COMING ATTRACTIONS:  "...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, hereWhat level of government can go bankrupt?  ANSWER.

150th anniversary of the war between the states this year...north in blue, south in if discussion of both. 

In 2009, we knew all about this crisis - read about it here.  And Dionne Warwick asks "Do you know the way to San Jose?"



CT 169 towns, plus special districts plus regional entities.
OTHER - Editorial, etc. PLUS N.Y.C. columnist, LWVCT speaker on outsourcing; urban renewal in the 21st century American city.

FORECLOSURE STORY USA 2014:  "Realty Track" - or reality check?

How, if at all, does 2012 CT beach pollution (USA map above) relate to public finance?  How does bankruptcy relate to desegregation, if at all? 
We're number two underwater.



In the fine old tradition of Urban Renewal - never thinking where those living in the demolished buildings will go...or did they?  Read the whole Plan here.

Blighted Cities Prefer Razing to Rebuilding
November 12, 2013

BALTIMORE — Shivihah Smith’s East Baltimore neighborhood, where he lives with his mother and grandmother, is disappearing. The block one over is gone. A dozen rowhouses on an adjacent block were removed one afternoon last year. And on the corner a few weeks ago, a pair of houses that were damaged by fire collapsed. The city bulldozed those and two others, leaving scavengers to pick through the debris for bits of metal and copper wire.

“The city doesn’t want these old houses,” lamented Mr. Smith, 36.

For the Smiths, the bulldozing of city blocks is a source of anguish. But for Baltimore, as for a number of American cities in the Northeast and Midwest that have lost big chunks of their population, it is increasingly regarded as a path to salvation. Because despite the well-publicized embrace by young professionals of once-struggling city centers in New York, Seattle and Los Angeles, for many cities urban planning has often become a form of creative destruction.

“It is not the house itself that has value, it is the land the house stands on,” said Sandra Pianalto, the president and chief executive of the Federal Reserve Bank of Cleveland. “This led us to the counterintuitive concept that the best policy to stabilize neighborhoods may not always be rehabilitation. It may be demolition.”

Large-scale destruction is well known in Detroit, but it is also underway in Baltimore, Philadelphia, Cleveland, Cincinnati, Buffalo and others at a total cost of more than $250 million. Officials are tearing down tens of thousands of vacant buildings, many habitable, as they seek to stimulate economic growth, reduce crime and blight, and increase environmental sustainability.

A recent Brookings Institution study found that from 2000 to 2010 the number of vacant housing units nationally had increased by 4.5 million, or 44 percent. And a report by the University of California, Berkeley, determined that over the past 15 years, 130 cities, most with relatively small populations, have dissolved themselves, more than half the total ever recorded in the United States.

The continuing struggles of former manufacturing centers have fundamentally altered urban planning, traditionally a discipline based on growth and expansion.

Today, it is also about disinvestment patterns to help determine which depopulated neighborhoods are worth saving; what blocks should be torn down and rebuilt; and based on economic activity, transportation options, infrastructure and population density, where people might best be relocated. Some even focus on returning abandoned urban areas into forests and meadows.

“It’s like a whole new field,” said Margaret Dewar, a professor of urban and regional planning at the University of Michigan, who helped plan for a land bank in Detroit to oversee that city’s vacant properties...story in full here.

A Studebaker moment - 1954 Hurricane Carol in New Hampshire...

Stepping Up With a Plan to Save American Cities

November 11, 2013, 1:21 pm

FOR decades, cities and states that needed more cash for their workers’ pensions have turned to local taxpayers, the municipal bond market or even the workers themselves. Now those options appear to be drying up.

That leaves mayors and governors with a troublesome issue. The law says they have to keep their pension plans intact, but the cost is growing every year, and they are running out of ways to raise the money. Taxpayers fight any kind of increase now, and the bond markets have grown chilly since Detroit declared bankruptcy.

One municipal bankruptcy expert has been devising a structure that may help cities find their way out of the jam. James E. Spiotto, a partner with Chapman & Cutler in Chicago, has loosely modeled his idea on the special-purpose entities that helped tide New York City through its fiscal crisis of 1975. He calls his version the Public Pension Funding Authority, and he has been pitching it to federal regulators, credit analysts, bond dealers, academics and lawmakers — anyone worried that without some kind of fix, more cities will go the way of Detroit.

“Which is the death spiral,” Mr. Spiotto said, citing the self-feeding cycle of unbalanced budgets, cuts in policing and other essential services, tax increases and an exodus of frustrated homeowners and businesses. Each round of departures leaves a smaller and poorer population behind, struggling to cover the city’s mounting costs. At the end of the spiral is a bleak scene like the one playing out in Detroit, where the city is destitute but its workers and retirees still have a constitutional right to be paid in full for work performed years ago.

“You can’t just say, ‘Workers, you lose,’ or, ‘Citizens, you lose,’ ” Mr. Spiotto said. “The citizens and the workers and the retirees are all in this together.”

Ideally, the Public Pension Funding Authority would halt death spirals and save distressed American cities. It would not be able to make money appear out of nowhere, of course, but it would offer independent, quasi-judicial powers to sort out the facts of each case, then help severely troubled communities restructure their debts.

The authority could determine, for example, whether a city had exhausted its ability to raise taxes, or whether ballooning pension obligations were preventing a city from providing essential services. It could decide whether bigger contributions from a city or its workers could save a tottering pension fund, or whether the plan was simply unsustainable. The authority’s decisions would be binding.

Mr. Spiotto said it would be possible, in theory, to establish such an authority at the federal level. But he thought it would be better to have the states create their own versions through legislation. That’s how New York City wound up in the hands of the Municipal Assistance Corporation and the Emergency Financial Control Board in 1975. Once an authority was up and running, Mr. Spiotto said, distressed cities could approach it for help voluntarily. But it would also have powers to step in when a city — or a town, county, school district or other local government — reached predetermined thresholds. It could intervene if a municipal pension fund fell below a certain level of funding, for example, or if a local government was so overwhelmed that it could no longer provide for the safety and well-being of its people.

Some policy makers say the idea has promise, but the unions that represent public workers are extremely skeptical, seeing it as a way around laws that forbid any reduction of public pensions.

Daniel Biss, a state senator in Illinois who has been serving on a joint House-Senate pension committee in Springfield, said he was “certainly intrigued” by the idea, but added that no one had drafted or introduced a bill yet. “There’s a genuine dispute about how bad the problem is,” said Mr. Biss, a Democrat from Evanston who taught mathematics at the University of Chicago before his election to the Senate. He said he thought that the state’s pension morass was “horrific” but that others disagreed with him, citing rosier projections.

To avoid getting mired in the endless, polarizing debate about pension numbers, Mr. Spiotto would have his authority do something simpler: determine how much of a benefit a city could afford in the current year.

In many places, the money available for pensions after budgeting for essential services, maintenance and debt service would be less than the yearly cost of the existing pension plan. In such cases, the authority would work with local officials on redesigning the plan within the city’s means. It would be bitter medicine, to be sure.

“When you raise this with municipal leaders, their response is, ‘Hold on! What happened to democracy?’ ” Mr. Biss said.

In Illinois, and many other states, he said, the power to fix public pensions rested solely with the state legislature. Mayors, like Rahm Emanuel of Chicago, can talk themselves blue about pension woes but accomplish nothing; reform can come only from the state.

Mr. Biss said that when he discussed the idea of an authority with local leaders, they thought it sounded like one more way for the state to limit their powers. “They’d like a free hand to deal with it,” he said. “They’d like to have a minimum external mandate, and a maximum of external support.”

Mr. Spiotto acknowledged that local officials were wary of the idea and labor leaders were opposed to it. “They think they can just raise taxes,” Mr. Spiotto said. “I understand where they’re coming from.”

He said that when a city had begun to decline, raising taxes locally could hasten the spiral, exposing retirees to even bigger potential losses. Halting the death spiral would be better for everyone.

If retirees had to give up part of their benefits, it would be with the guarantee that what was left was rock-solid — no more risk of a disorderly collapse later on. For active municipal workers, the authority would require any cuts to be distributed across the entire local work force, rather than imposing all the pain on the young, as is now the usual practice. That could reduce turnover and improve the level of public services.

And for residents, more money would be made available to repair crumbling streets, improve public schools and bolster police and fire services. Local taxpayers would be able to see where their tax money was going and, if they liked what they saw, lose interest in moving away. With luck, the local tax base would stop shrinking.

The authority would “hardwire” the funding of the new benefit plan, Mr. Spiotto said. It would have the power to intercept city tax money and make sure it was used to fund the benefits. Under certain circumstances, the authority might issue bonds to fund the plan, or it might transfer a city’s failing pension fund into a bigger, stronger state network. If necessary, the authority could even send a municipality into federal bankruptcy court, using its own findings of fact as the basis of a prepackaged debt-adjustment plan.

“People are looking at this,” Mr. Spiotto said. “It could work very well for Michigan, and for a number of states. You’ve got to have buy-in by the local municipalities.”

Getting buy-in is a slow process. It took a full decade to enact the federal law that requires companies to fund their pensions, starting in December 1963 with the closing of a Studebaker plant in South Bend, Ind. The car company’s pension plan was not funded and workers and retirees lost their benefits, delivering a serious blow to the company town and highlighting the need for reform. Early versions of the federal pension law covered state and city pensions, too, but those provisions were dropped amid opposition by governors citing sovereignty and separation-of-powers issues.

Detroit’s bankruptcy may revive interest, though. The city is calling for harsh losses for retirees and bondholders. If the court approves them, America may have another Studebaker moment, where the pain is so bad that others vow not to let it happen again.

“Presently, we are playing the game of blink,” Mr. Spiotto said. “Everyone believes that the other side should give in and blink.”

Worsening Debt Crisis Threatens Puerto Rico
October 7, 2013, 8:48 pm

While Detroit has preoccupied Americans with its record-breaking municipal bankruptcy, another public finance crisis on a potentially greater scale has been developing off most Americans’ radar screens, in Puerto Rico.

Puerto Rico has been effectively shut out of the bond market and is now financing its operations with bank credit and other short-term measures that are unsustainable in the long run. The biggest concern is that the territory, which has bonds that are widely held by mutual funds, will need some sort of federal lifeline, an action for which there is no precedent.

In a meeting with bond analysts in New York on Monday, the president of the Puerto Rican Senate, Eduardo Bhatia, said officials in the United States Treasury and White House had been analyzing the situation carefully, “wondering how they can help Puerto Rico send a very strong signal of stability right now.”

“We are waiting for some sort of an announcement from the Treasury and the White House,” he said without clarification. He also complained that analysts and investors did not appreciate the tough austerity measures that Puerto Rico pushed through in recent months.

Puerto Rico, with 3.7 million residents, has about $87 billion of debt, counting pensions, or $23,000 for every man woman and child. That compares with about $18 billion of debt for Detroit, with a little more than 700,000 people, or about $25,000 for every person in the city. Detroit and Puerto Rico have been rapidly losing population, leaving a smaller, and poorer, group behind to shoulder the burden.

Detroit, at least, was able to seek relief in bankruptcy court, but Puerto Rico is in a legal twilight zone. Territories, like states, have no ability to declare bankruptcy. Another territory, the Northern Mariana Islands, tried in 2012, but its case was rejected. Top Puerto Rican officials say that the territory is not bankrupt and is working through its problems responsibly. To show their good intent, the governor, Alejandro Garcia Padilla, and members of his government have been shuttling to New York and Washington in recent weeks, meeting with bankers, credit analysts, members of Congress and Treasury officials, providing details of the fiscal changes they have pushed through and discussing what else might be needed.

“These guys down in Puerto Rico, they’re determined to make this work,” said Alan Schankel, a managing director at Janney Capital Markets, who recently visited the island.

But the coming weeks will be critical, and how Puerto Rico comes through depends, to some extent, on factors beyond its control. If its financial problems worsen, it may need some form of sovereign debt relief for which there is no direct precedent — and that would probably be subject to approval by a Congress now paralyzed and focused on a fiscal situation closer to home.

“A lot of people believe that the Territorial Clause of the United States Constitution gives Congress the power to impose control,” said Robert Donahue, a managing director with Municipal Market Advisors, who has been discussing the situation with members of the President’s Task Force on Puerto Rico, a group representing 16 cabinet-level agencies and the White House.

One idea being considered is that Congress might establish a financial control board, perhaps like the one that helped guide the District of Columbia through a turbulent period from 1995 to 2001. One of that board’s first steps was to appoint a financial official with power to override the mayor and City Council.

But with the federal government shut down, Mr. Donahue said, “there’s really no path.”

Despite its uncanny similarities to Detroit, Puerto Rico got into trouble in a sharply different way. Detroit owes the bulk of its debt to retired city workers, in the form of unfunded pensions and promises to provide health care. Puerto Rico has also made big pension promises, but the bulk of its debt is owed to investors that hold its bonds.

Until a few months ago, Puerto Rico was the belle of the bond markets. As a territory, it can sell bonds that pay tax-exempt interest in all 50 states, a rare and desirable trait. Puerto Rico’s bonds also pay higher interest than many others because its credit rating is relatively low — but not low enough to scare off investors. Some of its bonds were insured against default; others have special legal structures that make them seem bulletproof. The territory’s constitution explicitly states that general bond obligations have first call on all available resources.

Because Puerto Rico’s bonds have these unusual advantages, investors snapped them up year after year, even as the territory’s overall debt load started to snowball. In each of the last six years, Puerto Rico sold hundreds of millions of dollars of new bonds just to meet payments on its older, outstanding bonds — a red flag. It also sold $2.5 billion worth of bonds to raise cash for its troubled pension system — a risky practice — and it sold still more long-term bonds to cover its yearly budget deficits.

Mutual funds in particular were eager buyers; by adding Puerto Rican debt to an otherwise ho-hum portfolio, they could lift the overall yield without seeming to add much risk.

That cycle — a bountiful supply of debt feeding a seemingly insatiable demand — sputtered to a halt this summer, leaving Puerto Rico with more debt than it can easily pay. Its government must still borrow to finance its operations. Now it will cost much more to do so.

The Federal Reserve’s signals earlier this year that it would ease its stimulus measures spooked the bond markets. Most states and cities have kept soldiering along, but the shocks left Puerto Rico effectively unable to borrow on the public markets.

In September, mutual funds and other institutions began to sell big blocks of its bonds, driving their prices down. That led to buying by hedge funds hoping to profit on a possible restructuring.

After the yields on Puerto Rico’s outstanding bonds rose higher even than Greece’s, José V. Pagán, the interim chief of the Puerto Rican Government Development Bank, announced that the territory would postpone most long-term borrowing for the rest of 2013. For now, he said, Puerto Rico would rely mainly on bank credit and private placements of short-term notes.

The three main ratings agencies have held Puerto Rico’s general-obligation debt one notch above junk, despite the deterioration of the last few weeks. After the spate of selling in September, yields on its debt now correspond to those of speculative bonds.

“We found the actions that the government took credible,” said Lisa Heller, a lead public-finance analyst at Moody’s Investors Service. She said she wanted to see how well the government’s reforms would take hold, given the difficulty of raising taxes and utility fees in a weak economy.

A one-notch downgrade would officially send Puerto Rico’s general debt into junk territory, with troubling consequences. Puerto Rico, like Detroit and numerous other localities, is party to financial contracts known as interest-rate swaps, which require it to post cash collateral if its credit falls below investment grade. In addition, mutual funds and other institutions might have to sell their Puerto Rican holdings if they lose their investment-grade ratings. That could set off another damaging run.

Puerto Rican officials argue that the markets do not appreciate the tough fiscal changes that Governor Garcia Padilla has made since taking office in January. He has frozen the biggest of the island’s public pension funds, raised utility rates sharply, imposed new taxes and stepped up enforcement of existing taxes.

“I do not know a single state government, a single municipal government, that within six months of being elected undertook this amount of reforms,” Mr. Bhatia told the analysts’ group on Monday.

“I thought that in September I was going to come to New York and open a glass of Champagne with investors,” he said, but instead, the analysts seemed to ignore all the government had done and demanded more.

Analysts at the meeting told Mr. Bhatia they had been following Puerto Rico’s economy for many years and had heard previous administrations talk of great reforms, only to see deficit spending and borrowing continue.

“This time is different because we have approved the legislation that you have asked us to approve,” Mr. Bhatia said, citing the pension overhaul and the sale of the island’s biggest airport to private investors. The changes were “unparalleled to any reforms that I have seen in Puerto Rico over the last 30 years,” he said, “and we are paying a very serious political price for it in Puerto Rico.”

“I’ll be blunt — we are frustrated,” he said. “We are slowly, slowly seeing the initial results, the short-term results of our reforms. We need some breathing room. Puerto Rico is certainly doing its part.”

Does previous experience in Wisconsin appear anything like this?

Judge Rejects Overhaul of Illinois’s Beleaguered State Pension System

NOV. 21, 2014

An Illinois judge on Friday rejected the state’s effort to bolster its shaky public pension system, giving public workers a reason to rejoice that could prove short-lived.

Judge John W. Belz of the Sangamon County Circuit Court in Springfield found that the pension overhaul enacted in December 2013, which reduced some benefits, violated a clause in the State Constitution that makes pensions “an enforceable contractual relationship” that cannot be impaired.

The state’s attorney general, Lisa Madigan, said she would appeal the decision to the State Supreme Court.

The decision opens a new and unpredictable chapter in the state’s continuing pension problem. Governor-elect Bruce Rauner is a Republican who favors a so-called defined-contribution system, which would leave it up to public workers to invest their own retirement money in vehicles like 401(k) plans. That would insulate the state budget and relieve taxpayers from having to bear large investment risks in the existing defined-benefit system, which guarantees retired workers a set amount. The unions representing public workers would almost certainly fight such a change. But by rejecting the overhaul led by the departing governor, Pat Quinn, Judge Belz may have cleared the way for Mr. Rauner to seek a pension remedy more to his liking.
Gov. Pat Quinn of Illinois signing the law revamping the state pension system in 2013. A judge on Friday ruled that it violated the State Constitution. Credit M. Spencer Green/Associated Press

“Today’s ruling is the first step in a process that should ultimately be decided by the Illinois Supreme Court,” Mr. Rauner said in a statement on Friday. “It is my hope that the court will take up the case and rule as soon as possible. I look forward to working with the Legislature to craft and implement effective, bipartisan pension reform...”  For story in full:

Illinois Legislature Approves Retiree Benefit Cuts in Troubled Pension System
December 3, 2013

SPRINGFIELD, Ill. — The Illinois legislature on Tuesday ended a day of emotional debate and fierce back-room arm-twisting by passing a deal to shore up the state’s debt-engulfed pension system by trimming retiree benefits and increasing state contributions.

With one of the nation’s worst-financed state employee pension systems — some $100 billion in arrears — Illinois has been the focus of intense attention across the country as states and municipalities struggle to come to grips with their own public pension problems. The compromise reached in Illinois, a staunchly blue state with a strong labor movement that had successfully resisted previous efforts to trim pensions, could provide a template for agreements elsewhere.

