RandomGuy
06-25-2013, 11:18 AM
For those of you bitching about pensions, this is for you, and it says something about the assumptions underlying muni bond pricing:
IT IS, says the man who has to deal with it, “the Olympics of restructuring”. After decades of population decline (see chart), political bungling and corruption, Detroit, once America’s third-largest city, now needs an emergency manager to save it. In March the state of Michigan appointed Kevyn Orr, a bankruptcy lawyer (pictured), to the unenviable job. In May, to no one’s surprise, he declared the city insolvent. Its ability to borrow was exhausted after years of issuing long-term debt to pay its bills. The city has liabilities of more than $17 billion, or $25,000 for everyone who lives there. Residents can escape these debts simply by moving away; many have done just that.
Bettie Buss, an expert on Detroit who works for the Citizens Research Council of Michigan, says Mr Orr’s proposal to creditors is quite new. For the first time, general-obligation debt and pension obligations are being treated in the same way, meaning that bondholders, as well as city employees and pensioners, must share the pain of restructuring. On June 17th Moody’s, a credit-rating agency, agreed that the plan was ground-breaking, “girding the city for a tough fight with creditors of all types”.
...
It will mean severe cuts in pensions, benefits and services, making “staggering” demands on city staff and residents, according to Mr Orr’s spokesman. But if this unconventional approach is accepted, other distressed cities across America may want to try the same thing (see article).
http://www.economist.com/news/united-states/21579829-citys-default-spells-pain-creditors-employees-and-residents-iron-orr
INteresting Idea from the commentary:
Featured comment
View thread
WT Economist
Jun 21st, 11:23 Detroit should do a debt for equity swap. Take all the abandoned and tax delinquent property in the city, and all that will become abandoned in the next decade or two, and transfer it to a "Detroit REIT."
The bondholders would trade all the value of the bonds, and the pensions would trade much of the value of their pensions, for shares in the REIT. The land would be tax free for 20 years; the buildings would be taxed if the land were redeveloped.
The REIT would develop a plan for the redevelopment of Detroit. It could use some of the land for open space and parkland without losses, since that would increase the value of its other land. The city could support it by removing derelict buildings and actually providing public services.
Therefore, instead of feasting on the corpse of the city, the bondholders and pensioners would have a stake in its revival, and could profit hugely.
(related article)
On June 14th Mr Orr announced that Detroit would miss a $40m unsecured-bond payment, and proposed a restructuring that would mean some holders of the city’s unsecured debt receiving pennies on the dollar. If creditors reject Mr Orr’s offer bankruptcy looms. Detroit would be the largest-ever American city to go bust, but hardly the first. In recent years issuers of municipal bonds that have filed for Chapter 9 protection from creditors have included Stockton, Vallejo and San Bernardino in California; Central Falls, Rhode Island; Jefferson County, Alabama; and Harrisburg, Pennsylvania. Others have defaulted without going bust. America’s $3.7 trillion muni-bond market has long had its doomsayers. Is this their moment?
The situation remains grim. According to the National League of Cities, an advocacy group, American cities in 2012 experienced their sixth straight year of constant-dollar declines in general-fund revenues. Year-on-year sales-tax collections rose modestly in 2012 but income-tax collections fell for the third year in a row. So did property-tax collections, despite a recovery in housing markets; assessed values, which determine property-tax rates, usually lag the market by at least 18 months. Cash reserves have fallen by almost 50% since 2007 to 12.7% of expenditures, their lowest level since 1996. (The picture is a bit rosier for states, which tend to have more flexibility in raising revenue than cities do.)
... (bit of back and forth over a set of mixed data) ...
