"...There’s a famous exchange in
Hemingway’s The Sun Also Rises. Someone asks Mike Campbell, 'How did
you go bankrupt? Two ways, he replies. 'Gradually, then
suddenly.'” Below, a photo of Central Park "Hooverville" -
shantytown set up in the depths of the Great Depression. Story,
or scholarly paper, here.
BANKRUPT CITIES AND TOWNS
IN THE U.S.A.; HARTFORD, CT, SOMEDAY
SOON? HOW ABOUT THE POST OFFICE?
anniversary of the war between
the states this year...north
in blue, south in grey...black
if discussion of both.
ON THE 13 FINANCIALLY SICKEST AMERICAN CITIES; STATES WITH
BANKRUPT CITIES OR COUNTIES: AND THEN THERE IS
THIS...AND THE STATES (North and South)
- Why CT doesn't have the
cities anymore - because the Census Bureau has regionalized them (i.e.
RATING AGENCIES' ROLE
OTHER - Editorial, etc.
S.E.C. Accuses Illinois of Securities
By MARY WILLIAMS WALSH,
For the second time in history, federal regulators accused an American
state of securities fraud on Monday, ordering Illinois to stop
misleading investors about the condition of its public pension system.
In announcing a settlement with the state, the Securities and Exchange
Commission said Illinois had passed a law in 1994 allowing itself to
put less than the required amount into its pension system each year.
For the next 15 years, the state issued annual reports showing that it
was on track with its lawful schedule, even as it fell further behind
the real-world amount needed to pay all public retirees their benefits.
In 2005, the state passed another law giving itself a holiday from even
the inadequate amounts on the schedule.
From 2005 to 2009, Illinois issued $2.2 billion worth of municipal
bonds, which the S.E.C. said were marketed under false pretenses. There
was a growing hole in the pension system, putting increasing pressure
on the state’s finances every year. That raised the risk that at some
point retirees and bond buyers would be competing for the same limited
money. The risk grew greater every year, the S.E.C. said, but investors
could not see it by looking at Illinois’ disclosures.
In effect, that meant investors overpaid for bonds of a lower quality
than they were made out to have, although the S.E.C. did not measure
any loss. In Monday’s settlement with the S.E.C., Illinois agreed to a
cease-and-desist order without admitting or denying the accusations.
In reaching the settlement, the agency said, it considered “remedial
acts” by the state, which hired disclosure counsel in 2009 and made
extensive corrections and amplifications in its financial reports.
“Municipal investors are no less entitled to truthful risk disclosures
than other investors,” said George S. Canellos, acting director of the
S.E.C.’s Division of Enforcement. “Time after time, Illinois failed to
inform its bond investors about the risk to its financial condition
posed by the structural underfunding of its pension system.”
Because the states are legally sovereign, federal securities regulators
have limited jurisdiction over their activities and can take action
only when there has been a fraud. The first state to be accused of
securities fraud by the S.E.C. was New Jersey, in 2010. The commission
found that New Jersey had also deceived the municipal bond market about
the risks posed by its shaky pension system.
In his budget address on Friday, Gov. Pat Quinn of Illinois, issued a
clear warning that the pension system had to be fixed.
“Without pension reform, within two years, Illinois will be spending
more on public pensions than on education,” said Mr. Quinn, a Democrat.
“As I said to you a year ago, our state cannot continue on this path.”
NYC Main Post
And they did!
Post Office Nears Historic Default
on $5B Payment
By THE ASSOCIATED PRESS
WASHINGTON (AP) — The U.S. Postal
Service is bracing for a first-ever default on billions in payments due
to the Treasury. That's adding to widening uncertainty about the mail
agency's solvency as first-class letters plummet and Congress deadlocks
on ways to stem the red ink.
With cash running low, the Postal
Service says it will not make two legally required payments for future
retiree health benefits — $5.5 billion due Wednesday, and another $5.6
billion due in September.
The defaults won't stir any kind of
short-term catastrophe — post offices will stay open, mail trucks will
run, employees will get paid.
But postal analysts point to
longer-term harm, as the mail agency finds it increasingly preoccupied
with staving off bankruptcy.
The Postal Service estimates that it
is now losing $25 million a day.
you’re a hedged investor, this is great,” Mr. McNamara said. Never say never.
F. McNamara, president of the Detroit Fire Fighters Association,
described the city’s economic growth as “small little pockets.”
Fire protection supplied by too few w/shuttered fire houses.
Mayor Dave Bing know this is not slam dunk...
Fear of art sale sparked by
Detroit emergency manager asking for appraisal
Fri, May 24 2013
DETROIT (Reuters) - As part of his
efforts to solve Detroit's financial crisis, the city's emergency
manager Kevyn Orr has asked for an appraisal of the collection at the
Detroit Institute of Arts, sparking fears in artistic and philanthropic
circles that he means to auction off the city's artistic jewels.
Orr was appointed in March by
Michigan's Republican Governor Rick Snyder to tackle the shrinking
city's long-term debt problem, which the emergency manager estimated at
$15 billion in a recent report on the state of Detroit.
Orr's spokesman Bill Nowling insists
that the appraisal is not about having an artistic fire sale, but more
about being ready when bondholders and their insurers, who will be
asked to absorb considerable losses, inquire about the artwork.
"If we are going to ask creditors to
get a big haircut, we have to look at how to rationalize all of the
city's assets, including the artwork," Nowling told Reuters late on
Thursday. "We obviously don't want to get rid of art."
Although Orr is seeking an appraisal
for the collection, museum officials and local media claim it is worth
several billion dollars. But recent prices at auction for pieces
similar to those likely to be sold could not immediately be obtained.
Several published sources have estimated the total annual value of fine
art auctions by Christie's and Sotheby's at $8 billion, and estimates
of the global art market top $60 billion.
The Detroit Institute of Art's
collection features several works by Vincent van Gogh, including a self
portrait, Auguste Rodin's "The Thinker," paintings by Henri Matisse,
Edgar Degas, Rembrandt, Caravaggio, ancient sculptures, plus enormous
and famous murals of Detroit by Diego Rivera.
Many of the works in the institute's
collection have been gifted over the years by local noteworthy families
from the city's glorious industrial and commercial past, such as scions
of the Ford family.
city's museum is funded by a regional tax, and a nonprofit
operates the museum. So if the city wants to sell off the artwork, it
could take a judge to decide whether Detroit has the authority to do so.
Lawyer Is Named to Manage an Ailing Detroit
By MONICA DAVEY, NYTIMES
Rejecting an appeal by some Detroit
leaders, Gov. Rick Snyder of Michigan said Thursday that his
administration was proceeding with plans to send an emergency manager
to run the state’s largest city, and that he favors a lawyer who worked
on Chrysler’s bankruptcy proceedings for the job.
“In many respects it’s a sad day,”
Mr. Snyder said Thursday afternoon during a news conference in Detroit,
which has been strained by annual cash shortages and $14 billion in
long term liabilities even as residents have complained of fading,
insufficient services. “But again I like to say it’s an opportunity.”
Mr. Snyder said he was recommending
Kevyn D. Orr, a Washington lawyer and partner at Jones Day who has
focused on restructuring businesses, to become Detroit’s first
emergency manager. The governor’s recommendation all but ensures that
Mr. Orr, who was part of the team that represented Chrysler in
bankruptcy proceedings in 2009, will be chosen. Under state law, a
board of leaders from several state departments formally hires
emergency managers, and that board was preparing to meet later on
Members of Detroit’s City Council,
who are expected to lose power under a state-appointed manager, have
contested the notion that the city requires an intervention and have
denounced the plan as undemocratic. Earlier this week, they asked Mr.
Snyder to reconsider his finding, but his announcement Thursday does
not close the possibility for other avenues of appeal, including in the
Mr. Orr was lauded by some observers
for his long experience with financially troubled businesses,
overseeing bankruptcies and guiding restructurings, as well as earlier
posts at federal entities like the F.D.I.C. Mr. Orr, 54, who received
his law degree from the University of Michigan, is also
African-American — a fact that some in Detroit, which is nearly 83
percent black, said was likely to temper a racial backlash that was
expected when Mr. Snyder, who is white and a Republican, announced
For any arriving emergency manager,
though, the challenges in Detroit will be intense, given the
frustrations of local leaders who disagree with any state intervention;
a time frame for restructuring that could turn out to be as short as 18
months; and the depth of the city’s financial problems, which some
people suggest can be solved only through an eventual bankruptcy filing.
Municipal bankruptcies are extremely
rare, but it was lost on no one that the state has selected an expert
in bankruptcy law for Detroit, as opposed to a financial accountant,
for instance, or a former city manager or elected leader, which have
been picked for emergency management roles in some smaller Michigan
cities. Under Michigan law, a city can file for bankruptcy only under
certain conditions, including if an emergency manager has attempted
other measures and concluded that such a move was needed.
Crisis of Bad Decisions and Crossed Fingers
By MONICA DAVEY and MARY WILLIAMS WALSH
DETROIT — This city was already sinking under hundreds of millions of
dollars in bills that it could not pay when a municipal auditor brought
in a veteran financial consultant to dig through the books. A seasoned
turnaround man and former actuary with Ford Motor Co., he was stunned
by what he found: an additional $7.2 billion in retiree health costs
that had never been reported, or even tallied up.
“The city must take some drastic steps,” the consultant, John Boyle,
warned the City Council in delivering his report at a public meeting in
2005. Among the options he suggested was filing for bankruptcy.
“I thought all hell would break loose — I thought the flag would
finally be raised,” Mr. Boyle recalled in an interview last week. But
his warning drew little notice. “It was utterly astounding,” he said.
The financial crisis that has made Detroit one of the largest cities
ever to face mandatory state oversight was decades in the making, a
trail of missteps, of trimming too little, too late, of hoping that
deep-rooted structural problems would turn out to be cyclical downturns
that might melt away as the economy picked up. Some factors were
out of the city’s control. As auto industry jobs moved elsewhere over
the decades, for example, Detroit lost much of its affluent tax base.
Lower than expected state revenue sharing did not help, nor did
corruption allegations in the administration of Kwame M. Kilpatrick, a
mayor who resigned in 2008 and was convicted on Monday of racketeering
and other federal charges.
But recent findings from a state-appointed review team and interviews
with past and present city officials also suggest a city that over the
years was remarkably badly run.
The state review team found in recent months that the city’s main
courthouse had $280 million worth of uncollected fines and fees. No one
could tell the team how many police officers were patrolling the
streets, even though public safety accounted for a little more than
half the budget. The city was borrowing from restricted funds and
keeping unclaimed property that it was required to turn over to the
state. In some city departments, records were “basically stuff written
on index cards,” as one City Council member put it.
“This was bad decisions piled on top of each other,” Gary Brown, the
Detroit City Council president pro tem, said the other day. “It has all
been a strategy of hope. You keep borrowing where every piece of
collateral is already leveraged. You have no bonding capacity — you’re
at junk status. You’re overestimating revenues and not managing the
resources. Now the chickens have come home to roost.”
Once the nation’s fourth-largest city, Detroit had grown up around the
auto industry, booming right along with it in the 1950s. City workers
gained ground with pay increases intended to keep pace with those the
United Auto Workers won for its members, analysts said.
“It was easy to do so back in the 1950s,” said Joseph L. Harris,
Detroit’s former auditor general. “The city had 1.8 million residents
But as auto jobs moved elsewhere and the region aged, Detroit’s labor
costs — retiree health care costs, especially — ballooned.
At the same time, officials papered over growing deficits with more
borrowing. Finally Detroit’s legal debt limit, which is linked to the
total value of real estate in the city, fell when the mortgage bubble
burst and property values plunged. Today the city says its debt limit
is $1 billion, and it has effectively lost its ability to issue debt in
the name of its taxpayers.
When a city cannot borrow, it cannot function; New York City showed
that in 1975, Cleveland in 1978. But even as Detroit has approached the
critical limit, some city leaders have seemed unaware, quarreling over
smaller, symbolic issues like whether to lease a city-owned park to the
“It is peeling an onion,” Mayor Dave Bing said of his growing
understanding after he took office in 2009 of the depths of the city’s
financial woes. “You dig and you dig and you dig, and you really start
to find out how bad the problem was. “
Mr. Bing knew plenty about the city’s struggles before taking office
and ran on a platform of reversing the spiraling finances. Still,
within his first six months in office, the city came close to not
“That’s a scary moment,” he recalled in an interview. “You’ve got
people living from paycheck to paycheck, week to week, and you’re about
to run out of cash. You can only imagine what kind of impact that
that’s going to have just on the life of the average person.”
The big structural imbalance was hard to see building up, because until
2008, when a new accounting rule took effect, cities like Detroit were
not required to keep track of their workers’ lifelong health care
bills. That is why Mr. Boyle found a $7.2 billion promise that no one
knew about. Detroit’s general-obligation debt to its bondholders, by
contrast, was a little less than $1 billion that year, safely within
the city’s legal debt limit, then $1.4 billion.
But while the numbers are particularly grim here, the basic story line
is hardly unique. The same path, long and slow, can be found from
Providence, R.I., to Stockton, Calif. To preserve cash, the city
resorted to increasing its workers’ future pensions at contract time,
instead of raising their pay. That helped balance the immediate
budgets, but set up a time bomb sure to explode as more workers
retired. The cost of the retirees’ pensions also grew because of
an inflation-protection feature that compounds every year. Detroit
cannot renege on paying the benefits, at least outside of bankruptcy,
because the State Constitution makes it unlawful to reduce pensions
after public workers earn them.
By the 2000s, Detroit was borrowing to solve budget shortfalls.
Meanwhile, property tax revenues fell, not just because of departing
residents, but also as values fell and some people quit paying. The
city has reported collecting 84 percent of property tax levied, but a
Detroit News analysis suggests a collection rate closer to half of
In recent years, city officials have made deep cuts in staff and
operations, leaving residents complaining of darkened streetlights,
slow police response times and bus delays. But while cutting workers
can help reduce the current year’s costs, it moves many of those people
into the ranks of retirees, putting heavy long-term pressure on
Detroit’s two public pension funds. By late 2011, a sense of
crisis descended on Detroit. In November, Mayor Bing, a Democrat,
addressed the city on live television, warning that Detroit would run
out of money without concessions from unions, layoffs and
privatization. A month later, Gov. Rick Snyder, a Republican, called
for a review of Detroit’s finances, a first step in cases where the
state is preparing to send an emergency financial manager.
City officials held off further intervention by committing to a legal
agreement with the state in 2012 that laid out measures to save money.
By fall, a board overseeing the agreement said progress was moving too
slowly. While City Council members are contesting the matter during a
hearing in Lansing on Tuesday, Mr. Snyder’s administration is preparing
to name an emergency manager within days. Mr. Bing says his
administration has drawn up a plan to spare the city, though he
acknowledges that it has yet to be fully put into effect.
Under Michigan law, the emergency manager would ultimately have the
authority to remove local elected officials from most financial
decision making, change labor contracts, close or privatize
departments, and even recommend that Detroit enter bankruptcy
proceedings, a possibility that experts say raises the prospect of the
largest municipal bankruptcy in the nation’s history, at $14 billion
worth of long-term obligations.
None of the decisions, experts here say, will be simple, and some
wonder whether Detroit can be saved at all. Some 700,000 residents now
live in this vast 139-square-mile city that once was home to nearly two
million people. That number may fall to close to 600,000 by 2030 before
the population begins to rise again, one regional planning group
projects. By pushing costs into the future while its population is
shrinking, Detroit has left the people least able to pay with the
biggest share of its bills.
“Detroit is a microcosm of what’s going on in America, except America
can still print money and borrow,” Mr. Boyle said.
Detroit’s Public Blight
By MONICA DAVEY, NYTIMES
DETROIT — Private industry is
blooming here, even as the city’s finances have descended into wreckage.
In late 2011, Rachel Lutz opened a
clothing shop, the Peacock Room, which proved so successful that she
opened another one, Emerald, last fall. Shel Kimen, who had worked in
advertising in New York, is negotiating to build a boutique hotel and
community space. Big companies like Blue Cross Blue Shield have moved
thousands of workers into downtown Detroit in recent years. A Whole
Foods grocery, this city’s first, is scheduled to open in June.
On Friday, just as Michigan’s
governor, Rick Snyder, was deeming an outside, emergency manager a
necessity to save Detroit’s municipal finances, the once-teetering Big
Three automakers were reporting growing sales.
“It’s almost a tale of two cities
here,” said Ms. Lutz, who is 32. “I tripled my projections in my first
Around the country, as businesses
have recovered, the public sector has in many cases struggled and
shrunk. Detroit may be the most extreme example of a city’s dual fates,
public and private, diverging.
At times, the widening divide has
been awkward, even tense. As private investors contemplated opening
coffee bean roasters, urban gardening suppliers and fish farms, Detroit
firefighters complained about shortages of equipment, suitable boots
and even a dearth of toilet paper.
“You’ve got to walk before you run,
and for many years we weren’t even walking,” William C. Ford Jr.,
executive chairman of the Ford Motor Company, said of the developments
of late within Detroit’s private sector. “But now it’s really
interesting. Even as the political and financial situations continue to
deteriorate, in spite of that, there is very hopeful business activity
In the eyes of some, the signs of a
private sector turnaround have only served to accentuate divisions: a
mostly black city with an influx of young, sometimes white artists and
entrepreneurs; a revived downtown but hollowed-out neighborhoods
beyond; an upbeat mood among business leaders even as the city’s
frustrated elected officials face diminished, uncertain roles under
“There’s been way too much focus on
the corporations and not enough on the residents,” said Krystal
Crittendon, a candidate for mayor and a critic of government
incentives, including tax breaks, that have helped encourage some of
the projects. “Private businesses are coming in and basically
purchasing properties for a penny, but meanwhile there’s no
concentration on the neighborhoods and the common folks. We have to be
sure everyone participates in this recovery.”
Daniel F. McNamara, the president of
the Detroit Fire Fighters Association, described the city’s economic
growth as “small little pockets” in an otherwise painful cityscape
where services like fire protection have shrunk to too few firefighters
and too many shuttered fire companies.
“If you’re a hedged investor, this
is great,” Mr. McNamara said. “There are lots of attempts at tremendous
things going on. But for you and me, has our world changed any? Not so
much. There are so many individual tragedies going on.”
No doubt the picture here remains
murky and unfinished. For all the talk of a private sector renaissance,
demographers say that much of the economic growth remains mostly around
the downtown and midtown sections, a small fraction of a vast
139-square-mile city that is otherwise wrestling with vacant homes,
empty blocks, darkened streetlights, crime fears and overburdened
police officers. While businesses have returned to Detroit, some others
have left, and this city’s most essential problem, its swiftly dipping
population, demographers say, has yet to reverse itself.
This city grew up around the
automobile, becoming home to more than 1.8 million residents by 1950,
before the population began sinking along with a decline of
manufacturing, wide-scale flight to the suburbs, and the travails of
the American automobile industry. From 2000 until 2010, Detroit’s
population dropped by 25 percent, the biggest percentage loss during
that decade for any American city with more than 100,000 people, aside
from New Orleans, which had been pummeled by a hurricane. About 707,000
people live here now, by recent estimates, though some demographers say
the city has already lost more residents.
But so much misery also brought
newcomers: out-of-town investors who learned of properties for sale at
prices unimaginable in other cities and young entrepreneurs, artists
and musicians who said they valued Detroit, in part, for its grit and
its seemingly wide open spaces, the very elements that had made some
people flee. Business incubators, like TechTown, began emerging, and
Michigan business executives began reinvesting in the city, among them
figures like Dan Gilbert, the founder of Quicken Loans, who has bought
building after building downtown.
Meanwhile, Detroit’s car companies
have experienced what had once seemed like the unlikeliest of comebacks
after the financial crisis. General Motors and Chrysler emerged from
bankruptcy filings and government bailouts to far more upbeat signs —
and with investments in Detroit. Not long ago, Chrysler moved its
regional marketing team into a downtown building here, and an assembly
plant in the city, Jefferson North, was retooled to produce a new
version of the Jeep Grand Cherokee sport utility vehicles, among the
company’s hottest sellers.
Governor Snyder’s announcement last
week that the city had reached the point of financial emergency drew
new, widespread awareness to the crisis, but business leaders here said
they had been well aware of the government’s misery — and defiantly
moving on in the face of it — for years. In a way, some viewed the
announcement as merely a public acknowledgment of a long-held truth,
raising the prospect that the public sector might eventually be sorted
out and catch up to industry.
“Everything has sort of been
operating on separate tracks,” said Kurt Metzger, director of Data
Driven Detroit, a nonprofit organization that tracks demographic,
economic and housing trends in the region. “The business and
philanthropic communities had basically just decided to go ahead in
spite of government.”
Still unanswered, though, is how a
shifting government alignment may change the business climate. Mr.
Snyder’s decision would shore up Detroit’s finances with a
state-assigned manager granted sweeping powers to merge or eliminate
city departments, call for the sale of city assets, and adjust
contracts with labor unions. That move has created new uncertainty for
some entrepreneurs about what exactly that may mean for business.
“The honest answer is, I just don’t
know,” said Ms. Kimen, the hotel and community space developer, whose
plans for the Eastern Market neighborhood include something like a
cross between a museum and a public library. She said she had at
various points considered Maine, Memphis, even Alaska before she left
New York City in 2011 for Detroit. “I’m here and I’m committed,” she
said, adding, “This city has had so many heartbreaks.”
emergency financial manager in Detroit, has candidate in mind
Detroit Free Press
1 March 2013
Citing runaway deficits and
long-term debts Detroit could never repay on its own, Gov. Rick Snyder
today pulled the trigger and announced he will appoint an emergency
financial manager for the state’s largest city. The decision means
Motown will soon have a new boss in charge of restructuring Detroit’s
dire financial mess, likely to include drastic cuts in public services
and a top-down rethinking of the type of government a shrunken city
with a dwindling tax base can afford.
Draws Closer for Detroit After Fiscal Review
By MONICA DAVEY, NYTIMES
DETROIT — A review team appointed by
the state of Michigan has
concluded that Detroit is mired in a serious financial problem, a step
that draws the city ever closer to emergency oversight by a
state-assigned financial manager.
If Gov. Rick Snyder concurs with the
findings in the coming days, state
officials will appoint an emergency financial manager who would attempt
to solve the city’s financial woes, or could ultimately urge Detroit to
enter into bankruptcy proceedings.