The top leaders of both legislative houses, Democrats and Republicans, had cobbled together the bill and pushed strenuously for its passage, supported by the state Chamber of Commerce and the Illinois Farm Bureau. Union leaders and some Democratic lawmakers opposed it, just as strenuously, arguing that the bill fell too harshly on state workers who had paid into their pension plans over the years with the understanding that the benefits would be there when they retired. Some Republicans also opposed the bill, saying it did not trim enough to solve the state’s pension troubles.

“Today, we have won,” Gov. Pat Quinn, who made overhauling the pension system a focus of his administration, said in a statement after the vote. “This landmark legislation is a bipartisan solution that squarely addresses the most difficult fiscal issue Illinois has ever confronted.” He is expected to sign the legislation on Wednesday.

We Are One Illinois, a coalition of labor unions that opposed the bill, issued a very different assessment. “This is no victory for Illinois,” it said in a statement, “but a dark day for its citizens and public servants.”

The battle now turns to the courts, where union leaders have promised to take the legislation. Some opponents have asserted that it violates the State Constitution by illegally lowering pension benefits.

The plan’s architects said it will generate $90 billion to $100 billion in savings by curtailing cost-of-living increases for retirees, offering an optional 401(k) plan for those willing to leave the pension system, capping the salary level used to calculate pension benefits and raising the retirement age for younger workers, in some cases by five years. In exchange, workers were to see their pension contributions drop by 1 percent. The measure also calls for the state to increase state payments into the system by $60 billion to $70 billion.

The legislature opened late Tuesday morning, and almost immediately recessed so both parties could go into closed-door caucus and leaders could count votes. The fruit of those efforts became clear through the afternoon, as the measure passed by 30 to 24 in the Senate, with three members voting “present,” and in the House by 62 to 53, with one voting “present.”

In both chambers, the debate was fiercely emotional.

“It’s difficult work we have to do and a difficult vote we have to take,” said State Senator Kwame Raoul, a Chicago Democrat who was a co-chairman of the conference committee that passed the legislation. “We cannot continue to be the embarrassment of the nation.”

There was no cheering or celebration when the bill passed in the Senate.

“I don’t take any joy in this action today,” said Representative Elaine Nekritz, a supporter of the legislation. “But it is the responsible thing to provide for a pension system that gives workers retirement security without bankrupting our state.”

Opponents were even more emphatic.

“This is more than a vote, this is defining the future of American workers,” said Senator William Delgado, a Democrat. “This is morally corrupt. We are robbing the benefits of these hard-working people.”

The break in the negotiations came last week when the Democratic and Republican leaders in the legislature ended months of wrangling and agreed on a plan that they said would save $160 billion and erase the state’s pension debt by 2044. It was the first time that top leaders from both parties had been able to reach a deal.

Negotiations had been particularly difficult in a state with a strong labor tradition. And Mr. Quinn, a Democrat, was also under pressure put the matter to rest before next year’s election.

The vote on Tuesday came one day after the deadline for candidates to file to run for state office in next year’s primary, so legislators could know whether they faced a primary opponent. Democrats hold a solid majority in the State Senate.

Many states have already voted to trim pension payments and make other adjustments to address skyrocketing retirement costs, but Illinois had thus far avoided doing so, with unions arguing that members should not be punished for mismanagement of the fund. Meanwhile, its pension mess got steadily worse, helping give Illinois the lowest credit rating of any state.

Opposition to the plan rose swiftly, particularly from union leaders who found it too draconian. But two of the governor’s Republican challengers also denounced the deal, as too lenient. The state Chamber of Commerce also said it preferred even stronger measures to trim back state pensions.

“The truth is that the savings in this bill are both insufficient and will make true, comprehensive reform more difficult,” said one challenger, Bruce Rauner, a wealthy business executive. Another challenger, the state treasurer, Dan Rutherford, said Monday that he also opposed the bill and that he did not believe it would survive a court challenge.

Facing them in next year’s Republican primary will be State Senator Bill Brady, who supported the bill, and State Senator Kirk Dillard, who said that he would oppose the legislation.

Mayor Rahm Emanuel of Chicago, whose city has retirement issues of its own — payments to the local pension fund are expected to more than double to almost $1.1 billion starting in 2015 — said he hoped the compromise would provide a template for Chicago, as well. In a statement on Tuesday, Mr. Emanuel said “the work is far from finished.”

“The pension crisis is not truly solved until relief is brought to Chicago and all of the other local governments across our state that are standing on the brink of a fiscal cliff because of our pension liabilities,” he said.

Steven Yaccino contributed reporting from Chicago.

Illinois Gives Plan Details for Bailout of Pensions
November 29, 2013

CHICAGO — Seeking to repair one of the nation’s worst-financed public pension systems, legislative leaders in Illinois on Friday began urgently trying to sell a rescue plan that cuts cost-of-living increases for retirees, raises the age of retirement for some employees, and sets a cap on pensions for those with the highest salaries.

The details of the proposed deal to save $160 billion over 30 years were handed out to rank-and-file lawmakers as the state’s leaders sought to solve the state’s pension crisis and move beyond many months of contentious debate. But the deal, announced without any detail on Wednesday, seemed certain to create a showdown in the capital, Springfield, next week.

Around the nation, officials wrestling with rising pension costs and underfinanced systems will be watching closely to see if Illinois, a populous state under the control of Democrats and the home of President Obama, is willing to challenge labor. For Democrats especially, given a long alliance with unions, the notion of slashing retirement benefits to bolster pension systems is politically difficult.

For many state and local governments, pension costs have become a central challenge with no easy political or legal answers. Detroit officials have cited $3.5 billion in unfunded pension costs among a list of debts that has left that city seeking federal bankruptcy protection. In San Jose, Calif., Chuck Reed, the Democratic mayor, championed efforts to pass a referendum to reduce pension benefits, though city workers say the move is illegal. The mayor now says he hopes to mount a statewide ballot initiative next year that would change the state Constitution to allow cities to cut pension benefits.

Under the plan being debated in Illinois, the state would be required to make additional payments into the pension system until it is fully funded, no later than the end of 2044. Workers who are 45 or younger would need to retire later — working as much as five years longer, depending on their age. And cost-of-living increases would apply only toward a portion of a person’s pension in many cases, under a formula based on how long they held their job.

While top legislative leaders of both parties here say they are working to win enough votes to pass an overhaul many fiscal experts call necessary, if painful, labor leaders denounced the plan as “catastrophic,” and written behind closed doors without public comment. They said they intended to lobby lawmakers against it at every opportunity before a vote during a special session scheduled for Tuesday.

“This is a grotesque taking of employees’ retirement security that seems both patently illegal and unfair,” said Daniel J. Montgomery, the president of the Illinois Federation of Teachers. “It’s a sharp jab in the eye — and the heart — of public employees. There’s a lot of anger out there.”

For years, the state has wrestled with an overwhelming pension problem. The system is underfunded by $100 billion, helping to make Illinois the state with the worst credit rating in the nation. That has meant, according to a recent report, that about 20 cents of every taxpayer dollar must be dedicated to pensions, money that could go to other state needs.

Still, answers have been hard to come by. Democratic leaders in the legislature have long disagreed about how to solve the problem without infuriating labor unions and how to navigate the Illinois Constitution, which prohibits pension benefits from being “diminished or impaired.”

Gov. Pat Quinn, a Democrat who is expected to have a difficult re-election challenge in 2014, has repeatedly put solving the pension crisis at the center of his agenda, and leaving the issue unaddressed would offer endless fodder for a strong cast of Republican candidates who want his job. Rahm Emanuel, the mayor of Chicago and a Democrat, has also vehemently urged lawmakers to change the state system, and, in so doing, to create a model for changes to the deeply underfinanced pension system in his own city, the state’s largest.

Still, in what was perhaps a sign of how politically delicate the issue is, the special session was called for Tuesday, a day after the filing deadline for any primary challenges. That means lawmakers will know which of them might be most vulnerable to an election fight if they approve the measure.

If some Democrats were worried that the proposed changes go too far in cutting benefits for unions, some Republicans were already suggesting that on the contrary, the plan does not go far enough or fully fund the pension system as quickly as they would like. But Christine Radogno, the state Senate’s Republican leader, said in an interview, “I really believe that it has become more of a political liability not to solve this than it is to solve it.”

Leaders on both sides of the aisle, she said, were busy counting votes and urging their rank-and-file members to support the plan.

“This does set the state on sound financial footing,” Ms. Radogno said. “It doesn’t erase the unfunded liability in one fell swoop, but it certainly puts us on a path to get it paid off in a minimum of 30 years.”

Among the provisions laid out Friday: most pension matters would no longer be part of collective bargaining; some workers could choose to switch to a defined benefit system, like a 401(k), rather than their pension; and workers would be asked to contribute 1 percent less of their salaries to retirement.

But union leaders, representing some of the thousands of state employees, teachers outside of Chicago and university workers whom the proposal would affect, said the changes to cost-of-living increases appear the most drastic. Current workers would be asked to skip some increases to their pensions — as many as five times over a decade for the youngest among them.

A new formula further limiting those increases would be devastating to many, the union leaders said. According to a coalition of unions, known as We Are One Illinois, the result would be a loss of thousands of dollars in pension payments, on average, to a retired teacher or nurse over the next five years.

“If we’re not successful in stopping this train, then our next step is litigation,” said Anders Lindall of the American Federation of State, County and Municipal Employees.

Illinois Lawmakers Say They Have Plan to Fix Underfunded Pension System
November 27, 2013

CHICAGO — Leaders of the Illinois legislature on Wednesday announced that they had found, at long last, a way to repair the state’s deeply troubled pension system, which has been deemed among the most underfunded public systems in the nation, has jeopardized the state’s financial stability and has become a political risk for state leaders.

The leaders declined to make details of their plan public as they privately sought support from rank-and-file lawmakers before a special session called for Tuesday. Gov. Pat Quinn, a Democrat, praised the leaders — a group of top Democrats and Republicans — for what he described as a “critical agreement.” He said, without providing more details, that the deal met a crucial standard of eliminating the unfunded debt and fully stabilizing the system, which has an estimated $100 billion in unfunded liability.

But the state has appeared on the eve of a solution to its pension crisis before, and some suggested on Wednesday that the votes were by no means assured. Labor union leaders said that they expected any proposal to include cuts to retirees’ pension benefits, and that they intended to vehemently object. Among the topics of discussion in earlier efforts to overhaul the pension system have been notions such as lowering cost-of-living allowances and increasing the age for retirement.

“Unions representing hundreds of thousands of public employees and retirees were not included in the leaders’ talks,” said a statement issued by a coalition of unions, known as We Are One Illinois. “If their new plan is in line with what’s been reported from earlier discussions, then it’s an unfair, unconstitutional scheme that undermines retirement security.”

For years, even as financial analysts warned that the situation in Illinois had reached crisis levels, lawmakers in this Democrat-controlled state have wrestled with a vexing issue: how to cut pension costs without alienating labor unions, a key bloc for political support, while also staying within the limits of the State Constitution, which bars pension benefits from being “diminished or impaired.” Many states have wrestled with mounting pension liabilities, but experts have pegged Illinois’s troubles as among the worst.

The issue has proved to be a deeply contentious one in Springfield, the capital, and even among the state’s top Democratic leaders. At one point, the Senate passed a plan. The House passed a different one. And Mr. Quinn, for his part, announced that he was stopping paychecks to lawmakers until they agreed on a plan, a move that caused the lawmakers to sue the governor.

With elections in 2014, the political stakes of repairing the pension system are rising. Mr. Quinn, who has wrestled with low approval ratings and is expected to face a serious Republican challenge in his re-election bid next year, has for several years held out a pension overhaul as an important goal. A year ago, he campaigned publicly for an overhaul with an orange cartoon snake he called Squeezy the Pension Python, though a legislative session at the time came and went with no solution.

The outcome in Springfield next week may have a wider effect. In places like Chicago, which has a pension system for City of Chicago retirees that is short by $19.5 billion, Mayor Rahm Emanuel made it clear he would be watching closely. The state controls the benefit and financing levels for Chicago’s pension system, and those advocating changes to the state’s pension system say they presume such changes would ultimately be replicated at the city level.

Mr. Emanuel has warned that a requirement that Chicago make far larger contributions to its system starting in 2015 threatens to leave the city hundreds of millions of dollars in the red.

“Fixing the state pension issue is critical for Chicago’s future, and I will be working actively on behalf of the legislation,” Mr. Emanuel said of the deal from legislative leaders. “Nevertheless, it is critical to remember that Illinois’s pension crisis will not truly be solved until relief is brought to Chicago and all of the other local governments across our state that now stand on the brink of a fiscal cliff because of our pension liabilities.”

NYTIMES article on Affordable Care Act 7-29-13
Retired and ill Chicago policeman is worried and asks why pension is different from health care benefits...

Chicago Pursues Deal to Change Pension Funding
December 4, 2013

SPRINGFIELD, Ill. — First came the State of Illinois, now comes the City of Chicago.

The hard-fought passage here Tuesday of a landmark bill trimming retirement benefits for state workers, aimed at fixing the vastly underfunded pension system, has become instantly relevant to the nation’s third-largest city, which has its own pension systems in various stages of financial collapse.  And if anything, the reckoning in Chicago is even nearer and more difficult than the one the state had faced, putting its Democratic mayor, Rahm Emanuel, in a difficult position under a tight deadline.

Under state law, the city must increase its contributions to its workers’ pension funds by $590 million in 2015, to a total annual contribution of $1.4 billion for current and future retirees. If no pension deal can be reached by November of next year, when the city will draft its next budget, the city will either have to raise taxes or cut services or some combination of both.

But city officials are hoping there is now momentum on their side to force a compromise solution. They come armed not only with Tuesday’s state vote but also with a federal judge’s ruling, also on Tuesday, to formally send Detroit into bankruptcy. Chicago is not facing bankruptcy, but the Detroit case produced a development being watched closely by cities and unions across the country: It explicitly permitted changes to public pension funds to help the city shed its debts and reorganize.

“Should Chicago fail to get pension relief soon, we will be faced with a 2015 budget that will either double city property taxes or eliminate the vital services that people rely on,” Mr. Emanuel said in an email on Wednesday. “To avoid that, we need a balanced approach. We need a plan that is fair to both workers and taxpayers, and gives them both the certainty and security they are looking for.”

Pension changes must be part of the calculus, he said.

“Without reform and revenue, we cannot make the critical investments in our future — and the future of our children and neighborhoods,” the mayor wrote. “Without reform and revenue, we cannot be the city that we want to be.”

One credit rating agency, Fitch Ratings, estimated that if there is no deal to reduce pension benefits for city workers and no cuts in services, the city will have to increase property taxes by 35 percent.  Actually, the situation is even worse, said Laurence Msall, president of the Civic Federation, a government watchdog group. The Fitch study looked only at police and firefighter pensions. If you include pensions for teachers, laborers and other municipal employees, property taxes in that situation would have to more than double, he said.

Angry union officials say they will file suit in state court in coming days to have the new state law overturned, a process that could last more than a year, and they argue that no further deals involving the more than 62,000 Chicago workers should be enacted until that litigation plays out. City officials say they cannot wait that long.

“There’s a definite hole in the budget, and neither taxpayers or employees should be expected to fill it alone,” said Kelley Quinn, a spokeswoman for the mayor. “The longer we delay, the worse the problem gets.”

Union leaders are not in such a rush.

“There certainly seems to be a will to address Chicago’s pensions, and obviously the mayor is pushing that vigorously,” said Daniel J. Montgomery, president of the Illinois Federation of Teachers. “But if they are looking to duplicate what they did to the state systems, they’ve got a few legal hurdles.”

For one thing, he said, the Illinois Constitution has “very clear and precise language” that guarantees that retirement benefits cannot be lowered. The ruling on Tuesday by the judge overseeing Detroit’s bankruptcy that federal law trumps the Michigan Constitution when it comes to lowering benefits does not apply in Illinois, Mr. Montgomery said.

“The City of Chicago is not bankrupt,” he said. “It is an entirely different situation.”

Michael K. Shields, president of Chicago’s Fraternal Order of Police, said there was no way to compare the new state bill with the situation faced by his members. “This pension bill is not one size fits all,” he said.

He pointed out that much of the benefit cuts in the state law came from changes in the way annual cost-of-living raises are dispensed. While state workers received annual raises of 3 percent that compounded every year, Chicago police officers and firefighters receive a flat 3 percent raise that does not compound. So more benefit cuts would have to be found elsewhere for those city workers.

Other union leaders were even more blunt.  Karen Lewis, president of the Chicago Teachers Union, which represents 30,000 people, called the whole process an unnecessary attempt on behalf of bankers and the financial community to force government workers out of defined benefit pension plans and into 401(k) plans.

“Our actual problem with this bill is that, once again, the people who are behind this thing are the very people who stand to gain from our members going into 401(k)’s,” Ms. Lewis said. “They will get those fees from administering the 401(k)’s. These people are hypocrites, and they should be ashamed to open their mouths.”

Relations between the mayor and the city’s teachers’ union had already been strained by a bitter strike last year that kept classes closed for eight days.

What has also attracted little attention, compared with the emotional public debate that surrounded passage of the state pensions law, is the deal reached in the legislature last month involving pensions for Chicago parks workers, whose unfunded pension liability grew from $77 million in 2003 to $550 million in 2012, a 615 percent increase. That deal may well provide a better template for a deal covering other city workers, city officials and others contend.

Under the deal, parks workers will no longer be able to retire at age 50 with 30 years of service. Instead, to get full benefits, they will have to work to age 58, except for those who will be 45 or older on Jan. 1, 2015, who will retain the old deal. Annual cost of living increases will also be limited, and the city will have to borrow money in 2015 by issuing one-time pension bonds.  If all goes well, the pension fund for parks workers will be 90 percent funded by 2049 and 100 percent by 2053.

City officials, meanwhile, insist that Chicago has no other choice but to come up with some sort of a solution by November, including some measure of pension cuts.  If so, then prepare for a fight, union officials say.

“We’re going to take to the airwaves and knock on doors, do whatever we have to do to let people know what’s happening here is an injustice,” said Thomas E. Ryan Jr., president of the Chicago Firefighters Union Local 2. “All we ask for when we no longer can do this job is to live with some kind of dignity. All we want is what was promised to us when we were hired. That’s it. We’re not asking for anything special.”

Steven Yaccino contributed reporting from Chicago.

Chicago Sees Pension Crisis Drawing Near
August 5, 2013

CHICAGO — Corporations are moving in, and housing prices are looking better across the region. There has been a slight uptick in population. But a crushing problem lurks beneath the signs of economic recovery in Chicago: one of the most poorly funded pension systems among the nation’s major cities. Its plight threatens to upend the finances of President Obama’s hometown, now run by his former chief of staff, Rahm Emanuel.

The pension fund for retired Chicago teachers stands at risk of collapse. The city’s four funds for other retired city workers are short by $19.5 billion. At least one of the funds is in peril of running out of money in less than a decade. And starting in 2015, the city will be required by the state to make far larger contributions to the funds, which could leave it hundreds of millions of dollars in the red — as much as it would cost to pay 4,300 police officers to patrol the streets for a year.

“This is kind of the dark cloud that’s coming ever closer,” Mr. Emanuel said in a recent interview, adding that he had no intention of raising his city’s property taxes by as much as 150 percent — the price tag, he says, that it might take to pay such bills. “That’s unacceptable.”

