controlled legislature, then vetoed by the Democrat Governor.

The fact that the Governor of New Hampshire believes it is “fair” that unions are able to charge non-members for bargaining and “administrative” costs is plainly put – ridiculous. Union membership has been on the decline, according to the Bureau of Labor Statistics: at 11.3 percent in 2010 almost a full point lower than the previous year. Of specific interest is that public employee’s union membership was up 36% over the private sector unions at approximately 7%. Therefore, the fate of funds for the New Hampshire Public Employee Unions is most likely on the line.
With the “Stimulus” funds, which created mainly government jobs versus private sector jobs, those funds also had a “shelf life”, and are about to expire. States and their respective municipalities, that used these funds to “create and save” public employee jobs, are now scrambling to come to a solution and most often, the Unions are in histrionics over the results. In nearby Massachusetts, even the bluest state, has been seeking way in which to curb collective bargaining when it comes to health and pensions, a bill, passed by the Democrat controlled Commonwealth Legislature did just that in April of this year. (Boston Globe).

Simply put the states, and cities can no longer afford to function with high priced public employee unions. Unfortunately, there are unions that should be considered “untouchable” by any government and those are the unions that cover our public service employees who put life and limb on the line for the protection of the individual – Fire and Police. Unfortunately, other unions with a great deal of clout, that cover teachers, and administrative personnel, or those who hold high degrees and are in no wise, in fear of losing life and limb, make up the majority of the public employee unions (Bureau of Labor Statistics) – Would those types of positions be treated as private sector, it would serve two purposes: one allowing incompetent workers to get the boot, and two, allowing successful professionals to achieve more in salary and status through results. (Refer to study on Teachers Unions and the decline of U.S. Education since inception here ”Study concludes teachers should be laid off based on Low Student Test Scores not Seniority”)

The New Hampshire Unions that are seeking to fleece non-members for administrative costs, and are given a green light by the Governor to do just that, screams clout of unions when it comes to control over the Democrat Party. In a recent decision by AFLCIO union contributions to Democrat Candidates will be based on the level of support for same, which which speaks to the need for unions to grab dollars where-ever they can, even from non-union members, in order to continue to contribute to their chosen political party on a national level.
Therefore high marks go to the New Hampshire Legislature for attempting to override the Governor’s veto.

Wisconsin, Walker’s Watch: Unemployment Down 7.4% Public Sector Jobs Climb, Union Continues to Fight On as Relevancy Wanes

One of many Wisconsin Union Protesters - Image: SodaHead.com

Wisconsin: Unemployment dropped in February to 7.4%, the lowest since January 2010, under Governor Walker’s administration, while Democrats and Public Employee Unions continue to protest in Madison, WI. The hubbub yesterday (politely put), was over the Republican Legislature, in Committee, separating the language specific to reducing collective bargain for public unions in the budget bill, and then going to the floor for a vote – where it passed. (AP) According to the AP report, there were upwards to 7,000 protestors at the State Capital – 7,000. The 14 Wisconsin Senate Democrats are still “in hiding” in neighboring Illinois, and are calling foul – threatening to return to Madison WI, where they might resume the work they were hired to do. Polling, at this point in time, is with the public employees union, as millions have been poured into the state in the form of television and radio ads by both sides (Union and Republican).

However, would that poll be in favor of the public union if it was understood exactly what the contracts contained? Public Employee unions, with exceptions for those who are employed in dangerous fields (i.e. police and firefighters) are somewhat ridiculous, in an age where the federal government regulates everything in the workforce through a variety of federal laws.
Wisconsin’s law does not affect: steel workers, or unfortunately the UAW, nor any other public sector union, nor does it affect any public unions in any other states (although most of the other 49 are now considering a Walker move - including Massachusetts!)

Although the media is making it appear as though the “Republicans” in the Wisconsin government, from the Governor down through the legislature are attempting to strip unions nationwide of rights, the fact is they are limiting collective bargaining for public employee unions, not stripping all rights, and allowing teachers to choose between joining the union or not. At the moment, public schools teachers are forced to join a union, and opt outs in some states are possible, with a “fee” paid by the prospective teacher, in order to keep out of the union. In addition, once told there is a nominal fee ($500), one is told that if one opts not to join the union, one might feel the pressure of being ostracized by the union teachers. So much for a free country. In Wisconsin, prospective teachers are then free to make the choice, with this legislation.