In a way, the review team’s
conclusion, announced on Tuesday, seemed
inevitable in a city that has wrestled with more than $14 billion in
long-term liabilities, nearly annual projections of imminent cash
shortfalls and a population — and accompanying tax base — that has
plunged to 713,000 residents from 1.8 million decades ago. Still, it is
an outcome many of this city’s political leaders have fought for years
to avoid, racing in recent months to cut costs and collect more revenue
as proof that Detroit can solve its own problems.
The team’s findings called new,
undesired attention to the dismal
financial circumstances of government operations in Detroit, a city
which, by some other measures, has experienced a period of renaissance
and private investment in recent years. It also raised the prospect of
growing political and racial tension between the city, where the
population is about 83 percent black and many leaders are Democrats,
and the state, where the population is nearly 80 percent white and
where Republicans, including Mr. Snyder, control the capital.
Along the streets here on a
blustery, frigid day, Detroiters expressed
a mix of views about the prospect of state intervention. Some suggested
that the notion violated the role of the city’s elected leaders, while
others seemed unconcerned about who fixes the city’s problems as long
as someone does.
On Tuesday, it remained conceivable
that Detroit might yet avoid a
state-appointed emergency financial manager, though many here suggested
that the odds of that now appeared slim and Mr. Snyder has in recent
days been studying a pool of possible candidates for the job.
Under a Michigan lawaimed at sparing
the state’s most financially
troubled cities from failure, Mr. Snyder could within 30 days reject
the conclusion that Detroit’s situation is dire. Or, should he agree
with that conclusion, Detroit officials could still appeal the
decision. The city could also enter into a legal agreement with the
state, laying out plans for remaking the city’s finances with no
emergency manager. However, just such an agreement was enacted last
April, and some state officials say it has failed to go far enough to
solve the city’s crisis.
“We believe there’s a financial
emergency in the city, and there’s no
plan in place to correct the situation,” said Andy Dillon, Michigan’s
state treasurer and a member of a six-person review team that examined
Detroit’s finances over the past two months.
The review team found a city
troubled for years with cash shortfalls —
including one expected to reach $100 million by June — as well as
repeated general fund deficits, year after year, dealt with mostly by
issuing long-term debt. In fiscal year 2012, that general fund deficit
reached more than $326 million.
But the city’s long-term liabilities
— more than $14 billion — may be
the larger problem, the review team’s report suggested.
Detroit’s problems are by no means
simple or new, and some have
questioned whether even an emergency manager — someone meant to have
few political considerations and an unsentimental perspective on the
city’s operations — will be able to turn things around.
In only the last four years, the
number of city employees has been
reduced to 9,696 from more than 13,400 to save money, and some argue
that the only way to financial stability will be through more cuts,
furloughs and benefit reductions. Yet at the same time, residents here
complain about slow city services and a significant increase in
killings in 2012.
The city’s geography is itself
another puzzle. The cradle of the
American auto industry and once the nation’s fourth most populous city,
Detroit remains vast at 139 square miles — a city suited to a larger
population and city services to match — but is now left with pockets of
empty lots, shuttered homes and a continuing foreclosure problem in the
face of high unemployment.
If an emergency financial manager is
ultimately appointed here, that
person will have relatively broad powers to reshape Detroit’s budget,
but will be unable, at least temporarily, to throw out existing labor
contracts, as had been permitted under a sweeping emergency manager law
that voters statewide rejected last November. Since then, the governor
and legislators have passed new provisions for emergency managers,
which take effect in late March and grant such managers more control
over labor contracts.
Under Michigan law, an outside
manager could eventually help lead the
city into bankruptcy proceedings — an outcome that few in Detroit or
Lansing see as wise or likely but that some have come to talk about as
a real consideration. Municipalities rarely wind up pursuing such a
course, known as Chapter 9, and if Detroit were to do so, it would be
the nation’s largest municipal bankruptcy in terms of size of debt as
well as the most populous city to do so.
Around the nation, states have long
used a variety of approaches,
including appointed receivers and oversight boards, to step in when
cities are teetering toward failure. The role and authority of such
bodies range widely, as do views about whether they ultimately work. A
financial control board helped New York City regain its footing in the
1970s. In Michigan, five cities and three school districts are already
under the supervision of an emergency financial manager, but the
prospect of outside oversight for Detroit, given its size and history,
draws especially pointed reactions.
Mayor Dave Bing, a Democrat who has
spent much of his four years in
office focused on trying to solve Detroit’s financial woes and has yet
to announce whether he will seek re-election this year, has in the past
said the city needs no takeover by an emergency manager. Still, even
during discussions of cost-cutting in recent months, Mr. Bing and
Detroit’s City Council have sometimes clashed over what to do. And
earlier administrations — including that of Kwame Kilpatrick, a former
mayor accused of corruption whose fate was being weighed here by a
federal jury on Tuesday — have left behind a financial crisis, Mr. Bing
On Tuesday, Mr. Bing said even he
was unsurprised by the review team’s
conclusion. “My administration has been saying for the past four years
that the city is under financial stress,” he said, adding, “If the
governor decides to appoint an emergency financial manager, he or she,
like my administration, is going to need resources — particularly in
the form of cash and additional staff.”
keep control of its finances; State may impose emergency manager
By Andrea Billups
Sunday, December 25, 2011
DETROIT — In the Motor City, the fight over who gets the keys is
becoming increasingly intense.
Detroit city officials and activists
such as the Rev. Jesse Jackson are stepping up their campaign to retain
local control as Gov. Rick Snyder, a Republican, nears a decision on
whether to appoint an emergency manager to keep the financially
crippled city from going under.
Hammered by foreclosures, 20 percent
unemployment and governmental malfeasance, the city is facing a $47
million shortfall by June - a deadline that has residents concerned
that services including fire, police and even garbage pickup would go
off the rails unless the state intervenes.
The situation pits Detroit leaders
struggling to maintain the city's independence against outsiders
pressing for reform.
"They don't want someone from the
outside running their city. They have a long history of that," says
Doug Roberts, a former state of Michigan treasurer who directs Michigan
State University's Institute for Public Policy and Social Research.
"The best scenario is that the governor keeps pushing and says, 'I'm
coming,' and they begin to make serious and quick progress internally,
because they all agree they don't want the option of an emergency
Currently, the state has begun the
process of a 30-day preliminary review — a precursor to forming a
formal review team that could set in motion the appointment of an
emergency manager. The governor, however, has stressed that he would
rather the city work matters out, and that he has no interest in the
state running Motown.
As the situation in Detroit comes
down to the wire, several members of Michigan's congressional
delegation have approached the governor about reviewing the emergency
financial manager law itself. They question its constitutionality,
which has been used successfully in other Michigan cities, and they
hope to meet with Mr. Snyder to discuss not only the constitutional
issue, but also the emotional ramifications of the state taking over a
"We are deeply concerned about how
this law is igniting tensions in our local communities and dividing our
state," said Sens. Carl Levin and Debbie Stabenow, both Democrats, in a
letter to the governor. "This law runs counter to this cooperative
spirit and is sending the wrong message to the rest of the country
about what our state stands for."
Rep. John Conyers Jr. — whose wife,
a former Detroit City Council member, is serving time in federal prison
for her role in a bribery scandal - has taken the matter one step
further. He is seeking Justice Department review of the Michigan
emergency manager law and asking U.S. Attorney Gen. Eric H. Holder Jr.
Meanwhile, as lawmakers seek to
assuage tensions about a possible takeover, momentum is building behind
a petition drive to gather 161,000 signatures to repeal the current
Public Act 4, which gives the state power to put in place an emergency
financial manager for schools and governments.
"I've got real doubts that they will
be able to get them," says Bill Ballenger, the publisher of Inside
Michigan Politics. "If they do, they will be fought tooth and nail by
the state and everybody else in the courts."
A native of Flint, where an
emergency financial manager is in place, Mr. Ballenger says that if
Detroit can't fix its problems, it shouldn't be immune to a takeover.
"Why is Detroit different? Why do
they get a pass?" he says of the public outrage. "It's absurd. They are
either going to have to have a consent agreement between the mayor and
council" or get an emergency manager.
"Frankly, I am on Snyder's side and
his approach to this. It's the only way Detroit is ever going to get
out of this mess is through this mechanism. The petitioners are just
Last week, the GOP-led Michigan
Senate, in its closing days before the holidays, approved what has been
described as a stopgap bill that allows the governor to create a
transition board for cities currently under emergency revision, along
with a new emergency manager in places where the problems have yet to
be fixed. Democrats were angered by the measure that they said would
fly in the face of the petition drive's success.
"This legislation is an end-run
around the last constitutional step left to our citizens to stop bad
legislation passed by the Legislature, that being the petition
initiative," state Sen. Glenn Anderson, a Democrat from Westland, said
in a statement. "This action by the Republican-controlled Senate and
House ignores the will of the people and subverts their right to place
the emergency financial manager legislation before a vote of the
The possibility has put Detroit
Mayor Dave Bing in a tough position. He has attempted to negotiate with
the city's 48 employee unions. He has asked for concessions in wages
and benefits to stop the state takeover. The City Council last week
approved 10 percent pay cuts for the few nonunion city workers.
The mayor is also in the process of
laying off about 1,000 city employees, a painful process for city
police, firefighters and bus drivers along with many from the
white-collar ranks. If spending is not stemmed, the city faces a budget
shortfall by April and could not cover payroll and essential city
Former Mayor Dennis Archer, speaking
on WJR-AM radio's Frank Beckmann show Dec. 19, says union pension and
retiree health care costs have been the 100-pound weight on the city
for many years. Detroit, he added, cannot keep up the heavy payment
burden, and he called on the current council and government to find
their own solutions now on these legacy costs, something he thinks can
keep the state away from Detroit's door.
Mr. Roberts, the former treasurer,
however, calls it not just a Detroit problem, but an issue that affects
everyone in the state. He dubs Mr. Bing's efforts "sincere," but says
if an emergency manager is ultimately put in place, "the single biggest
loser would have to be the mayor."
He compared the city's legacy woes
with what ultimately sunk General Motors Corp. into bankruptcy
protection - a move that ultimately gave the company a chance to turn
its fortunes around.
"I think everyone here is trying to
walk a little gingerly because they know every step is fraught with
difficulties," he said. "The union could take a step that says we
disagree and we understand and will come to work and sue you in court.
Or, the other step is they say we disagree and are not showing up. That
is a serious issue."
He said he hopes Detroit's leaders
will use the little bit of time they now have to work on a mutual
solution, but he is not optimistic.
"I think ultimately an [emergency
financial manager] is going to have to be appointed," he said. "Some
people in Detroit already support [the move], and that is not the same
ones who necessarily show up for mass rallies."
2011 The Washington Times, LLC. Click here for reprint permission.
Looking Up, Detroit
Faces a New Crisis
By MONICA DAVEY, NYTIMES
DETROIT — For a city that some have
declared dead again and again, the talk of late here was of renaissance
— of auto industry jobs growing, new companies moving into empty
buildings downtown, urban gardens blooming in vacant lots.
Then came the revelation that
Detroit is poised to run out of money by April and fall deep into debt
by June. Now a place that had seemed to be finding its balance is
reeling once more.
A formal state review of Detroit’s
books — a step that could lead to the appointment of an outside
emergency manager to take over the city’s finances — was announced this
week. City leaders are conducting urgent meetings with labor union
leaders and financial consultants in a race to cut costs and head off
The possibility that an outside
manager could come in — one who would have broader than ever powers
under a rewritten state law — has stirred new concerns among financial
ratings agencies and business leaders who have fresh investments in the
city. City government, meanwhile, is finding itself forced to
re-examine services it provides — including buses, health care and
street lighting — and shed what it can no longer afford.
The crisis could not have come at a
“This state is starting to come
back, the economy is starting to come back, and as long as you are out
there promoting all this negativity, it’s no good for any of us,” Mayor
Dave Bing said in an interview. “You don’t need Detroit against the
Still, Mr. Bing, a former basketball
star who built an auto-parts manufacturing company, says he also knows
the risks — symbolically, financially and politically — if a city of
this size reaches a point where it cannot pay debts.
“If Detroit would ever go into
default, it would kill the state,” he said, quickly adding that he did
not think the situation would come to that.
Already, though, Detroit is the only
major American city with credit that sits beneath investment grade,
experts say. With 11,000 city employees and 139 square miles of
increasingly vacant land to tend to, it has struggled, year by year,
deficit by deficit, to pay its bills. Once the nation’s fourth-largest
city, it has seen its population drop since a high of 1.8 million in
1950 to a low last year of 714,000.
In the eyes of some leaders, this
financial crisis, despite the recent positive signs from the private
sector, was decades in the making: the city never shrank its operations
enough to match a shrinking tax base, and it delayed its woes with
borrowing, exaggerated revenue estimates and accounting shifts.
This fall, Mr. Bing warned that
Detroit would run out of cash without major cuts, particularly layoffs
and deep salary reductions.
Within days of Mr. Bing’s
announcement, state officials said they were starting a preliminary
review of the city’s finances, which concluded this week with the
announcement of a deeper state look at the books and an alarming
snapshot of Detroit: more than $12 billion in long-term debt, an
estimated general fund deficit of $196 million and no sufficient plan
for dealing with the shortfall.
The state’s moves have set off an
uproar. Under Michigan law, a formal review must precede a state
finding that a city’s financial circumstances are so dire as to require
an outside manager to take over — and many here view that as the
state’s ultimate intent. Mr. Bing, a Democrat, and even groups he has
sparred with — the City Council and leaders of the city’s 48 unions,
whose contracts are the target of much of the cuts — have pushed back,
as have residents. The refrain: Detroiters can take care of Detroit
just fine, thanks.
For Gov. Rick Snyder, a Republican
and businessman elected in the wave of Republican statehouse victories
in 2010, Detroit’s crisis comes at a complicated moment. Earlier this
year, Mr. Snyder and the Republican-dominated Legislature passed a law
adding vast powers to the emergency managers sent to troubled Michigan
cities, including the ability to throw out union contracts.
Critics said the law was an attack
on democratic principles and an assault on labor unions. A lawsuit is
pending. A campaign to repeal the law is under way, raising the
possibility that the current emergency manager law could be suspended
until the vote — even as the state’s most significant city may be on
the verge of being assigned one.
State officials insist that the
steps taken do not mean that an outside manager will necessarily be
appointed in Detroit. For his part, Mr. Snyder, who had never held
political office before, seems put off at suggestions that he hopes to
“Why would I want an emergency
manager?” Mr. Snyder said in an interview. “I’ve got plenty to do as it
is. It’s best if we’re a supporting resource and they resolve their own
issues with support.”
That said, Mr. Snyder, a former
computer company executive and venture capitalist who is trained as a
certified public accountant, seems unlikely to back away without firm
evidence — perhaps a consent agreement between the state and the city —
that Detroit is taking steps to repair itself. Mr. Bing says he opposes
such a commitment.
A financial control board helped
pull New York City from the brink in the 1970s, and some have begun
speaking of Detroit in similar terms.
“An emergency financial manager
might be a blessing at this point,” said Peter Karmanos Jr., who
founded the Compuware Corporation, which moved its headquarters to
downtown Detroit from the suburbs almost a decade ago.
Mr. Bing said he believed a solution
was within reach. Significant concessions by the city’s labor unions,
whose contracts do not expire until June, would have to be a part of
that, city officials say, though no agreements have been announced. Mr.
Bing has called for 1,000 layoffs, a 10 percent pay cut for employees
and privatization of some services, though City Council members have
said cuts will have to go far deeper.
The one thing that is certain is
change is coming.
“Privatization, outsourcing has
always been a dirty word,” Mr. Bing said. “But we’re talking about
survival. And we can’t allow our 11,000 employees that we have to
dictate the future of over 700,000 people here in this city.”
On the streets here, Detroiters
sound frustrated — at the mayor, at the state, and at the possibility
that more cuts might mean a further diminishment of their shrinking
“Are we going to survive?” Mr. Bing
says constituents are asking. “What are we going to look like when all
of these changes are implemented? Should I stay? Should I run? You hear
all of that. But I think the base in this city, in terms of citizens,
are fighters, and don’t want to give up.”
Scranton mayor slashes pay
city workers—including police and firefighters—to minimum wage
By Dylan Stableford, Yahoo! News, Senior
10 July 2012
Cash-strapped Scranton, Pa., has
slashed pay for all city employees—including police and firefighters—to
minimum wage, sparking furor among unions that now say they plan to sue
in federal court.
A lawyer representing three unions
told Scranton's Times-Tribune he will file several motions, including
one to hold Mayor Chris Doherty in contempt of court for violating a
judge's order to pay full wages.
The lawyer, Thomas Jennings, said he
also expects to file a pair federal lawsuits on behalf of the
unions—International Association of Firefighters Local 60, the
Fraternal Order of Police E.B. Jermyn Lodge 2 and the International
Association of Machinists and Aerospace Workers Local Lodge
2305—alleging the city failed to pay proper wages and overtime, and cut
benefits for disabled police and firefighters without a proper hearing.
"Pick a law," Jennings told the
Times-Tribune. "They violated it."
Last week, Doherty abruptly cut pay
for all 398 city employees to $7.25 per hour, saying it was the only
way to keep Scranton solvent.
According to the paper,
Scranton—which faces a $16.8 million budget deficit—had $133,000 in
cash on hand as of Monday, but owed $3.4 million in various vendor
bills, including health insurance.
Roger Leonard, a city employee, told
NPR he typically gets a $900 check for two weeks of work. On Friday, it
"I have two children and a wife, and
my wife is a stay-at-home mom," Leonard told NPR. "If the savings
gets drained, we won't be OK."
The mayor, meanwhile, blamed the
City Council for Scranton's financial woes.
"If they'd gone with my budget, we
wouldn't be having this discussion," Doherty said. "The taxes would
have been raised. The bills all would have been paid because we would
have had a dedicated revenue stream."
police, fire and DPW unions will sue in federal court; Federal suit
likely to be filed against Doherty
By Jim Lockwood (Staff Writer)
Published: July 10, 2012
Scranton's police, fire and DPW unions not only again will ask a
Lackawanna County judge to hold Mayor Chris Doherty in contempt of
court for paying minimum wages to employees, but they also expect to
sue him in federal court and file a workers' compensation complaint,
their attorney said Monday.
The trio of unions - International Association of Firefighters Local
60, the Fraternal Order of Police E.B. Jermyn Lodge 2 and the
International Association of Machinists and Aerospace Workers Local
Lodge 2305 - expect to soon file several new legal actions, said their
attorney, Thomas Jennings. Those actions would include:
n A motion in Lackawanna County Court to hold the mayor in contempt,
due to paying 398 city employees minimum wages in their paychecks
Friday, even though a judge on Thursday and Friday ordered full wages.
n A lawsuit in U.S. District Court in Scranton under the Fair Labor
Standards Act alleging the city has failed to pay wages on time and
failed to pay overtime.
n Another federal complaint alleging violations of the Heart and Lung
Act, because benefits of disabled police and firefighters also were cut
to minimum wages without first having a required hearing.
n A penalty petition with the state workers' compensation commission
over the minimum wages.
"Pick a law. They violated it," Mr. Jennings said.
Mr. Doherty said, "If I had the money, I'd pay them (employees). Again,
it's the council's budget" that has not provided enough funding to pay
all of the city's bills.
Efforts to reach council President Janet Evans were not successful.
Regarding legal matters, Mr. Doherty deferred comment to city solicitor
Paul Kelly, who represented the city Thursday and Friday in court on
the unions' lawsuit. Efforts to reach Mr. Kelly also were unsuccessful.
With more legal battles looming, the city's financial crisis remained
at a stalemate Monday: the city was still running on fumes while an
agreement between administration and council on how to get out of the
jam remained elusive, the mayor said.
"Nothing's changed," Mr. Doherty said.
It remains to be seen whether the city would have enough cash on hand
to make a full payroll on the next payday of July 20, the mayor said.
As of Monday, the city had $133,000 in cash, but owed $3.4 million in
various vendor bills, one of which was health insurance, said city
Business Administrator Ryan McGowan.
That was more than either Thursday and Friday, when the city's bottom
lines were $5,000 and $83,000, respectively, he said. The daily amount
fluctuates depending on how various tax revenues come in and bills are
paid, he said.
For example, the city began Monday with $373,000, paid $190,000 to Blue
Cross of Northeastern Pennsylvania and $50,000 to the DPW union's
pension fund, which had threatened to sue if a payment was not made,
Mr. McGowan said.
An expected influx of wage taxes in August, from
second-quarter-of-the-year collections, would bolster city coffers, but
only temporarily as the city still projects a $16.8 million deficit for
the year, he said.
A payroll every two weeks amounts to $1 million, officials said. To
free up cash to pay overdue bills, particularly health coverage, the
mayor on June 27 announced he was indefinitely cutting salaries of all
non-federally funded employees to the federal minimum wage of $7.25 an
hour. This way, the payroll every two weeks would amount to $300,000,
though he pledged to pay all back wages once the crisis is resolved.
The three unions sued on July 2 and Lackawanna County Court Judge
Michael Barrasse issued injunctions Thursday (temporary) and Friday
(preliminary permanent) ordering full wages, despite administration
testimony that the city is nearly broke.
Payroll processing began July 3 in preparation of Friday's paychecks,
which contained only minimum wages. Despite Thursday's temporary
injunction, the mayor saying Thursday that only minimum wages would be
paid Friday prompted the unions to seek to hold him in contempt of
Thursday's ruling. However, the judge on Friday said he would not hold
the mayor in civil contempt Friday because such a move would have been
premature. After that hearing, however, the employees learned their
paychecks indeed contained only minimum wages and they vowed to again
seek to hold the mayor in civil contempt.
Under questioning by Mr. Jennings, witnesses testified Friday that the
administration negotiated with vendors regarding extending credit or
accepting partial payments, but did not attempt any negotiations with
the unions regarding lowering of their salaries.
Mr. Kelly also unsuccessfully argued in court that the lawsuit was
flawed because a key party to the dispute - the council - was missing.
The unions' lawsuit named as defendants only the City of Scranton and
Mr. Doherty, in his capacity as mayor. Though the lawsuit faults both
mayor and council for months of "squabbling" and "internecine political
warfare" that led to gridlock and victimization of employees, the
lawsuit did not specifically name council as a defendant or seek to
hold council members in contempt. Mr. Jennings said that was because
Mr. Doherty was the one who unilaterally decided to slash salaries to
minimum wages and signed the June 27 letter that was given to heads of
the city's four unions informing them of his decision.
