Saving Detroit and what it means for muni bonds

[RandomGuy]

For those of you ing 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...dents-iron-orr

INteresting Idea from the commentary:

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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/financ...onds-state-pay

[boutons_deux]

How Wall Street Fraudsters Plunder Public Finances, And 5 Ways to Fight Back

Nearly five years after Wall Street’s shady activities triggered massive funding crises for cities, states, and municipalities, the $3.7 trillion municipal finance cesspool has yet to be dredged. Banks continue to profit from their bad — or even fraudulent — advice that cost billions of dollars of taxpayer money. Meanwhile, the rest of us must tighten our belts, or pay higher taxes, or see services slide.

Let’s take a look at how bankers cooked up scams to drain the public coffers and why they continue to get away with it.

http://www.alternet.org/economy/wall...unicipal-fraud

[TeyshaBlue]

For those of you ing about pensions, this is for you, and it says something about the assumptions underlying muni bond pricing:





http://www.economist.com/news/united...dents-iron-orr

INteresting Idea from the commentary:

The Detroit REIT idea is pretty outside the box, but at first blush, seems to make alot of sense except for that 20 TIF. That seems a bit much.

[RandomGuy]

The Detroit REIT idea is pretty outside the box, but at first blush, seems to make alot of sense except for that 20 TIF. That seems a bit much.

Go back and re-read it. That is only for undeveloped land. That makes your carrying costs low, until you can line up financing and build something that is hopefully economically viable.

It reduces front end risk to potential investors, and since Detroit is almost certainly not getting any property taxes out of the abandoned parcels anyway, it is an extremely good idea, IMO.

[TeyshaBlue]

Go back and re-read it. That is only for undeveloped land. That makes your carrying costs low, until you can line up financing and build something that is hopefully economically viable.

It reduces front end risk to potential investors, and since Detroit is almost certainly not getting any property taxes out of the abandoned parcels anyway, it is an extremely good idea, IMO.

I'm pretty sure the idea included abandoned and tax deliquent properties in the REIT proposal, not just undeveloped properties.
I might just be lost in the terminolgy, but undeveloped seems to not include tax deliquent properties that might be abandoned in the next 10 t0 20 years.
"Take all the abandoned and tax delinquent property in the city, and all that will become abandoned in the next decade or two...."

[RandomGuy]

I'm pretty sure the idea included abandoned and tax deliquent properties in the REIT proposal, not just undeveloped properties.
I might just be lost in the terminolgy, but undeveloped seems to not include tax deliquent properties that might be abandoned in the next 10 t0 20 years.
"Take all the abandoned and tax delinquent property in the city, and all that will become abandoned in the next decade or two...."

The land would be tax free for 20 years; the buildings would be taxed if the land were redeveloped.

Land would be tax free... the buildings, if any would be.

The idea was just from the commentary, did you have some reading about an RL proposal?

[TeyshaBlue]

ahhh..that's what I missed. Land =/= buildings as tax policy is applied.

[RandomGuy]

ahhh..that's what I missed. Land =/= buildings as tax policy is applied.

Sokay. It is quite literally my job to notice the subtle stuff in the fine print, ehehehe. I knew you would get it eventually.

[TeyshaBlue]

Sokay. It is quite literally my job to notice the subtle stuff in the fine print, ehehehe. I knew you would get it eventually.

I'm a ing analyst. You'd think I'd occasionally get the details right.

[boutons_deux]

Emergency Manager Wants to Sell Off City's Precious Art, While Banks Get Fatter

Over the past decade, the banks have evicted many, many people in Detroit from their homes.

These were people who either did or did not deserve to be evicted. Perhaps they did not deserve loans in the first place. I am not interested in going over any of that at this time; mine is a very a different point.

For what is interesting is what happened next:

After these evictions occurred, the banks did not foreclose the homes. They simply let the houses rot.