Illinois lawmakers, who make key financing and benefit choices for Chicago’s pension system, have wrestled for months without agreement on the politically troublesome matter of cutting the benefits of public sector retirees to save money. And last month, Moody’s Investors Service downgraded Chicago’s rating by an unexpected three notches as part of a broad reassessment of how pensions are affecting the financial strength of cities. That “super downgrade,” in the parlance of the bond market, left Chicago, the nation’s third-largest city, with a lower rating than 90 percent of Moody’s public finance ratings.

The financial woes of Detroit, which last month became the nation’s largest city to file for bankruptcy protection, dwarf the financial issues here. But as Detroit makes its way through the federal court system, other cities, including Chicago, are wrestling with overwhelming pension liabilities that threaten to undermine their capacity to provide municipal services and secure their futures.

The pension system in Charleston, W.Va., is so depleted that retirees are being paid straight from the city budget, something experts say is unsustainable. School districts across Pennsylvania, including Philadelphia’s, are stumbling as required contributions to a state-run teachers’ pension system rise and education money from the state drops. Even prosperous San Jose, Calif., has a pension problem, leading residents last year to vote to slow the rate at which city workers build up their benefits.

Among the nation’s five largest cities, Chicago has put aside the smallest portion of its looming pension obligations, according to a study issued this year by the Pew Charitable Trusts. Its plans were funded at 36 percent by the end of 2012, city documents say. Federal regulators would step in if a corporate pension fund sank to that level, but they have no authority over public pensions.

Chicago’s troubles, experts say, were years in the making. They are the result of city contributions under a state-authorized formula that failed to accumulate nearly enough money, two economic downturns in the 2000s that led to heavy investment losses, and an impasse in the State Capitol despite urgent calls to cut costs of the state’s own pension system. Illinois, which has the most underfunded state pension system in the nation, controls Chicago’s benefit and funding levels.

In Springfield, which, like Chicago, is controlled by Democrats, leaders have clashed over how best to cut costs of the plans — a notion that pits the lawmakers against labor unions, which have traditionally been allies.

By last week, top Democratic leaders in the legislature sued Gov. Pat Quinn, a fellow Democrat, after he announced he was withholding lawmakers’ paychecks until they come up with a plan to fix the state’s pension crisis. “That was a drastic step but obviously a necessary one,” Mr. Quinn said, describing the pension crisis as “the biggest, most important economic challenge we’ll ever have.”

State leaders have argued over the meaning of a state constitutional provision protecting government pensions in Illinois, and, in private conversations, over the potential political fallout from unions if benefits are cut. But Mr. Emanuel has openly called for increasing retirement ages, raising workers’ contributions toward their own pensions and temporarily freezing inflation adjustments now paid to retirees, all of which amount, union leaders say, to benefit cuts.

Public sector union leaders have been enraged by Mr. Emanuel, who was at the helm in 2012 during this city’s first teachers’ strike in 25 years and who has announced plans to phase out city health care coverage by 2017 for some city retirees. A change in pension benefits could affect more than 70,000 people who worked as Chicago police officers, teachers, firefighters and others, and who now receive average annual benefits ranging from about $34,000 for a general-services retiree to $78,000 for a former teacher with 30 years of service.

Some labor leaders say the city, not the state, is ultimately responsible, arguing that Chicago leaders long ago should have begun planning how to pay for pensions promised to its workers, regardless of insufficient state contribution formulas.

“The city failed to fund this all along, and now Mayor Emanuel has made it clear he is going after the hard-working men and women on the Chicago Police Department to make up for that,” said Michael K. Shields, president of the Fraternal Order of Police, who described Mr. Emanuel, simply, as anti-labor. “He’s trying to stiff us out of our pay.”

All sorts of political battles are emerging from the pension crisis. Candidates from both parties are seeking Mr. Quinn’s job next year, many of them citing the state’s inability to untangle the pension woes as reason to toss out those holding office. William M. Daley, another former chief of staff for President Obama and now a Democratic candidate for governor, said in an interview, “Anyone who thinks that this is just a problem on paper, those are the same people who looked at Detroit 20 years ago and said, ‘Don’t worry about it, we can handle it.’ ”

Mr. Emanuel has made clear his plans to seek a second term as mayor in 2015, and no major challenger has emerged so far. But the city’s looming pension debt — and the bills that will balloon by election year — may carry political fallout from unions as well as ordinary Chicagoans.

“Voters don’t care about pensions as an abstract issue,” said Dick Simpson, a former Chicago alderman and political scientist. “What they care about are the effects over the next two years of having to cut services or raise taxes to pay for this.”

Over all, experts say Chicago’s financial health has improved since the recession; city revenues are growing again and the population, which fell during the decade after 2000, has grown modestly since 2010. The city’s general budget fund faces a potential shortfall of $339 million in 2014, but city officials say that gap is lower than initially expected and manageable.

Circumstances grow far more complicated a year later, when state law will require Chicago to pay significantly more — $1 billion a year — into the city’s pension funds, to make up for years of underpayments. Even sooner, the Chicago Public Schools, which draws from the same tax base, is required to find an extra $338 million for its pension fund, and more every year after that.

Unless the legislature agrees to a complete overhaul of the pension plans, Mr. Emanuel said, he will not even entertain the notion of raising Chicagoans’ taxes.

“What the system needs is a hard, cold dose of honesty,” Mr. Emanuel said. “I understand the anger. I totally respect it. You have every right to be angry because there were contracts voted on.”

He added: “People agreed to something. But things get updated all the time.”

Monica Davey reported from Chicago, and Mary Williams Walsh from New York.

S.E.C. Accuses Illinois of Securities Fraud
March 11, 2013

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 Office above.

Postal Service revamps priority mail program

By SAM HANANEL Associated Press

Article published Aug 15, 2013

Washington - The financially struggling U.S. Postal Service is revamping its priority mail program to raise revenue and drive new growth in its package delivery business.

The agency is offering free online tracking for priority mail shipments, free insurance and date-specific delivery so customers know whether a package will arrive in one, two or three days.

Postal officials said Wednesday they expect the changes to generate more than $500 million in new annual revenue. The changes, including redesigned boxes and envelopes, are effective immediately.

The improvements come as the Postal Service is reeling from losses this year totaling $3.9 billion. The agency has been trying to restructure its retail, delivery and mail-processing operations, but says its financial woes will worsen without help from Congress.

The changes to priority mail will help the Postal Service better compete with rivals FedEx and UPS in the increasingly lucrative area of shipping products purchased from online retailers, said Nagisa Manabe, the service's chief marketing and sales officer.

"We're looking at strong underlying growth as Americans increasingly shop online," Manabe said in a conference call with reporters. She estimated the sharp pace of growth would continue "well past 2020."

Until now, priority mail has been advertised as a 2-3 day delivery service, with customers unable to know exactly how long it would take for a parcel to reach its destination. That left too much uncertainty, Manabe said, especially for small businesses. Now, they will know the specific date on which a package will be delivered.

Demand from small business customers also helped convince the agency to offer free insurance, $50 coverage for most priority mail shipments and $100 coverage for priority mail bulk orders shippers.

As part of the changes, the service has rebranded its overnight express mail service as priority mail express. That service will still offer $100 of free insurance.

The Postal Service is launching a major advertising campaign to make customers aware of the new changes, including television ads starting next week. Newly designed priority mail boxes and envelopes are already appearing at high-volume post offices, and customers should see them nationwide within the next couple of weeks, Manabe said.

The service has struggled for years with declining mail volume and a 2006 congressional requirement that it make $5.6 billion annual payment to cover expected health care costs for future retirees, something no federal agency does.

And they did!
Post Office Nears Historic Default on $5B Payment

July 30, 2012

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.


Part of an excellent series of "ruins" this reminds us of Gilbert & Bennet...

Pontiac’s Rough Road to Recovery Could Foreshadow Detroit’s Path
September 15, 2013

PONTIAC, Mich. — When Gov. Rick Snyder declared this city’s financial crisis resolved last month, officially ending the tenure of the state-appointed emergency managers who have controlled it for four years, the elected municipal leaders thought they were getting their jobs back. But they may not be in charge anytime soon.

The mayor has been demoted, reporting to a city administrator who is now calling the shots. The part-time City Council has the authority to do little more than approve the minutes from its weekly meetings. Public employees, totaling several hundred not long ago, are almost extinct, overtaken in City Hall by private contractors who deliver nearly all of Pontiac’s public services.

As speculation grows about what Detroit will look like when it is expected to emerge from bankruptcy proceedings and state control a year from now, Pontiac’s experience offers a glimpse at the myriad complications that accompany a transition back to elected leadership after an emergency manager departs.

“I think we all knew we were going to have some kind of training wheel when the state decided this emergency was over,” said Kermit Williams, a member of Pontiac’s City Council, which has battled the state’s intervention from the beginning. “What we didn’t know was that emergency management would still exist under another name.”

There are a dozen Michigan cities and school districts under some form of state-imposed oversight — with more under review — authorized by a law that gives emergency managers broad authority to set budgets, sell city assets and alter union contracts.

Few have showcased that power more than those in Pontiac. Police and fire departments were merged with those of municipalities nearby. Private companies now handle duties like trash pickup, ambulance services and street maintenance. The city payroll now consists of 20 people.

Selling assets and outsourcing public services, though upsetting to many here, have reduced Pontiac’s $87 million debt and eliminated a $9.2 million structural deficit, leading Mr. Snyder, a Republican, to declare an end to the financial emergency on Aug. 19. But an effort to protect those changes has raised questions about the best exit strategy for emergency managers and whether a lasting grip on local government is justifiable when the elected leaders fervently opposed the state’s plan from the start.

“They didn’t work with me or have anything to do with me for two years,” Louis H. Schimmel, the most recent emergency manager in Pontiac, said about the City Council. “They have no idea how to run this city.”

Mr. Schimmel, whose budget will be locked in for two years after his departure, is one of four members of a state advisory board that will monitor financial decisions made in Pontiac until the transition is complete.

“I just want to make sure my policies don’t go down the drain,” he said, adding that the handoff would take at least a couple of years. State officials will determine when the transition is over.

Though far smaller than Detroit, just 20 miles to the southeast, Pontiac followed a similar descent into fiscal disarray. Home of General Motors’ namesake brand, the city and its treasury were crippled by the downturn of the auto industry. It has lost more than one-quarter of its taxpayers over the past four decades; its population today is roughly 60,000.

Residents have mixed reactions to the managers. Some deride an early decision to sell the Silverdome football stadium, where the Detroit Lions used to play, for about $20 million less than what it had once been valued. But many say the police force, now run by the Oakland County Sheriff’s Department, has improved drastically under the new leadership. Signs of new business investments downtown are attributed to renewed confidence in the city’s fiscal health.

Most of the privatization deals in Pontiac were brokered by Mr. Schimmel, 76, who was appointed in September 2011 to be the city’s third and final emergency manager. Years earlier, he had balanced the books in two other Michigan cities — Ecorse in 1986 and Hamtramck in 2000 — but both places were eventually placed back under state control after financial problems resurfaced. Ecorse started its most recent transition to local control in April.

“Nobody was thinking about after,” Mr. Schimmel said, blaming elected leaders in those cities for going “back to their old ways” of spending when he left. Now, with lawsuits pending against some of his decisions in Pontiac, Mr. Schimmel said he was determined to ensure that did not happen again.

Last month, Mr. Schimmel issued a final order giving a city administrator — Joseph M. Sobota, an aide to Mr. Schimmel while he was emergency manager — the power to make fiscal decisions for Pontiac during the transition. The new position comes with a $120,000 salary and authority over all contracts, hiring and spending, with the advisory board’s approval.

Mayor Leon B. Jukowski, a Democrat who has been criticized by the Council for working closely with Mr. Schimmel, will make $100,000 a year and assist Mr. Sobota as a liaison to business leaders and the public.

City Council members, whose predecessors used to earn $15,000 a year, will be paid $100 per weekly meeting they attend, plus up to $100 a month for committees. The body will be consulted on issues but can be overruled by Mr. Sobota or the advisory board. The council members are not allowed in City Hall after hours.

“The order suggests that local democracy is indefinitely suspended without any time limit or timeline for its restoration,” said Tim Greimel, who represents Pontiac and is the Democratic minority leader in the State House. Calling Mr. Schimmel’s final move an overreach, Mr. Greimel sent the governor and other state officials a public letter on Thursday expressing his outrage.

Sara Wurfel, a spokeswoman for Mr. Snyder, defended the approach in a statement, saying that its “intent is absolutely to return full control to elected officials as quickly and efficiently as possible, but while ensuring the long-term financial success of the municipality or school district.”

Still, the City Council called for “agents of the state to cease and desist immediately.” It passed the toothless resolution last month, overruling a veto by Mr. Jukowski, who has argued that fighting the state will only prolong its short leash on the city.

And yet, the mayor and council members are still running for re-election in November. Mr. Jukowski placed second in a nonpartisan primary in August and will face Dr. Deirdre Waterman, an ophthalmologist and widow of a popular judge in Pontiac, in a runoff that many view as a referendum on Mr. Jukowski’s cooperation with Mr. Schimmel.

The shifting power struggle continues to puzzle more than a few residents. “I’m kind of confused about who’s running the city,” said Robert Cluckey, 55, asking for clarification during the public comment portion of a recent Council meeting.

No one answered his question.

Story in full:

Detroit Institute of Art:  Let us not forget the power of its great collection...

Diego Rivera courtyard at top:
Detroit Institute of Art - saved perhaps from sale by amazing "deal" - creativity in jurisprudence, an oxymoron?

Story in full:

Story in full here:

Detroit Needs Residents, but Sends Some Packing
JUNE 26, 2014

DETROIT — Ronald Ford Jr. has watched neighbors move away and brick houses on his family’s block crumble to nothing, but he says he wants to stay put and give a chance to city leaders who now promise a renaissance. “I’d like to try to go with the new Detroit if that’s really coming,” Mr. Ford, 49, said, standing outside the house on the city’s east side that he describes as precious, “like a family heirloom.”

Yet as Mike Duggan, the mayor of the nation’s largest bankrupt city, pledges to stem the flood of departures that have crippled Detroit and to begin increasing the city’s population for the first time in decades, Mr. Ford is on the verge of losing his family’s house. So are tens of thousands of others here who failed to pay their property taxes.

In a city that desperately needs to hold onto residents, there is a virtual pipeline out. At least 70,000 foreclosures have taken place since 2009 because of delinquent property taxes. And more than 43,000 properties — more than one in 10 in this city — were subject to foreclosure this year, some of them headed for a public auction where prices can start as low as $500.

Tax foreclosures have grown so steeply that county officials have lately had to forgo pursuing tens of thousands of additional properties that have fallen far enough behind to risk foreclosure.

“It’s more than this office can handle at this point,” said David Szymanski, the chief deputy for the Wayne County treasurer’s office, which had so many properties to foreclose on this year that it held 10 sets of hearings about them in a convention center auditorium. “We are popping at the seams.”

Other cities wrestle with unpaid taxes, too, but the size of Detroit’s problem is staggering. Several factors have brought the city to the point that crucial revenues are not being collected and thousands of houses are being taken away each year — not by banks, for failure to make mortgage payments, but by the government, for failure to pay taxes. Contributing are soaring rates of poverty, high taxes despite painfully diminished city services and a long pattern of lackadaisical tax collection by the city.

In some cases, homeowners have abandoned properties and simply quit paying taxes, and foreclosure may be the only way to get a house back into the hands of people who actually want to live there and pay their share. In other cases, those who lose or abandon their houses sometimes end up buying other houses at auction — sometimes for as little as $500 — and begin the cycle again, although new rules are aimed at taking back properties sooner if taxes are again not paid. Either way, the city fails to get all the tax revenue it is owed.

But then there are owners like Mr. Ford who desperately want to stay. Political leaders here acknowledge that the flood of tax foreclosures has become a problem, and say they are making efforts to improve the situation by lowering property assessments — and thus tax bills — and by trying to help people find steady incomes. But it may not be enough.

“This whole ecosystem has to be rethought if we’re going to be effective and sustainable going forward,” said Matt Cullen, a business executive who took part in a task force, begun by the White House, aimed at solving Detroit’s crisis of blighted neighborhoods and abandoned and dilapidated buildings. “How important is it to take it back on taxes? At what point should you be really working hard with the owner to keep them in? Fundamentally, if you take the people out of the home, almost invariably the home ends up being blighted and taken down.”

Forty-five years ago, Mr. Ford’s family bought the 1920s-era house for about $17,000. But in recent years, Mr. Ford said he had struggled to find work and pay even his immediate bills — for electricity and food — much less overdue property taxes. Though he was hired in June to do demolition work, Mr. Ford said he did not have the more than $7,000 he owed in back taxes since 2010 and in interest and fees, which now amount to 30 percent of that total bill. This winter, he found a plastic sack hanging on the front door, alerting him that the house was to be foreclosed on for taxes. It will most likely be sold at auction this fall unless he finds the money. The bags speckle the neighborhoods here during certain seasons. “All the wind came out of me when I saw that,” Mr. Ford said. “I’ve been here since I was 3. My focus is on finding a way to keep it. But if not, where will I be? I don’t know.”

In 1999, Michigan changed the way its localities dealt with people who failed to pay property taxes. State lawmakers ended a system of tax liens in which the rights to collect debts were sold to investors, but which often left the titles of properties murky and, in the time-consuming process, left properties to decay. Under the new method, homeowners who fell three years behind could expect to lose their homes.

In Detroit, which lost a quarter of its population in the ten years after 2000 and where those who remained struggled during the recession, more and more people began falling behind. In 2008, 47,000 properties were subject to forfeiture, meaning their owners failed to pay taxes for one year. By 2010, that number hit 86,000. And by 2012, 95,000 properties had gone unpaid. The county’s required legal announcement of homes in forfeiture, mostly from Detroit, is reams thicker than most Sunday newspapers — a fat, gloomy record of a city in foreclosure.

Of the properties in forfeiture, thousands of owners come up with the money to pay off their debts. Others qualify for programs aimed at sparing them from losing their homes, including a state program using federal funds and a county program that permits extensions of time, as well as stipulated monthly payment agreements and assistance from nonprofits. This year, for example, thousands of the more than 43,000 properties headed for foreclosure had by mid-June been spared. Still on the list: the owners of more than 26,000 properties — some of whom could not qualify for assistance or already failed to meet monthly payment plans.

Ted Phillips, the executive director of United Community Housing Coalition, where a worn office is regularly crowded with families in search of a last-ditch way to save their homes, has watched the numbers swell. “If we don’t make some changes with what we’re doing, I don’t know where this ends,” Mr. Phillips said.

In a city where 38 percent of people live below the poverty level, people have often viewed their tax bills as the least of their problems — particularly as they watch neighborhoods hollow out but their taxes stay relatively high. And the interest rate, set by state law, reaches 18 percent by the time properties are to be foreclosed on, making the prospect of catching up more remote.

It is difficult to compare tax foreclosure rates on a national scale. States use a range of time frames and methods to handle unpaid taxes. In Michigan, Wayne County, which includes Detroit, has the highest number of properties foreclosed on for taxes by far; Genesee County, Mich., the second highest, saw 2,769 foreclosed on in 2013, state records show, while 17,965 were ultimately foreclosed on the same year in Wayne County.