The city's remaining employees' union, the International Association of
Machinists and Aerospace Workers Local 2462 that represents clerical
workers, was not a plaintiff in the unions' lawsuit.
24 October 2011 Last updated at 18:24 ET
declares Harrisburg in fiscal emergency
12 October 2011
The governor of the US state of
Pennsylvania has declared a fiscal emergency in the capital,
Harrisburg, beginning a state takeover of the city's finances.
The takeover comes after
Harrisburg's city council rejected calls to implement a financial
recovery plan and declared bankruptcy. The city faces debts of $458m
(£291m) and has struggled to pay for services.
Critics of the takeover law say it
is unconstitutional. Mr
Corbett signed the takeover law last week, after it was passed by the
Debt woes have plagued the city of
50,000 since 2010, when an incinerator project funded by municipal
bonds failed to raise expected cash. A takeover plan is likely to include
renegotiating labour deals, cutting jobs and putting most of the city's
valuable assets up for sale or lease, correspondents say. That would include the incinerator, as
well as parking garages. The city council has said it chose
bankruptcy over a rescue plan which would benefit creditors at the
expense of the city.
"I think [bankruptcy] is the only
real option that we had," said City Controller Dan Miller. "They wanted
to sell all of our assets and make Harrisburg destitute for decades to
Harrisburg's bankruptcy declaration
is opposed by the city's mayor, Linda Thompson, who challenged the
legality of the vote. According
to Ms Thompson, city law requires the mayor and the city solicitor to
sign off all hiring of outside lawyers, as well as having city
solicitors approve all ordinances and resolutions considered by the
"They have been dishonest with the
entire community for months," the mayor said about the council. "I am
ashamed of the behaviour."
Harrisburg's federal petition for
Chapter 9 bankruptcy lists six pending legal actions by creditors.
economic crisis for state and local governments
Friday, Sept. 9, 2011
Ongoing economic stagnation has hit state budgets hard. The pain
inflicted by the market's downward spiral has been made more acute by
mounting deficits in state pension plans. Five years ago, 40 percent of
these government-run retirement systems were underfunded. Now only four
states are fully funded. The problem is so serious that Rhode Island
was forced to call a special legislative session to address the crisis.
Closer to home, both Maryland and Virginia are facing about $17 billion
in unfunded pension liabilities. It's a story repeated through the
country. Without significant reform, municipalities, counties and state
governments will be forced into bankruptcy by the crushing obligations.
For years, the problem of underfunding has been carefully concealed
from public view. States have borrowed cash to paper over the
shortfalls. They've preserved benefits for retirees while cutting
benefits for new hires in an attempt to limit the future damage.
They've even resorted to bookkeeping gimmicks. State pension plans have
broad leeway over the accounting methods they use, and, unsurprisingly,
they take advantage of wildly optimistic projections of market earnings
while downplaying life expectancy.
Most public pension funds, for example, assume their investments will
grow between 7.5 and 8.5 percent annually. The Dow Jones Industrial
Average grew at an average annual rate of 5.3 percent over the 20th
century; any long-term predicted return above that rate is unrealistic,
to say the least. At the same time, cost pressures mount because we are
living longer, and health care expenses are on the rise. A California
study predicted that its retiree health costs would jump from $4
billion in 2008 to $27 billion in 2019.
The problem is obvious. Pension funds get their money from three
sources: employee contributions, government payments and the returns
from investing this money. These funds are supposed to pay annual
pensions and health benefits to retirees for their lifetimes. But
generous terms allow employees to retire young - sometimes after
showing up at the office for as little as 28 years, as is the case in
Rhode Island. Pensions can even exceed the amount of a full salary. In
one Ocean State town, retired firefighters were actually paid more than
those doing the hard work of putting out fires.
Municipalities and states are rapidly realizing the mess they've made.
Faced with tax-weary residents, Rhode Island is already contemplating
what was previously unthinkable - reducing benefits for retirees.
Courts in Colorado and Minnesota have already upheld benefit cuts
implemented in those states. Other states might well follow.
Other reforms, such as requiring state pension plans to adhere to the
same accounting standards as private plans, must be adopted
immediately. This will clarify the true extent of the problem. Above
all, the states must stop the gravy train and switch to defined
contribution plans - just like the ones that private-sector employers
Central Falls Success
By JOE NOCERA, NYTIMES
January 2, 2012
Central Falls, R.I., is a speck of a city, one square mile of
triple-decker houses and tired storefronts a few miles up the road from
the state capital, Providence. It is the poorest city in Rhode Island,
with 27 percent of its residents below the poverty line, according to
the Census Bureau. Earlier this year, it started bankruptcy
proceedings. Its mayor, who is the subject of a state police
investigation, has been pushed aside in favor of a receiver, who has
taken control of the city’s finances.
Central Falls, though, also has one of the most promising reading
experiments in the country. The Learning Community, a local charter
school, and the Central Falls public elementary schools have joined
forces in a collaboration that has resulted in dramatic improvements in
the reading scores of the public schoolchildren from kindergarten to
grade 2. Given the mistrust of charter schools by public
schoolteachers, creating this collaboration was no small feat. And
while the city’s bankruptcy now threatens it, the Central Falls
experiment not only needs to be preserved, it should be replicated
across the country. I haven’t seen anything that makes more sense.
When I last wrote about public schools, it was through the prism of
Steven Brill’s book, “Class Warfare: Inside the Fight to Fix America’s
Schools.” Though a fan of the charter school movement, Brill concluded
that, by themselves, charters were never going to fix what ails the
nation’s public schools; you couldn’t possibly scale them to encompass
50 million public school students.
As it turns out, Meg O’Leary and Sarah Friedman, the co-founders of The
Learning Community, had gotten there a whole lot earlier. Before
starting The Learning Community in 2004, they spent three years working
with the Providence school system on a pilot program designed to come
up with ways to “transform teaching practices and improve outcomes,”
says Friedman. During a time of upheaval in the school system, a small
corps of great teachers were the real anchors in the schools. In
setting up The Learning Community, O’Leary and Friedman wanted to apply
the best practices they had learned during the Providence project —
and, eventually, to use their knowledge to help public school districts
in Rhode Island.
They got their chance in 2007, when Frances Gallo became the Central
Falls Schools superintendent. After she got the job, Gallo stopped in
on several families just as they had learned that their children had
won a spot (via lottery) in The Learning Community. “They were so
excited,” recalls Gallo. She wanted to understand why.
So Gallo began spending time at The Learning Community — where she,
too, became excited. The school drew from the same population as the
public schools. It had the same relatively large class sizes. It did
not screen out students with learning disabilities. Yet the percentage
of students who read at or above their grade level was significantly
higher than the public school students. When Gallo asked O’Leary and
Friedman if they would apply their methods to the public schools, they
jumped at it.
Did everything go smoothly at first? Not even close. “At first it was,
‘Oh, here comes another initiative,’ ” recalls Friedman. There were
plenty of “venting” sessions at the beginning, along with both
resentment and resistance. But The Learning Community invited the
teachers to visit its classrooms, where the public school teachers saw
the same thing Gallo had seen. And very quickly they also began to see
results. Most public schoolteachers yearn to see their students succeed
— just like charter schoolteachers do. Most of the resistance melted
There is another important element to this collaboration: The Learning
Community advisers who work most closely with Central Falls teachers
haven’t just done a fly-by. They have worked hand in hand with their
public school colleagues for three years. They have been a constant,
encouraging presence. They have developed relationships. And they have
treated the public schoolteachers with respect. It makes a huge
Early on, O’Leary and Friedman convinced Gallo to hire reading
specialists for Central Falls. (The Learning Community’s methods call
for a great deal of one-on-one instruction, especially when a teacher
sees a student beginning to lag behind.) Ann Lynch, a Central Falls
elementary school principal, told me that budget cuts have already
forced her to cut back from two specialists to one. Everybody is
worried about more cuts: the combination of the bankruptcy and a new
state funding formula — which will cut back some state financing for
the Central Falls School District — has people fearful that The
Learning Community’s project will be pared back, too.
Let’s hope it doesn’t happen. What is happening between this one
charter school and this one school district offers an all-too-rare
chance for optimism — not just about Central Falls’s public schools,
Island pension system overhaul passes
By DAVID KLEPPER Associated Press
Article published Nov 18, 2011
Providence - Despite jeers and the threat of a union
lawsuit, Rhode Island lawmakers on Thursday approved sweeping changes
to one of the nation's most underfunded public pension systems.
The state's heavily Democratic General Assembly defied its traditional
union allies to pass the landmark changes. The legislation is designed
to save billions of dollars by backing away from promises to state and
municipal workers that lawmakers say the state can no longer afford.
Lawmakers said Thursday's vote was one of the most wrenching they've
had to cast, though the fight might not be over if unions follow
through with promised lawsuits.
"It would certainly be a lot easier to walk away from this reform,"
said Senate President Teresa Paiva Weed, D-Newport. "However, it is
clear that doing nothing only puts our retirees' and our active
members' benefits at greater risk. We owe it to them, as well as to all
other taxpayers, to attack this challenge head on."
Gov. Lincoln Chafee, an independent and one of the bill's original
authors, said he will sign the bill.
Public workers said they felt betrayed and some interrupted Thursday's
debate with jeers.
"They should be ashamed of themselves," said Dean Brockway, a Cranston
firefighter with 28 years on the job. "These were Democrats voting to
do this. They're trying to solve a 40-year-old problem in one day. They
didn't have to do this."
The landmark legislation could have big implications around the nation.
Nearly every state is confronting the same problem, caused by
escalating pension costs, huge investment losses and recession-induced
budget deficits. The Pew Center on the States released a report earlier
this year that found that states face a collective gap of $1.26
trillion between what they've promised public workers and what they've
set aside to meet those promises.
Rhode Island needs $7 billion to fully fund the pension fund that
covers state workers and many municipal employees - roughly the same
amount as the state's entire annual budget. Under the current system,
the state must pour more and more into the pension system annually,
from $319 million in 2011 to $765 million in 2015 and $1.3 billion in
The pension system covers 66,000 active and retired public teachers,
state employees, judges and police and firefighters. Fifty-eight
percent of retired teachers and 48 percent of retired state workers
receive more money in their pensions than they did in their final years
of work. Their benefits are set by state law and not collective
The legislation passed Thursday would suspend automatic, annual pension
increases for retirees for five years and then award them only if
pension investments perform well. The bill also raises retirement ages
for many workers and creates a benefit plan that mixes pensions with
401(k)-style accounts. The changes wouldn't apply to municipal pension
The measure is projected to reduce the state's unfunded pension
liability by $3 billion immediately and save taxpayers $4 billion over
Passage of the bill is a political victory for legislative leaders,
Chafee and Treasurer Gina Raimondo, a Democrat who was the main
architect of the legislation.
For months, Chafee and Raimondo warned that unless the state reined in
pension costs, lawmakers would have to raise taxes and slash funds for
education and other services.
"Rhode Island has demonstrated to the rest of the country that we are
committed to getting our fiscal house in order," Chafee said.
Leaders of public-sector unions aren't giving up and vow to overturn
the legislation in the courts.
"The attorneys are going to make a lot of money," Philip Keefe,
president of Local 580, which represents social service, administrative
and technical workers. "If this is overturned, it will be you, me and
every other taxpayer that is on the hook for billions."
Opponents of the bill pushed unsuccessfully to weaken its impact, but
the bill passed easily nevertheless. The Senate passed its version of
the legislation 35-2, with the House voting 57-15 a few hours later.
Frustrated opponents of the bill warned that it would prompt a long and
potentially expensive court battle.
"What we are about to do is a crime," said Rep. Scott Guthrie,
D-Coventry, a retired firefighter. "You want this thing to linger
around for 10, 15 years? You want to go through 10 years of litigation?
You want to spend God knows how much money on legal fees?"
Several lawmakers said they supported the bill with great reluctance,
noting that they were voting to withhold money that retired workers
were counting on. Rep. Donna Walsh, D-Charlestown, said it was the
"most heart-wrenching, gut-wrenching vote" she has cast in 12 years in
the General Assembly.
"It may be necessary, but it certainly is not fair," said Rep. John
Savage, R-East Providence. "Can we honestly say to our state workers,
to those who educate our children, to those who protect us... that this
bill is fair? I don't think so."
Lawmakers said the state's stubbornly high unemployment rate of 10.5
percent helped convince them of the need for change. The state has
intervened in the financial struggles of two cities, and a
state-appointed receiver sought bankruptcy protection last fall for the
insolvent city of Central Falls.
Raimondo said it's not fair to ask taxpayers to pay for ever-increasing
pensions for public workers when they may not be able to find a job
"The average Rhode Islander is worse off than the average public
employee," she said. "The average Rhode Islander is pretty strapped
The changes in the legislation would not apply to locally run pension
funds, many of which are in even worse shape than the state-run system.
Chafee said he will introduce legislation in January to give cities and
towns greater authority to curb their pension costs.
Rhode Island City Tests Vows
By MARY WILLIAMS WALSH and MICHAEL COOPER
August 13, 2011
When the small, beleaguered city of Central Falls, R.I., filed for
bankruptcy this month, it sought to cut the pension checks it has been
sending its retired police officers, firefighters and other workers by
as much as half. All the city promises now is that its retirees, many
of whom do not get Social Security, will not have their benefits cut to
less than $10,000 a year.
But investors who bought the city’s bonds could do much better: Rhode
Island recently passed a law intended to make sure that they would be
paid in full, even in bankruptcy.
Retirees are wondering how the city can cut what they believed was a
guaranteed benefit. “We put our time in, we put our money in,” said
Walter Trembley, 74, a retired Central Falls police officer. “And the
city, through their callousness and everything else, just blew it. They
were supposed to put money in and they didn’t.”
Cities and local governments make lots of promises: to their citizens,
workers, vendors and investors. But when the money starts to run out,
as it has in Central Falls, some promises prove more binding than
others. Bond lawyers have known for decades that it is possible, at
least in theory, to put bondholders ahead of pensioners, but no one
wanted to try it and risk a backlash on Election Day. Now the poor,
taxed-out city of Central Falls is mounting a test case, which other
struggling governments may follow if it succeeds.
If Central Falls, a city of about 19,000, is able to reduce the
benefits its retirees now get — something they will fight — it would
not only unsettle the millions of public workers and retirees across
the country, but also reshape the compact between governments and their
workers. Most public workers now pay a portion of their salaries toward
their pensions, but they may balk if they see those pensions can be cut
when they retire. And governments that, like Central Falls, have not
enrolled all their workers in Social Security as a money-saving measure
may have to rethink that strategy.
Millions of teachers, police officers, firefighters and other
government workers have long believed that their pensions were
untouchable, thanks to provisions in state laws and constitutions. But
some of those promises are unclear or untested, said Amy B. Monahan, an
associate professor at the University of Minnesota law school who has
studied the myriad laws protecting public pensions in different states.
Just how those promises would stack up against promises made to others,
like bondholders, is unclear. It is also unclear how those state laws
would hold up in federal bankruptcy court, which has its own ranking of
“This will all be up to a court to decide,” Professor Monahan said.
But many cities and states have already signaled that their bondholders
was poised on the brink of bankruptcy this summer after defaulting on
more than $3 billion of bonds to finance a new sewer system, the state
moved to help. Alabama’s new governor, Robert Bentley, proposed a plan
to replace the defaulted bonds with new ones issued with state backing,
which could lower the borrowing cost and avert what would otherwise be
the biggest municipal bankruptcy in American history. Bondholders would
forgive some of the debt they are owed.
Mr. Bentley’s move contrasted with the lack of action by his
predecessor two years ago when the city of Prichard’s pension fund ran
out of money and it simply stopped sending retirees their checks.
Despite a state law saying that the pensions must be paid, no one in
state government moved to enforce the law or propose a rescue plan.
“I’m a little ticked about it,” said Mary Berg, 62, a retired assistant
city clerk from Prichard, who said she had sent news accounts of the
proposal to help Jefferson County to local officials, asking why the
state had never helped her and her fellow retirees. “The state didn’t
even look at Prichard.”
Teachers in New Jersey likewise got a cold shoulder when they tried to
make the state comply with a law that it contribute a required amount
to their pension fund each year. A judge ruled that their plan was not
yet unsound, despite the state’s failures to make the payments. The
teachers, who argued that by the time the plan qualified as “unsound”
it would have collapsed, lost on appeal last year. But the state always
sets aside enough money to pay bondholders.
Illinois has some of the strongest bondholder protections anywhere,
which explains how a state that began its fiscal year with $3.8 billion
in unpaid bills from last year — and whose pension system has less than
half of the money it needs — is able to keeping selling bonds.
State law requires Illinois to make “an irrevocable and continuing
appropriation” of tax revenues into a special fund every month that can
be used only to pay bondholders. Illinois’s pension system claims to
have a “continuous appropriation” too, but it does not have meaningful
deadlines and has proved much more porous over the years.
The federal bankruptcy code says pensioners and general-obligation
bondholders are both unsecured creditors, stuck at the back of the line
and treated as equals. But there is maneuvering room in the welter of
state and federal laws. After Vallejo, Calif., declared bankruptcy
three years ago, it cut payments to bondholders, but let workers bear
their loss in lower pay and skimpier retiree health benefits. Pensions
In Central Falls, the pension plan for the police and firefighters is
projected to run out of money in October. But officials there say
short-changing the bondholders will not bring relief. The next time the
city needs to borrow money, investors will simply demand more in
interest, and they might decide all Rhode Islanders were a bad risk and
charge all cities more.
“The last thing we want to do is increase borrowing costs for all our
cities and towns, and therefore cause tax rates to go up across the
state, because one city has fiscal problems,” said Robert G. Flanders
Jr., the state-appointed receiver for Central Falls, explaining the new
state law putting bondholders first in line.
After going 20 months without their pension checks, the 141 retirees of
Prichard decided a third of a loaf was better than nothing and settled
with the city. Their average benefit, which had been $1,000 a month, is
now about $350. But they also get Social Security. Ms. Berg, the
retired clerk, said she worried about the retirees of Central Falls,
many of whom do not.
“I can’t imagine telling them that they have to take this 50 percent
cut,” she said. “These are retirees, elderly people. They can’t go out
and get new jobs.”
Runaway Pensions: Nonprofit groups have been living well off the
By Kevin D. Williamson
April 6, 2013
Government pensions have long been a sweet deal for government
employees — and, in Kentucky, for some non-government employees, too.
Seven Counties is the name of a nonprofit corporation that provides
mental-health services in the Louisville area, and it was just
bankrupted by the Kentucky state pension system.
Though it is not a state agency, Seven Counties joined the state
pension system, Kentucky Retirement Systems (KRS), in 1979. It must
have sounded like a good idea at the time, and it was in fact a great
deal for many years. Like practically every other government-run
pension system in the country, KRS provided generous benefits to state
workers, and employees of Seven Counties, too. At the same time, they
have done very little to secure its ability to meet the attendant
profligate financial promises. It’s a win-win for the political class:
Public-sector employees earn inflated retirement benefits, but
taxpayers don’t get dinged for it immediately, because that
compensation is pushed off into the future. And then the bill comes due.
Seven Counties alone is now responsible for a $227 million shortfall in
its pension funding, an amount that the organization’s president,
Anthony Zipple, says it could not pay in “200 years.” That is not quite
true: The nonprofit’s three highest-paid employees take home nearly $1
million a year by themselves, almost enough to cover the deficit over
the period of time stated. Chew on that for a second: As I argued in
The Dependency Agenda, the real beneficiaries of the welfare state are
the high-income contractors who provide government-funded social
services. Here we have a nonprofit that is funded mostly by Medicaid,
supplemented by other taxpayer-derived sources, with an employee paid
more than $325,000 a year. Who says Medicaid is a program for poor
It will not surprise you that Mr. Zipple said that his biggest concern
about health-care reform is that it would prove “too timid,” nor will
it surprise you that 100 percent of the 2012 political donations from
Seven Counties employees disclosed at OpenSecrets.Org went to Barack
Obama, or that 100 percent of their donations in earlier years went to
Democratic candidates and Emily’s List.
Mr. Zipple expects KRS and the state to make good on that $227 million.
Kentucky enacted a sham pension reform in 2008, which consisted mainly
of a promise to start fully funding pensions . . . in 2025. Another,
more robust pension-reform bill was signed in March, and it requires
agencies to start making pension-fund payments that more closely
reflect their underlying liabilities. That means that Seven Counties
will see its annual pension payments rise from $9.5 million to $15.5
million. Faced with that reality, the nonprofit announced Friday that
it would file for bankruptcy.
Kentucky’s pension system is a veritable horse-trading operation. Its
managers are currently the subject of an SEC investigation of its
payments to investment agents with ties to the pension board. KRS has
unfunded pension liabilities of around $37 billion, while the separate
teachers’ system has another $11 billion in unfunded liabilities.
Kentucky’s unfunded pension liabilities are growing at a rate of $500
million a year, while the unfunded obligations of its retiree
health-care plans are growing at $600 million a year. Which is to say,
Kentucky needs to cough up more than $1 billion a year just to keep the
situation from deteriorating further. As Professor Brian Strow of the
BB&T Center for the Study of Capitalism at Western Kentucky
University notes, the 2013 round of “reform” will add only about $100
million a year to the pension system, with a great deal of that money
diverted from road repair and maintenance. The center also notes that
Kentucky already has cut education spending by 26 percent in real terms
since 2008. The roads and the schools get shortchanged, but the
pensions of the political class are inviolable.
And what of the structure of those reforms? Professor Strow explains:
“New state workers in Kentucky are moved to a hybrid retirement plan.
Rather than have a defined-benefit plan, they are guaranteed a 4
percent rate of return on their defined-pension contribution. Where
does one guarantee a 4 percent return on investments these days? Not in
U.S. government bonds.”
Some of Kentucky’s counties and municipalities, which by law have been
obliged to be more fiscally responsible than the state, want out of the
state system, or at least a measure of independence. But there is no
escape: Whether they are managed locally or at the state level, those
liabilities are not going away. As recently as 2002, pension payments
accounted for only 6 percent of the city of Louisville’s spending.
Today they account for 15 percent of the city’s outlays, and that
number will continue to grow. Every household in New York City is
$35,000 in debt to retiring city workers — and that is beyond the
billions they’ve already put in the pension funds. As Professor Joshua
Ruah of the Kellogg School of Management calculates, “If states wanted
to remedy this situation over the next 10 years with supplemental
contributions, total contributions would have to rise by $75 billion
annually, again assuming 8 percent investment returns. For comparison,
total 2008 state tax revenues were $781 billion, and annual
contributions in 2008 were approximately $100 billion. Thus, annual
contributions would have to rise by 75 percent during the coming
decade.” And that 8 percent seems very optimistic.