Rarely, if ever, quoted here, Conservative Pundit, Ann Coulter, has a column this week regarding the Wisconsin brouhaha, which, if ads were run based on Coulter’s column, one would bet the residents of Wisconsin would poll in favor of the Governor, the Republicans in the Senate, and anyone else who would stop the excesses of what is known as a public union. Coulter, when one puts aside the dripping sarcasm (which can be amusing, deepening upon the subject), is impeccably researched: From www.anncoulter.com:

“Because of the insane union contracts in Wisconsin, one Madison bus driver, John E. Nelson, was able to make $159,000 in 2009 -- about $100,000 of which in overtime pay. Jackie Gleason didn't make that much playing bus driver Ralph Kramden on "The Honeymooners." Seven bus drivers took home more than $100,000 that year.

When asked about the outrageous overtime pay for bus drivers -- totaling $1.94 million in 2009 alone -- Transit and Parking Commission Chairman Gary Poulson said: "That's the contract."

It's ludicrous to suggest that these union contracts were fairly bargained. Only one side was at the negotiating table. Ordinary people with jobs were not at the meetings where public sector compensation was discussed”

(read the entire article here).

Meanwhile, the 14 Democrats hiding out in Wisconsin, are vowing (with help from their friends at the SEIU, to have the Republican Senators and the Governor recalled. They are in the process of rushing back, three weeks after they first learned there would be a vote, and refused to return, some Republican lawmakers in Wisconsin suggesting that the Unions have more sway over when they come or go, than those Senators on the proverbial lam.

It is, to be blunt, a cruel joke on the people of Wisconsin, it is further, a cruel joke on those teachers and employees involved in the public unions, that there possibly “preferred Senators” are not in the fray fighting for their “rights” to filch every nickel and dime out of the taxpayers in Wisconsin, especially now, when they have learned there are new public sector employees, able to pay taxes and support the “contracts” that place bus drivers on a pay scale above the local MD’s. (Who, with the costs of regulation, malpractice insurance for self and staff, and overhead, make less per hour than say, the local veterinarian.)

While SEIU members from across the nation have flooded into Wisconsin to protest (no those are not all Wisconsin Teachers in that Capitol building), one has to ask why it is so important for this particular organization to fight tooth, nail and ad campaigns against union restructuring of this nature. One must only follow the money trail; 27 Million Dollars spent on electing one man, Barack Obama, president. FEC via CNSnews. With the option on the table in Wisconsin of members being able to choose between joining or not joining the public employees union, the SEIU must fear that their popularity is not all that – and those who have a choice, will opt out, leaving them short of cash, which is short of influence in the upcoming elections.

There are not unions that protect employees who work in hazardous situations, or who are working in conditions such as those who endured the horrors of the Triangle Shirtwaist Factory, (well worth reading for perspective) at the turn of the century. Although this tragedy produced unions for workers rights, specifically the IGLWU (which is now defunct), it bears repeating that throughout the coming decades legislation was passed, departments formed, and workers rights were given a place in the laws of the United States. This Federal action, reduced the need for unions, other than as a body to ensure those with little to no education would be able to receive benefits and maintain safe working environment. Unions, therefore, are in place for those who are perceived as being unable to fend for themselves, ensuring employees a living wage, and safe working conditions, and benefits that might equal those in the “shops” management.

Teachers, and bus drivers who pull down six figure salaries, (plus overtime), with the help of collective bargaining, simply defies logic.

It remains to be seen how this will all play out, however, if one is fond of placing a bet or two, one might put their wager on the Governors, the Mayors, and those in a position of having to balance a budget, by eliminating excesses granted by public (emphasis – public) employee unions, rather than the union bosses who are in the “trenches” fighting for the “teachers” while pulling down similar salaries for being professional rabble-rousers.