“By any measure, this number of tax sale properties for a city the size of Detroit is extraordinary,” said John Rao, a lawyer with the Boston-based National Consumer Law Center.

For some, the remarkable churn of tax foreclosures here has become just one more game in a city where the unwritten rules of survival are unlike any other. Some investors have purchased properties at auctions, only to continue skipping payments but collect rent or resell. Renata Lewis, 33, said she agreed to purchase a home from a family acquaintance by making payments over a period of time. It was to be the first home she had ever owned, and she has decorated the inside with purple accents and stencils with messages like “Dream Wish Imagine.”
Patricia Adams reads to children at the daycare center she runs from her Detroit home to pay off the over $20,000 she owes in back taxes and interest. Credit Joshua Lott for The New York Times

Not long after, she learned that the house was drastically behind on taxes. Ms. Lewis, who has three children, said she was struggling to make monthly payments of $858 to cover the old bills.

“When I moved in here, I felt like I finally did something right,” Ms. Lewis said. “But now I feel like I messed up. They knew what was going on with this house already. Here I went and paid for this house and now I can lose it?”

There have been efforts to remake Michigan’s rules, including measures to require those who purchase properties at auction to keep tax payments up to date. “A lot of it gets back to the basics of economic growth and having jobs,” Gov. Rick Snyder said of the larger issue. “We’re getting people to work.”

Mayor Duggan’s administration recently lowered assessments around the city, and it is in the middle of a property-by-property look at values that could further affect tax bills by the end of 2016. “His first priority is keeping Detroiters in their homes and in the city,” said John Roach, the mayor’s spokesman.

Patricia Adams said she already was seeing upbeat signs for her city, such as increased trash removal. If police protection can improve, she said, she believed Mr. Duggan’s vision for growing Detroit could yet be possible. But for her, it may be too late.

Ms. Adams owes more than $20,000 in back taxes and interest. Obligations for payment plans have not been met, county officials said, despite generous extensions. Her plan now is really just a hope — that she can buy her own house back during the auction this fall.


Google map
put together for the NYTIMES (?)

Century of population change: Wikipedia - Detroit (l), Metro region including 6 counties, and larger Detroit-Windsor Ontario (c).  Feds to the rescueAffordable Health Care Law part of the answer?

Detroit Rolls Out New Model: A Hybrid Pension Plan
June 18, 2014 11:53 am
Detroit firefighters and police at a meeting about their pensions.Tim Galloway for The New York TimesDetroit firefighters and police at a meeting about their pensions.

In the face of Detroit’s tumultuous bankruptcy proceedings, in which multiple parties are quarreling to protect their interests, the city and its unions have negotiated a scaled-back pension plan that could serve as a model for other troubled governments.

One of the most closely watched issues of the case is whether a government pension plan can be legally cut in bankruptcy. Detroit, saddled with a pension system it cannot afford, has introduced a new plan with the cooperation of its unions, which have been among the most vocal opponents of cutbacks.

While both retired and active workers now participate in the same city pension system, the new plan is intended only for Detroit’s active workers, who will shift to it on July 1. Retirees will keep 73 percent to 100 percent of their current base pensions under the city’s proposal to exit bankruptcy.

The new plan is called a hybrid, which means the workers will keep some of their current plan’s most valuable features but will give up others. Trading down to a less generous pension plan is often said to be a legal nonstarter for government workers, so if Detroit succeeds, its hybrid could become a model for other distressed governments from Maine to California.

Countless elected officials — from Rahm Emanuel, the Democratic mayor of Chicago, to Chris Christie, the Republican governor of New Jersey — are caught between ballooning pension obligations, angry local taxpayers who don’t want to pay for them and labor lawyers who say it’s impossible to cut back.

“We have a festering sore here,” Christopher M. Klein, the judge in the bankruptcy case of Stockton, Calif., said at a hearing in May, referring to that city’s surging pension costs and its unwillingness to deal with them. “We’ve got to get in there and excise it.”

Detroit’s current pension system simply costs too much relative to its battered tax base, and the watchword for Detroit this summer is feasibility. For the city to emerge from bankruptcy, its emergency manager, Kevyn D. Orr, must convince Steven W. Rhodes, the judge overseeing Detroit’s bankruptcy case, that his long-term financial plan is feasible. The matter is to be decided at a trial scheduled to start in August.

There would be little hope of persuading Judge Rhodes if Detroit’s workers were still covered by the existing pension plan and struggling local taxpayers were still liable for the relentlessly mounting obligations. The current plan lets city workers earn benefits that others in Detroit can only dream about — full pensions at 55, longevity bonuses, annual cost-of-living increases, an extra “13th check” in December and bankable sick leave that can be converted to cash, among others. In recent years, the resulting pensions have been greater than the per capita income of the residents who were expected to pay for them.

On June 30, Mr. Orr will freeze that pension plan, meaning that the city’s current workers will not accrue any further benefits on those terms.

Starting the next day, in the new hybrid plan, they will still earn so-called defined-benefit pensions, something their unions consider critical. But at the same time, they will start to bear most of the new plan’s investment risk. That means Detroit’s taxpayers — who pay a city income tax in addition to property and sales taxes — will no longer face cash calls every time the plan’s investments drop in value. Officials hope that making the workers backstop the investments will discourage the overreliance on high-risk strategies that has characterized the current plan.

This unusual combination of features gives both the city and the unions an opportunity to declare victory and provides Mr. Orr with ammunition for the coming feasibility trial.

But it also flies in the face of a legal principle known as the vested-rights doctrine, which holds that the pension formula in force on the day a public worker goes on the job cannot be reduced for the full duration of employment. No such legal protection exists for workers in the private sector, whose pension plans can be frozen at any time. But in the public sector, the vested-rights doctrine is an article of faith, zealously defended, and it helps explain why a bankrupt city like Stockton is proposing to saddle its other creditors with big losses but not touch the pension plan.

The vested-rights doctrine is especially powerful in California, growing out of court decisions dating back to 1947. Unions in San Jose recently used it to keep the city from making its workers contribute more toward their pensions. Employees of four California counties argued in court last year that they had a vested right to pad their pensions by counting things like unused vacation time in their benefit calculations, despite laws prohibiting the practice. In March, Judge David B. Flinn of Contra Costa County Superior Court ruled that there was no such thing as a vested right to an illegal benefit — but the ruling applies only to current workers. Retirees are still receiving the padded pensions.

California’s state pension system, Calpers, is a powerful proponent of the vested-rights doctrine, and many state and local governments follow its lead.

In Detroit’s bankruptcy, however, the vested-rights doctrine does not appear to be an issue. The Michigan law for distressed cities gives emergency managers like Mr. Orr the power to set the terms of public employment. That means he can legally freeze Detroit’s existing pension plans and establish new ones for city workers, said Bill Nowling, a spokesman for Mr. Orr.

“He is not making any benefit cuts,” Mr. Nowling added.

For Detroit’s retirees, it’s a different matter. They are not being asked to give up benefits they had hoped to earn in the future; they are being told they must give up benefits they have already earned. Michigan’s constitution forbids this, so Mr. Orr is using the Chapter 9 municipal bankruptcy process, in which federal law applies. A bitter battle is already taking shape.

By the time the fate of the retirees has been decided, Detroit’s workers will already be earning hybrid benefits. To shift the investment risk their way, Detroit has set up a series of eight “levers” to pull if the plan’s investments falter. They include setting up a reserve fund that must be used to cover losses, raising the workers’ required contributions, lowering retirees’ cost-of-living increases and making workers build up their benefits more slowly.

In hard times, plan officials will be required to pull as many levers as it takes to keep the plan on track to be 100 percent funded within five years. Only if all eight levers are pulled and the plan is still not responding can Detroit’s taxpayers be called on to rescue it.

To measure the level of funding, the plan will use a rate-of-return assumption of 6.75 percent. That still allows for a substantial amount of risk, although it is less than the 7.9 percent assumption the city was using when it declared bankruptcy. Officials of the American Federation of State, County and Municipal Employees, which led the negotiations, did not respond to calls seeking comment. The union is one of 48 that represent Detroit’s municipal workers.

Even as they were negotiating the hybrid pension plan, Detroit’s unions were still appealing a ruling last December by Judge Rhodes that pensions could be cut under federal bankruptcy law, despite protective language in Michigan’s constitution. The unions are required to drop the appeal if they vote for Detroit’s plan of adjustment. From California, Calpers has asked to serve as a “friend of the court” in the appeal, saying Judge Rhodes’s decision “raises issues that are of critical importance to Calpers and its 1.7 million members.”

Calpers’s brief argues that Judge Rhodes ruled improperly and asks the United States Court of Appeals for the Sixth Circuit to vacate his finding that state laws protecting pensions are not binding in bankruptcy cases. Although California’s laws have no force in a federal case in Michigan, Calpers expressed concern that rulings concerning Detroit’s bankruptcy might recast the legal landscape in California.

“Such a precedent can be, and has been, misconstrued for the broad proposition that all pensions are subject to impairment in Chapter 9,” the Calpers brief said.

Restructuring & Bankruptcy   
Judge Approves Pact to End Detroit Swap Deal
April 11, 2014, 10:50 am

Updated, 12:58 p.m.

DETROIT — A federal judge on Friday approved this bankrupt city’s latest attempt to extricate itself from some long-term financial contracts that have been costing it tens of millions of dollars a year, holding up a settlement as an example of “the very spirit of negotiation and compromise” that he hoped other creditors would follow.

Judge Steven W. Rhodes of United States Bankruptcy Court ruled that Detroit could proceed with a plan to pay $85 million to UBS and Bank of America to terminate the financial contracts, known as interest-rate swaps, that were used to help finance pensions.

Under the terms of the settlement, the two banks agreed to back Detroit’s overall plan of adjustment, which is critical for the city’s push to resolve its bankruptcy by early fall. Municipal bankruptcy rules say that if one class of impaired creditors votes to approve the city’s plan of debt adjustment, the judge may be able to impose the terms forcibly on everybody else. The judge’s decision gives Detroit leverage for settlements with other creditors.

Earlier this year, Judge Rhodes had rejected a previous attempt to end the swaps that called for Detroit to pay the banks $165 million. He called that proposal “just too much money” and noted that Detroit would have a reasonable chance of success if it sued the banks outright, calling the swaps invalid and refusing to make any termination payments at all.

“They might have been discouraged and hardened their positions” by that assertion, Judge Rhodes said of the city and the two big banks. “They chose instead to re-engage.”

“The message,” he added, “is that now is the time to negotiate.”

Detroit’s emergency manager, Kevyn Orr, and other officials have been calling for creditors to negotiate settlements quickly out of fear that Detroit’s case will become a hopeless quagmire if creditors keep fighting the city’s proposals for resolving their debts. The state law that put Detroit under emergency management is scheduled to expire in September.

“There’s a lot of pressure on the judge to wrap up this bankruptcy quickly,” said Abayomi Azikiwe, an observer who said he was a member of the Moratorium Now Coalition.

Detroit entered into the swap contracts in 2005, when it tapped the municipal bond market for $1.4 billion to put into its workers’ pension funds. Much of the deal was structured with variable-rate debt, and the swaps were intended to work as a hedge, to protect Detroit if interest rates rose. But rates fell, and under those circumstances, the terms of the swaps called for Detroit to make regular payments to UBS and Bank of America. The swaps cost Detroit about $36 million a year.

The 2005 borrowing also required an unusual structure to avoid violating the city’s legal debt limit. In 2009, the debt was downgraded to junk, putting the city out of compliance with the terms of the swaps. So Detroit restructured the swap obligations, offering the two banks the tax revenue that it received from local casinos as a backstop.

When Detroit declared bankruptcy last summer, it estimated the cost of terminating its swaps at about $345 million. Days before filing its bankruptcy petition, Detroit said Bank of America and UBS had given it a break, so that it would have to pay only about $250 million to cancel the contracts. But other creditors, facing bigger relative losses, complained that the two banks were still getting way too much. They argued, among other things, that the interest-rate swaps were invalid from the beginning because the use of casino taxes for financial hedges is not allowed under state law.

With complaints about the swap payment mounting last December, Judge Rhodes sent the parties back to renegotiate their deal with the help of another federal judge, Gerald E. Rosen, the chief justice for the Eastern District of Michigan. Judge Rosen is the lead mediator of the Detroit bankruptcy, trying to negotiate settlements among Detroit’s more than 100,000 creditors to keep the huge bankruptcy from being mired in endless lawsuits.

Judge Rosen persuaded Bank of America and UBS to agree to a $165 million settlement just before Christmas, but Judge Rhodes rejected that deal, saying it was still too generous. He urged the two sides to try to negotiate a new settlement

Restructuring & Bankruptcy
Judge Rejects Detroit’s Deal to Exit Swap Contracts
January 16, 2014, 2:50 pm

A federal bankruptcy judge ruled on Thursday that Detroit could not proceed with a plan to extricate itself from some costly long-term financial contracts by paying $165 million to two big banks.

Judge Steven Rhodes said in his decision that Detroit had hurt itself financially in the past by going forward with hasty and imprudent decisions and that the practice “must stop.”

At the same time, Judge Rhodes said that Detroit could go ahead with a special $120 million loan from another bank, Barclays, which Detroit has said it urgently needs to provide municipal services in bankruptcy.

Detroit had asked the court to approve a bigger loan from Barclays, for $285 million, but it had planned to use the first $165 million to pay Bank of America and UBS to end the financial contracts, known as interest-rate swaps.

Officials have said that without the special loan from Barclays, Detroit would soon run out of cash and not be able to pay its workers. But because Detroit is already in default on some of its bonds, it could not take on new debt without pledging collateral, and the only money it could pledge was tied up in the interest-rate swaps.

Creditors have argued that the interest-rate swaps, which were set up in 2005 as part of a $1.4 billion borrowing that Detroit undertook to shore up its pension system, have never been valid or enforceable and should simply be voided.

In Detroit Ruling, Threats to Promises and Assumptions
December 4, 2013

Someday, Detroit’s bankruptcy may well be seen as the start of an era of broken promises.

For years, cities have promised rock-solid pensions without setting aside enough money to pay for them, aided by lax accounting practices, easy borrowing and sometimes the explicit encouragement of labor unions.

Officials were counting on rich investment gains to fill the holes; unions and their retirees were counting on legal provisions — like Michigan’s Constitution — that said pensions were unassailable and that benefits would always be paid, whether through higher taxes or budget cutbacks elsewhere.

But a bankruptcy judge, Steven W. Rhodes, threw a wrench into that thinking on Tuesday, ruling that pension benefits could be reduced in a bankruptcy proceeding. The decision recast the landscape and gave distressed cities leverage to backtrack on their promises.

“Last night, as a public employees’ union leader, you went to bed thinking, ‘My workers’ pensions have special protection; I can continue to play hardball,’ ” Karol K. Denniston, a lawyer with the firm Schiff Hardin who has been advising residents of California cities on fiscal issues, said Tuesday after the judge issued his ruling. “This morning you woke up and found yourself in a new world.”

Public employees’ unions are already fighting back, though not against the chronic underfunding of their benefits. They are fighting the notion that at some point, the state protection of benefits does not hold.

Detroit’s biggest municipal union, the American Federation of State, County and Municipal Employees, or Afscme, swiftly asked permission to appeal directly to the United States Court of Appeals for the Sixth Circuit, rather than Federal District Court, citing the wide public interest in the case. Officials of Detroit’s pension system said Wednesday that they planned to appeal as well.

“The state Constitution represents the people’s will,” they said in a statement. “That will cannot be ignored or subverted because it’s financially convenient to do so.”

Afscme leaders were also girding for battle in California, Florida and Illinois — places where public pension costs are rising beyond the local population’s willingness to pay, prompting cutbacks, whether in bankruptcy or not. They and other union officials argue that their members bargained away potential salary increases in favor of pensions, so cutting them now would be like refusing to issue paychecks at the end of the workweek.

“It’s a horror film,” said Anders Lindall, a spokesman for Afscme in Illinois, where the state legislature voted Tuesday to cut back retirees’ cost-of-living adjustments as part of a broad effort to bring the state’s pension system into balance. Illinois, like Michigan, has an explicit reference to protecting public pensions in its Constitution.

Sharon Levine, a lawyer who helped lay out the unions’ case before Judge Rhodes, warned that his decision would “be a road map for governors across the country to use Chapter 9 to create a self-created emergency.”

Fiscal hawks argue that states and cities already have a pension emergency, just not an easy one to see. Economist after economist has begun to argue in recent years that trillions of dollars are missing from state and local pension systems, but the shortfall is obscured by murky accounting. Governmental accounting rules, in turn, were written differently from corporate ones on the thinking that a city differs from a company. One big difference is that companies go bankrupt by the thousands but cities are thought to last forever, supposedly giving them infinite time and little reason to disclose pension values precisely.

Detroit illustrates the flaw in that thinking, but not just since Tuesday’s ruling. Its painful decline has been happening for decades. As city workers continued to build up their benefits over the years, the cost of the pension promises grew beyond the means of the city’s shrinking tax base. In 2005, the city needed more cash for its pension funds, so it tapped the municipal bond markets for $1.4 billion.

Detroit, by that time, had already reached its legal borrowing limit, but its financial advisers were able to structure the deal to make it appear as if it did not add to the city’s debt. The unions signed on because the mayor at the time, Kwame M. Kilpatrick, warned that the only other option was to lay off 2,000 workers, many of them union members. The prospectus’s description of the constitutional pension protection made it seem as if the city was simply complying with its mandate.

Those securities were the first to go into default as Detroit plunged toward bankruptcy last summer. The investors who bought them have discovered that they, too, are unsecured creditors in bankruptcy — and they, too, thought they had legal protections from the state. “No one should be surprised,” said Richard Ravitch, the former lieutenant governor of New York who is conducting a research project to track the sustainability of state finances. “Every incentive in this system is to kick the can, and everybody’s doing it.”

“The unions knew the contracts would be abrogated in bankruptcy,” he said. “The bankers, too.”

Mr. Ravitch recalled the way company pensions were handled in Chapter 11 bankruptcy cases. In those cases, workers and retirees are treated as secured creditors to the extent that there is money in the pension fund. That money serves as collateral, fully backing the benefits. In the typical company bankruptcy these days, however, the pension fund has a shortfall, and the workers’ claim for that amount is treated as unsecured credit, as Judge Rhodes has ruled for Detroit.

Workers for companies owe their relative protection to big unions, like the United Auto Workers and the United Steelworkers, which pushed for a landmark pension law enacted in 1974. It set up a federal pension insurance program and required companies that promised pensions to fund them. It also empowers the federal government to penalize companies that fail to fund their benefits.

Members of Congress wanted the funding rules to cover state and city pensions, too. Russell Mueller, an actuary who spent months researching public pensions for a House subcommittee, filed a report in 1978 describing a pension Wild West, where the federal government was running dozens of plans that no one seemed to know about, and the states and cities had more than 7,000 overlapping plans. The accounting was so haphazard that when Mr. Mueller totaled the forgotten assets, the discrepancy had a material effect on the gross national product.

The report quoted a Michigan state representative, Dan Angel, complaining about the way pensions in his state were being granted: “This takes place in a totally political atmosphere, without any regard for how the bill will be paid, by whom, and when,” he said. “Employees had better get concerned that there is enough cash on hand to meet retirement needs, and taxpayers had better get concerned with these massive and increasing debt obligations.”