If you think that your schools or roads need more funding, ask yourself
where the money is going. By the time a child born today finishes high
school, pension costs in Ohio will be eating up more than half of all
projected tax revenue. That isn’t a compensation package, it’s a Viking
raiding party on taxpayers, carried out by government workers — and, in
the case of Kentucky, with some berserkers from the nonprofit sector
joining in too.
Birmingham, Alabama, in Jefferson County.
Judge clears way
for record bankruptcy in Alabama
By JAY REEVES | Associated Press
March 5, 2012
BIRMINGHAM, Ala. (AP) — A judge has
cleared the way for an Alabama county to move forward with the largest
municipal bankruptcy in U.S. history, overruling Wall Street claims
that state law didn't allow the county to file the case.
U.S. Bankruptcy Judge Thomas Bennett
issued his order late Sunday, allowing Jefferson County, the state's
largest county, to remain in bankruptcy as it attempts to sort out more
than $4 billion debt linked to borrowing for the county's sewer system.
Bennett's decision could be reviewed
by the 11th U.S. Circuit Court of Appeals, which already has been asked
to consider another question in the case.
Home to the state's largest city of
Birmingham and more than 650,000 people, Jefferson County filed the
largest municipal bankruptcy ever in November after three years of
negotiations failed to result in a settlement to pay off the debt.
Lenders asked Bennett to throw out the case during a hearing December,
arguing that Alabama's 1901 Constitution doesn't allow Jefferson County
to file a municipal bankruptcy.
Trying to stop the bankruptcy in a
move that could have resulted in more negotiations, a dozen lenders led
by trustee The Bank of New York Mellon claimed Alabama law permits
bankruptcy only for bond debt. Jefferson County has a different type of
debt called warrants, they argued.
The county argued that bankers were
misapplying state law in hopes of getting the case dismissed, and that
any government in the state can go bankrupt no matter what kind of debt
Bennett ruled Jefferson County is an
insolvent municipality under state law and negotiated in good faith to
resolve its debts, so the bankruptcy can move ahead.
Jefferson County cited $4.15 billion
in debt when it filed Chapter 9 bankruptcy, far exceeding the previous
record set in 1994 by Orange County, Calif., over debt totaling $1.7
billion. Jefferson County's financial problems resulted from a mix of
outdated sewer pipes, the economy, court rulings and public corruption.
County officials say higher sewer
rates will result from the debt. Faced with budget shortfalls after
courts threw out a separate job tax, the county has cut staff, reduced
services and closed outlying courthouses as it attempts to balance its
books. Residents routinely wait in lines for hours to conduct simple
business like renewing their car tags.
Alabama, a County That Fell Off the Financial Cliff
By MARY WILLIAMS WALSH, NYTIMES
ONE county jail here is so crowded
that some inmates sleep on the floor, while the other county jail, a
few miles down the road, sits empty.
There is no money for the second one
The county roads here need paving,
and the tax collector needs help.
There is no money for them,
either. There is no
money for a lot of things around here, not since Jefferson County,
population 658,000, went bankrupt last fall. There is no money for
holiday D.U.I. checkpoints, litter patrols or overtime pay at the
courthouse. None for crews to pull weeds or pick up road kill — not
even when, as happened recently, an unlucky cow was hit near the town
“We don’t do that any more,” E.
Wayne Sullivan, director of the roads and transportation department,
said of such roadside cleanup.
This is life today in Jefferson
County — Bankrupt, U.S.A. For all the talk in Washington about taxes
and deficits, here is a place where government finances, and government
itself, have simply broken down. The county, which includes the city of
Birmingham, is drowning under $4 billion in debt, the legacy of a big
sewer project and corrupt financial dealings that sent 17 people to
If you want to take a broad view,
the trouble really began with the Constitutional Convention of the
State of Alabama in 1901. The document that emerged there — written to
empower business interests and disenfranchise African-Americans and
poor whites — gives towns and counties little authority over local
issues. Local taxing power rests with the state, though state lawmakers
are loath to wield it today, in an age of anti-tax populism. Last
summer, the Supreme Court of Alabama struck down a tax that was a
crucial source of revenue for Jefferson County, finally pushing the
county over the brink.
Officials here have only begun to
grapple with the implications of life under Chapter 9 of the federal
bankruptcy code, a municipal form of debt adjustment, rather than
reorganization or liquidation. Until now, the most famous example was
Orange County, Calif., which filed for Chapter 9 in 1994, after risky
investments went horribly wrong. Many local governments are struggling
to pay their bills these days, but hardly any have filed for
bankruptcy. Notable exceptions include Harrisburg, the capital of
Pennsylvania, Vallejo, Calif., and Central Falls, R.I.
“This is really a journey without a
road map,” said John S. Young, the civil engineer who was appointed by
an Alabama court to figure out how to fix Jefferson County’s sewer
system. Today he is that project’s official receiver in name only: a
federal bankruptcy court has suspended his powers, ruling that the
federal bankruptcy law trumps state laws that protect bondholders.
Ordinary citizens can’t do much at
this point. Jefferson County has even canceled municipal elections
scheduled for this August. It seems that there’s no money for voting
IN late 2010, a Wall Street analyst,
Meredith Whitney, caused a stir during an appearance on “60 Minutes.”
The $4 trillion market for municipal bonds, Ms. Whitney said, was
headed for trouble. Within 12 months, 50 to 100 sizable defaults,
possibly more, would rattle the market, she predicted. The reaction was stunning. In a blink,
billions of dollars flew out of the muni market. Mutual funds that
specialized in such bonds were hit especially hard.
Ms. Whitney’s prediction hasn’t come
to pass, and the muni market — usually a dull-as-dishwater corner of
Wall Street — has since recovered.
Many muni experts called Ms. Whitney
an alarmist, but she clearly touched a nerve. States, counties, cities
and towns issue many billions of dollars worth of new munis every year,
and those bonds pay for all sorts of things. Government bodies
nationwide can borrow those billions at a low cost because munis are
traditionally considered among the most conservative of investments.
Without quick and easy access to this market, local government as we
know it would fall apart.
That’s why the developments in
Jefferson County are so unnerving. About 300 municipalities nationwide
are in default on their debt, but most of them are so tiny that they
draw little attention. What is more, after New York City ran into
financial trouble in the ’70s, and Cleveland fell into a hole in the
’80s, the federal bankruptcy code was changed to ensure that certain
types of muni bonds would keep paying interest and principal even if
the issuing government authority sought bankruptcy.
Yet Chapter 9 bankruptcies have been
so rare, and Chapter 9’s involving lots of bonded debt rarer still,
that there is almost no legal precedent for what is happening in
Jefferson County. Its lawyers are negotiating with roughly 4,000
creditors, from suppliers to hedge funds. The federal bankruptcy judge
in the case is exerting enormous influence. By the time this is over,
the lines between state and federal power may be redrawn when it comes
to who, if anyone, can force a community to make good on its promises.
“It could set a precedent for the
whole market,” said Matt Fabian, a managing director at Municipal
Market Advisors, a research firm.
One possibility is that bonds backed
by revenue from a particular public works project — fees from a sewer
system like Jefferson County’s, for instance — will come to be viewed
as riskier investments in general. Until now, many municipal bond
investors assumed that they would be paid back almost entirely in the
event of a bankruptcy. Orange County ultimately set a reassuring
example; although it postponed a debt repayment, it made up for the
delay by paying a higher rate of interest.
Now, who knows? Officials in places
like Harrisburg are watching the developments in Alabama closely.
Harrisburg’s Chapter 9 filing was rejected by a federal bankruptcy
court, but officials in that city still hope to wrest some concessions
from creditors. Pennsylvania has passed a law that prevents Harrisburg
from filing for Chapter 9 again, but that law expires on July 1.
NOT long after Jefferson County went
bust, John S. Young was sitting under the arched windows of the Yale
Club in Midtown Manhattan, trying to explain how all this started. Mr.
Young, 58, had been brought to New York City by the Municipal Analysts
Group of New York, a professional society, to give a briefing on the
developments down south.
Mr. Young quickly recapped what just
about everyone here knew: in 1996, the Environmental Protection Agency
accused the county of dumping raw sewage into the Black Warrior and
Cahaba rivers. Elected officials had to figure out what to do, and to
figure it out fast.
Birmingham, which had thrived from
Reconstruction to the mid-1960s as an iron and steel town, had been
declining for years. Why not embark on a giant public works project, a
Taj Mahal of sewage systems, to foster jobs and development?
Jefferson County began to borrow
vast sums of money, but that money, it turned out, was a perfect medium
for graft and contract-padding. Rather than replacing more than 2,000
miles of decrepit sewer pipes, the county dispensed contracts to build
water treatment plants, pumping stations and administrative buildings,
some on slag heaps left behind by closed steel mills.
All this debt was supposed to be
paid off with revenue from the new sewer system — in other words, by
fees the county would charge residents whose homes were hooked up to
the system. As the debt grew, so did those fees — and the public
outcry. By 2002, the average sewer bill in the county had doubled, to
$18 a month.
One thing led to another. In an
attempt to expand the system and add new ratepayers, the county tried
to bore a giant tunnel beneath the Cahaba River, Birmingham’s main
source of drinking water. But the tunnel was so unstable that the
endeavor was abandoned. The county spent millions just to extract the
boring machine, which had become entombed underground.
“That cost $19 million,” Mr. Young
told the bond analysts. “Now it’s called ‘the Tunnel to Nowhere.’ ”
Despite all this, the county still
hadn’t fixed its sewers, as the E.P.A. had required. It needed more
money, but people were so angry that officials were afraid to raise
Desperate, Jefferson County turned
to Wall Street, particularly to JPMorgan Chase. The bank was able to
persuade the county to agree to a bond deal with terms that included
complicated interest-rate swaps. Those swaps blew up during the
financial crisis of 2008, leaving the county with even more debt than
it had started with. In
addition, the project and its financing led to a variety of criminal
and civil charges, with several officials and others receiving prison
time. In one case, Larry Langford, a former president of the Jefferson
County Commission and former mayor of Birmingham, was sentenced to 15
years in prison.
In another case, J.P. Morgan
Securities dropped claims to $647 million in termination fees it had
tried to make the county pay on the swaps, as part of a settlement that
also called for J.P. Morgan to make payments of $25 million to the
Securities and Exchange Commission and $50 million to the county.
As residents of the county saw more
officials go to prison, public opinion hardened against paying the debt.
“I don’t accept the legitimacy of
this debt,” said Allyn Hudson, 32, an Occupy Birmingham organizer
camping near the bankruptcy court. “It shouldn’t ever have been issued,
and therefore it shouldn’t exist. It shouldn’t have been spent. Since
it shouldn’t have existed, we’re not going to pay it.”
Although JPMorgan, in its
settlement, let the county out of its swaps deal, the county’s
underlying debt remains outstanding. Today, the county is effectively
shut out of the muni bond market and is coasting on reserves, further
delaying work on sewers that don’t function properly. “I’ve never seen
a utility that had such big financial needs, and no access to the
financial markets,” Mr. Young said.
EVEN before the bankruptcy, the old
industrial core of metropolitan Birmingham looked like a monument to
urban blight. About a quarter of the people in Birmingham live below
the poverty line. It’s different in the suburbs, where the money is,
and where many homes have private wells and septic systems.
Downtown, at the courthouse, the
line for car license tags snakes down a corridor. The county has shut
its satellite courthouses, so everything now gets done here. Every
department is short-staffed. The sheriff, Mike Hale, can’t afford to
pay overtime. There is also outrage that the county paid Mr. Young, the
court-ordered receiver, a little more than $1 million for 14 months’
The county’s road crews are patching
only big potholes; resurfacing can wait. The tax collector has laid off
four agents, at a savings of $180,000. But the math of bankruptcy
doesn’t always work well. Last year, those four agents collected $2.7
million from delinquent taxpayers, so it’s possible the county is
losing money in this arrangement.
Down U.S. 11 from Birmingham is the
city of Bessemer, where the second county jail, refurbished a few years
ago at a cost of $11 million, sits empty and unused. The county can’t
afford to pay for the guards. At the county jail in Birmingham,
meanwhile, a 20-year-old program under which certain inmates were
released pending trial, provided they wore electronic monitors and
underwent drug tests, has been cut. That saved $2 million, but now the
jail is overcrowded.
David Carrington, the president of
the Jefferson County Commission, has floated the idea of freeing
several hundred inmates. “We can’t be in contempt of court,” Mr.
Sheriff Hale refuses to consider
that. The county, he said, has a duty to protect its citizens.
Here and there, new projects have
sprouted up as if nothing has happened. The Logan family just broke
ground on a $64 million ballpark for the Birmingham Barons, the minor
league baseball team. Over in Hoover, a bedroom community that
stretches over parts of Jefferson and Shelby counties, the police
department bought 30 new Chevy Tahoes last year and sold a few of its
old ones to Sheriff Hale.
And yet David Sher, a local
businessman, said everyone wonders how the county will ever get out of
this financial mess.
“People are desperate to think of
anything they can to get the money,” he said.
The federal bankruptcy judge
overseeing the case, Thomas B. Bennett, has already rendered a sobering
appraisal. It is “highly unlikely,” he wrote in a decision in January,
that “what was loaned can ever be repaid.”
Votes to Settle Debt, Avoid Bankruptcy
By THE ASSOCIATED PRESS
September 16, 2011
BIRMINGHAM, Ala. (AP) — Leaders of Alabama's largest county on Friday
chose to settle with Wall Street over $3.1 billion in debt from a sewer
system overhaul rather than go through with what would have been the
largest municipal bankruptcy in U.S. history.
Jefferson County Commissioners voted to endorse the deal, but the state
legislature must take action in a special session to complete the deal
and commissioners said bankruptcy was still possible if that
legislation doesn't go through.
Commissioner Jimmie Stephens, who oversees county finances, said there
was no certainty legislators would approve the mix of local tax hikes
and budget changes required to make the deal final. "It's a problem,"
Jefferson County has been trying to avoid filing bankruptcy over the
sewer system debt since 2008. Its problems stem from a mix of outdated
sewer pipes, the economy, court rulings and public corruption.
The main effect of a settlement for county residents would be higher
monthly bills for sewer service. Jefferson County has about 658,000
residents and is home to both Alabama's largest city, Birmingham, and
its medical and financial centers.
The settlement proposal with Wall Street investors led by JPMorgan
Chase & Co includes the lenders agreeing to forgive about $1
billion in debt, the county refinancing about $2 billion, and a series
of annual sewer rate increases.
The Alabama constitution gives state lawmakers a high level of control
over county finances, so the legislature will have to take several
steps to seal the debt deal. They will need to approve formation of a
public corporation to take over the sewer system from the county, agree
to fund the settlement if the county comes up short and pass
legislation allowing the county to reallocate money already earmarked
for other uses and to somehow replace lost revenues.
It was not immediately clear if there is enough support in the
legislature. But Gov. Robert Bentley welcomed the deal and said he
would work with lawmakers and the county so that the necessary laws can
"It may have been easier for the Commission to file for bankruptcy, but
this settlement will result in a much better deal for the ratepayers
and citizens of Jefferson County and for the state, with more than a
billion dollars in debt reduction for the county," Bentley said in a
A bankruptcy filing in this case would have overshadowed the record one
filed by Orange County, Calif., in 1994 over debts totaling $1.7
JPMorgan welcomed the agreement. "We are encouraged by the county's
decision to refinance the sewer debt and look forward to working toward
a successful resolution in the coming months," a bank spokesman said.
A federal court forced Jefferson County to begin a huge upgrade of its
outdated and overwhelmed sewer system to meet federal clean-water
standards in the 1990s, and officials used bonds to finance the
improvements. Outside advisers suggested a series of complex deals with
variable-rate interest that were later shown to be laced with bribes
Loan payments rose quickly because of increasing interest rates as
global credit markets struggled, and the county could no longer afford
its payments. Meanwhile, a string of elected officials, public
employees and business people were convicted of rigging the
transactions that helped put the county in so much trouble.
Those convicted in the graft investigation include then-Birmingham
Mayor Larry Langford, a former president of the Jefferson County
Commission; and ex-Commissioner Chris McNair, whose daughter was one of
the four black girls killed in an infamous Ku Klux Klan church bombing
in Birmingham in 1963. Langford and McNair both are in federal prison.
The sewer debt isn't Jefferson County's only problem, though. It
already has laid off about 550 of its 2,300 workers and reduced
government services because courts struck down an occupational tax and
business license that provided more than $74 million annually for its
operating budget. The county has closed satellite offices and reduced
hours, and long benches now line a hall in the main courthouse where
residents often have to wait hours for the simplest of transactions,
like getting a new car tag.
Bankruptcy Fears? See
Jefferson County, Ala.
By CAMPBELL ROBERTSON and MARY WILLIAMS WALSH
July 29, 2011
BIRMINGHAM, Ala. — A few hundred miles north of here, politicians are
fighting over debt. It is a spirited debate, full of discussions about
what kind of country will be left for future generations and pledges
not to kick the can down the road.
But one does not have to go far to see that possible future. Welcome to
Jefferson County. This is the end of the road, where the can cannot be
kicked any farther.
There are lessons for everyone here, and they are all painful: lessons
for those who are not concerned about the prospect of mounting debt,
for those who insist that steep cuts can be relatively painless, for
those who think the bill for big spending can safely be put off into
the future, for those who have blind faith in the market and for those
who think the government can always be relied upon to protect the
interests of the people.
All of these beliefs have led to a place where the government can no
longer borrow and the little cash on hand is being demanded by
creditors, where the Sheriff’s Department cannot afford to respond to
traffic accidents and hundreds of county workers are sitting at home,
temporarily or possibly permanently out of work. They have also led to
a widely held conclusion among residents that no one is on their side.
“I get tired of them dumping on the little people,” said Deb Passmore,
58, who had to shut down her Laundromat several years ago when the
sewer and water bills reached $500 a month.
The prospect of county bankruptcy, which would be the largest of its
kind in United States history, has gone from being an unwelcome mark of
distinction to something that many residents insist should have
happened a long time ago.
It still stings to think about how things got this way, how county
residents are stuck with the tab from a reckless binge by Wall Street
bankers, middlemen and crooked politicians, a greed-fueled spree that
none of the voters actually wanted or even knew was happening. But
residents know that complaints about fairness have not made that debt,
all $3.2 billion of it, go away.
“What are you going to do?” said Steve Mordecai, 50, who was eating
lunch at Ted’s, a meat-and-three place here that is somewhat less
crowded than usual on Fridays, given that so many county employees are
no longer working. “The county created the mess,” Mr. Mordecai said.
“Now we have to pay it back.”
The story that ends in overspending excess began in neglect: in 1996,
the federal government accused Jefferson County of sending raw sewage
into area rivers and demanded that it rebuild its dilapidated sewer
system. Such a project would be costly, but officials hoped to avoid
unpopular rate increases first by pushing that cost into the future,
and then by adding a maze of derivatives that were supposed to shield
the county from interest-rate increases.
But the bond deals were fraught with pay-to-play scandals. Four county
commissioners were convicted of taking bond-related bribes. Two bankers
are fighting federal accusations that they made secret payments, and in
2009 J.P. Morgan forfeited $752 million to settle a complaint by the
Securities and Exchange Commission.
The complicated bond-and-derivative structures failed during the
financial turmoil of 2008, leaving the county with a $3.2 billion debt
to pay, faster than planned. Sewer revenues that were pledged to pay
the debt cannot keep up. The problems keep compounding: federal
prosecutors have taken a derivatives consultant to court on bid-rigging
charges. And the Internal Revenue Service is investigating whether the
sewer bonds really should have been marketed as tax exempt.
But the fiscal crisis went from a simmer to a full boil in April, when
the Alabama Supreme Court declared a major county tax unconstitutional.
Shortly afterward, with the county reeling from the severe shortfall in
general funds, a court-appointed receiver recommended a steep increase
in county sewer rates, and also laid claim to the county’s only cash
reserves, saying they were needed to bolster the sewer system’s
At the end of June, Gov. Robert Bentley declared a shaky truce while
negotiations took place. On Thursday, the County Commission announced
that it was entering a seven-day standstill period to consider a
settlement offer from the creditors, an announcement that was met with
grumbles across most of the county.
“They should have filed for bankruptcy 10 years ago,” said Howard
Faulk, an owner of Sophie’s Deli across the street from the county
courthouse, where the lines for county business are hours long but the
parking is free because the county cannot afford parking attendants.
“If you’re standing in water this deep,” Mr. Faulk asked, his hand at
his neck, how much deeper can it get?
But any residents who think a bankruptcy will simply wipe the debt
clean are probably in for a bleak surprise. Chapter 9 of the federal
bankruptcy code, the one local governments use, does not work like
Chapter 11, where corporations restructure and bondholders routinely
In fact, Chapter 9 was amended in 1988 with the specific goal of making
clear that certain types of municipal bonds would keep on paying even
in bankruptcy, said James E. Spiotto, a bankruptcy specialist with the
firm of Chapman Cutler. The bonds issued to finance Jefferson County’s
giant sewer project are this type.
“The whole purpose is to assure the market that in times of distress,
the bonds will be paid,” Mr. Spiotto said in an interview.
Many citizens of the county speak bitterly of a perception that other
parts of Alabama think of the county as unworthy of help. Even one of
the county’s own state senators blocked a plan to allow Jefferson to
raise revenue to replace some of what was taken away by the April court
decision, thus forcing layoffs.
“In Alabama, Jefferson County is Chinatown,” said David Mowery, a
Montgomery political consultant, using the metaphor for hopeless
inscrutability from the Roman Polanski film of the same name. “Forget
it,” he said, summing up the general attitude toward the county.
“There’s nothing you can do about it.”
But as Alabama’s own governor learned over the spring and summer, you
cannot just forget Jefferson County, where Birmingham is the county
seat. If it goes down, it takes the state — and the state’s credit —
with it. This realization prompted the governor to intervene when the
county was near declaring bankruptcy at the end of June.
Still, little of this reassures the people slogging through here, who
realize that life will get harder before it gets better. The only
consolation is gallows humor and signs they might not be alone.