The concern for the municipal-bond market is less about an imminent deluge of defaults, and more about the lasting precedents set by places like Detroit. Cities and states face huge long-term pressures from health-care costs and pension obligations. Investors are used to seeing governments raise taxes and cut spending to ensure repayment. They are learning that “full faith and credit” has its limits.
http://www.economist.com/news/finance-and-economics/21579861-what-do-woes-detroit-mean-muni-bonds-state-pay
IT IS, says the man who has to deal with it, “the Olympics of restructuring”. After decades of population decline (see chart), political bungling and corruption, Detroit, once America’s third-largest city, now needs an emergency manager to save it. In March the state of Michigan appointed Kevyn Orr, a bankruptcy lawyer (pictured), to the unenviable job. In May, to no one’s surprise, he declared the city insolvent. Its ability to borrow was exhausted after years of issuing long-term debt to pay its bills. The city has liabilities of more than $17 billion, or $25,000 for everyone who lives there. Residents can escape these debts simply by moving away; many have done just that.
Bettie Buss, an expert on Detroit who works for the Citizens Research Council of Michigan, says Mr Orr’s proposal to creditors is quite new. For the first time, general-obligation debt and pension obligations are being treated in the same way, meaning that bondholders, as well as city employees and pensioners, must share the pain of restructuring. On June 17th Moody’s, a credit-rating agency, agreed that the plan was ground-breaking, “girding the city for a tough fight with creditors of all types”.
...
It will mean severe cuts in pensions, benefits and services, making “staggering” demands on city staff and residents, according to Mr Orr’s spokesman. But if this unconventional approach is accepted, other distressed cities across America may want to try the same thing (see article).
http://www.economist.com/news/united-states/21579829-citys-default-spells-pain-creditors-employees-and-residents-iron-orr
INteresting Idea from the commentary:
Featured comment
View thread
WT Economist
Jun 21st, 11:23 Detroit should do a debt for equity swap. Take all the abandoned and tax delinquent property in the city, and all that will become abandoned in the next decade or two, and transfer it to a "Detroit REIT."
The bondholders would trade all the value of the bonds, and the pensions would trade much of the value of their pensions, for shares in the REIT. The land would be tax free for 20 years; the buildings would be taxed if the land were redeveloped.
The REIT would develop a plan for the redevelopment of Detroit. It could use some of the land for open space and parkland without losses, since that would increase the value of its other land. The city could support it by removing derelict buildings and actually providing public services.
Therefore, instead of feasting on the corpse of the city, the bondholders and pensioners would have a stake in its revival, and could profit hugely.
(related article)
On June 14th Mr Orr announced that Detroit would miss a $40m unsecured-bond payment, and proposed a restructuring that would mean some holders of the city’s unsecured debt receiving pennies on the dollar. If creditors reject Mr Orr’s offer bankruptcy looms. Detroit would be the largest-ever American city to go bust, but hardly the first. In recent years issuers of municipal bonds that have filed for Chapter 9 protection from creditors have included Stockton, Vallejo and San Bernardino in California; Central Falls, Rhode Island; Jefferson County, Alabama; and Harrisburg, Pennsylvania. Others have defaulted without going bust. America’s $3.7 trillion muni-bond market has long had its doomsayers. Is this their moment?
The situation remains grim. According to the National League of Cities, an advocacy group, American cities in 2012 experienced their sixth straight year of constant-dollar declines in general-fund revenues. Year-on-year sales-tax collections rose modestly in 2012 but income-tax collections fell for the third year in a row. So did property-tax collections, despite a recovery in housing markets; assessed values, which determine property-tax rates, usually lag the market by at least 18 months. Cash reserves have fallen by almost 50% since 2007 to 12.7% of expenditures, their lowest level since 1996. (The picture is a bit rosier for states, which tend to have more flexibility in raising revenue than cities do.)
... (bit of back and forth over a set of mixed data) ...
The concern for the municipal-bond market is less about an imminent deluge of defaults, and more about the lasting precedents set by places like Detroit. Cities and states face huge long-term pressures from health-care costs and pension obligations. Investors are used to seeing governments raise taxes and cut spending to ensure repayment. They are learning that “full faith and credit” has its limits.
http://www.economist.com/news/finance-and-economics/21579861-what-do-woes-detroit-mean-muni-bonds-state-pay