“Public pension legislation is inevitable,” Mr. Mueller concluded in his report.

But he was wrong. State and local officials shot down the proposed federal funding requirements. Mr. Mueller’s research was filed away and forgotten for the next 35 years, leaving governments and their workers to rely on state laws and constitutions, whose protection now has been called into serious question.

Fate of Detroit’s Art Hangs in the Balance
December 3, 2013

With a ruling by a federal judge on Tuesday that Detroit is eligible to enter bankruptcy, the fate of the city’s art collection — one of the finest in the country — now moves front and center in the legal battle over the city’s future.

But the judge, Steven W. Rhodes, questioned for the first time the push by some of the city’s largest creditors to sell paintings and sculpture from the Detroit Institute of Arts, a sale that could generate hundreds of millions of dollars or more. While he did not say specifically that the art should be spared, Judge Rhodes, in a brief mention of the institute by name, said that such a sale would not have helped Detroit avoid bankruptcy.

“A one-time infusion of cash by selling an asset,” he said, would have only delayed the city’s “inevitable financial failure” unless it could have also come up with a sustainable way to enhance income and reduce expenses. Judge Rhodes added that in considering selling assets, a city “must take extreme care that the asset is truly unnecessary in carrying out its mission.”

Some creditors argue that the art is not necessary for the city’s mission. Derek Donnelly, managing director of the Financial Guaranty Insurance Company, a creditor, told The Detroit Free Press, “The D.I.A. or art is not an essential asset and especially not one that is essential to the delivery of services in the city.” A coalition of creditors filed a motion last week asking the judge to appoint a committee to oversee an independent appraisal of the collection, which is owned by the city and includes masterpieces by Bruegel, van Gogh and Cézanne. Financial Guaranty did not return telephone calls seeking comment on Judge Rhodes’s statement.

Michael G. Bennett, an associate professor of law at Northeastern University School of Law, who was in the courtroom during the ruling, said, “Judge Rhodes seemed to be saying something that amounted to a defense of the collection.”

A price tag on at least some of the pieces in the collection is expected soon. The city’s emergency manager, Kevyn D. Orr, hired the auction house Christie’s to appraise hundreds of selected pieces from the institute, and those estimated values are expected to be made public as part of the bankruptcy case by mid-December.

In a talk with The Free Press’s editorial board after Tuesday’s ruling, Mr. Orr said that in “preliminary discussions” with Christie’s, it appeared that the market value of some of the best pieces in the collection would be less than $2 billion — a figure widely cited as a low estimate of the collection’s value — and that the appraisal could come in at less than $1 billion.

“We will try to get some value from the art in some fashion,” he told the board, but he said that did not mean that there was any plan at present to sell any art at auction. (Other possibilities for generating money from the art could include using it as collateral for loans or charging to lend pieces out, although the museum has had little success in doing that in the past.) Mr. Orr, in his presentation to the newspaper, added, referring to the art: “Let’s be clear. That’s a city asset.”

Mr. Orr has said publicly that museum officials must “save themselves” by finding a way to contribute money, possibly as much as $500 million, toward the city’s debt relief.

Mr. Bennett, who has argued publicly against the sale of art, added that the ruling seemed to say that “even if sales from the institute generated a lot of money — let’s say $900 million or even $1 billion — it’s still not going to solve the city’s problem in any fundamental way, and it could end up contributing to more problems down the road.”

No other American museum the size of the institute has ever confronted such a threat to the integrity of its collection. Museum officials, who have said they will go to court to try to prevent any sale, have warned that if any pieces are sold the museum will no longer be able to attract donors and will immediately lose a crucial stream of tax revenue voted in last year by three Michigan counties.

Such a loss of operating revenue and donations, said the museum’s director, Graham W. J. Beal, would almost certainly lead to what he called a “nonprofit controlled liquidation” of the museum.

Detroit Is Ruled Eligible for Bankruptcy
December 3, 2013

DETROIT — The struggling metropolis of Detroit, overwhelmed by debt and groping for a path forward, on Tuesday became the largest American city ever to qualify for bankruptcy protection.

Judge Steven W. Rhodes of the United States Bankruptcy Court, found that Detroit was insolvent and that the pension checks of retirees could be cut during a bankruptcy proceeding, a crucial part of his decision.

Under the ruling, the vastly diminished city, once the nation’s fourth largest and the cradle of the American auto industry, will now be allowed to search for a way to pay off some portion of its debts and restore essential services to tolerable levels under court supervision. The goal, according to an emergency manager appointed by the state of Michigan, is to emerge next year from court protection with a formal plan for starting over.

“This once proud and prosperous city cannot pay its debts. It is insolvent. It’s eligible for bankruptcy,” Judge Rhodes said Tuesday. “But it also has an opportunity for a fresh start.”

The decision was an essential step in municipal bankruptcy proceedings, which are extremely rare. Lawyers for the city’s public sector unions and retirees, who contend that Detroit’s request for bankruptcy protection earlier this year came before city officials truly tried to negotiate deals with city workers and creditors, have said they intend to appeal.

The city needs help, he said. As the proceedings unfolded, protesters with signs gathered outside and the police blocked the street to traffic in front of federal courthouse.

Detroit filed for municipal bankruptcy protection in July, with approval from Gov. Rick Snyder, , making it the largest city in the nation’s history to take such a rare step. The filing was also the largest ever in terms of municipal debt; the emergency manager, Kevyn Orr, says the city carries about $18 billion in debt, including $3.5 billion in unfunded pension obligations.

Most agreed the situation was dire: annual operating deficits since 2008, a pattern of new borrowing to pay for old borrowing, a shrunken population and tax base, and miserably diminished city services. But under federal bankruptcy provisions for municipalities, known as Chapter 9, a city must first prove its eligibility for protection before it can proceed with a plan to pay diminished sums to creditors.

Under the law, a city must not only be deemed insolvent, but also must negotiate in “good faith” with its creditors, who expect to be offered far less than they are owed, or be unable to negotiate with them because such talks are unworkable. For months, municipal bankruptcy experts have said it might be difficult to prove that city and state officials had failed to meet such a standard. “There isn’t a bright-line definition of ‘good faith’ in this context,” Douglas C. Bernstein, a Michigan lawyer and bankruptcy expert, said.

Detroit’s public workers and retirees had hoped to keep the city out of federal bankruptcy court, for fear that the proceedings there would allow for cuts in their benefits, especially pensions. Other than in bankruptcy, the state constitution prohibits reducing pensions that public workers have already earned. But there appears to be too little money set aside in Detroit’s pension fund to cover the full cost of those accruals.

Judge Rhodes ruled Tuesday that Michigan’s protections for public pensions “do not apply to the federal bankruptcy court,” adding that pensions are not entitled to “any extraordinary attention” compared with other debts.

Labor agreements, including pensions, are subject to changes during a bankruptcy proceeding, the judge said, but the court “will not lightly or casually exercise the power to impair pensions.”

Those objecting to the city’s pursuit of bankruptcy protection, including Detroit’s employee unions and representatives of its retirees, say Mr. Orr, who was appointed by Governor Snyder, failed to negotiate with them in good faith. During nine days of heated and sometimes emotional testimony in recent weeks, the opponents had suggested that Mr. Snyder and Mr. Orr had forced the city into bankruptcy without truly searching for some other solution. They said that the officials were seeking a way around the state’s constitutional protection of pensions without giving workers and retirees a chance to negotiate concessions.

Lawyers for the state and for Detroit, in turn, said that the city’s slide into insolvency had been years in the making, and that state officials had tried for more than a year to find some alternative approach to solving the financial crisis, — through efforts by elected leaders at Detroit’s city hall and later a consent agreement with the city. They said that the city could no longer afford its current pension plan and must replace it with a less costly one. Representatives for city workers and retirees had never suggested some way to solve the problem without cutting pensions, the lawyers said. In a deposition, Mr. Snyder, a Republican whose first term as governor has been defined by the bankruptcy filing by the state’s most populous city, said good faith negotiations over the issue had broken down, and that officials found themselves “at that last resort point.”

Regardless of the court’s eligibility decision, some experts said the task ahead for Detroit remained largely the same — whether in or out of the courts. “Ultimately the creditors have to come together with the debtor and realize that they need to work together to come up with a solution,” said James E. Spiotto, a Chicago lawyer and an expert on municipal bankruptcy. “No matter what, at some point, that reality needs to sink in.”

Mary Williams Walsh contributed reporting from New York, and Steven Yaccino from Chicago.

Detroit Pension Cuts 'Function of Mathematics': Investment Banker
October 25, 2013

DETROIT — Cuts to Detroit's public pensions and retiree healthcare were inevitable given the city's sagging finances, a top consultant for the city testified on Friday during the third day of a trial to determine whether the city is eligible for bankruptcy.

Money owed to Detroit workers and retirees is a key factor in the case, which will also hear testimony by Kevyn Orr, Detroit's state-appointed emergency manager. Orr is expected to explain efforts to negotiate with the city's numerous creditors, including retirees and pension funds, before deciding to file for the largest-ever Chapter 9 municipal bankruptcy on July 18.

A key claim made by attorneys representing the city's unions, retirees and pension funds is that Orr and his team were intent on filing for bankruptcy and did not make best efforts to negotiate with them prior to the bankruptcy filing. They also claim that plans to cut pensions would violate the Michigan Constitution.

On Friday, city financial consultant Kenneth Buckfire said he did not have to recommend to Orr that pensions for the city's retirees be cut as a way to help Detroit navigate through debts and liabilities that total $18.5 billion.

Buckfire said it was clear that the city did not have the funds to pay the unsecured pension payouts without cutting them.

"It was a function of the mathematics," said Buckfire, who said he did not think it was necessary for him or anyone else to recommend pension cuts to Orr.

"Are you saying it was so self-evident that no one had to say it?" asked Claude Montgomery, attorney for a committee of retirees that was created by Rhodes.

"Yes," Buckfire answered.

Buckfire, a Detroit native and investment banker with restructuring experience, later told the court the city plans to pay unsecured creditors, including the city's pensioners, 16 cents on the dollar. There are about 23,500 city retirees.

On Thursday, Buckfire was questioned by attorneys from Jones Day, the city's attorneys in the bankruptcy filing and Orr's former employer.

This portion of the trial is to determine whether the city is eligible to undergo Chapter 9 restructuring. To qualify for bankruptcy, Detroit must prove the city is insolvent and that it negotiated in good faith with creditors, or that there were too many creditors for negotiations to be feasible. The city also must prove it desires to enact a restructuring plan.

U.S. District Court judge Steven Rhodes, presiding over the trial expected to last at least through next Tuesday, is not expected to rule until at least mid-November whether the city is eligible to undergo restructuring in bankruptcy.

If Orr does not testify on Friday, he may do so on Monday, when Michigan Governor Rick Snyder also is expected to take the stand.

Rhodes is not expected to decide on the eligibility issue until at least November 13, which is the date for attorneys from both sides to file with Rhodes documents explaining defending their notions of what constitutes "good faith" negotiations.

The city has said about half of its liabilities stem from retirement benefits, including $5.7 billion for healthcare and other obligations, and $3.5 billion involving pensions.

As the cross-examination of Buckfire began Friday morning, Bill Nowling, press secretary for Orr, said on Twitter, "the journey up the River Denial continues for union and creditors attorney(s)."

Buckfire said the city did not consider the state constitution's protection of pensions in creating its restructuring proposal presentation to creditors on June 14.

"We did give it some weight, but did not deem it relevant," Buckfire said.

UAW attorney Peter DeChiara and Montgomery, the retirees committee lawyer, made arguments on Friday morning to Rhodes that Buckfire's testimony should not be allowed because he was not deemed an expert witness by the court.

Rhodes ruled that Buckfire's testimony would be allowed, in part because he had become an expert after in-depth study of the city's financial status.

(Reporting by Joseph Lichterman and Bernie Woodall in Detroit; editing by Gunna Dickson)


Kim Gittleson BBC reporter, Detroit

It's already buzzing here in the early morning cold at the Theodore Levin courthouse in downtown Detroit - the site of the city's bankruptcy eligibility hearings.

In a city where seeing a pedestrian can often feel like a surprise, the noise made by early morning union protestors rings out among the empty buildings. A sign advertises that the complex next to the courthouse is available to let.

Wearing t-shirts that say "hands off my pension" and waving signs that say "bail out people not banks", there's a palpable sense of anger here among retired and current city workers. They feel that the city's emergency manager Kevin Orr has ignored them and lined his pockets in the process.

But the question is whether that anger can translate into convincing legal argument?

Billions in Debt, Detroit Faces Millions in Bills for Bankruptcy
October 7, 2013

DETROIT — This city is learning that it is expensive to go broke.

Even as it wrestles with the $18 billion of debt that has overwhelmed it, Detroit has already been billed more than $19.1 million by firms hired to sort through that debt, search for ways to restructure it, and now guide the city through court. That does not include more costs that the city is expected to bear for the support staff for its state-appointed emergency manager, and for another set of lawyers and consultants to represent city retirees.

“It’s just ridiculous,” Edward L. McNeil, an official with the local council of the American Federation of State, County and Municipal Employees, said of the mounting costs. “The only thing that’s getting done is that these people are getting paid big-time while the citizens of Detroit are getting ripped off.”

The uncharted scale of Detroit’s bankruptcy — it is the largest municipal bankruptcy filing in the nation’s history in terms of both the city’s population and its debt — suggests that it may also become the costliest, experts say. City officials offer no estimate for a final tab, but some bankruptcy experts say the collapse could ultimately cost Detroit taxpayers as much as $100 million. As of last week, 15 firms had contracts with the city that could total as much as $60.6 million, city records show.

Some lawyers and other consultants are accepting discounted fees, and a fee examiner has been appointed to ensure that bills stay within reason. Still, the soaring costs are a jolt to retirees and creditors bracing for cuts to payments they once expected.

Some lawyers from the firm Jones Day, which charged the city $3.6 million for four months of work this year, bill for as much as $1,000 an hour, documents filed with the city show. The firm also forgave the city more than $1.2 million in additional costs during the same period, and accepted fee caps as part of its contract, the records show, resulting in effective hourly rates that are lower.

A financial analyst who graduated from college last year drew intense media attention here when bills showed that his services were costing $275 an hour — $26,000 for two weeks, and that was only part of the more than $200,000 his turnaround and restructuring firm, Conway MacKenzie, had billed for the same two-week stretch, records showed.

The State of Michigan is required to pay $275,000 a year to Kevyn Orr, a former Jones Day partner brought here by Gov. Rick Snyder’s administration as an emergency manager assigned to find a way out of the financial mess. But the city itself will pay $225,000 a year each to two top aides to Mr. Orr — aides who city officials say replaced two similar positions in the mayor’s office — as well as smaller salaries for a few more workers as part of Mr. Orr’s team.

Among other tolls the city now unhappily finds itself bearing: $200,000 (plus as much as $50,000 in expenses) to Christie’s, the auction house, to appraise works at the Detroit Institute of Arts as part of the proceedings, despite strenuous objections of Detroit leaders at the very thought that the art may be at risk.

Even the bills for Robert M. Fishman, the Chicago lawyer appointed by the bankruptcy court judge as the fee examiner assigned to scrutinize fees billed to the city, will be paid by the city. His price: $600 an hour for him (a discount, court documents show, from his usual $675) and $430 an hour, at most, for his firm’s work over all. His bill for August seeks $28,407.85 for his work so far, in addition to more than $14,000 for his law firm and $5,000 more for a consulting financial firm.

“They say we’re broke, but yet we’re still taking money from our budget to pay people to help us resolve issues that we could handle without outside help,” said the Rev. W. J. Rideout III, a local pastor.

The costs are mostly unavoidable, bankruptcy experts unconnected to Detroit’s case say, and probably will fall far below the totals spent in major corporate bankruptcies. Because municipal bankruptcies, known as Chapter 9, are extremely rare, they require expertise from a relatively small cast of lawyers and consultants, the experts said, particularly given that the city’s creditors have hired their own top-flight lawyers. Meanwhile, most of the city’s consultants are seeking significantly less in Detroit’s circumstances than they usually do. Conway MacKenzie, for instance, is charging 25 percent less than its usual rates, the company said.

“These are very competent, very experienced professionals,” Bill Nowling, a spokesman for Detroit’s emergency manager, said of the city’s advisers. “They don’t work for free. To get to the level of work we need, we have to pay those competitive fees. But we’re always very conscious of, ‘Are we getting value for our money?’ ”

One complication of estimating the cost of Detroit’s crisis is that the tally includes not only court proceedings, but also broader, lengthier efforts to reshape the city’s finances and operations. Long before the city sought bankruptcy protection in July, as city officials raced to restructure its finances, Detroit already was hiring some of the 15 firms with sizable contracts; at least two of the firms, city records show, had contracts for related work approved before 2013. Hiring was initially done by the City Council and, after Mr. Orr was sent to repair Detroit in March, by Mr. Orr’s office.

Some costs, too, will be paid by the state, officials said, noting that Michigan has agreed to pay as much as $4.7 million to share a portion of the city’s contracts with four firms, including Conway MacKenzie and Ernst & Young, the financial adviser.

Other expenses, including Mr. Orr’s housing (he stays in a condominium at the Westin Book Cadillac hotel) and travel (he regularly flies to his family home in the Washington area), are being paid by New Energy to Reinvent and Diversify, known as NERD, a nonprofit fund created by Mr. Snyder as a “social welfare organization” and not required, under federal provisions, to divulge its donors.

Since April, the fund has paid $4,200 a month for such expenses, an aide to Mr. Snyder said. Mr. Orr also gets protection from the Michigan State Police, though officials said the costs were covered by that agency’s existing budget.

“This is the largest, most complicated Chapter 9 filing in the state’s and country’s history,” said Sara Wurfel, a spokeswoman for Mr. Snyder, who approved the city’s pursuit of bankruptcy protection. “It will solve a financial crisis 60 years in the making. While it’s imperative that we’re being extremely prudent on costs, it’s also imperative that this is done right and as quickly and efficiently as possible.”

James E. Spiotto, a lawyer who is a bankruptcy expert, said it was difficult to predict Detroit’s costs in part because so few American cities, towns, villages and counties — fewer than 65 since 1954 — have filed for bankruptcy, a process that can itself grow costly. “That’s one reason why Chapter 9 is rarely used by cities of any size,” he said. “With size come problems of size. And once you get in court, everybody is entitled to due process, and that can be expensive.”

Jefferson County, Ala., which sought bankruptcy protection in 2011, has spent about $22 million, or about $1 million a month, according to David Carrington, that county commission’s president. Stockton, Calif., has spent $9 million on legal and other fees tied to its bankruptcy filing in 2012, city officials said. Vallejo, Calif., which emerged from bankruptcy in 2011, has spent $13 million since 2007, the city said.

In Detroit, a judge last month approved an outline of spending rules with which Mr. Fishman, the fee examiner, is to monitor charges to the city on the court case itself. Among regulations those working for Detroit must now follow: time spent traveling can be billed for up to one-half of a firm’s applicable rate. And generally not subject to city repayment will be expenses for alcohol, first-class plane flights and motel room movies.