“I used to think what awful leadership we have in Jefferson County,”
said Phillip Winette, 58, who runs a printing company. “But now I’m
watching the debate on a national level. It’s an epidemic.”
readies for possible record bankruptcy
By JAY REEVES - Associated Press
July 26, 2011, 4pm
BIRMINGHAM, Ala. (AP) — Alabama's largest county began laying
the groundwork Tuesday for what would be the largest-ever U.S.
municipal bankruptcy after three years of trying to work out a solution
with Wall Street to more than $3 billion in debt linked to a massive
sewer rehabilitation project tainted by corruption.
Officials in Jefferson County hope to avoid new layoffs but may have to
raise sewer rates or trim public services. On Tuesday, county
commissioners approved resolutions to hire prominent bankruptcy lawyers
and to sell bonds later in case money is needed to emerge from a
Chapter 9 bankruptcy, the type that can be filed by governments.
Two of the five commissioners said there's an 80 percent chance the
county will file bankruptcy, and a vote could come at a meeting
scheduled for Thursday in Birmingham, the county seat and Alabama's
The commission president, David Carrington, said other possibilities
include extending talks with creditors led by JPMorgan Chase & Co.
or accepting a settlement offer. But something must be done to resolve
a crisis that has cast a shadow over the county for so long, hurting
economic development and industrial recruiting amid the uncertainty, he
"This county deserves a resolution to this problem. We cannot let this
thing go on another three years," said Carrington. "We will do what we
were elected to do."
Jefferson County's bankruptcy filing would be nearly twice as large as
the record one filed by Orange County, Calif., in 1994 over debts
totaling $1.7 billion. One of the attorneys retained by Jefferson
County had a leading role in representing Orange County.
Jefferson County Commissioner Jimmie Stephens said he favors bankruptcy
unless there's "meaningful progress" in talks with creditors, and
The county already has laid-off hundreds of workers and reduced
services because of problems unrelated to the bankruptcy threat, and
commissioners said they did not anticipate additional immediate
reductions should the county file for bankruptcy.
But Andrew Bennett, who works in a courthouse annex in Bessemer, said
he worries that the county will repay lenders at the expense of needy
people who cannot afford to pay more for sewer service and would be
harmed by any possible cuts in county services.
"It's always the poor people who get left behind," he said.
The county — Alabama's historic economic hub with some 658,000
residents — has been trying to avoid filing bankruptcy since 2008. The
deal it offered last week to JPMorgan Chase and other creditors would
erase more than $1 billion of its debt with the promise of repaying the
remaining amount through a combination of modest sewer rate increases
and loans. But lenders have yet to respond to what amounted to a
last-ditch effort to avoid bankruptcy.
"The fact that we have not received a counteroffer speaks volumes to
me," said Commissioner Joe Knight.
JPMorgan Chase declined comment.
A court-appointed official last month recommended a 25 percent rate
hike for sewer customers, whose average residential bill would increase
from $37.74 a month to $46.88, calling it a necessary step toward
financial viability. Commissioner Sandra Little Brown said the 25
percent increase is too high, and she prefers filing bankruptcy since
cost increases could be limited to the single digits.
The county's problems result from a mix of outdated sewer pipes, the
rough economy, court rulings and public corruption.
A federal court forced Jefferson County to begin a huge upgrade of its
outdated and overwhelmed sewer system to meet federal clean-water
standards in the '90s, and officials used bonds to finance the
improvements. Acting at the suggestion of outside advisers in a series
of deals that were later shown to be laced with bribes and
influence-peddling, the county borrowed money for the project in a
complex and risky series of transactions.
Loan payments skyrocketed because of increasing interest rates as
global credit markets struggled, and the county could no longer afford
to repay the money. In the meantime, a string of elected officials,
public employees and business people were convicted of rigging the
sweetheart deals that helped put the county in dire straits.
Those convicted in the graft investigation include then-Birmingham
Mayor Larry Langford, a former president of the Jefferson County
Commission; and ex-Commissioner Chris McNair, whose daughter was one of
the four black girls killed in an infamous Ku Klux Klan church bombing
in Birmingham in 1963. Langford is in federal prison, and McNair's
lawyer is now asking President Barack Obama to pardon him for his
As if the sewer debt wasn't enough, the county has another major
problem: Jefferson County already has laid off about 550 of its 2,300
workers and scaled back government services because courts struck down
an occupational tax and business license that provided more than $74
million annually for its operating budget. Callers to a main county
telephone number now get a recording telling them the automated system
has been taken out of service because of the budget and to look up
department numbers the old-fashioned way, in a phone book.
Commissioner Stephens, whose duties include overseeing county finances,
said residents wouldn't immediately feel any fallout from a decision to
file bankruptcy, but it is unclear what would happen in the coming
weeks or months.
Likewise, a decision to file bankruptcy in Jefferson County may not
affect the broader municipal bond market.
Matt Fabian, managing director at research firm Municipal Market
Advisors, said a filing by Jefferson County was not likely to rattle
investors across the country since many have been anticipating the move
for years and already have factored it into their risk assessments of
municipal bonds in general.
"Probably half the muni market thinks Jefferson County is in bankruptcy
already," he said. "It's been so well telegraphed."
Well, we're even-handed in our
shortfall (l)...Connecticut one of 50 states: here's how we measure up...
Report Details CT’s Fiscal Challenges
by Christine Stuart | Apr 19, 2013
An accountant and an economist
tossed cold water on Connecticut’s financial outlook this week when
they released a report detailing the “deep fiscal hole” policymakers
have dug the state into over the past few decades.
The report by Fred Carstensen, an
economist and director of the Connecticut Center for Economic Analysis,
and former U.S. Comptroller David Walker who heads the Comeback America
Initiative, found that Connecticut has “some of the highest — if not
the highest — total liabilities and unfunded obligations per taxpayer
of any state in the nation.”
According to the report if you add
up the unfunded pension liabilities, retiree health care, and bonded
debt, the cost per taxpayer in Connecticut is $37,693. The only other
state that comes close to that is New Jersey where the per-taxpayer
liability is $36,480. According to Truth in Accounting Connecticut’s
per-taxpayer burden increased to $50,900 in 2011. That’s the when all
the debt and assets are combined on a per capita basis. Click here to
find out how they did their calculation.
“Beginning in the 1990s, state
employee retirement programs were expanded considerably,” the report
released this week found. “For several years now, elected officials
have not made the necessary contributions to fund the promised
That changed last year when Gov.
Dannel P. Malloy implemented a plan he hopes will get the funds to
achieve 80 percent funding in 2025 and 100 percent in 2032. In order to
get there he’s increasing the actuarially required contribution by
about $125 million.
But Carstensen and Walker pointed
out that Malloy’s plan may not be enough.
“These steps were much too modest
and came at the price of a four-year, no-layoff commitment to state
employees,” the report says. “In addition, the state’s major labor
contract, covering benefits, is not scheduled to reopen until 2022.
This appears unrealistic because Connecticut’s current fiscal path is
Unfunded pension debt isn’t the only
thing making Connecticut less competitive as a state. There’s also the
Carstensen and Walker pointed out
that while Connecticut is perceived as being a high-tax state, that’s
not entirely fair or accurate.
At the state level, Connecticut
ranks 18th in the nation in state taxes collected as a percent of
personal income. If local government taxes are factored in,
Connecticut’s tax burden ranks 13th in the nation, below that of New
York, New Jersey, and Rhode Island.
The report found that the state has
relied too heavily on certain industries over the past two decades,
which may have caused higher unemployment rates than the national
“For the past several decades
Connecticut’s economy has been heavily reliant on the financial,
insurance, and real estate industry (FIRE), with approximately 32
percent of its economy in the industry, compared to 21 percent of the
nation as a whole,” according to the report. “Thus, Connecticut was
disproportionately impacted by the financial crisis. But even before
2007, the industry did not experience employment growth, due in part to
accelerating productivity resulting from increased use of information
Also the lack of meaningful
participation in the information technology revolution by the
manufacturing industry hurt the state’s competitiveness.
“These two issues, overreliance on
financial services and a decline in key industries, contribute to a
relatively weak small business sector, with very few young and
innovative firms, which are the primary engines of job creation,” the
Carstensen and Walker said they
wrote the report not to “criticize current or past policymakers’
decisions, or to dwell on negative aspects of the state’s challenges.
Rather, the purpose is to present information to facilitate a
productive discussion about how to create a better future in
To that end, the two offered a
series of recommendations.
The first is that Connecticut must
put its finances in order, especially with regard to restructuring
pension and healthcare plans to make them fair, affordable and
sustainable. The second is that the state must take steps to attract
businesses in the sectors that can grow Connecticut’s economy in the
future — such as digital technology, biomedical innovation, and
pharmaceuticals. The third is the need to create a culture of
transparency, accountability, and transformation at all levels of
government in order to address economic inefficiencies and disparities
that arise, in part, from the fact that Connecticut is one of only two
states without county government.
State economy headed for crisis
Keith M. Phaneuf, CT MIRROR
April 17, 2013
Connecticut's massive long-term debt, deep pockets of poverty and more
than 20 years of stagnant job growth threaten to sink the state's
economy for decades unless major reforms are enacted, according to a
report Wednesday from a national fiscal responsibility group and the
University of Connecticut's economic think-tank.
Comeback America Initiative founder David M. Walker and UConn economics
Professor Fred V. Carstensen, who outlined their report at the Hartford
Marriott, called for dramatic new reductions on public worker
retirement benefits, deeper investments in transportation, education
and economic marketing, and an enhanced "culture of transparency" that
will drive greater efficiencies in state spending.
Each CT resident owes more than $50,000
Though Connecticut has one of the highest bonded debts, per capita, of
any state in the nation, that represents just a fraction of the
crippling debt taxpayers must answer for the in near future, said
Walker, a Bridgeport resident and former U.S. comptroller general under
President Clinton. He launched his Comeback America campaign for fiscal
responsibility in 2010.
The picture goes from bad to scary, the report says, when one considers
state employee and public school teacher pension funds that have less
than half the resources they need to meet future obligations, as well
as a state retiree health care program for which government has saved
Connecticut ranked dead last among states in 2011 when all debt is
combined and assessed on a per capita basis. Each man, women and child
effectively owed $50,900 here.
The second-worst state, Illinois, had per capita debt of $38,500. Ohio
and Washington ranked in the middle with $7,700 and $8,200 owed,
respectively. Six states, particularly those rich in energy resources,
topped the list with positive balances, led by Alaska with an average
per person credit of $34,100.
And even though interest is not charged on retirement benefit debt, it
ultimately translates into state budget deficits that often are
financed with bonding -- and interest charges.
Though interest rates have been kept low artificially, largely by the
Federal Reserve System, that cannot continue much longer, Walker said,
adding that it represents a crippling financial blow for Connecticut
somewhere down the road.
"It's not a matter of if," he said. "It's a matter of when, how much,
and how fast."
Though state employees did agree to some restrictions on retirement
benefits in 2009 and 2011, Walker said the reforms simply didn't go far
enough, and retiree health care in particular may need to change
dramatically -- both for existing and future state workers.
The existing benefits contract between state government and employee
unions runs through 2022, but Walker predicted severe budget crises
would spring up well before then. "That cannot stand," he said.
Both Walker and Carstensen acknowledged that the huge cost of providing
public-sector benefits stems largely from poor planning. State
government provided very generous benefits for decades without saving
anything to cover them over the long-term.
In addition, past governors and legislatures routinely raided worker
pensions -- with union permission -- to close budget deficits.
No job growth and pockets of overty
Unfortunately while this was going on in the 1990s and 2000s,
Connecticut "hit the wall" in terms of growing private-sector jobs,
said Carstensen, who is director of the Connecticut Center for Economic
Analysis. "We have a terrible track record in terms of employment."
Though the state's shrinking manufacturing sector grabs plenty of media
headlines, Connecticut largely has stabilized that segment of its
economy through business innovation and efficiency, he said.
But the financial services, insurance and real estate sectors, which
dominated the economy in the 1980s, have been on a two-decade-long
plunge and "we don't have a coherent strategy overall about how we're
going to address that issue," Carstensen said.
Further complicating matters, the pain of that 20-year slide wasn't
felt equally, the UConn professor said, adding that Connecticut's urban
centers faced the worst of lost jobs, businesses and declining
earnings. This, in turn, drove up local property taxes, which then
accelerated the cities' economic decline.
Connecticut has become one large suburb that maneuvers around economic
sink holes in its big cities, a disparity that costs money. "Doughnuts
do not succeed," he said, adding that this poverty creates much greater
costs for government, particularly with education.
"We've been trying to treat the symptoms too long. It's time we started
trying to treat the disease," Walker said, adding that any so-called
solution to fiscal woes that only relies on slashing all government
spending will exacerbate urban poverty -- and ultimately weigh down the
The first step in reversing these trends, Walker said, is for voters to
demand a change in culture at the Capitol that demands greater
transparency and accountability in all programs -- which is the best
way to weed out unnecessary spending and waste.
Carstensen noted that a recent restriction on worker health care
negotiated by Gov. Dannel P. Malloy two years ago -- a $35 co-payment
for emergency room visits that don't lead to a patient being admitted
to the hospital -- has cut ER visits by 40 percent since then.
But both Walker and Carstensen said state officials also will need to
raise more revenue. Some should come from taxpayers with a revised
system that asks the state's wealthiest to pay more.
But Connecticut also should become more creative with tolls and other
types of user fees that require those who heavily use public services
and other resources to pay more.
"There's no way we're just going to cut our way out of this,"
Liabilities Loom Just Down The Road
By DAVID M. WALKER | COMMENTARY
7:57 PM EDT, July 20, 2012
In just the past month, three California municipalities — Stockton,
Mammoth Lakes and San Bernardino — have filed for Chapter 9 bankruptcy.
Consider this a warning shot for state and local governments across the
country, especially in Connecticut.
The Institute for Truth in Accounting, for which I am an adviser, just
released its annual financial rankings for the 50 states, and it's bad
news for the vast majority. When you consider current liabilities,
underfunded pension and unfunded retiree health obligations, a mere six
states have sufficient assets to cover their liabilities and
obligations per taxpayer. That leaves 44 states with more liabilities
and obligations than assets per taxpayer, with Connecticut at the very
bottom. (The ranking of all states is at
Those numbers are bad in many cases as well for Connecticut's cities
and towns. For example, the total liabilities and unfunded promises per
taxpayer in Bridgeport were about three times as high as Stockton as of
June 30, 2010. Although Stockton's financial problems are more
immediate, Bridgeport's overall financial condition is worse.
A major cause of these disturbing numbers is the amount of unfunded
pension and retiree health care obligations that state or local
governments have amassed. These burdens were a key factor behind the
recent gubernatorial recall election in Wisconsin and those California
bankruptcy filings. They're taking Connecticut toward a fiscal crisis,
Time is against us. Demographic trends — and basic math — mean that the
finances of Connecticut, Bridgeport, and most states and localities
will continue to deteriorate, absent meaningful structural reforms.
Their financial situation will be further complicated when the
Government Accounting Standards Board's recently issued pension
accounting standards are implemented.
More damaging will be the effect when the federal government finally
restructures its finances. Among other things, the federal government
will need to significantly reduce its spending, including support to
state and local governments. In 2011, Connecticut received almost 40
percent of its revenue from the federal government. The restructuring
"bad news" will flow downhill and add to the fiscal challenges of
states and localities.
Governors, mayors and other government officials, along with
legislatures, need to recognize reality and put their financial houses
in order. A critical step will be restructuring pension and retiree
health care obligations. In doing so, elected officials must recognize
that fairness is a two-way street. Government employees should receive
compensation and related benefits that are reasonable compared with
those offered by major private employers. Fairness to taxpayers,
however, requires that these plans be affordable and sustainable over
These determinations must be made by comparing the public and private
sector plans (e.g., participation requirements, benefit levels and
formulas, employee contributions, retirement ages, indexing provisions).
At a minimum, the following reforms need to be considered:
•Pension and retiree health care plans for new government workers
should be competitive with current plans of major private employers.
This will result in revising the type of plans and limiting their
•Plans for current workers should be revised to eliminate abuses and
better control costs. For example, overtime, vacation and sick pay
should not be included in calculating pension payments. In addition,
individuals should not draw a government pension when they are working
for that entity as an employee or a contractor.
•Pension payments for current employees should not be reduced, but they
should be capped. Annual pension indexing should be limited so that
retirees cannot make more than a stated percentage of the pay of a
current employee in an equivalent position. This percentage should vary
based on the retiree's years of service.
•Individuals who are eligible for employer related health coverage
should not be eligible for government funded retiree health care
benefits. Those retirees who are receiving such benefits should stop
getting them upon becoming eligible for Medicare. In addition,
eligibility standards for retiree health care should be tightened.
Government officials and legislatures should reform public employee
retirement plans to get the power of compounding working for them
rather than against them. Although Connecticut made retiree health care
reforms within the past year, they were far short of what is needed.
Government workers deserve competitive plans; however, it's neither
reasonable nor equitable to expect taxpayers to pay significantly
higher taxes in the future to fund retirement benefits that are much
more generous — for jobs that are much more secure — than they will
The time for truth, transparency, taxpayer activism and action by
responsible public officials is now. Connecticut and Bridgeport can
either lead the way to a brighter future or face their own day of
David M. Walker is former U.S.
comptroller general and CEO of the Comeback America Initiative based in
Two different takes on
Keith M. Phaneuf, CT MIRROR
February 22, 2012
Cromwell -- Leaders of Connecticut's small towns were left to read the
fiscal tea leaves Wednesday as state leaders offered two starkly
contrasting views of Connecticut's finances.
Gov. Dannel P. Malloy and his fellow Democrats leading the House and
Senate declared fiscal stability and pledged to continue trying to
bolster municipal budgets, but GOP legislative leaders cited projected
deficits, a bond rating downgrade and cash flow problems as evidence of
another impending fiscal crisis.
"What a difference a year makes," Malloy said to open a 16-minute
address at Wednesday's annual council meeting at the Cromwell Plaza
Hotel and Conference Center.
"A year ago we were literally standing at a cliff, looking over that
cliff and making a decision whether we would do what other states were
doing," Malloy said, adding that nearly all states except Connecticut
attacked state budget deficits but ordering deep cuts to municipal aid
and to social service programs, passing burdens onto property taxpayers
and the poor. "We went a different way. Our economy is beginning to
grow, and we are taking on other, systemic issues."
The governor reminded municipal leaders that he inherited a budget with
a built-in deficit that topped $3.6 billion in the 2011-12 fiscal year,
a gap equal to nearly one-fifth of all spending. "We promised not to
balance our budget on your backs and we didn't," he said, adding it
probably was a "daunting fear" in many communities that town aid would
The administration is committed to "maintaining a level of fiscal
discipline that was not present in state government a short while ago,"
Malloy said, adding that this, coupled with the tax hikes and spending
cuts ordered one year ago, now leave his administration poised to focus
even more strongly on economic development.
Malloy said he plans to build on new programs that offer companies
incentives to add jobs, and to move to or expand in Connecticut.
"If we don't get that pipeline going again, if we don't rebuild our
economy, ... then we are going to be far worse in the coming years."
Connecticut was one of just three states, along with Michigan and Rhode
Island, that created no net new jobs over the 22 years before his
administration began in January 2011, Malloy said.
Besides promoting job growth, the administration also is working to
dramatically reform Connecticut's education system, the governor said,
noting that 42 percent of 8th graders in the Hartford school system are
not proficient at reading.
"If we are going to grow jobs, we have to have a workforce prepared to
take those jobs," Malloy said.
Besides refocusing the educational agenda, Malloy said the current
fiscal stability also is enabling him to fix the cash-starved state
employee pension system. Though that means hundreds of millions of
dollars in additional spending on pensions in the next few years,
starting in the mid 2020s Connecticut will begin saving on pensions
annually, with cumulative savings topping $5.8 billion by 2032.
"What would happen to state aid to municipalities" in two decades if
the system isn't fixed? Malloy asked. "What it would mean, in the out
years ... is you would have people trying to balance their budgets on
your backs again."
Shortly before Malloy's address, Democratic legislative leaders offered
a similarly optimistic outlook on the state budget.
"We did what we had to do to stabilize our state," House Speaker
Christopher G. Donovan, D-Meriden, said, adding that lawmakers remain
determined not to balance state finances on the backs of cities and
towns. "I think we want to keep that cooperation going."
Senate President Pro Tem Donald E. Williams Jr., D-Brooklyn, predicted
state government would finish this fiscal year with either a small
surplus or a small deficit, adding that legislators' focus has moved on
to doing more to stimulate the economy. "It's time to do more to lift
up our Connecticut businesses, he said.
But Republican legislative leaders said the signs point to something
considerably less rosy than Democrats would have town leaders believe.
"We were hopeful we would be able to come before you this year and say
things are different," said House Minority Leader Lawrence F. Cafero,
But Cafero said several recent developments have demonstrated that
Connecticut's fiscal outlook is at risk:
"What it means, in short folks, is we are not bringing in the
money we thought we would bring in, we are not achieving the savings we
thought we would achieve and we have not controlled spending the way we
thought we would," Cafero said. "We're still unstable. We're still
unsure. It was not supposed to be this way. We have to prepare for the
- State Treasurer Denise L. Nappier reported that she had
temporarily shifted funds in December from capital programs to cover
operating expenses to cover a cash flow shortage. This is a legal
procedure employed on past occasions at year's end or on other
occasions when bills exceed tax and other operating fund receipts.
- The legislature's nonpartisan Office of Fiscal Analysis
recently has issued reports showing the current budget is $145 million
in deficit, and arguing that administration cost-savings projections
tied to pension concessions granted by state employee unions last
summer are far too large.
- And Moody's Investors Services, a leading Wall Street
credit rating agency, downgraded Connecticut's rating in January,
citing a heavily loaded state credit card, huge debts in pension and
retiree health care programs, and a depleted emergency reserve.
Further complicating matters, the administration's own numbers show its
new budget proposal is in balance for just one year, noted Senate
Minority Leader John P. McKinney, R-Fairfield. The plan is projected to
fall $424 million in deficit, and to exceed the constitutional spending
cap by $650 million in 2013-14.
"What I hope to accomplish over the next session is to communicate that
we're spending too much money," McKinney said, adding that Malloy's
budget proposal would raise spending more than 8 percent in total over
the next two fiscal years.
"It's not easy" to discern where state finances are going, Bart
Russell, director of the Connecticut Council of Small Towns, said.