In other words, as opposed to following the due diligence of a functioning system, wherein these banks would have gone through the legal process of actually foreclosing the home, earning back the home’s le, and then paying the taxes on the property until the property was sold to a new owner, they did nothing. They simply walked away.

So, for starters, they owe taxes on those homes. Not just a few homes; thousands of homes. That’s lot of taxes. When you’re done adding everything that’s owed, it’s probably worth more than a few Chagalls.

Then there’s this: by letting those homes rot, these banks caused the depreciation of all the other homes in all those neighborhoods, block after block, along nearly every avenue, street and boulevard. Each one of these abandoned homes pulls the value of all those other buildings down.

These banks were like the shark in Copley’s famous painting (at the Detroit Ins ute of Art, of course), attacking the vulnerable drowning figure in the water. The victims were honest and hard working, and their homes were suddenly worth less. What followed was predictable: a shrinking tax base, the city unable to pay its bills, cut services. So now the police don’t show up, the firemen are understaffed, people are less safe, people move away, more homes stand empty, and the banks didn’t know or didn’t care. Having made the money they were going to make, they simply swam on.

No one has time to think it through. It’s a fraternity of returns and profits and endless appe e. They are not interested in the people in those neighborhoods they have ruined. Like the dead-eyed and hungry beast in the Copley painting, they have eaten through Detroit without any real fear of accountability or justice. And now, as we watch, they are preparing to sink their teeth into it again. They really can’t help themselves. It is simply too delicious.

http://www.alternet.org/hard-times-u...=15&paging=off

aka, disaster capitalism of The Shock Doctrine. http://www.naomiklein.org/shock-doctrine

[Winehole23]

A federal judge has ruled Detroit should be granted protection from its creditors, marking the largest public bankruptcy in US history.


US bankruptcy judge Steven Rhodes said payments to retired staff, which make up half of the city's liabilities, could be "impaired" as a result.
Detroit is now expected to submit a plan to rid its balance sheet of $18bn (£11bn) of liabilities.

http://www.bbc.co.uk/news/business-25203691

[boutons_deux]

I read earlier when Detroit first went under the emergency manager (as bankruptcy expert, we know what his/Repug goal was from the very start) that only $3B of the $18B debt was pensions. Now it's $9B?

[RandomGuy]

I read earlier when Detroit first went under the emergency manager (as bankruptcy expert, we know what his/Repug goal way) that only $3B of the $18B debt was pensions. Now it's $9B?

Very hard to put a finger on what is what. I will look into it and see if I can sort it out.

[boutons_deux]

Another question is the who gets priority in the queue, bondholders, suppliers before pensioners, or pensioners first?

And which category of claimants get how many cents on the $ ?

My guess is the capitalists/bondholders get the most on the $, and suppliers and above all pensioners get screwed the most.

[EVAY]

Another question is the who gets priority in the queue, bondholders, suppliers before pensioners, or pensioners first?

And which category of claimants get how many cents on the $ ?

My guess is the capitalists/bondholders get the most on the $, and suppliers and above all pensioners get screwed the most.

Traditionally, bondholders are always first in line. There may be some specific law relating to pensions that changes that, but I would be surprised. This is just the first of many, I fear. Government worker pensioners are in a world of hurt in a lot of places, including Illinois, California and Louisiana.

[EVAY]

Truth be told, wouldn't you be surprised that anyone was still buying Detroit bonds for the last, oooh, maybe 5 years or so? I would be. One set of analysts tried to sell me a bond proposal just last summer that included bonds for Detroit and Birmingham, Alabama. I was shocked that they were making the attempt. I mean, you really have to not be paying attention to not notice those things, don't you?

[boutons_deux]

MI pension funds are protected by state cons ution, but the judge ruled Fed law trumps state law, pension obligations are vulnerable.

So the money employees salary contributions to their retirements for 30 or more years can be given to capitalists/bondholders. aka, wealth redistribution to the wealthy, which the wealthy NEVER whine about.