$300 Million in Detroit Aid, but No Bailout
September 26, 2013

WASHINGTON — Two months after Detroit became the largest city ever to file for bankruptcy, top Obama administration officials will be there on Friday to propose nearly $300 million in combined federal and private aid toward a Motown comeback — only a fraction of the billions the city owes and a reflection of the budget and political limits on President Obama.

This first major infusion from the federal government, which administration officials say will not be the last, would be used to help clear and redevelop blighted properties, improve transportation systems, bolster the police — especially around schools — and overhaul city management systems wrecked by years of poor administration and inadequate resources.

The package follows weeks of meetings in Detroit and at the White House between the administration team and local business, labor and philanthropic leaders on how best to pool existing resources. Final details are to be worked out in a two-hour meeting of the federal and local officials at Wayne State University, participants said.

While Mr. Obama remains in Washington as fights over the budget and health care threaten a government shutdown at the start of a fiscal year on Tuesday, he is sending a delegation led by his chief White House economic adviser, Gene B. Sperling, which includes three cabinet members: Attorney General Eric H. Holder Jr.; Shaun Donovan, secretary of housing and urban development; and Anthony R. Foxx, secretary of transportation and a former mayor of Charlotte, N.C.

Administration officials acknowledged that the initial aid would hardly solve problems in Detroit that have been decades in the making. But, Mr. Sperling said, “It’s the largest city bankruptcy in the history of our country, on our watch, and we’ve got to do something.”

Yet the idea of the federal government’s responsibility toward Detroit is hardly a settled issue in Washington. Instead, divisions over the question reflect the fundamental divide between the two parties over the size and role of government.

Congress, preoccupied with reducing federal deficits, has been all but silent about helping the birthplace of the auto industry and, some say, of the American middle class. The Republican-controlled House is hostile to any spending initiatives from Mr. Obama. In the Senate, two Southern Republicans separately and unsuccessfully proposed legislation intended to ban bailouts — Detroit leaders have not sought one — briefly churning the racial currents at play over a city where four out of five residents are black.

So with the chances that Congress would pass any legislation for Detroit “somewhere between zero and zero,” as an administration official put it, Mr. Obama has fallen back on what he can do through executive actions, with available money and tax credits, or through partnerships with local businesses and foundations.

The effort is similar to the way he has worked around Congress to create advanced manufacturing centers nationwide with federal and local support, provide broadband in every classroom, speed up infrastructure projects and try to reduce gun violence.

Even before Friday’s event, administration officials worked with Michigan’s governor, Rick Snyder, a Republican, to redirect $52 million in federal money to be used to demolish abandoned properties that are blighting communities and discouraging investment.

Most of the roughly $300 million to come is federal money, with the state and foundations chipping in, according to the White House. About $140 million would go toward transit improvements, including $24 million to repair buses. An additional $100 million would go to blight efforts, including $25 million for commercial demolitions from combined federal, state and foundation money. With the planned $25 million in federal Homeland Security money, up to 150 firefighters could be hired.

“Our message right from the beginning was: There is nothing we can do to help on the bankruptcy; there is no bailout,” said Mr. Sperling, a native of Ann Arbor, Mich. “However, we want to look at what could we do to help Detroit through existing resources and mobilization” of public and private partners.

“What we knew, too, was that this was a place where signaling was important,” he added. “You want to signal that people are staying with Detroit, that this is still a place to invest, to go.”

The signals are intended for outside investors and residents alike. “There is this quiet desperation of just everyday normal people, of why does nobody care, why isn’t anybody helping us,” said Debbie Dingell, a local leader and the wife of Representative John D. Dingell, a Democrat whose district is west and south of Detroit.

“I’ve said a thousand times, we’re a precursor to the same problems everyone else is facing,” Ms. Dingell added, citing in particular the public pension obligations that weigh on many local and state governments.

The White House’s decision not to seek special help from Congress for the city initially frustrated some people within and close to the administration, who thought the president should at least try. The decision also frustrated some leaders in Detroit.

“Unfortunately, we’re not going to get the bailout that New York got in the 1970s,” said Dan Gilbert, founder and chairman of Detroit-based Rock Ventures, an investment firm, and Quicken Loans, the nation’s largest online mortgage lender. “That looks like it’s off the table for whatever various political reasons.”

What is needed, Mr. Gilbert said, is “a Marshall Plan for Detroit.” Citing the city’s “soul-sucking” blight, he said: “We need to remove every single structure and building in this city that is no longer viable. Once you remove all of that, and I mean all of it, you start renewing hope.”

In contrast to Washington’s hush regarding Detroit, loud debate about what the government could or should do followed New York City’s 1975 financial crisis — as captured by the Daily News headline “Ford to City: Drop Dead.” Ultimately, President Gerald R. Ford, a Republican from Michigan, and the Democratic-controlled Congress agreed to a multibillion-dollar loan package that the city eventually repaid, with fees.

Four decades later, Michigan’s two Democratic senators, Carl Levin and Debbie Stabenow, said — like White House officials — that they knew better than to seek Congress’s help.

“There is not going to be a bailout for Detroit or any other city,” said Mr. Levin, a six-term Democrat who has lived in downtown Detroit for 35 years. “There’s not even enough funds in this budget to fund our own federal programs under sequestration,” the across-the-board spending cuts.

In July, after Mr. Snyder authorized Detroit’s emergency manager to file for bankruptcy, Mr. Levin had aides identify federal programs that Detroit could tap — the fiscal equivalent of looking under sofa cushions for spare change. A result was a 20-page spreadsheet of potential grants for neighborhood stabilization; brownfield cleanup; highway, education and antigang programs; and more.

Mr. Levin shared the list with Mr. Sperling, who was charged by Mr. Obama with overseeing a working group of administration officials. They soon discovered many areas where city officials had “left money on the table” by not applying for available federal money correctly, or at all. Foundations and businesses promised matching money. By late Thursday, the tabulation for Friday was still inching upward.

“What is important is that this is not a one-time announcement,” Ms. Stabenow said. “This is the first step.”

Detroit Manager Seeks to Freeze Pension Plan
September 26, 2013, 3:05 pm

Detroit’s emergency manager wants to freeze the city’s pension system for public workers, in light of mounting evidence it was operated in an unsound manner for many years, contributing to the city’s financial downfall.

The emergency manager, Kevyn Orr, issued on Thursday the preliminary results of a three-month investigation that identified diversions of shared money into individual accounts, real estate investments that lost millions of dollars and “disconcerting administrative protocols” for handling health care and other benefits.  Unfunded pensions and health care are by far the biggest claims in Detroit’s big municipal bankruptcy. Mr. Orr said that the purpose of the investigation, still in progress, was “to help identify how the city can address its present financial crisis and, going forward, help determine the basis for and what, if any, actions that must be taken.”

In a letter sent with their report, the auditor general and inspector general, Mark Lockridge and James Heath, said they focused on real estate investments first because federal law enforcement agents have already been looking at allegations of fraud in that area. They said they plan to look at other types of investments later.

Details of the pension freeze were outlined separately in a memo provided by Tina Bassett, a spokeswoman for the trustees of Detroit’s General Retirement System. The memo said that the city’s current defined-benefit pension plan would be closed to new members as of Dec. 31. Further benefit accruals would be halted on that date for city workers already vested in the pension plan, but they would keep the pensions that they had earned up until then.

That type of pension freeze is legal and fairly common in the private sector. But public employees’ unions in many states say it would be illegal for their members, because of statutes and constitutional provisions that apply to governmental workers.  The Detroit pension freeze would also halt payments of other nonpension benefits that have been made for many years, including distributions to active workers. Retirees would no longer receive yearly cost-of-living adjustments. Current city workers would be shifted into new defined-contribution plans, similar to 401(k) plans, which would comply with the requirements of the Internal Revenue Code, according to the memo.

The city’s current approach, in which money is diverted from a pooled pension trust fund to a system of individual accounts, appears not to comply, risking the pension system’s tax-qualified status. Pension funds are rarely stripped of their qualified status by the Internal Revenue Service because the result is so harsh for the participants. All the contributions and investment earnings of the plan in such a case would immediately become taxable, a catastrophic event.

Ms. Bassett said the trustees did not support the proposed pension freeze and saw it as a sign of bad faith on the part of the city and the law firm that is advising it in its municipal bankruptcy case, Jones Day.

“No one from the G.R.S. had any input into this proposal,” she said in a written statement. “We believe it is unseemly and disingenuous to present a proposal involving a new benefit structure that will affect the pensions of our members, beneficiaries and city employees not yet vested, without seeking our input, suggestions, knowledge and expertise.”

The statement suggested that city unions will include the pension proposal at an important bankruptcy hearing in October, where they plan to argue that the city is not qualified for bankruptcy court protection because it did not first make good-faith efforts to resolve its problems in negotiations.

Federal Government finally listens to its most famous residents...may be an eyesore now, but former residents had some groovy sound!

Detroit Housing Project Where Supremes Lived Razed
September 4, 2013

DETROIT — City and federal officials are making good on promises to raze a vacant Detroit housing project once home to the Supremes before the musical trio became vital voices of "the Motown sound."

Mayor Dave Bing and Department of Housing and Urban Development Secretary Shaun Donovan on Wednesday announced the first stage of demolishing the Frederick Douglass Homes. The graffiti-covered complex comprising several city blocks is better known as the Brewster projects.

Bing announced the plans last year. A $6.5 million federal grant covers the initial phase of demolition and cleanup.

Bing has acknowledged the Brewster's lore as the proving grounds for Diana Ross, Florence Ballard and Mary Wilson before joining Motown Records a half-century ago. But he says the haven for crime on the edge of downtown is an "eyesore."

Motor City savior (l)
Both sides of the coin, appropriately, left and right - National Review version here.

In Detroit's ruin, law firms see land of new opportunity
By Nick Brown
Sun Jul 21, 2013 8:14am EDT

(Reuters) - With more than $18 billion at stake in Detroit's restructuring, big law firms and other advisers are clamoring to represent the city's many creditors - including some advisers not exactly known for municipal work.

The city, which filed the largest-ever U.S. municipal bankruptcy on Thursday, tapped high-priced lawyers from Jones Day, financial advisers from Ernst & Young and restructuring consultants from Conway MacKenzie, court papers show.

For creditors and related parties, there is clearly a lot at stake. That means bondholders, insurers, retirees and others are sure to be accompanied in court by platoons of lawyers.

Detroit owes more than $8 billion in bond debt, and the insurers likely on the hook for those costs have already retained big-name law firms to take their cases.

Federal Guaranty Insurance Co tapped Weil Gotshal & Manges, according to a source close to the matter, who declined to be named because the information was not public as of Saturday. An attorney for Weil declined to comment.

David Dubrow, a lawyer at Arent Fox, confirmed on Saturday that he has been tapped by Ambac Financial Group.

And, according to the court's electronic docket, Syncora hired Kirkland & Ellis, known for its corporate bankruptcy work, while Assured Guaranty retained Winston & Strawn, and National Public Finance Guarantee Corp hired Sidley Austin.

Bond insurers will play a key role in Detroit's case. While a portion of the city's $1.13 billion in general obligation bonds are secured by city assets, about $651 million of it is secured only by the ability to raise taxes. The city's emergency manager, Kevyn Orr, has said he will treat that portion of the debt as an unsecured claim.

That classification, which has been largely untested in federal courts, is likely to be hotly contested and possibly litigated by bondholders or their insurers.

Detroit also owes $5.7 billion in unfunded healthcare and other benefits to retirees, and has asked the judge to form a committee to look out for their interests. The Department of Justice may also appoint a committee of unsecured creditors in the case. Both moves would mean opportunities for professional advisers.

The city needs to negotiate new labor deals with unions, and its pension funds are underfunded by $3.5 billion, providing yet more opportunities for attorneys to advise creditors.

Chapter 9, the section of the bankruptcy code that governs municipal bankruptcies, is attractive for advisers, provided there is money to pay them. Unlike in Chapter 11, where billing is subject to court and regulatory review, Chapter 9 allows bills to stay between the adviser and its client.

In corporate restructurings, creditors, judges and the Justice Department pore over fees line by line, and can raise objections to unnecessary or overpriced items. Over the past few years, the Justice Department has ramped up its policing of high fees and has required bankruptcy lawyers to disclose more.

In municipal bankruptcies, fees could be subject to disclosure under the Freedom of Information Act, but they do not need to be reported publicly in court.

"You're used to being in a world where you have to explain yourself, and suddenly you don't anymore," said a bankruptcy lawyer, who asked not to be named.

The catch is that, unlike in corporate bankruptcies, there is no mechanism under Chapter 9 to make the bankrupt entity pay certain creditors' fees. And corporate bankruptcies are generally more lucrative for advisers because there is often more money to go around.

But with $18.5 billion in debt, Detroit is an outlier among municipal bankruptcies, where advisers see the potential for high fees without the hassle of having to justify them in court.


In the past, only a small handful of professionals were known for having expertise in municipal restructuring. But a recent slew of Chapter 9 filings has yielded many new faces, and Detroit's bankruptcy will only continue that trend.

"Every time a case gets bigger, there are new players," said Richard Levin, a partner at Cravath Swaine & Moore who is representing the Detroit Institute of Arts in the restructuring.

Chapter 9 filings are rare, with only about 650 cases filed in the 75 years to 2012, mostly involving small municipal entities like sewer districts. But, the last three years have seen filings by the city of Harrisburg, Pennsylvania, Jefferson County, Alabama and the California cities of Stockton and San Bernardino.

And a concurrent lull in corporate bankruptcies has put strain on big restructuring firms like Weil Gotshal, which last month laid off 170 associates and support staff, driving professionals toward municipal work.

"Chapter 9 is not something I started out doing," said George South, a partner at DLA Piper who has become well-versed in the arena, representing creditor groups in the bankruptcies of both Harrisburg and Jefferson County.


In addition to general obligation bonds, Detroit owes nearly $6 billion in revenue bonds and $1.43 billion in pension certificates. Even though the bond insurers are likely to be the ones on the hook, the bondholders themselves will also "lawyer up."

Subsets of the holders may even band together to form committees if they feel a united front would better serve their interests, providing yet another potential path for advisers.

A number of other large law firms, including Brown Rudnick, Orrick Herrington & Sutcliffe and DLA Piper, are involved in the case or looking for ways in, according to people familiar with the matter.

Even if advisers lose out on big-money clients, Detroit's restructuring calls for a slew of projects and transactions that will require their own armies of professionals.

"There's all kinds of consulting opportunities," said Levin, whose client, the Detroit Institute of Arts museum, is at the center of a dispute over whether the city can sell the museum's art collection.

Orr, the emergency manager, has outlined in court papers his plans to create a new water and sewer management authority, transfer Detroit's Belle Isle Park to the state of Michigan, and restructure Coleman A. Young airport, which has not serviced commercial jets in 13 years but which the city must maintain to keep some federal subsidies.

Each of those moves will require lawyers, consultants and financial advisers to strategize the most cost-efficient execution, said Kenneth Klee, a Chapter 9 expert and bankruptcy lawyer at Klee Tuchin Bogdanoff & Stern.

"Chapter Nines require complete expertise in the area of municipal finance," Klee said. "If you only have bankruptcy expertise, that's not enough."

Eventually, hedge funds and other investment vehicles could find ways into the case, as Orr has stressed the importance of new investment, particularly with respect to the proposed new water and sewer authority, which could finance its operations with new bond issuance.

The case could be a boon for smaller law firms, too.

While large, corporate creditors are apt to tap similarly colossal law firms with whom they have preexisting relationships, smaller or locally-based stakeholders may opt to hire attorneys native to Detroit.

"There are a lot of talented lawyers in Detroit," Levin said. "I would think pensions and unions, for example, might opt for those guys."

We Have to Step In and Save Detroit

July 19, 2013, 10:03 pm

For months, the question in many minds has been not whether Detroit would file for bankruptcy, but when.

But while Detroit’s decision this week to enter bankruptcy might make it easier to improve the city’s fiscal position, it will prove far tougher to design and implement an effective restructuring for Detroit than it was to put General Motors and Chrysler through Chapter 11.

That’s partly because municipal defaults are handled under a different section of the law — Chapter 9 instead of Chapter 11. The latter, which governs companies, includes a provision that allowed General Motors, the city’s largest company, to take a quick, 39-day rinse in bankruptcy.

Cities must go the slow route, almost certainly at least a year in Detroit’s case. Such lengthy bankruptcies are costly, not just in fees but more so in distraction for city officials and uncertainty for local businesspeople.

More important, Detroit is in far worse shape than the auto companies were in 2009. Its steadily declining population has meant falling tax revenues and, because it is difficult to cut expenses as quickly as revenues slip, six consecutive years of deficits.

And unlike the auto companies, which could close unneeded plants and shed workers without diminishing their ability to produce quality cars, Detroit has been cutting for years and is already delivering substandard services.

Average police response times have reached 58 minutes, compared with a national average of 11 minutes. Its per capita violent crime rate is nearly triple that of Cleveland and St. Louis, and it has fewer than half as many functioning streetlights per square mile as those cities. And on and on.

But while Michigan Gov. Rick Snyder has capably overseen Detroit’s march to Chapter 9, neither the state nor the federal government has evinced any inclination to provide meaningful financial assistance.

That’s a mistake. No one likes bailouts or the prospect of rewarding Detroit’s historic fiscal mismanagement. But apart from voting in elections, the 700,000 remaining residents of the Motor City are no more responsible for Detroit’s problems than were the victims of Hurricane Sandy for theirs, and eventually Congress decided to help them.

America is just as much about aiding those less fortunate as it is about personal responsibility. Government does this in so many ways; why shouldn’t it help Detroit rebuild itself?

Many call for scaling back the city to fit realistic population projections. While logical, the potential for downsizing Detroit is limited because the city’s population didn’t flee from just one neighborhood; the departures were scattered, requiring Detroit to deliver services across a geographic area the size of Philadelphia, with less than half the population. Further cuts will surely come, but in some key areas, like public safety and blight removal, Detroit needs to spend more, not less.

That necessitates large-scale reductions in its liabilities, which total as much as $18 billion. By comparison, the country’s second largest municipal bankruptcy — that of Jefferson County, Ala., which is slightly smaller than Detroit in population — involves $4 billion of liabilities.

Detroit faces greater challenges than the automakers because the structure of its obligations is quite different from those of General Motors and Chrysler.

Detroit owes approximately $5.3 billion on debt that has first call on all water and sewer revenues, which means the holders of that debt have to the right to take as much of the water and sewer fees (after operating expenses) as are needed to service the debt.

The bulk of its obligations are to the grossly underfunded pension plans and for retiree health care costs — nearly half of the city’s total liabilities. The city has suggested that it cut these by 90 percent. Although retirees don’t have a lot of legal rights in the bankruptcy process, it is difficult to imagine — on either a human or a political level — an exit from bankruptcy that would include reductions of this magnitude.

The first duty to help lies with the state: Gov. Rick Snyder has made clear that Detroit’s success is key to Michigan’s success.

For starters, if the state assumes responsibility for the $1.25 billion in reinvestment spending that Detroit’s emergency manager, Kevyn Orr, has included in his proposed budget, the city could use those freed-up funds to trim the potential pension reductions of retirees. And the Obama administration should comb through its urban programs to try to allocate more funds to a city that is truly in distress. (If I thought it could pass Congress, I’d happily support a special appropriation, but the politics of any spending are toxic in Washington these days.)