"On the one hand, we are extremely pleased that the governor presented
a budget for the second year in a row that towns can take to the bank
and develop their budgets around," Russell said, referring to the $20.7
billion state spending plan Malloy proposed two weeks ago for the
fiscal year that starts July 1.
That plan not only spares the $2.9 billion municipal aid package from
any major cuts, but also includes a $50 million increase in the
Education Cost Sharing program, the single-largest municipal grant.
Malloy and the legislature approved a budget last spring that closed a
historic budget deficit without cutting municipal aid. That package
also gave towns nearly $50 million in new assistance by sharing state
sales and other tax revenues.
Russell called for, and received, a round of applause from the audience
for Malloy for his record on municipal aid. "For that governor, I want
to thank you," he said.
But Russell also noted during an interview Wednesday that when COST's
oversight board met last week to develop an agenda for the coming year,
"there was quite a bit of discussion about the future and even some
fear about the future some of the assumptions state policy makers are
making about the economy."
Municipal leaders from both sides of the aisle also said that while
they believe state finances are better off than they were 12 months
ago, they aren't convinced everything is stable.
"It does look like things are starting to turn around," said Sprague
First Selectwoman Cathy Osten, a Democrat. "But does that mean we
should stop being fiscally conservative? No."
Osten said that despite the ECS increase proposed by Malloy, she has
asked her local school board to reduce its budget request for 2012-13.
Local education officials are seeking a 2.6 percent hike, but Osten
said teachers have agreed to accept a wage freeze and she now is trying
to keep the school budget increase under 1 percent.
East Lyme First Selectman Paul Formica, a Republican, said that while
he also appreciates the support Malloy and the legislature have shown
for town aid, "we still need to control our spending. Just given the
economic environment, it is clear that our residents don't have an
appetite for any tax increases."
Then there is Greenwich,
Connecticut..."neither a borrower nor a lender be" used to be the town
motto - on the road to economic perdition?
Looking for low interest loan, Greenwich digs deep...will RTM
makes this into a high drama? Can they put out the fire of wildly
of structures now to be paid for by bonds, just like the rest of the
169 towns - this is really big news - of course, their comptroller used
to work for Weston!
Town borrows $56 million,
low interest rates
Updated 10:59 p.m., Wednesday, February 15, 2012
The town recently took advantage of its sterling credit rating to
borrow $56.6 million at what finance officials are characterizing as
bargain-basement interest rates.
Of that total, $23 million is considered "new money," with the town
having already committed in prior years to borrowing the $33.6 million
balance. The money will help pay for a host of capital projects,
including the construction of a new high school auditorium and a
central fire station, paving and sewer work.
"This is a super deal," said Peter Mynarski Jr., the town's
comptroller. "These are the lowest rates I've ever seen."
The town issued $40 million in one-year bond anticipation notes on Jan.
18, borrowing the money from Bank of America Merrill Lynch at an
interest rate of 0.13 percent through a competitive bidding process.
"So for one year, we're paying $52,000 to borrow $40 million. I think
that's pretty remarkable," said Larry Simon, a former member of the
Board of Estimate and Taxation.
The town borrowed another $15.6 million from UBS Financial Services
Jan. 18 through a combination of five-year and 20-year general
obligation bonds. The blended interest rate on those bonds is 1.52
"We should always be so fortunate to have those kind of rates," said
Bill Finger, the Democratic caucus leader of the BET.
Of the $15.6 million, $1.3 million is for the architectural and
engineering phase of an upcoming renovation project at the town-owned
Nathaniel Witherell nursing home that is expected to cost $22
million. Budget officials attributed the low interest rates to
the town's AAA credit rating, saying that the cost controls implemented
by the town enable it to borrow money on the cheap without saddling
taxpayers with huge debt-service payments.
"By doing this, we've saved the town an enormous amount of money," said
Michael Mason, chairman of the BET.
Bond anticipation notes, or BANs, are instruments that allows the town
to extend the window of debt service. With a BAN, the town has the
option to pay off the balance after one year, roll over its obligation
to a second year or spread the payments out over an even longer period
by issuing five-year general obligation bonds. Fiscal stewards
have turned to short-term borrowing to augment tax revenues to pay for
capital items in recent years, resorting to long-term bonds for sewer
improvements and other projects in which the town will get a guaranteed
return on its investment through fees.
Simon said the ability to borrow money without burdening the town with
excessive interest payments is a testament to the work of the finance
"I think it shows how strong we are as a town financially," Simon said.
Constitution Plaza Building In Foreclosure
By KENNETH R. GOSSELIN, email@example.com
5:34 AM EST, January 19, 2012
The owners of the former Travelers Education Center on Constitution
Plaza in downtown Hartford have lost the five-story office building to
The 132,000-square-foot building at 200 Constitution Plaza, near the
clock tower, has been empty for about a year but was covered by a
master lease that guaranteed rent payments until the lease expired a
few months ago.
GE Asset Management took control of the building, whose ownership is
separate from other structures on the plaza, in late December,
according to a filing with the city dated Jan. 13. GE declined to
comment Wednesday about its plans for the building.
The former owner — U.S. Bank, National Association, the trustee of the
Walters Connecticut Venture Trust, couldn't be reached for comment.
The building at 200 Constitution Plaza is the latest high-profile
office building in the city's central business district to get mired in
foreclosure trouble. Two others -- CityPlace II and Goodwin Square --
appear to be in the final stages of foreclosure, both owned by
Northland Investment Corp. Northland last year lost Metro Center One,
also in downtown.
VOLCKER IS CORRECT - 4
How many economists does it take to figure out that we are on a
downward trend to financial free fall?
Last Updated: 12:14 AM, November 24, 2012
Posted: 11:11 PM, November 23, 2012
Get set for some big-time pain in the classroom — and in the
pocketbook: A bulletin from the New York State Teachers Retirement
System suggests that taxpayers andstudents are in for a nasty one-two
Schools, the retirement system recently announced, will have to fork
over as much as 16.5 percent of their payrolls next year — a whopping
40 percent jump — to keep the pension fund sound. That means less
money for upstate and suburban students. (New York City runs its own
pension system for teachers; its turn will come soon enough.)
And because some of the costs — as the Empire Center’s E.J. McMahon has
noted — can be recouped through property-tax hikes (even above the
state’s 2 percent cap), taxpayers will be hit hard, too. Put it
way: It’s going to hurt. And then, hurt some more.
“We recognize this rate has a significant impact on school-district
budgets,” said the NYSTRS bulletin.
Uh, gee — ya think?
And it’s going to get worse, McMahon predicts: Just since 2009 alone,
teachers’ pension costs have doubled. Much of the pain could have
avoided. True, part of the problem is poor performance by the markets;
nearly half of NYSTRS’ assets are parked with publicly traded US
corporate stocks. But also fueling costs is a double-whammy of
benefit payments, growing an average 8 percent a year, and
unrealistically rosy assumptions of investment returns — with taxpayers
forced to cover any resulting shortfalls.
NYSTRS, you see,
still uses the once (but no longer) standard figure of
8 percent to project its funds’ yearly growth. Yet since 2000, actual
returns have averaged only 4.4 percent, McMahon reported. Last year,
they came in at a paltry 2.8 percent. Thus, gaps have been
Eventually, taxpayers (and students) pay.
And it’s not just teacher pensions squeezing budgets; public employees
of every stripe, in the city and throughout the state, have won
generous retirement packages for years. Those pricey perks are now
helping to bankrupt local governments. Yet the pols, who set
terms, have done next to nothing to curb costs. This year, for example,
Gov. Cuomo signed a wholly inadequate pension reform that won’t provide
meaningful relief for years.
Why hasn’t Albany done more? Consider a report last month by the
Thomas B. Fordham Institute, which ranks New York’s teachers unions
ninth versus those in other states in terms of their grip on lawmakers.
Notably, the report found, “a full 63.5 percent” of school funds goes
for teacher salaries and benefitî€€s — the highest percentage in
America “by a considerable margin.”
New York’s pols, in other words, help make sure the unions — and their
members — are well taken care of. And to hell with everyone
Which explains why teacher wages and benefits remain high, and pension
costs are out of control.
Will this sad cycle never end?
Crisis in States
Will Last Beyond Slump, Report Warns
By MARY WILLIAMS WALSH and MICHAEL COOPER, NYTIMES
July 17, 2012
WASHINGTON — The fiscal crisis for states will persist long after the
economy rebounds as states confront financial problems that include
rising health care costs, underfunded pensions, ignored infrastructure
needs, eroding revenues and expected federal budget cuts, according to
a report issued here Tuesday by a task force of respected budget
The severity of the long-term problems facing states is often masked by
lax state budget laws and opaque accounting practices, according to the
report, an independent analysis of six states released by a group
calling itself the State Budget Crisis Task Force. The report said that
the financial collapse of 2008, which caused the most serious fiscal
crisis for states since the Great Depression, exposed a number of
deep-set financial challenges that will grow worse if no action is
taken by national policy makers.
“The ability of the states to meet their obligations to public
employees, to creditors and most critically to the education and
well-being of their citizens is threatened,” warned the two chairmen of
the task force, Richard Ravitch, the former lieutenant governor of New
York, and Paul A. Volcker, the former chairman of the Federal Reserve.
The report added a strong dose of fiscal pessimism just as many states
have seen their immediate budget pressures ease for the first time in
years. It also called into question how states will be able to restore
the services and jobs that they cut during the downturn, saying that
the loss of jobs in prisons, hospitals, courts and agencies had been
more severe than in any of the past nine recessions. “This is a
fundamental shift in the way governments have responded to recessions
and appears to signal a willingness to ‘unbuild’ state government in a
way that has not been done before,” the report said, noting that court
systems had cut their hours in more than a dozen states, delaying
actions including divorce settlements and criminal trials.
The report arrived at a delicate political moment. States are deciding
whether or not to expand their Medicaid programs to cover the uninsured
poor as part of the new health care law — an added expense some are
balking at even though the federal government has pledged to pay the
full cost for the first few years and 90 percent after that. Many
public-sector unions feel besieged, as states and cities from Wisconsin
to San Jose, Calif., have moved to save money on pensions. And
Washington’s focus on deficit reduction — and a series of big budget
cuts scheduled to take place after the fall election — has made cuts to
state aid inevitable, many governors believe.
If federal grants to the states were cut by just 10 percent, the report
calculated, the loss to state and local government budgets would be
more than $60 billion a year — which it said would be nearly twice the
size of the combined tax increases that states enacted from 2008 to
2011 in response to their deepest fiscal crisis in more than 50 years.
Things are worse than they appear, the report contends.
Even before the recession, Medicaid spending was growing faster than
state revenues, and the downturn has led to even higher caseloads —
making the program the biggest single share of state spending, as many
states have cut aid to schools and universities. States do not have
enough money set aside to cover the health and retirement benefits they
owe their workers. Important revenue sources are being eroded: states
are losing billions of sales tax dollars to Internet sales and to an
economy in which much consumer spending has shifted from buying goods
to buying lightly taxed services. Gas tax revenues have not kept up
with urgent infrastructure needs. And distressed cities and counties
pose challenges to states.
While almost all states are required by law to balance their budgets
each year, the report said that many have relied on gimmicks and
nonrecurring revenues in recent years to mask the continuing imbalance
between the revenues they take in and the expenses they face in the
short term and long term — and that lax accounting systems allow them
to do so. The report focused on California, Illinois, New Jersey, New
York, Texas, and Virginia, and found that all have relied on some
gimmicks in recent years to balance their budgets.
California borrowed money several times over the past decade to
generate budget cash. New York delayed paying income tax refunds one
year to push the costs into the next year and raided state funds that
were supposed to be dedicated to the environment, wireless network
improvements and home care. New Jersey borrowed against the money it
received from its share of the tobacco settlement and, along with
Virginia, failed to make all of the required payments to its pension
funds. Texas delayed $2 billion worth of payments by a month — pushing
those expenses into the next fiscal year. Illinois has billions of
dollars of unpaid bills and borrowed money to invest in its severely
underfunded pension funds.
When desperate budget officials go looking for money to balance their
budgets, they often see public pension funds as an almost irresistible
pool of money. One common way of “borrowing” pension money is to not
make each year’s required government contribution. Most places use
actuaries to calculate how much money they must set aside each year to
cover future payments — a number known as the “annual required
contribution.” But despite the name, there is usually no enforceable
law that the state or locality must pay it.
As a result, the task force found that from 2007 to 2011, state and
local governments had shortchanged their pension plans by more than $50
billion — an amount that has nothing to do with the market losses of
2008, which caused even more harm.
When money is withheld from a pension fund, the arrears can start to
snowball, because most states count on the money compounding at a rate
of about 8 percent. Eventually the unfunded liability grows
unmanageable, given all the other fiscal pressures on states and
cities. In addition to pensions, America’s states and municipalities
are estimated to have promised well more than $1 trillion in health
benefits — that most have not started saving for — to their retirees.
(The health costs became apparent only a few years ago, when an
accounting rule was changed.)
Mr. Ravitch became deeply concerned about the fiscal problems of the
states in 2009, after he won an emergency appointment as New York’s
lieutenant governor during that year’s budget impasse. As he dug into
financial records to devise a fiscal plan, he said, he began to see the
extent to which officials had been using one-offs and accounting
gimmicks year after year to make the budget seem balanced. His plan was
Mr. Ravitch spent the remainder of his 17-month term investigating New
York State’s finances on his own and trying to compare what he found
with the problems emerging in other states. But he could not find what
he considered an adequate source of information to document the
problem, so he and Mr. Volcker decided to raise money to create one of
their own. Last week, Mr. Ravitch was in Washington, presenting the
task force’s initial findings and recommendations to Treasury Secretary
Timothy F. Geithner, Federal Reserve chairman Ben S. Bernanke, and
Taxes Drive Down Home Values:
state and local officials can do to help the housing market recover.
Dec. 1, 2011
Standard & Poor’s released the latest Case-Shiller data on
house prices on Tuesday, and the results weren’t pretty. In the past
five years, house prices have declined to 2003 levels, and the average
home declined in price by 3.9 percent over the last year alone.
National politicians are scrambling to reverse the trend. But the
remedy lies in state houses and town halls.
Two weeks ago, both Republicans and Democrats in Congress cited the
struggling housing market as their reason for extending an “emergency”
subsidy for homebuyers. The taxpayer-backed Federal Housing
Administration will continue to guarantee mortgages on houses worth as
much as $729,500, something it has done for three years. No
middle-class family can afford such a home. But the home-builders lobby
argued that a reduction in the guarantee would mean less demand and
thus lower home prices not just at the top, but throughout the market.
If you can buy an “expensive” bottle of wine for cheap, why buy the
cheap bottle? The same thing goes for houses: When expensive houses
become cheaper, there is less demand — and thus lower prices — for even
No matter how hard Washington tries, though, it can’t legislate away
reality. And the reality is that even half a decade into a housing
slump, Americans still have good reasons to be wary of plunking down
their hard-earned cash and signing up for a long-term mortgage. These
reasons are closer to, well, home, than to Washington.
A house is worth what a buyer is willing to pay for it in monthly
costs. That’s why if mortgage interest rates go down, house prices go
up (or at least fall less than they would have otherwise). When a
potential homeowner has to spend less on mortgage interest, he can
devote more money to paying principal, and therefore is willing to make
higher bids. So the house is “worth” more — at least until interest
rates rise again.
But when you buy a house, you’re not just committing to a mortgage. You
are also promising to pay the future property taxes on that house. What
drives those local property taxes are the future costs of paying state
and local workers and retirees, particularly retirees’ pensions and
health care. These costs are going in one direction: up.
Unless state and local governments take steps now to reduce future
costs, or unless they plan on suddenly repudiating their promises to
their public-sector work forces one day, every dollar in unfunded
pension and health-care costs is up to a dollar less in the future
value of a house.
Take one example, New York’s Westchester County, the highest-taxed
county in the nation. According to the Tax Foundation, property taxes
in Westchester average $9,044 annually — up by $1,707, or 23 percent,
in the five years from 2005 to 2009. Inflation accounts for less than
half of the increase.
What if property taxes in Westchester were to increase by another 23
percent, to $11,124, in the next half decade, or even the next decade?
That’s an extra $2,080 in annual costs per house, or nearly $175 every
month. Even after deducting these levies from his federal tax bill, a
homeowner would end up losing $1,456 a year. Families that considered
buying a house would sensibly lop that extra amount off the price they
are willing to pay — and the seller would lose about $23,500 in
When houses prices were skyrocketing, nobody cared. The force of the
bubble seemed strong enough to overcome such cash outflows. But now
that the bubble has burst, these costs are much more real.
Westchester may be an extreme case. But in New York State, counties,
villages, towns, and school districts (excluding New York City) have
made about $28.7 billion in health-care promises to future retirees
without setting aside any money to pay these bills. That money has to
come from somewhere.
A home buyer should consider part of this projected burden to be a call
on the future resale value of his house. New Jersey, California, and
other states have made similar promises with their residents’ home
Yes, it’s true that New York and New Jersey recently enacted caps on
property-tax hikes, and California has long had such a cap. But unless
state and local governments rein in costs, local governments will have
no choices but to find a way around these caps. The New York and New
Jersey caps already feature generous loopholes, allowing local
governments to increase taxes above the cap to pay pension and some
Moreover, if local governments can’t pay their bills through property
taxes, they’ll try to get the money from taxpayers by some other route,
likely state income taxes. In the past few days, New York governor
Andrew Cuomo has seemed to be backing away from a pledge to allow a
“temporary” income-tax surcharge on six- and seven-figure earners to
Higher state income taxes similarly mean less discretionary income for
taxpayers — and thus less money available to spend on housing. Less
money in a future taxpayer’s pocket means less money for today’s
homeowner when he wants to sell his house tomorrow.
Washington can continue to take extraordinary measures to prop home
prices up. But forces at the state and local level are pulling prices
By LAWRENCE MONE
Last Updated: 3:38 AM, December 1, 2011
Posted: 10:27 PM, November 30, 2011
Gov. Cuomo, under enormous pressure from public-employee unions and
Democrats in the Legislature to extend New York’s “millionaires’ tax,”
is considering at least some higher taxes on higher incomes. The big
irony here is that much of the money raised from any “millionaire” tax
hikes would go to fund the growing phenomenon of public-sector
How’s that? Well, most dictionaries define a millionaire as someone
with wealth (i.e., assets) of $1 million. By that definition, many New
York teachers and the vast majority of police and firefighters are
millionaires, because the “net present value” of their retirement
benefits is well in excess of $1 million.
That is, if they had to fund their retirements from their own savings,
they’d have to set aside seven figures today.
Few who don’t work for the government sector have comparable assets.
Over the last several decades, the private sector has moved
increasingly to the 401(k)-style “defined contribution” model, which
yields a retirement nest egg based on what both employers and employees
have contributed to individual accounts.
Public-sector workers, on the other hand, still rely on “defined
benefit” pensions, which provide a guaranteed stream of income based on
career longevity and late-career peak salaries.
A New York City public-school teacher earning $100,000 can retire at 55
with a pension of $60,000. A private-sector worker would need $1.2
million to buy an annuity with the same yield and starting at the same
(relatively young) age, according to the online pension calculator
developed by the Manhattan Institute’s Empire Center.
It would take an even larger nest egg to replicate the pension income
of city police officers, who typically retire in their 40s. According
to data posted at SeeThroughNY, an Empire Center Web site, the average
newly retired city cop collects a pension of $58,563 — plus a $12,000
(Of course, public-sector workers also receive lavish health-care
Few private-sector workers have anything close to $1 million socked
away in their retirement accounts. According to the Federal Reserve,
the average worker in his late 50s has a balance of $85,600 in his
retirement account, and a net worth of $222,300 overall.
To be sure, most public employees do contribute a small portion of
their salaries to their pension funds, but the state and city
contribute many times more. By contrast, private employers and
employees more commonly do a one-to-one match.
And private-sector workers assume all the risk of these investments,
while public-sector workers enjoy generous rates of guaranteed return.
As former New York City Schools Chancellor Joel Klein quipped when he
discovered his city pension offers a guaranteed 8 percent annual
return, “Who but Bernie Madoff guarantees” such a return “permanently?”
Let me be clear: Many public-sector employees — especially frontline
employees like teachers, cops and firefighters — have difficult,
important and often dangerous jobs. They deserve to be
well-compensated. And, for the most part, they are. After six years,
police and firefighters can earn more than $90,000, excluding overtime.
Another irony: Salaries for public employees — math and science
teachers, for example — could be raised if so much of their
compensation wasn’t backloaded in pension costs.
In the popular 1950s TV show “The Millionaire,” a fictional character
would hand out checks for a million dollars. Over the last few decades,
we’ve developed a public-sector retirement system that basically does
the same. It’s a system New York’s beleaguered taxpayers can simply no
City pension costs have jumped from about 4 percent of city tax
revenues to 20 percent over the past decade, crowding out other vital
public investments. If New York is to avoid the fate of cities like
Central Falls, RI, which have been driven into bankruptcy and are
slashing promised retiree benefits, we must begin to fix the system
now. Ideally, for new employees, by switching to the same type of
“defined-contribution” retirement system now used by virtually everyone
in the private sector.
There simply aren’t enough private-sector “millionaires” to support all
the new public-sector millionaires being created every day.
finance and the pension puzzle
By NICOLE GELINAS
Last Updated: 4:16 AM, November 21, 2011
Posted: 10:28 PM, November 20, 2011
Future city pensioners might wonder whether Comptroller John Liu, a guy
who isn’t being up-front about his own funds, is being truthful about
the disposition of their retirement benefits.
You’d think that the person responsible for New York’s finances would
be meticulous about the money he oversees for his own benefit. Not so.
Last week, the feds charged a Liu campaign fund-raiser, Xing Wu Pan,
with fraud. An undercover agent tricked Pan into thinking he was a
businessman offering $16,000 for Liu’s re-election. To get around the
city’s contribution limit, Pan said he could split the money into
smaller “donations” from fake contributors. Pan told the donor that Liu
would know where the cash came from.
Friday, Liu said the charges were “quite embarrassing, as the chief
financial officer of the city.” But he still won’t release the names of
his top fund-raisers, as the law demands, saying it’s not so easy.
How hard can it be? It looks as if Liu is just buying weeks, or months,
to avoid harsher scrutiny.
Yet a true picture of the comptroller’s finances will inevitably
emerge. Delaying gains him nothing.
Political shenanigans are a dime a dozen here, but city workers should
pay attention in this case. Liu has built his reputation on one issue:
public-pension benefits. His position, laid out in three reports over
eight months, is that they’re fine the way they are.