Given the depth of Detroit’s hole, no one should doubt that one of the important principles of the auto rescue — shared sacrifice by creditors, workers and other stakeholders — should be maintained.

When President Obama rescued the auto companies, his decision was politically unpopular. By the time of last fall’s presidential election, a majority of Americans had swung in favor of the move. History could repeat itself.

19 July 2013 Last updated at 17:52 ET
Detroit legal battle over bankruptcy petition
Detroit used to be a thriving industrial city, but over the past few decades its fortunes have waned

A judge in the US state of Michigan has ordered the city of Detroit to withdraw its application for bankruptcy over its debts of $18bn (£12bn).  Judge Rosemarie Aquilina said the petition, filed on Thursday, violated the state's laws and constitution because it threatened pension benefits.  But the state's attorney general immediately appealed against the order.

Earlier, Governor Rick Snyder said the move towards bankruptcy would reverse decades of decay.  Bankruptcy would allow Detroit's state-appointed emergency manager, Kevyn Orr, to liquidate the city's assets to satisfy creditors and pensioners.


Mr Orr proposed a deal in June in which creditors would accept 10 cents for every dollar they were owed.  But two pension funds representing retired city workers have resisted the bankruptcy plan, and - with tens of thousands of creditors - the city is already facing a number of lawsuits.

In her ruling on Friday, Circuit Judge Rosemarie Aquilina sided with the pension plaintiffs.  She ruled that the 2012 law which allowed for bankruptcy to be filed was unconstitutional, but it enabled the state governor to jeopardise the pension benefits of public employees.  But it remained unclear what impact the ruling would have on the proceedings.

The BBC's Jonny Dymond, in Detroit, says it is just the first stage in a multi-layer legal system, but that it throws into question the stunningly complex rescue plan for the troubled city.

Shortly after, Michigan Attorney General Bill Schuette said he had appealed against Judge Aquilina's rulings on behalf of Governor Snyder.

'Basically broke'

Governor Snyder: "This has been a long period of decline. It's time to do something about it."

Detroit is the largest US city ever to file for bankruptcy. In 2012, three smaller California cities - Stockton, Mammoth Lakes and San Bernardino - took the step.  It has been struggling for decades with spiralling debts - public services are nearing collapse and about 70,000 properties lie abandoned.  Known as Motor City for its once-thriving automobile industry, Detroit stopped debt repayments to unsecured creditors last month to keep the city running.

About $9bn of Detroit's debt is owed to the pension funds and retiree healthcare benefits of the city's 10,000 workers and 20,000 retirees.

Earlier on Friday, Gov Snyder said the city had filed for bankruptcy on because it was "basically broke".

"We're the comeback state in Michigan, but to be a great state, we need Detroit on the path to being a great city again," he told Friday's news conference.

"Now is the opportunity to stop 60 years of decline," he added.

"We will come out with a stronger, better Detroit and a format to grow this city. The citizens of not just this city but the state deserve it."

Detroit’s Creditors and Unions Prepare for Bankruptcy Fight
July 19, 2013

DETROIT — A day after Detroit became the largest American city ever to seek bankruptcy protection in court, the size of the battle this city now faces was growing clear, as creditors vehemently objected to the way Detroit is asking to repay them pennies on the dollar and as representatives of city workers, who face benefits cuts, said the city had failed to truly negotiate before heading to court.

“The fiscal realities confronting Detroit have been ignored for too long,” Gov. Rick Snyder said on Thursday as he authorized Detroit’s bankruptcy filing after a recommendation from Kevyn D. Orr, the emergency financial manager Mr. Snyder, a Republican, had appointed to resolve the city’s dire financial situation. “I’m making this tough decision so the people of Detroit will have the basic services they deserve and so we can start to put Detroit on a solid financial footing that will allow it to grow and prosper in the future.”

By Friday, many in this city, including some elected leaders, said bankruptcy seemed unfortunate but also inevitable. But those representing tens of thousands of city employees and retirees said they intended to fight the case, particularly for the thousands of retirees who depend on city pensions.

“Apparently Governor Snyder and Kevyn Orr want Detroit’s public service workers to rely on their children for food and shelter, or have to work until they die,” said Lee Saunders, president of the American Federation of State, County and Municipal Employees.

The move to bankruptcy by leaders in Detroit, the cradle of America’s automobile industry and once the nation’s fourth-most-populous city, also amounts to the largest municipal bankruptcy filing in American history in terms of debt.

Not everyone agrees how much Detroit owes, but Mr. Orr, the emergency manager, has said the debt is likely to be $18 billion and perhaps as much as $20 billion.

For Detroit, the filing came as a painful reminder of a city’s rise and fall.

“It’s sad, but you could see the writing on the wall,” said Terence Tyson, a city worker who learned of the bankruptcy as he left his job at Detroit’s municipal building on Thursday evening. “This has been coming for ages.”

Detroit expanded at a stunning rate in the first half of the 20th century with the arrival of the automobile industry, and then shrank away in recent decades at a similarly remarkable pace. A city of 1.8 million in 1950, it is now home to 700,000 people, as well as to tens of thousands of abandoned buildings, vacant lots and unlit streets.

From here, there is no road map for Detroit’s recovery, not least of all because municipal bankruptcies are rare. State officials said ordinary city business would carry on as before, even as city leaders take their case to a judge, first to prove that the city is so financially troubled as to be eligible for bankruptcy, and later to argue that Detroit’s creditors and representatives of city workers and municipal retirees ought to settle for less than they once expected.

Some bankruptcy experts and city leaders bemoaned the likely fallout from the filing, including the stigma. In addition to further benefit cuts for city workers and retirees, they anticipate more reductions in services for residents, and a detrimental effect on borrowing.

“For a struggling family I can see bankruptcy, but for a big city like this, can it really work?” said Diane Robinson, an office assistant who has worked for the city for 20 years. “What will happen to city retirees on fixed incomes?”

But others, including some Detroit business leaders who have seen a rise in private investment downtown despite the city’s larger struggles, said bankruptcy seemed the only choice left — and one that might finally lead to a desperately needed overhaul of city services and to a plan to pay off some reduced version of the overwhelming debts. In short, a new start.

“The worst thing we can do is ignore a problem,” said Sandy K. Baruah, president of the Detroit Regional Chamber. “We’re finally executing a fix.”

The decision to go to court signaled a breakdown after weeks of tense negotiations, in which Mr. Orr had been trying to persuade creditors to accept pennies on the dollar and unions to accept cuts in benefits.

All along, the state’s involvement — including Mr. Snyder’s decision to send in an emergency manager — has carried racial implications, setting off a wave of concerns for some in Detroit that the mostly white Republican-led state government was trying to seize control of Detroit, a Democratic city where more than 80 percent of residents are black.

The nature of Detroit’s situation ensures that it will be watched intensely by the municipal bond market, by public sector unions, and by leaders of other financially challenged cities around the country. Just over 60 cities, towns, villages and counties have filed under Chapter 9, the court proceeding used by municipalities, since the mid-1950s.

Leaders in Washington and in Lansing, the state capital, issued statements of concern late Thursday. A White House spokeswoman said President Obama and his senior team were closely monitoring the situation.

“While leaders on the ground in Michigan and the city’s creditors understand that they must find a solution to Detroit’s serious financial challenge, we remain committed to continuing our strong partnership with Detroit as it works to recover and revitalize and maintain its status as one of America’s great cities,” Amy Brundage, the spokeswoman, said in a statement.

The debt in Detroit dwarfs that of Jefferson County, Ala., which had been the nation’s largest municipal bankruptcy, having filed in 2011 with about $4 billion in debt. The population of Detroit, the largest city in Michigan, is more than twice that of Stockton, Calif., which filed for bankruptcy in 2012 and had been the nation’s most populous city to do so.

Other major cities, including New York and Cleveland in the 1970s and Philadelphia two decades later, have teetered near the edge of financial ruin, but ultimately found solutions other than federal court. Detroit’s struggle, experts say, is particularly dire because it is not limited to a single event or one failed financial deal, like the troubled sewer system largely responsible for Jefferson County’s downfall.

Instead, numerous factors over many years have brought Detroit to this point, including a shrunken tax base but still a huge, 139-square-mile city to maintain; overwhelming health care and pension costs; repeated efforts to manage mounting debts with still more borrowing; annual deficits in the city’s operating budget since 2008; and city services crippled by aged computer systems, poor record-keeping and widespread dysfunction.

All of that makes bankruptcy — a process that could take months, if not years, and is itself expected to be costly — particularly complex.

“It’s not enough to say, let’s reduce debt,” said James E. Spiotto, an expert in municipal bankruptcy at the law firm of Chapman and Cutler in Chicago. “At the end of the day, you need a real recovery plan. Otherwise you’re just going to repeat the whole thing over again.”

The municipal bond market will be paying particular attention to Detroit because of what it may mean for investing in general-obligation bonds. In recent weeks, as Detroit officials have proposed paying off small fractions of what the city owes, they have indicated they intend to treat investors holding general-obligation bonds as having no higher priority for payment than, for instance, city workers — a notion that conflicts with the conventions of the market, where general-obligation bonds have been seen as among the safest investments and all but certain to be paid in full.

Leaders of public sector unions and municipal retirees around the nation will be focused on whether Detroit is permitted to slash pension benefits, despite a provision in the State Constitution that union leaders say bars such cuts.

Officials in other financially troubled cities may feel encouraged to follow Detroit’s path, some experts say. A rush of municipal bankruptcies appears unlikely, though, and leaders of other cities will want to see how this case turns out, particularly when it comes to pension and retiree health care costs, said Karol K. Denniston, a bankruptcy lawyer with Schiff Hardin who is advising a taxpayer group that came together in Stockton after its bankruptcy.

“If you end up with precedent that allows the restructuring of retirement benefits in bankruptcy court, that will make it an attractive option for cities,” Ms. Denniston said. “Detroit is going to be a huge test kitchen.”

Around this city, there was widespread uncertainty about what bankruptcy might really mean, now and in the long term. Officials said city workers were being sent letters, notifying them that city business would proceed as usual, from bills to permits. A hot line was planned for residents and others with questions and worries.

For some Detroiters, recent memories of bankruptcies by Chrysler and General Motors — and the re-emergence of those companies — appeared to have calmed nerves. But experts say corporate bankruptcy procedures are significantly different from municipal bankruptcies.

In municipal bankruptcies, for instance, the ability of judges to intervene in how a city is run is sharply limited. And municipal bankruptcies are a form of debt adjustment, as opposed to liquidation or reorganization.

Here, residents are likely to see little immediate change from the way the city has been run since March, when Mr. Orr arrived to oversee major decisions. A bankruptcy lawyer, he is widely expected to continue to run Detroit during a legal process. Mayor Dave Bing and Detroit’s elected City Council are still paid to hold office and are permitted to make decisions about day-to-day operations, though Mr. Orr could remove those powers.

Mr. Orr has said that as part of any restructuring he wants to spend about $1.25 billion on improving city infrastructure and services. But a major concern for Detroit residents remains the possibility that services, already severely lacking, might be further diminished in bankruptcy.

About 40 percent of the city’s streetlights do not work, a report from Mr. Orr’s office showed. More than half of Detroit’s parks have closed since 2008.

Monica Davey reported from Detroit, and Mary Williams Walsh from New York.

$18 billion plus in debt, Detroit does Chapter 9 bankruptcy, tailored to municipal, governmental, quasi-governments entities.

Billions in Debt, Detroit Tumbles Into Insolvency
July 18, 2013

DETROIT — Detroit, the cradle of America’s automobile industry and once the nation’s fourth-most-populous city, filed for bankruptcy on Thursday, the largest American city ever to take such a course.

The decision, confirmed by officials after it trickled out in late afternoon news reports, also amounts to the largest municipal bankruptcy filing in American history in terms of debt.

“This is a difficult step, but the only viable option to address a problem that has been six decades in the making,” said Gov. Rick Snyder, who authorized the move after a recommendation from the emergency financial manager he had appointed to resolve Detroit’s dire financial situation.

Not everyone agrees how much Detroit owes, but Kevyn D. Orr, the emergency manager, has said the debt is likely to be $18 billion and perhaps as much as $20 billion.

For Detroit, the filing came as a painful reminder of a city’s rise and fall.

“It’s sad, but you could see the writing on the wall,” said Terence Tyson, a city worker who learned of the bankruptcy as he left his job at Detroit’s municipal building on Thursday evening. Like many there, he seemed to react with muted resignation and uncertainty about what lies ahead, but not surprise. “This has been coming for ages.”

Detroit expanded at a stunning rate in the first half of the 20th century with the arrival of the automobile industry, and then shrank away in recent decades at a similarly remarkable pace. A city of 1.8 million in 1950, it is now home to 700,000 people, as well as to tens of thousands of abandoned buildings, vacant lots and unlit streets.

From here, there is no road map for Detroit’s recovery, not least of all because municipal bankruptcies are rare. State officials said ordinary city business would carry on as before, even as city leaders take their case to a judge, first to prove that the city is so financially troubled as to be eligible for bankruptcy, and later to argue that Detroit’s creditors and representatives of city workers and municipal retirees ought to settle for less than they once expected.

Some bankruptcy experts and city leaders bemoaned the likely fallout from the filing, including the stigma. They anticipate further benefit cuts for city workers and retirees, more reductions in services for residents, and a detrimental effect on borrowing.

“For a struggling family I can see bankruptcy, but for a big city like this, can it really work?” said Diane Robinson, an office assistant who has worked for the city for 20 years. “What will happen to city retirees on fixed incomes?”

But others, including some Detroit business leaders who have seen a rise in private investment downtown despite the city’s larger struggles, said bankruptcy seemed the only choice left — and one that might finally lead to a desperately needed overhaul of city services and to a plan to pay off some reduced version of the overwhelming debts. In short, a new start.

“The worst thing we can do is ignore a problem,” said Sandy K. Baruah, president of the Detroit Regional Chamber. “We’re finally executing a fix.”

The decision to go to court signaled a breakdown after weeks of tense negotiations, in which Mr. Orr had been trying to persuade creditors to accept pennies on the dollar and unions to accept cuts in benefits.

All along, the state’s involvement — including Mr. Snyder’s decision to send in an emergency manager — has carried racial implications, setting off a wave of concerns for some in Detroit that the mostly white Republican-led state government was trying to seize control of Detroit, a Democratic city where more than 80 percent of residents are black.

The nature of Detroit’s situation ensures that it will be watched intensely by the municipal bond market, by public sector unions, and by leaders of other financially challenged cities around the country. Just over 60 cities, towns, villages and counties have filed under Chapter 9, the court proceeding used by municipalities, since the mid-1950s.

Leaders in Washington and in Lansing, the state capital, issued statements of concern late Thursday. A White House spokeswoman said President Obama and his senior team were closely monitoring the situation.

“While leaders on the ground in Michigan and the city’s creditors understand that they must find a solution to Detroit’s serious financial challenge, we remain committed to continuing our strong partnership with Detroit as it works to recover and revitalize and maintain its status as one of America’s great cities,” Amy Brundage, the spokeswoman, said in a statement.

The debt in Detroit dwarfs that of Jefferson County, Ala., which had been the nation’s largest municipal bankruptcy, having filed in 2011 with about $4 billion in debt. The population of Detroit, the largest city in Michigan, is more than twice that of Stockton, Calif., which filed for bankruptcy in 2012 and had been the nation’s most populous city to do so.

Other major cities, including New York and Cleveland in the 1970s and Philadelphia two decades later, have teetered near the edge of financial ruin, but ultimately found solutions other than federal court. Detroit’s struggle, experts say, is particularly dire because it is not limited to a single event or one failed financial deal, like the troubled sewer system largely responsible for Jefferson County’s downfall.

Instead, numerous factors over many years have brought Detroit to this point, including a shrunken tax base but still a huge, 139-square-mile city to maintain; overwhelming health care and pension costs; repeated efforts to manage mounting debts with still more borrowing; annual deficits in the city’s operating budget since 2008; and city services crippled by aged computer systems, poor record-keeping and widespread dysfunction.

All of that makes bankruptcy — a process that could take months, if not years, and is itself expected to be costly — particularly complex.

“It’s not enough to say, let’s reduce debt,” said James E. Spiotto, an expert in municipal bankruptcy at the law firm of Chapman and Cutler in Chicago. “At the end of the day, you need a real recovery plan. Otherwise you’re just going to repeat the whole thing over again.”

The municipal bond market will be paying particular attention to Detroit because of what it may mean for investing in general obligation bonds. In recent weeks, as Detroit officials have proposed paying off small fractions of what the city owes, they have indicated they intend to treat investors holding general obligation bonds as having no higher priority for payment than, for instance, city workers — a notion that conflicts with the conventions of the market, where general obligation bonds have been seen as among the safest investments and all but certain to be paid in full.

Leaders of public sector unions and municipal retirees around the nation will be focused on whether Detroit is permitted to slash pension benefits, despite a provision in the State Constitution that union leaders say bars such cuts.

Officials in other financially troubled cities may feel encouraged to follow Detroit’s path, some experts say. A rush of municipal bankruptcies appears unlikely, though, and leaders of other cities will want to see how this case turns out, particularly when it comes to pension and retiree health care costs, said Karol K. Denniston, a bankruptcy lawyer with Schiff Hardin who is advising a taxpayer group that came together in Stockton after its bankruptcy.

“If you end up with precedent that allows the restructuring of retirement benefits in bankruptcy court, that will make it an attractive option for cities,” Ms. Denniston said. “Detroit is going to be a huge test kitchen.”

Around this city, there was widespread uncertainty about what bankruptcy might really mean, now and in the long term. Officials said city workers were being sent letters, notifying them that city business would proceed as usual, from bills to permits. A hot line was planned for residents and others with questions and worries.

For some Detroiters, recent memories of bankruptcies by Chrysler and General Motors — and the re-emergence of those companies — appeared to have calmed nerves. But experts say corporate bankruptcy procedures are significantly different from municipal bankruptcies.

In municipal bankruptcies, for instance, the ability of judges to intervene in how a city is run is sharply limited. And municipal bankruptcies are a form of debt adjustment, as opposed to liquidation or reorganization.

Here, residents are likely to see little immediate change from the way the city has been run since March, when Mr. Orr arrived to oversee major decisions. A bankruptcy lawyer, he is widely expected to continue to run Detroit during a legal process. Mayor Dave Bing and Detroit’s elected City Council are still paid to hold office and are permitted to make decisions about day-to-day operations, though Mr. Orr could remove those powers.

Mr. Orr has said that as part of any restructuring he wants to spend about $1.25 billion on improving city infrastructure and services. But a major concern for Detroit residents remains the possibility that services, already severely lacking, might be further diminished in bankruptcy.

About 40 percent of the city’s streetlights do not work, a report from Mr. Orr’s office showed. More than half of Detroit’s parks have closed since 2008.

Monica Davey reported from Detroit, and Mary Williams Walsh from New York.

NEWS:  Detroit declares Chapter 9 bankruptcy.

Detroit Files for Bankruptcy
July 18, 2013

DETROIT — Detroit, the cradle of America’s automobile industry and once the nation’s fourth-most-populous city, has filed for bankruptcy, an official said Thursday afternoon, the largest American city ever to take such a course.