Last month, Liu’s latest report concluded that New York taxpayers are
getting a great deal on pensions, even as:
* Uniformed workers continue to retire after 20 years with oodles of
overtime baked into their benefits.
* Other workers retire in their 50s with guaranteed benefits for life.
* Annual pension costs have more than octupled under Mayor Bloomberg,
from $1 billion a decade ago to $8.4 billion.
In one year, New Yorkers spend four times on pensions what they’ve
spent over five years to build the mayor’s signature infrastructure
project, the No. 7 subway extension to Manhattan’s far West Side.
Future retirees are risking that Liu is playing just as fast and loose
with their old-age security as he is with the campaign-finance rules.
And it’s all about him: Just like he needs campaign money, he also
needs union votes.
Unlike with the campaign-finance case, Liu likely will be long gone
before a reckoning of pension costs can take place.
Liu’s not the only recent regional pol whose stance toward the public
fisc has proved disastrous.
In New Jersey, back in 2006, the state’s new governor, Jon Corzine,
said that much of that state’s pension problem could be solved if
pension-fund managers would just take more risk. One union leader, Rae
Roeder, fretted that “just like you’re sitting at the craps table, you
can lose it all. And it’s not his money — it’s our members’.”
Yes. This year, former Gov. Corzine used the same strategy at the small
brokerage firm he went on to manage, MF Global. He bet it all — and the
company’s shareholders and employees lost everything three weeks ago.
Investigators are probing whether Corzine’s firm used “segregated
customer funds” to bet more than the legal limit. That is, they’re
looking into whether Corzine’s firm stole customer money.
In the Corzine case, just as in Liu’s campaign-finance kerfuffle, the
facts will come out — fast. But it will take years for Jersey public
workers and retirees to understand the extent of their potential
Many observers say that public workers shouldn’t care: Public pensions
are guaranteed, so it’s the taxpayers’ problem.
But, absent serious reform, elected officials are going to have to
choose among paying pensions, paying bondholders and keeping cops on
the street. That’s happening in such poorer cities as Central Falls,
RI, where current pensioners face big benefit cuts.
People say it can’t happen here because New York is rich. But it’s
thinking like that that could make New York poor. The thinking that
mortgages were safe, for instance, made them risky.
Future retirees had better look out for themselves. The pols — and
today’s union leaders — figure they’ll be long gone before the bill
Nicole Gelinas is a contributing
editor to the Manhattan Institute’s City Journal.
came to office after scandal sank Gov. Spitzer.
Weston CT's Board of Finance sets up funding mechanism for
To Pay New York Pension Fund,
Borrow From It First
By DANNY HAKIM, NYTIMES
February 27, 2012
ALBANY — When New York State officials agreed to allow local
governments to use an unusual borrowing plan to put off a portion of
their pension obligations, fiscal watchdogs scoffed at the arrangement,
calling it irresponsible and unwise.
And now, their fears are being realized: cities throughout the state,
wealthy towns such as Southampton and East Hampton, counties like
Nassau and Suffolk, and other public employers like the Westchester
Medical Center and the New York Public Library are all managing their
rising pension bills by borrowing from the very same $140 billion
pension fund to which they owe money.
Across New York, state and local governments are borrowing $750 million
this year to finance their contributions to the state pension system,
and are likely to borrow at least $1 billion more over the next year.
The number of municipalities and public institutions using this new
borrowing mechanism to pay off their annual pension bills has tripled
in a year.
The eagerness to borrow demonstrates that many major municipalities are
struggling to meet their pension obligations, which have risen partly
because of generous retirement packages for public employees, and
partly because turbulence in the stock market has slowed the pension
The state’s borrowing plan allows public employers to reduce their
pension contributions in the short term in exchange for higher payments
over the long term. Public pension funds around the country assume a
certain rate of return every year and, despite the market gains over
the last few years, are still straining to make up for steep investment
losses incurred in the 2008 financial crisis, requiring governments to
contribute more to keep pension systems afloat.
Supporters argue that the borrowing plan makes it possible for
governments in New York to “smooth” their annual pension contributions
to get through this prolonged period of market volatility.
Critics say it is a budgetary sleight-of-hand that simply kicks pension
costs down the road.
“You’re undermining the long-term solvency of these funds and making
the pension fund even more of a gamble than it already is,” said Josh
Barro, a senior fellow and pension expert at the Manhattan Institute, a
conservative research organization. The state, he said, is betting that
the performance of the financial markets will improve over the next
decade and bail the system out.
“If performance continues to be weak, then contribution rates will be
even higher than the rates we’re trying to avoid now, and you’ll
produce even more fiscal pain down the road,” he said.
Nationwide, the cost of public retiree benefits has soared in recent
years, and states including California, Connecticut and Illinois have
been borrowing to pay, or even deferring, their pension bills. Many
states are worse off than New York. New Jersey is still paying off
bonds issued in 1997 to close a hole in its pension system.
And governors and lawmakers across the country have been trying to take
steps to reduce future pension costs, with limited success.
But New York appears to be unusual in allowing public employers to
borrow from the state’s pension system to finance their annual
contributions to that system.
The state’s borrowing mechanism, approved in 2010 under Gov. David A.
Paterson, was backed by public sector unions and by the state
comptroller’s office, which oversees the pension fund and prefers to
call the borrowing a form of amortization, or paying a debt gradually,
with interest. The public employers that borrow from the pension system
essentially contribute less than they owe in a given year, and agree to
repay the difference, with interest, over a decade.
Contributions to the pension system, which covers more than one million
members, retirees and beneficiaries, are due annually from the state
and municipal governments. As they struggle to pay their obligations
under the current system, municipalities are borrowing $200 million
this year, up from $45 million last year, the first year the borrowing
plan was available, according to the state comptroller’s office.
“I don’t think any financial manager likes to see the can kicked down
the road, and would prefer to see all costs paid for in the years that
they are incurred,” said Tamara Wright, the comptroller of Southampton.
Southampton, on the East End of Long Island, recently borrowed a fifth
of its pension bill — $1.2 million of $6 million — by decision of the
“I certainly am sensitive to the board’s concerns about the current
economic times,” she said.
The state is borrowing too — $575 million in the current fiscal year,
and $782 million in the next, under a budget proposed by Gov. Andrew M.
The state’s comptroller, Thomas P. DiNapoli, said in a statement,
“While the state’s pension fund is one of the strongest performers in
the country, costs have increased due to the Wall Street meltdown.” He
added that “amortizing pension costs is an option for some local
governments to manage cash flow and to budget for long-term pension
costs in good and bad times.”
The comptroller’s office noted that only a part of the overall pension
contributions owed by the state and municipalities was being borrowed.
And it said the number of borrowers had risen partly because the
borrowing plan only recently became available.
“It would not be fair to draw a characterization about statewide
municipal finances from these numbers,” said Kevin Murray, an executive
deputy in the comptroller’s office.
But it is clear that a number of major public employers are having
trouble affording the state’s current pension system.
“Sharp increases in pension costs are unsustainable and are devastating
state and local governments,” Robert Megna, Governor Cuomo’s budget
director, said in a statement.
Mr. Cuomo, a Democrat, is proposing changes that would require future
state employees to share a greater portion of their pension costs, and
would allow them to opt into a 401(k)-style retirement plan. The
proposal is known as Tier VI because it would be added to five existing
pension benefit categories.
The governor’s proposal has been met coldly by labor unions, as well as
by many state lawmakers and Mr. DiNapoli, also a Democrat and an ally
of the labor movement. The proposal is supported by Mayor Michael R.
Bloomberg of New York as well as other municipal leaders, and by
“It’s the most significant rising cost that we have,” Scott Adair, the
chief financial officer of Monroe County, said of pensions.
In Poughkeepsie, which is contributing $3.6 million into the state
pension system this year and borrowing nearly $800,000, Mayor John C.
Tkazyik, a Republican, said rising pension costs and new federal
accounting requirements for retiree health coverage could have dire
“It could bankrupt the city,” Mr. Tkazyik said, adding that the city
had cut its work force, to 367 from 418 employees, in four years as it
struggled to compensate.
The New York Public Library is borrowing nearly $2.9 million of a $14.7
million pension bill this year. A library spokeswoman said the decision
to borrow came at the urging of the city, which finances a majority of
the library’s budget. The city has its own pension system, separate
from the state, which has undergone its own fiscal stresses because of
sharp contribution increases.
“After a strong recommendation from the city, the library decided to
amortize its pension payments because of the cost savings to both the
library and the city, which reimburses more than half of our pension
costs,” said Angela Montefinise, the library spokeswoman.
But the Bloomberg administration played down its role.
“The library system decides how to manage their finances,” said Marc
LaVorgna, a Bloomberg spokesman, adding, “The decision was made by the
Almost like weather systems, everyting seems to begin in the West and
move East, and "so goes the
California is a larger place
than...Costa Rica (Wikipedia). Oakland a city close to brink...of chaos in time for political
conventions? A column by
Stanford prof on "The Two Californias"
Wikipedia: San Bernadino County fits the 4
it! Growth trend for San Bernadino County: U.S. Census. For
localtion of any good-sized California place, click
here. Oakland's Occupy a
California city council finds it can't afford to quit Calpers
By Tim Reid
Thu, Apr 25 2013
(Reuters) - The City Council of San
Jose, in the heart of California's Silicon Valley, wants to quit the
state's public pension fund - which covers its current and former
members - because it fears it can't afford the rising
just one problem. It also can't afford the "astonishingly high"
termination fee of up to $5.7 million that the California Public
Employees Retirement System is demanding.
The catch-22 situation comes at a
time when cities and states are struggling to manage budgets because of
soaring pension costs.
The San Jose City Council voted
unanimously in January 2012 to explore terminating its relationship
with Calpers, America's biggest pension system with $256 billion in
assets. It asked for a termination figure for the 30 current and former
council members subscribed to the plan. In January 2013, Calpers pegged
the cost at between $5 million and $5.7 million, a figure just made
"I was astonished," said Mayor Chuck
Reed. "It was a shock." One year ago, he said, the city council's
unfunded liability figure estimated by Calpers was about $500,000. "I
was expecting at most two or three times that as a termination figure,"
He said the quit fee was so high
that the city, America's 10th biggest with a population of nearly 1
million, had little option but to keep paying into Calpers for the
current and former council members. Newly elected members are already
offered a different pension plan with lower costs and benefits, and
will not pay into Calpers, Reed said. The city's general workforce pays
into different pension funds not managed by Calpers.
Brad Pacheco, a Calpers spokesman,
said that when a termination fee is paid, cities get fully funded and
guaranteed lifetime pension payments for all members in the plan.
"We are committed to helping the
city find solutions to reduce their pension costs and would be happy to
meet with the Mayor or any other stakeholders to discuss options,"
San Jose is not the only California
city looking for a way out of Calpers or a way to renegotiate their
obligations to the system. The tiny southern California city of
Canyon Lake served formal notice to quit Calpers earlier this month,
and Pacific Grove, another small city, on the state's central coast,
says it wants to quit the plan but cannot because of the high
James Spiotto, a municipal
bankruptcy specialist and a partner at law firm Chapman and Cutler in
Chicago, said the San Jose city council is just a small example of a
wider problem in California where cities simply cannot afford their
current pension obligations to Calpers. Something has to give, he said.
"If municipalities can't pay, then
they have to be able to negotiate" with Calpers, Spiotto said. "You
cannot have a situation where a city says they can't do it, but Calpers
says they have to do it. That's an impossibility."
Calpers serves many California
cities and counties, including the cities of Stockton
and San Bernardino, which filed for bankruptcy last year under the
pressure of rising costs for wages and pensions.
RATE OF RETURN A
BONE OF CONTENTION
Calpers calculated the San Jose
council's termination fee based on annual return rates of 2.37 to 2.5
percent -- compared with a the 7.5 percent return rate it uses to
calculate future liabilities for members in the plan.
The higher the estimated rate of
return, the less an employer has to pay into the plan. But when a
pension fund is closed, contributions from cities and workers stop.
"Calpers can no longer go back to
employers to make up shortfalls," Pacheco said. "This is why we adopted
a much more conservative investment strategy for the terminated agency
pool where the assets are moved."
Critics say that Calpers'
7.5 percent long-term projected return rate, as well as
similar rate of returns adopted by public pensions across the country,
is artificially high. Some economists suggest that pension funds,
including Calpers, should be using a lower rate to reflect risk-free
investments such as the yields paid by U.S. Treasury bonds.
When a pension fund's returns do not
meet its projected rate, a shortfall is created. The costs are
generally passed onto member cities. This month Calpers' board approved
accounting changes requiring state agencies, cities and counties to pay
rate hikes of up to 50 percent to cover the fund's shortfall over 30
Critics say the low discount
termination rate produces a huge one-time figure that makes it
impossible for cities to quit Calpers, and there is little that a
single city can do.
"There has to be a number between
7.5 percent and 2.5 percent, but there is no means for a city to
challenge that," said Karol Denniston, a bankruptcy attorney with
Schiff Hardin in San Francisco who helped draft California's bankruptcy
In San Jose, the council was worried
about its rising monthly contribution costs and a growing unfunded
liability to Calpers. Last year the city council paid Calpers $130,700
in annual contributions, and this year it paid over $147,000. Next
year's projected annual contribution is nearly $165,000, the city said.
Outside of the council, the city's
workforce does not pay into Calpers but into a separately administered
municipal plan - similar to other large California cities, including
Los Angeles. San Jose's workforce has had significant salary and
pension reductions imposed by the city council because of rising city
The council decided to look at
terminating its own pension plan with Calpers to show the city's wider
workforce that it was interested in reining in elected officials'
(Reporting by Tim Reid in Los
Angeles; Editing by Tiziana Barghini and Leslie Adler)
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still on for California cities: Fitch
19 September 2012
SAN FRANCISCO (Reuters) - Cities in California face ongoing financial
challenges from rising employee compensation and restrictions on their
ability to raise revenue, which will maintain pressure on their credit
ratings, Fitch Ratings said in a statement on Wednesday.
"Even as the broader economy shows
signs of stabilization, California cities face state-specific
uncertainties based on their diverse economic profiles, and revenue
raising environment," Karen Ribble, senior Director in Fitch's Public
Finance group, said in the statement.
"California cities facing the most
fiscal stress are those with limited options to address budget
imbalance, reinforcing the divide between the strong and the weak,"
Fitch downgraded nine California
cities last year and three this year, representing 30 percent of its
portfolio of cities in the state. Concerns about municipal bankruptcies
were stoked this year by Chapter 9 bankruptcy filings by the cities of
Stockton and San Bernardino.
"While the costs of bankruptcy -
both financial and reputational - remain high, some cities may see
bankruptcy as worthwhile depending on how the outcome of current cases
affects incentives," Fitch said in its statement.
"Stockton and San Bernardino are
concerning because in both cases management suggested bondholders
accept delayed, and perhaps reduced, payments rather than significant
reductions in labor costs, though San Bernardino does provide for full
debt service in its current budget," Fitch said.
Moody's Investors Service last month
noted the potential for other financially distressed cities in the most
populous U.S. state to seek Chapter 9 bankruptcy protection from their
creditors in the wake of San Bernardino's bankruptcy filing.
"San Bernardino's bankruptcy is not
a sign of systemic risks in the municipal market, but the filing does
signal the level of distress and potential for an increase in
bankruptcy filings, particularly among California cities," Moody's said
in a report.
Fitch rates 40 of 482 cities in
California with an average unlimited tax general obligation rating
(ULTGO) of 'AA,' which the rating agency said is consistent with its
ULTGO rating for municipalities nationwide.
California city could face
By Ronald Grover and Tim Reid | Reuters
26 July 2012
LOS ANGELES (Reuters) - In a case that illustrates the
mounting risks facing cash-strapped California cities and their
lenders, the desert city of Victorville is bracing for possible
litigation amid allegations that it improperly shifted funds among
different city-controlled entities.
The Victorville city council was told by its attorney last week that it
faced "significant exposure to litigation" relating to a
little-publicized Securities and Exchange Commission investigation into
its financial practices, the city attorney acknowledged in a statement
City attorney Andre de Bortnowsky denied that Victorville had violated
any laws, and said "it almost appears as if the SEC is on a fishing
The exact focus of the SEC investigation is not known. The SEC declined
In late June, a civil grand jury report alleged that Victorville may
have violated state laws by transferring property taxes dedicated to
its sanitation department to its general fund budget. Civil grand
juries are investigative bodies that are not empowered to bring charges.
Harvey M. Rose Associates, a San Francisco-based public sector
management consulting firm, said in its report to the civil grand jury
that Victorville had mismanaged projects, made poor decisions on
contracts and loaned $38 million to its municipal utility and its local
airport. The report said repayment of those loans was "highly
The report said the utility is insolvent, with $32 million in assets
and $108 million in liabilities.
Bortnowsky, in an email to Reuters, said the city "takes issue with
respect to many of the statements contained in the Grand Jury report,
especially those pertaining to purported violations of state and local
laws and resolutions."
He said a full response to the grand jury allegations would be
Victorville, with a population of about 115,000, had a total of $407
million in bond debt as of June 30, 2011.
The city's auditors said in February that there "was substantial doubt
about the city's ability to continue as going concern" due to
"recurring losses" in its general fund and lack of liquidity in funds
for its utility and the airport.
The city council in late June adopted a $47 million budget for its
general fund that included a $74,992 surplus.
Three California cities have filed or said they would file for
bankruptcy since June 28, when Stockton filed for Chapter 9 protection
to restructure more than $700 million in debt.
On July 2, the city of Mammoth Lakes filed to shield itself from a $43
million court judgment. The San Bernardino city council voted on July
18 to seek bankruptcy protection.
In both Stockton and San Bernardino, poor financial controls and
shuffling of money among different city entities appear to have
contributed to their respective financial crises.
flags over cities' bankruptcy filings
Wyatt Buchanan, STGate
Published 10:35 p.m., Saturday, July 14, 2012
San Bernardino's stunning news last week that it was broke and needed
to file for bankruptcy protection has some observers wondering who's
San Bernardino is the third California city, after Stockton and Mammoth
Lakes (Mono County), to declare bankruptcy within the past three weeks.
And while Stockton's June 28 filing wasn't surprising - city officials
had talked publicly about the problem for months - the moves by San
Bernardino and Mammoth Lakes were. Part of the reason, finance
experts say, is that it's not in a city's best interest, financially,
to bring up the possibility of bankruptcy: Talk of bankruptcy alarms
credit rating agencies, which can use the public discussion as a reason
to downgrade a city's rating, leading to increased borrowing costs for
"It's in the public interest for them to be very, very careful about
it," said Chris McKenzie, executive director of the League of
bankruptcies are rare, California cities are increasingly struggling
with the slow economic recovery, smaller budgets, state budget cuts and
the dissolution of redevelopment agencies.
This year, officials in the city of Hercules said they averted pursuing
bankruptcy protection by settling a $4.1 million lawsuit from a bond
insurer who filed suit after the city defaulted on a bond interest
payment. The Contra Costa County city's financial troubles were
exacerbated by the loss of redevelopment
funding, and it continues to struggle.
Warnings from 8 cities
An additional eight California cities, including Fairfield, which
declared a fiscal emergency in April, have officially notified the
municipal bond market this year that they are facing significant
financial hardship, according to Matt Fabian, managing director of
Municipal Market Advisors, which conducts independent research on the
municipal bond industry. The notifications don't necessarily mean
these cities are headed for bankruptcy court, but they do signal real
Along with Fairfield, the other cities include Arvin (Kern County), El
Monte (Los Angeles County), Grover Beach (San Luis Obispo County),
Lancaster (Los Angeles County), Monrovia (Los Angeles County),
Riverbank (Stanislaus County) and Tehachapi (Kern County).
"I think people in our market are certainly getting more concerned,"
Fabian said. "San Bernardino came out of nowhere, which makes you worry
that there are others in a similar situation that you don't know about."
In Fairfield, officials said the city is not in danger of declaring
bankruptcy but that it faces a deficit of almost $8 million in the
2013-14 fiscal year, which they said is because of the state swiping
local dollars for its budget and the elimination of redevelopment
David White, director of finance and assistant city manager for
Fairfield, said that after years of cutting back on services, the
declaration of a fiscal emergency was necessary to place a sales tax
increase on the November ballot.
"We are at the point now where we cannot cut any more from our budget
without severely impacting services and the quality of this community,"
White said. "I've never worried about going down the bankruptcy road."
Tax revenue plummets
The unusual occurrence of three bankruptcy actions in such a short
amount of time has raised red flags, though.
In Stockton, which filed for Chapter 9 bankruptcy protection, tax
revenue plummeted with the national mortgage crisis, which hit the city
particularly hard. Bad financial practices, overspending on civic
structures and generous retiree benefits also brought the city to
Mammoth Lakes filed for bankruptcy July 3 entirely because of a $43
million judgment against the city in favor of a developer who sued and
won for a breach of contract for a hotel development near the airport.
The action has been viewed as an outlier compared with the other two
cities, whose financial problems are systemic and long term.
In San Bernardino, which faces a $45 million deficit for the current
year, the situation is similar to Stockton. The city, home to 212,000
people, also was hard hit by the mortgage crisis and saw tax revenue
plummet. Current officials say past city leaders mismanaged and
misstated finances, perhaps intentionally, and that the city is
overextended on employee costs. The elimination of redevelopment
agencies by state leaders also blasted a hole in the budget.
"This city is in a dire financial situation. While many measures have
been instituted over the last four years to balance the city's budget,
our financial situation has continued to decline, and that has brought
us to a critical point," said Andrea Travis-Miller, interim city
Cities' common traits
Stockton and San Bernardino share three characteristics that could help
people better forecast which cities might be in danger of heading to
bankruptcy, said McKenzie of the League of California Cities.
Those include cities with tax revenue severely affected by the mortgage
crisis, cities that are older and have a significant amount of deferred
maintenance, and cities that are unable to persuade public employee
unions to agree to deep cuts in salaries and benefits.
McKenzie said he does not think the recent spate of bankruptcy actions
makes other cities see it as a less stigmatized and more palatable
action. He pointed to Vallejo, which entered bankruptcy in 2008 and
emerged in 2011 with fewer firefighters, police officers and public
services. Officials there have cautioned that bankruptcy is a
last-resort solution that's not only about numbers, but also about
people and their jobs, quality of life and morale.
"Everybody remembers Vallejo. Everybody remembers sometimes the
medicine is worse than the disease," he said.
Wyatt Buchanan is a San Francisco
Chronicle staff writer. E-mail: firstname.lastname@example.org
County Weighs Drastic Plan to Aid Homeowners
By JENNIFER MEDINA
FONTANA, Calif. — Browning lawns surround the otherwise neat houses in
these once-sparkling developments where foreclosures have become more
common than neighborhood cookouts. Each patch of dead grass is a
reminder of the inescapable truth: many homes here, as they are
elsewhere around the country, are worth half what they were just five
Desperate for a way out of a housing collapse that has crippled the
region, officials in San Bernardino County, where Fontana is one of the
largest cities, are exploring a drastic option — using eminent domain
to buy up mortgages for homes that are underwater.
Then, the idea goes, the county could cut the mortgages to the current
value of the homes and resell the mortgages to a private investment
firm, which would allow homeowners to lower their monthly payments and
hang onto their property.
Although the county has a long way to go before it could put the policy
in place, the mere idea has already rankled the banking community,
whose leaders say it would set a dangerous precedent of allowing a
government entity to act as a lender and would discourage banks from
granting loans in the area.
A decade ago, Fontana and other cities here in the Inland Empire — the
vast suburban sprawl east of Los Angeles — were just beginning to boom,
with new subdivisions opening seemingly every weekend.
Now, San Bernardino County, the largest county in the country, has
cities with some of the nation’s highest foreclosure rates.
“Sooner or later,” said Mayor Acquanetta Warren of Fontana, who has
seen the value of her own home cut in half, “all these people who are
upside down on their homes are just going to leave the keys out on the
door and say forget it. This was supposed to be the promised land, and
now we have people waiting in some kind of hellish purgatory. The
people who were so eager to give us money before now won’t even talk to
The idea to use eminent domain to seize mortgages first came from a
group of venture capitalists in San Francisco, Mortgage Resolution
Partners, who would collect a fee for each of the restructured loans.
The firm is also trying to persuade officials in Nevada and Florida to
try the idea. San Bernardino County officials were immediately
intrigued, given that roughly half the homes in the area are underwater
and the unemployment rate remains at nearly 12 percent. (Last week, the
City of San Bernardino voted to file for bankruptcy, saying it would
not be able to cover payroll costs through the summer.)
Officials in Suffolk County, N.Y., where about 10 percent of the homes
are valued at less than their loans, are also considering the mortgage
“Nobody else is addressing this adequately, and we’re still stuck,”
said Regina Calcaterra, the chief deputy county executive in Suffolk
County. “If Washington or the private sector was able to address this,
there wouldn’t be a need and we wouldn’t even have this conversation.”
Scott Larson, 42, moved to his current home in Upland, in the western
part of San Bernardino County, in 2003. A couple years later, when his
three-bedroom home was appraised at more than $500,000, he refinanced
to renovate his backyard. Now, he says, banks will not even consider
modifying his loan.
“I always look for other places to cut so I can do right and make the
loan payment, but the odds are really against me doing that for a long
time,” he said. “I’m willing to start over and take another 30-year
loan to stay here, but I don’t know who is looking out to let me do
San Bernardino County once relied on residents like Mr. Larson buying
small starter homes and moving into larger properties, a dream that now
seems quaint. But many community leaders here say the overall economy
will not improve without housing construction starting again.
“We have what we regard as a systemic problem, but it’s felt most
urgently at the local level,” said Steven M. Gluckstern, the chairman
of Mortgage Resolution Partners. “We have all these people who want to
be able to stay in their homes and keep that, but it is getting to be
impossible. Until you fix this problem, you can’t fix any other
As for the group’s eminent domain idea, “if it works, every mayor of
every city is going to want to do this,” Mr. Gluckstern said.
More than 20,000 homeowners in the county could ultimately be eligible
for the program, which would first focus on Fontana and Ontario, two of
the largest cities in the county. The county is just beginning to
consider how it could move forward with the proposal and officials say
they will consider alternatives, but many banking and mortgage groups
have already voiced skepticism or hostility about the plan.
Ken Bentsen, the executive vice president of the Securities Industry
and Financial Markets Association, said the idea would almost certainly
be challenged in court and would have a major impact on the local
“If the government has the ability to abrogate the contract at will and
at the expense of the bond holder, the investor is going to do one of
two things: require a tremendous premium for the risk they are
incurring, or just not invest at all,” Mr. Bentsen said. “It would be a
risk factor that would be impossible to underwrite.”
Under the current proposal, only homeowners who are current on their
payments would be eligible for the program, a policy some have
criticized because it does little to help the neediest people.
While Greg Devereaux, San Bernardino’s chief executive, has hardly been
surprised that so many banking and mortgage lenders are against the
plan, their level of opposition has angered him.
“There is no doubt that we have a major problem that we have to do
something about, or it will probably be a decade, if not two, for our
economy to recover,” he said. “It’s as if this can’t even be a
discussion. If they want to come and talk and propose other solutions,
great, but that’s not what is happening. Instead they are just trying
to kill it because they have nothing but their own interest in mind.”
Steve Manos, the president of Inland Valleys Association of Realtors,
said the housing market was already showing signs of improvement, with
fewer homes on the market and bidding wars breaking out among some
“We are seeing a recovery, but it’s a fragile recovery,” Mr. Manos
said. “This is the perfect example of something that could derail it
Mr. Devereaux said he hoped to have a decision by December about
whether the county will use eminent domain or some other strategy for
helping homeowners. For now, he laughs and dismisses the notion that
improvement is under way in the area.
“We’re seven years into things supposedly getting better and we have
thousands more foreclosures?” he asked, answering with a quick bit of
sarcasm. “My gosh, what an improvement.”
California’s last bankrupt city
By BEN BOYCHUK
Last Updated: 11:38 PM, June 27, 2012
Posted: 10:29 PM, June 27, 2012
Stockton, Calif., is bankrupt, but its troubles are no fluke.
In fact, California’s 13th-largest city — a former Gold Rush boomtown,
and home to one of the largest inland ports in the world — has been
broke for quite some time. The City Council just made it official this
How bad is it?
In the past three years, the city cut $90 million from its budget and
laid off a quarter of its cops and about a third of its firefighters.
Park upkeep and street sweeping went by the boards. Libraries slashed
hours. Every city worker took a pay cut.
And that wasn’t enough. Not even close.
Sure, the lousy economy didn’t help. When the housing bubble burst,
Stockton suffered more than most. Property- and sales-tax revenues
plummeted. The city has one of the highest foreclosure rates in a
But the big problem was the stupid decisions Stockton officials made
when the economy was flush. Like so many other near-sighted local
politicians, they assumed the good times would never end.
City Manager Bob Deis, who took his job in 2010 when the housing market
was still in freefall, summed up the situation as well as any
bureaucrat could: “Stockton overcommitted to long-term obligations that
even under the best of times the city could not afford.”
And how. Today, Stockton strains under $700 million in bond debt the
city borrowed to finance a sports arena, a fancy new waterfront — and
to shore up pensions and benefits for retired city workers.
When Deis came on the scene, he dug into the city’s ledgers and could
hardly believe what he found. Comparing Stockton’s finances to “a Ponzi
scheme,” he discovered, among other things, that employees and their
spouses receive free health care for life — a benefit some got after
only a month on the job.
Truth is, the bankruptcy bomb should’ve gone off months ago. But under
a state law that cunning legislators passed last year at the behest of
their public-employee-union benefactors, Stockton had to “mediate” with
its creditors for 90 days before seeking Chapter 9 bankruptcy
Those negotiations were held behind closed doors, but the outcome is
plain as day: Stockton’s public employees refused to renegotiate the
generous benefits that drove the city over a fiscal cliff.
For the moment, Stockton holds the record as the largest US city to go
bust. That dishonor previously belonged to Vallejo, Calif., a former
Navy town up the road from Oakland.
Vallejo declared bankruptcy in 2008. The story there was much the same
as Stockton’s now: mass layoffs affecting all but a few city employees.
Police and fire protection slashed. Closed libraries and parks.
One thing Vallejo didn’t do was touch retirement benefits. Officials
said they just couldn’t afford to fight the unions in court.
Vallejo emerged from bankruptcy on somewhat surer fiscal footing last
year. But as long as the growth of retirement benefit costs remains
unchecked, no city is safe.
Stockton is in immensely worse shape today than Vallejo was four years
ago. Yet its problems pale in comparison to the crisis looming in Los
LA Mayor Antonio Villaraigosa famously vowed the city wouldn’t go
bankrupt “on my watch.” But his term happens to end next year, right
about the time the city’s budget deficit is expected to jump from $222
million to $427 million — driven almost entirely by labor costs.
Delaying the inevitable didn’t help the people of Vallejo or Stockton,
and it won’t save Los Angeles and other cities from a similar fate.
Stockton is a sensation and a cautionary tale — but the worst is yet to
Fails, Pushing Stockton Toward Bankruptcy
By MALIA WOLLAN, NYTIMES
STOCKTON, Calif. — The long, slow slide into financial collapse is
nearly complete for this Central Valley community.
On Tuesday night, City Council members approved a new budget that will
guide city operations during bankruptcy and amend a $26 million budget
shortfall. With that vote out of the way, city officials could file for
Chapter 9 bankruptcy as early as Wednesday, which would make Stockton
the country’s largest city to go bankrupt. The new budget will
debt payments, cut employee pay and reduce retiree benefits, allowing
this city of about 292,000 residents to continue providing essential
services through the bankruptcy process.
“This is not where any of us wanted to be,” Bob Deis, the city manager,
said in a statement. “But absent restructuring agreements with our
creditors, any other options would decimate the city.”
A year after nearby Vallejo, Calif., filed bankruptcy in 2008, state
lawmakers passed AB 506, a bill requiring cities to hire a third-party
mediator to negotiate with creditors before filing for bankruptcy.
Stockton officials had hoped to avoid bankruptcy when the city became
the first to enter into the new state-required mediation in
on Monday night, after 90 days of mediation, the city and its 18
creditors failed to meet a midnight deadline for a deal.
“Bankruptcy is a terrible option until it’s the only option,” Marc
Levinson, a lawyer representing the city, told the council. During
Tuesday’s meeting, dozens of emotional residents and city retirees
begged officials to avoid bankruptcy and preserve benefits.
The State Constitution required that the city address its $26 million
general fund deficit, of a total budget of $521 million, to meet a July
1 deadline for cities to adopt balanced budgets. The city could
continue informal negotiations with creditors with the new budget, but
a bankruptcy filing appeared imminent. Bankruptcy experts and
officials at other fiscally wounded cities are keeping close tabs on
Stockton as it unravels.
“Everyone is watching,” said Karol K. Denniston, a partner at the law
firm Schiff Hardin who helped draft the AB 506 legislation. “It’s in
the interest of every teetering city to make its bankruptcy process as
short and cost effective as possible.”
Despite their failure to reach an agreement, three months of
negotiation between the city and its creditors could make the
bankruptcy process more efficient by shortening what can otherwise be a
long and costly period in court, Ms. Denniston said. Protracted
bankruptcy proceedings — like those in Vallejo — can push residents to
leave, further eroding a city’s tax base. Conventional wisdom has
held that large cities do not use bankruptcy court to restructure, said
David Skeel, a law professor at the University of Pennsylvania.
“To me Stockton confirms that Chapter 9 bankruptcy is not just for
small municipalities,” said Professor Skeel. “Here’s a substantial city
going into bankruptcy at a point in time when there are dozens and
dozens of cities across the country in comparable states of financial
Still, such municipal bankruptcies are rare. Stockton’s road from
boomtown to insolvency has been a torturous one, riddled with missteps
and unfortunate timing. This city, some 80 miles east of San
Francisco, was not so long ago a rapidly expanding bedroom community
for commuters to the Bay Area. But in recent years, Stockton has been
crushed by falling housing prices, foreclosures, the mounting costs of
retiree pensions and hefty price tags for buildings paid for with
taxpayer-guaranteed bonds, including a hockey arena.
Since 2009, the city has cut some $90 million in spending and
eliminated 25 percent of its police officers, 30 percent of its fire
department and 40 percent of all other city employees. Earlier
year the city defaulted on several debt payments, and as a result Wells
Fargo repossessed a downtown building bought in 2007 for $40 million.
Officials had planned a new city hall there. The bank also repossessed
three city-owned parking garages.
“We have hit the wall; we are insolvent,” Mayor Ann Johnston said in a
statement issued in early June, after city officials authorized the
city manager to file for bankruptcy if mediation efforts failed, as
they now have.
“This is the action that we must take to keep the services that are
important for the safety and health of our citizens.”
facing higher $16 billion shortfall
By JUDY LIN
13 May 2012
SACRAMENTO, Calif. (AP) — California's budget deficit has swelled to a
projected $16 billion — much larger than had been predicted just months
ago — and will force severe cuts to schools and public safety if voters
fail to approve tax increases in November, Gov. Jerry Brown said
The Democratic governor said the shortfall grew from $9.2 billion in
January in part because tax collections have not come in as high as
expected and the economy isn't growing as fast as hoped for. The
deficit has also risen because lawsuits and federal requirements have
blocked billions of dollars in state cuts.
"This means we will have to go much farther and make cuts far greater
than I asked for at the beginning of the year," Brown said in an online
video. "But we can't fill this hole with cuts alone without doing
severe damage to our schools. That's why I'm bypassing the gridlock and
asking you, the people of California, to approve a plan that avoids
cuts to schools and public safety."
Brown did not release details of the newly calculated deficit Saturday,
but he is expected to lay out a revised spending plan Monday. The new
plan for the fiscal year that starts July 1 hinges in large part on
voters approving higher taxes.
The governor has said those tax increases are needed to help pull the
state out of a crippling decade shaped by the collapse of the housing
market and recession. Without them, he warned, public schools and
colleges, and public safety, will suffer deeper cuts.
"What I'm proposing is not a panacea, but it goes a long way toward
cleaning up the state's budget mess," Brown said.
Democrats, who control the Legislature, have resisted Brown's proposed
cuts so far this year. Republican lawmakers criticized the majority
party for building in overly optimistic tax revenues.
"Today's news underscores how we must rein in spending and let our
economy grow by leaving overburdened taxpayers alone," said Assembly
Republican leader Connie Conway in a statement.
The governor pursued a ballot initiative because Republican lawmakers
would not provide the votes needed to reach the two-thirds legislative
majority required to raise taxes.
Assembly Speaker John Perez, D-Los Angeles, acknowledged that lawmakers
have "limited and difficult choices left to solve the deficit." Senate
President Pro Tem Darrell Steinberg, D-Sacramento, said he wasn't
surprised by the deficit spike given that state tax revenue have fallen
$3.5 billion below projections in the current year.
"We will deal with it," Steinberg said Saturday. "And we know that more
cuts are inevitable but we will do our very, very best to save more
than we lose, especially for those in need."
Under Brown's tax plan, California would temporarily raise the state's
sales tax by a quarter-cent and increase the income tax on people who
make $250,000 or more. Brown is projecting his tax initiative would
raise as much as $9 billion, but a review by the nonpartisan analyst's
office estimates revenue of $6.8 billion in fiscal year 2012-13.
Supporters of the "Schools and Local Public Safety Protection Act of
2012" say the additional revenue would help maintain current funding
levels for public schools and colleges and pay for programs that
benefit seniors and low-income families. It also would provide local
governments with a constitutional guarantee of funding to comply with a
new state law that shifts lower-level offenders from state prisons to
A second tax hike headed for the November ballot is being promoted by
Los Angeles civil rights attorney Molly Munger, whose initiative would
raise income taxes on a sliding scale for nearly all wage-earners to
help fund schools.
Anti-tax groups and Republican lawmakers say both tax increases will
hurt California's economic recovery. State GOP Chairman Tom Del Beccaro
has embarked on a statewide campaign to discuss alternatives to Brown's
The governor is expected to propose a contingency plan with a list of
unpopular cuts that would kick in automatically if voters reject tax
hikes this fall. In January, he said they would result in a K-12 school
year shortened by up to three weeks, higher college tuition fees and
reduced funding for courts.
Buffett cancelled municipal
debt bet 5
years early: WSJ
20 August 2012
(Reuters) - Berkshire Hathaway Inc terminated a large wager on the
municipal-bond market five years early, the Wall Street Journal quoted
a person familiar with the transaction as saying.
In a quarterly regulatory disclosure filed this month, the Warren
Buffett-owned company terminated credit-default swaps insuring $8.25
billion of municipal debt. The paper said the early termination
is deepening questions among some
investors about the risks of buying debt issued by cities, states and
other public entities. The WSJ quoted the source as saying that
Buffett's bet that more than a
dozen U.S. states would keep paying their bills on time had been made
before the financial crisis.
The insurance-like contracts, which required Berkshire to pay in the
event of bond defaults, were bought by Lehman Brothers Holdings Inc in
2007, more than a year before the firm filed for bankruptcy, the WSJ
quoted the source as saying.
Buffett declined to comment on the details of the termination with the
Lehman Brothers estate, the paper added. It is not clear if the move
would leave the company with a profit or loss on the wager.
Berkshire was not immediately available for comment outside regular
Moody's downgrades $64 billion of U.S. muni debt
By Joan Gralla and Michael Connor
Fri, Jun 22, 2012
NEW YORK/MIAMI (Reuters) - Moody's Investors Service on Friday cut
ratings on $64 billion (41.06 billion pounds) of municipal bonds,
including debt owed by 1,675 local and state governments, because the
obligations rely on 15 global banks the Wall Street credit agency sees
as less steady.
Moody's on Thursday downgraded big banks such as Citigroup that
provided "letters of credit, standby bond purchase agreements, and
other liquidity facilities" backing $45 billion of tax-free debt.
Separately, Moody's said it was also reducing ratings on $19 billion of
pre-paid natural gas bonds issued by 24 utilities in Tennessee,
Kentucky, Texas and elsewhere because the downgraded banks support
certain payment obligations on the bonds.
Moody's cut the credit ratings of 15 of the world's leading banks by
one to three notches to reflect rising risks of losses they face in
volatile capital markets. Such ratings cuts typically hurt prices
outstanding bonds and raise interest rate costs for issuers, but they
had little effect on Friday on muni bond prices.
The lion's share of the state and local government debt downgrades -
1,163 - hit obligations that were rated solely on the support provided
by the downgraded banks. The short-term ratings of 152 U.S.
obligations that were rated based on standby bond purchase agreements
and other third party supports also were cut. Also downgraded
short-term ratings of 137 series of tender option bonds that relied on
third party facilities. Tender option bonds typically have floating
rates and carry a promise that the holder can sell the security at
The long-term ratings of 40 series of tender option bonds were cut if
their underlying asset was a custodial receipt whose rating depends on
support from one of the 15 banks. Some 223 public finance sector
obligations supported by letters of credit were downgraded because
their long-term ratings were based on a joint default analysis, Moody's
The agency said the downgrades of the two dozen issues of gas
prepayment bonds, a form of debt public utilities use to lock in
discounted supplies of fuel, were also knock-on actions from Thursday's
Citigroup, Goldman Sachs Group, Inc, Credit Agricole Corporate &
Investment Bank, JPMorgan Chase, Morgan Stanley, Royal Bank of Canada
and Societe Generale were among the banks downgraded, Moody's
addition, Moody's said it expected the bank downgrades to have
relatively little effect on long-term bond ratings of variable-rate
securities issued by U.S. cities, states and counties. About 500
municipal issuers, including about 250 local governments, have
outstanding variable-rate demand bonds that are supported by letters of
credit or standby bond purchase agreements with banks, but the ratings
of fewer than 5 percent may be affected, Moody's said in a statement.
"Those ratings will be placed under review for possible downgrade over
the next few weeks. Moody's does not expect to place any state
government ratings under review," the rating agency said.
to the Bottom
December 5, 2012
Competition among states and cities
to lure businesses in hopes of creating jobs is not new, but it has
become more fierce in recent years. An investigation by The Times found
that state and local governments are giving out $80 billion a year in
tax breaks and other subsidies in a foolhardy, shortsighted race to
attract companies. That money could go a long way to improving
education, transportation and other public services that would have a
far better shot at promoting real economic growth.
Instead, with these giveaways,
politicians and officials are trying to pick winners and losers, almost
exclusively to the benefit of big corporations (aided by highly paid
lobbyists) at the expense of small businesses. Though they promise that
the subsidies are smart investments, far too often the jobs either
don’t materialize or are short-lived, leaving the communities no better
The three-part series by Louise
Story described how in places like Texas and Ohio, state and local
governments have lavished millions of dollars in tax breaks on
corporate giants like Samsung and the Big Three automakers — even as
they faced budget deficits and were forced to cut spending on critical
services. The tax revenues forgone in this giveaway frenzy should
concern Congress deeply. After all, federal funds account for one-fifth
of state and local budgets.
In one particularly egregious
example in Pontiac, Mich., the State of Michigan gave $14 million in
tax credits and a state pension fund guaranteed $18 million in bonds to
a movie studio that created just 12 permanent jobs. In Texas,
Amazon.com, the online retailer, received tax abatements, sales tax
exemptions and other benefits totaling $277 million to open a warehouse
that promises to employ 2,500 people. Those benefits were granted after
the retailer closed another warehouse because of a dispute with the
government involving sales taxes.
Many governments don’t know the full
value of the subsidies they hand out in the form of tax refunds,
rebates, loans, grants and more. And they don’t know if the jobs
created would have been created anyway. The fact is, numerous studies
show that such incentives result in only a small increase in jobs and
that any gains usually come at the expense of other cities and states.
Local governments would be much
better off investing tax dollars in education and public works that
would deliver long-term benefits to both businesses and workers.
California, for instance, is among the least generous of the larger
states in doling out tax breaks. It gave out just $112 per capita
compared with $759 in Texas, $672 in Michigan, and $210 in New York.
Its experience leaves no doubt that investments made in public
institutions like the University of California system can remain
critically important to economic growth decades later.
The senseless race to give away
billions in subsidies is, of course, hard to stop when elected leaders
think a pledge of potential jobs might help in their next election. But
even when attracting businesses is a legitimate goal, it has to be done
in ways that are fair and transparent.
The trouble with targeted incentives
is that they are little more than transfers of wealth to a handful of
powerful corporations from all other taxpayers, including other
businesses. If the problem is excessive tax burdens on businesses in
general, then the solution is broad tax reform that also benefits small
business owners, who are more likely to stick around if the regional
economy weakens and who are unlikely to hopscotch around the country in
search of a bigger tax break.
Original story here