The decision to turn to the federal courts, which required approval from both the emergency manager assigned to oversee the troubled city and from Gov. Rick Snyder, is also the largest municipal bankruptcy filing in American history in terms of debt.

Not everyone agrees how much Detroit owes, but Kevyn D. Orr, the emergency manager who was appointed by Mr. Snyder to resolve the city’s financial problems, has said the debt is likely to be $18 billion and perhaps as much as $20 billion.

For Detroit, the filing comes as a painful reminder of a city’s rise and fall.

Founded more than 300 years ago, the city expanded at a stunning rate in the first half of the 20th century with the arrival of the automobile industry, and then shrank away in recent decades at a similarly remarkable pace. A city of 1.8 million in 1950, it is now home to 700,000 people, as well as to tens of thousands of abandoned buildings, vacant lots and unlit streets.

From here, there is no road map for Detroit’s recovery, not least of all because municipal bankruptcies are rare. Some bankruptcy experts and city leaders bemoaned the likely fallout from the filing, including the stigma it would carry. They anticipate further benefit cuts for city workers and retirees, more reductions in services for residents, and a detrimental effect on future borrowing.

But others, including some Detroit business leaders who have seen a rise in private investment downtown despite the city’s larger struggles, said bankruptcy seemed the only choice left — and one that might finally lead to a desperately needed overhaul of city services and a plan to pay off some reduced version of the overwhelming debts. In short, a new start.

The decision to go to court signaled a breakdown after weeks of tense negotiations, in which Mr. Orr had been trying to persuade creditors to accept pennies on the dollar and unions to accept cuts in benefits.

All along, the state’s involvement — including Mr. Snyder’s decision to send in an emergency manager — has carried racial implications, setting off a wave of concerns for some in Detroit that the mostly-white, Republican-led state government was trying to seize control of Detroit, a Democratic-held city where more than 80 percent of residents are black.

The nature of Detroit’s situation ensures that it will be watched intensely by the municipal bond market, by public sector unions, and by leaders of other financially challenged cities around the country. Only slightly more than 60 cities, towns, villages and counties have filed under Chapter 9, the court proceeding used by municipalities, since the mid-1950s.

The debt in Detroit dwarfs that of Jefferson County, Ala., which had been the nation’s largest municipal bankruptcy, having filed in 2011 with about $4 billion in debt. The population of Detroit, the largest city in Michigan, is more than twice that of Stockton, Calif., which filed for bankruptcy in 2012 and had been the nation’s most populous city to do so.

Other major cities, including New York and Cleveland in the 1970s and Philadelphia two decades later, have teetered near the edge of financial ruin, but ultimately found solutions other than federal court. Detroit’s struggle, experts say, is particularly dire because it is not limited to a single event or one failed financial deal, like the troubled sewer system largely responsible for Jefferson County’s downfall.

Instead, numerous factors over many years have brought Detroit to this point, including a shrunken tax base but still a huge, 139-square-mile city to maintain; overwhelming health care and pension costs; repeated efforts to manage mounting debts with still more borrowing; annual deficits in the city’s operating budget since 2008; and city services crippled by aged computer systems, poor record-keeping and widespread dysfunction.

All of that makes bankruptcy — a process that could take months, if not years, and is itself expected to be costly — particularly complex.

“It’s not enough to say, let’s reduce debt,” said James E. Spiotto, an expert in municipal bankruptcy at the law firm of Chapman and Cutler in Chicago. “At the end of the day, you need a real recovery plan. Otherwise you’re just going to repeat the whole thing over again.”

The municipal bond market will be paying particular attention to Detroit because of what it may mean for investing in general obligation bonds. In recent weeks, as Detroit officials have proposed paying off small fractions of what the city owes, they have indicated they intend to treat investors holding general obligation bonds as equal, in essence, to city workers — a notion that conflicts with the conventions of the market, where general obligation bonds have been seen as among the safest investments.

Leaders of public sector unions and municipal retirees around the nation will be focused on whether Detroit is permitted to slash pension benefits, despite a provision in the State Constitution that union leaders say bars such cuts.

Officials in other financially troubled cities may feel encouraged to follow Detroit’s path, some experts say. A rush of municipal bankruptcies appears unlikely, though, and leaders of other cities will want to see how this case turns out, particularly when it comes to pension and retiree health care costs, said Karol K. Denniston, a bankruptcy lawyer with Schiff Hardin who is advising a taxpayer group that came together in Stockton after its bankruptcy.

“If you end up with precedent that allows the restructuring of retirement benefits in bankruptcy court, that will make it an attractive option for cities,” Ms. Denniston said. “Detroit is going to be a huge test kitchen.”

Around this city, there was widespread uncertainty about what bankruptcy might really mean, now and in the long term, though leaders of other cities who have been through court cautioned of lingering effects.

“The label sticks with us, unfortunately,” said Daniel E. Keen, the city manager of Vallejo, Calif., which filed for bankruptcy in 2008.

For some Detroiters, recent memories of bankruptcies by Chrysler and General Motors — and the re-emergence of those companies — appeared to have calmed nerves. But experts say corporate bankruptcy procedures are significantly different from municipal bankruptcies.

In municipal bankruptcies, for instance, the ability of judges to intervene in how a city is run is sharply limited. And municipal bankruptcies are a form of debt adjustment, as opposed to liquidation or reorganization.

Here, residents are likely to see little immediate change from the way the city has been run since March, when Mr. Orr arrived to oversee major decisions. A bankruptcy lawyer, he is widely expected to continue to run Detroit during a legal process. Mayor Dave Bing and Detroit’s elected City Council are still paid to hold office and are permitted to make decisions about day-to-day operations, though Mr. Orr could remove those powers at any point.

Mr. Orr has said that as part of any restructuring he wants to spend about $1.25 billion on improving city infrastructure and services. But a major concern for Detroit residents remains the possibility that services, already severely lacking, might be further diminished in bankruptcy.

In 2012, Detroit had the highest rate of violent crime in the nation for a city larger than 200,000, a report from Mr. Orr’s office showed. About 40 percent of the city’s streetlights do not work. More than half of Detroit’s parks have closed since 2008.

“If you’re a hedged investor, this is great,” Mr. McNamara said.  Never say never.  What now, he asks?
Daniel 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...

Financial Crisis Just a Symptom of Detroit’s Woes
July 8, 2013

DETROIT — A question unimaginable in most major American cities is utterly commonplace in this one: If you suddenly found yourself gravely ill, injured or even shot, would you call 911?

Many people here say the answer is no. Some laugh at the odds of an ambulance appearing promptly, if ever. In Detroit, people map out alternative plans instead, enlisting a relative or a friend.

As officials negotiate urgently with creditors and unions in a last-ditch effort to spare Detroit from plunging into the largest municipal bankruptcy in the nation’s history, residents say the city has worse problems than its estimated $18 billion debt.

“The city is past being a city now; it’s gone,” said Kendrick Benguche, whose family lives on a block with a single streetlight, just down from a vacant firehouse that sits beside a burned-out home. The Detroit police’s average response time to calls for the highest-priority crimes this year was 58 minutes, officials now overseeing the city say. The department’s recent rate of solving cases was 8.7 percent, far lower, the officials acknowledge, than clearance rates in cities like Pittsburgh, Milwaukee and St. Louis.

“I guess I’ll be glad if someone else takes over and other people run this thing,” Mr. Benguche said. “The way I look at it, the city is already bankrupt.”

Kevyn D. Orr, the state-appointed emergency financial manager for Detroit, has said that the chances of filing for bankruptcy, a possibility that could be decided as early as this month, stand at 50-50. On Wednesday, Mr. Orr is expected to lead 40 representatives of Detroit’s creditors on a bus tour of the city and its blight to let the bleak images of empty lots and shuttered firehouses make the argument that creditors should accept pennies on the dollars owed.

The prospect of a bankruptcy filing — a move that is extremely rare for cities and one that has never happened to an American city as populous as Detroit, with about 700,000 people — worries some residents. They say they fear that bankruptcy would add more stigma to a city that has contracted alarmingly in the decades since it was the nation’s fourth largest, starting in the 1920s, and that it might worsen already bare-bones services.

The notion that assets like Coleman A. Young International Airport, Belle Isle Park and the collections of the Detroit Institute of Arts might be sold — either in a formal bankruptcy proceeding or in a huge city reorganization outside of the court system — has fueled outrage.

“Bankruptcy scares me,” said LaTanya Boyce, a nurse practitioner. She urges her patients to treat health concerns before they become acute because, she said, “if they find themselves calling 911, it’s probably too late.”

But as with many here who have wrestled with the practical realities of living in this city, Ms. Boyce said she would not mind if some entity other than the city took over the management of Belle Isle, a park whose plan was conceived in the early 1880s by Frederick Law Olmsted. Ms. Boyce goes to the park for exercise, wearing a fanny pack that at times contains a gun — “Do you see any city police here?” — and bemoaning several locked restrooms that have portable toilets planted in front of them.

“I would love to see it leased to the state,” she said of the park. “They’d take better care.”

Recent developments among Detroit’s elected leaders have only added to the sense that significant changes in the city are perhaps even preferable. Two of the nine City Council members have resigned. (One said he was leaving to work for the emergency manager’s office.) Then, Charles Pugh, the Council president, had his salary stopped and power stripped by Mr. Orr after the councilman abruptly stopped showing up for meetings and disappeared from public view.

“Where Is Charles Pugh?” a headline at the top of the front page of The Detroit Free Press asked.

“For a lot of people, I think city government has become a nonentity here,” said Kurt Metzger, the director of Data Driven Detroit, which tracks demographic, economic and housing trends in the region. “People almost feel like the city goes on in spite of city government — that city government in this case certainly doesn’t define the city — and that affects how they’re feeling about what comes next.”

Recently, Mr. Orr indicated that Detroit was getting out of the business of electricity distribution. An independent authority is already planning to take control of the city’s streetlights, 40 percent of which, Mr. Orr’s office said, were not working in recent months. Similar handoffs are being weighed for the water and sewer services, and possibly more.

While many who have been through municipal bankruptcies say such moves often mean more budget cuts to city services, Mr. Orr has called for spending about $1.25 billion over the next 10 years on improving city infrastructure and services, including the police. Last week, James Craig, Mr. Orr’s choice for police chief, arrived to face a city that had seen five chiefs in as many years and had the highest rate of violent crime in 2012 of any city with more than 200,000 residents, according to a report by Mr. Orr.

“Whatever the solution is — a negotiated plan or a bankruptcy proceeding — the end result is going to be better services,” Bill Nowling, Mr. Orr’s spokesman, said. “This is all about getting Detroit strong, viable and solvent.”

Frank Ponder, 45, who works at a hospital here, said major changes in the city, even bankruptcy, now seem all but certain. “Everybody had all these ideas about saving Detroit, and nobody’s ideas actually worked,” he said. “At a certain point, you have to stop fooling yourself.”

The East Side house in which Mr. Ponder lives, once owned by his grandmother, is the only one on his block that appears to be occupied. He has been saving money for years in hopes of moving this fall to a suburb, Warren — and he expects to just walk away.

“What can you do?” he said. “Sell it? On that block?”

While corporations announced this year that they would donate money to the city in part to lease new emergency vehicles, there have been times in 2013, the authorities acknowledge, when only 10 to 14 of Detroit’s 36 ambulances have actually been in service. Some of the city’s emergency medical service vehicles have as many as 300,000 miles on them, so they tend to break down.

All this helps explain why Mr. Ponder said he, as so many here, would try to get himself to a hospital before seeking help from Detroit.

“If you have a heart attack, you’re dead,” he said. “There is no such thing around here as ‘in case of emergency.’ ”

In Embattled Detroit, No Talk of Sharing Pain
June 17, 2013

When New York City threatened to declare bankruptcy in 1975, the idea so terrified everyone that it forced the city, its workers and its recalcitrant bankers to sit down and find ways to share the pain.

Now another large city, Detroit, appears to be on the brink of filing for bankruptcy, but there is little talk of sharing the pain. Instead, the fiscal crisis in Michigan is setting up as a gigantic clash between bondholders and city retirees.

The city’s proposals, which could give some bondholders as little as 10 cents on the dollar, are making some creditors think they would be better off in bankruptcy. They see the specter of a federal judge imposing involuntary losses as less ominous than it was for New York.

“The haircut is so severe,” said Matt Fabian, a managing director of Municipal Market Advisors, “I think it’s scaring them into bankruptcy, rather than away from bankruptcy.”

But city retirees, facing the prospect of sharply reduced benefits whether in bankruptcy or under Detroit’s restructuring proposal, think they stand squarely on the moral high ground because despite the poverty of many current and retired members, they have already offered big concessions.

“It’s not the employees that are costing the city money,” said Edward L. McNeil, an official with the American Federation of State, County and Municipal Employees who is leading a coalition of 33 unions that will be affected by any restructuring of Detroit’s debts, which total roughly $17 billion. Just last year, he said, those unions offered concessions that could have saved the city hundreds of millions of dollars a year. But Detroit “botched the implementation,” he said.

And Michael VanOverbeke, interim general counsel for the general workers’ retirement plan, said bondholders were investors hoping for returns, who should expect “a certain amount of risk.”

“Planning for retirement and working for employers was not an investment into the market,” he added. “These are people who are on a fixed income at this point in their life. They can’t go back to work and start all over again.” He said it was unthinkable to cut retirees’ pensions outside of bankruptcy.

A bankruptcy in Detroit would have no precedent, despite an unusual flurry of municipal bankruptcies after the financial crisis. Rhode Island hurriedly passed a law giving municipal bondhholders priority over other creditors, including retirees, just before the small city of Central Falls filed for bankruptcy. That helped Central Falls resolve its bankruptcy quickly, but no one thinks Michigan could pass such a law. In Jefferson County, Ala., a large majority of the financial trouble grew out of debt issued to rebuild a sewer system, not pensions or other employee benefits. The rights of public workers and bondholders are in conflict in the bankruptcy of Stockton, Calif., but that case is not yet far enough along to be of any guidance to Detroit.

With talks on labor issues scheduled for Thursday, municipal bond market participants say one of their main concerns is that the city’s proposal would flatten the traditional hierarchy of creditors, putting say, a retired librarian on par with an investor holding a general obligation bond. That does not square with the laws and conventions of the municipal bond market, where for decades small investors have been told that such bonds are among the safest investments and that for “general obligation” bonds cities could even be compelled to raise taxes, if that’s what it took to make good. The “full faith and credit” pledge was supposed to make such bonds stronger than the other main type of muni — revenue bonds, which promised to pay investors out of project revenue.

Public finance experts have warned that broad societal problems could follow a loss of faith in municipalities’ commitments to honor their pledges. In a major report on the state of the muni market last year, the Securities and Exchange Commission warned that communities would find it increasingly costly to raise money, throwing into question the time-honored practices of building and financing public works at the local level.

Detroit’s proposal shows how much things have changed since the days when the municipal bond market consisted of two types of debt and little else. The emergency manager, Kevyn D. Orr, issued a complicated list of debts with a wide range of gradations, with general obligation bonds now inferior to revenue bonds.

Mr. Orr classified Detroit’s general obligation bonds into two groups — secured and unsecured — with the secured ones backed by outside sources of money, like state aid or federal block grants. The unsecured bonds are those that rely only on Detroit’s “full faith and credit” pledge. As a practical matter, much of Detroit’s bond debt is insured, so bondholders will feel no immediate pain as the city moves forward with its planned defaults. But the bond insurers have the right to do battle in the bondholders’ place, and other market interests are likely to join them.

Mr. Fabian said bondholders knew perfectly well that Detroit was broke and could not raise taxes and fees enough to cover all its bonds, but were still shocked by the proposed treatment.

“It’s not that people just want to get more money out of Detroit,” he said. “It’s the violence that’s being done to the city’s capital structure. It creates a new paradigm for investing in Michigan bonds.”

In the past, he said, the ratings agencies included the various debt structures in their evaluations of municipal bonds. An “unlimited-tax general obligation bond,” for instance, might be rated one or two notches higher than a “limited tax” version of the same bond. Investors would look at the rating, know what they were getting and pay more for the safer debt.

“Michigan is saying all that will go out the window,” Mr. Fabian said. “In effect, they’re saying that structure only matters when you don’t need it” — when everything is normal and the debt is being repaid.

“And when you need to rely on those legal differences, then they don’t matter,” he added. “It’s distressing.”

Municipal market participants are also rattled by a big, sudden increase in Mr. Orr’s measurement of Detroit’s pension shortfall, which he is also classifying as unsecured, leaving workers and bondholders to compete for whatever pool of money is left over. As of June 30, 2011, the city’s most recent actuarial snapshot showed that its two big pension funds were in pretty good shape — short by just $644 million, because the city had issued securities called “certificates of participation” in 2005 and 2006, and put the proceeds into the pension funds.

But Mr. Orr’s report said that estimated shortfall had been “substantially understated” through aggressive assumptions and other distortions. After correcting those, the two funds’ shortfall was closer to $3.5 billion.

And as for those certificates of participation, issued to produce money for pensions, they turn out to be among Detroit’s shakiest debts. The city already skipped a payment due last Friday, and Mr. Orr said the city had found “certain issues related to the validity and/or enforceability” of the debt. His report did not specify what the issues were, but said further investigation might be warranted.

The report said that to some extent, the trustees who sit on Detroit’s pension boards had worsened the pension trouble by promising workers “ad hoc sweeteners” and diverting investment income to other uses. As state-appointed emergency manager, Mr. Orr has authority to remove pension trustees.

But Mr. VanOverbeke said the trustees were not going anywhere. In fact, they have already set aside $5 million for a legal challenge in case Mr. Orr puts them “in a position that they would not have the resources necessary” to protect the pensioners, Mr. VanOverbeke said.

“It wasn’t put aside to do battle,” he said. “They were set aside so that as fiduciaries they can make the appropriate decisions and take the necessary actions as it is deemed appropriate.”

After opening gambit, Detroit manager's next move vexes creditors
By Nick Carey and Tom Hals
Sun Jun 16, 2013 12:00pm EDT

(Reuters) - Now that Detroit's emergency manager has laid out a tough road that could include a bankruptcy filing for the city, the bondholders, pension managers and others with a stake in the outcome are left to assess his next steps while seeking to minimize any possible losses.

Kevyn Orr faces a difficult task, for he must either coerce the financially troubled city's creditors into cutting a deal that would leave many with just pennies on the dollar, or file for Chapter 9 bankruptcy, where his powers would be greater but the likelihood of long, costly litigation far higher.

Rather than a corporate setting, the city's emergency manager is acting in a political realm where the interests of Detroit's citizens and even credit ratings throughout the state of Michigan may hang in the balance.

There was a forceful start to negotiations with debtholders at a Detroit hotel on Friday, with the city represented by Orr saying it would stop making payments on some of its $18.5 billion in debt, which would put it in default.

Orr also presented a proposal on Friday to creditors, bondholders, pension funds and union representatives, laying out his case for concessions from them in a plan that ran to 134 pages.

Orr told reporters on Friday there was a 50/50 chance of bankruptcy for Detroit, which would be a first for a major U.S. city. At the same time, he insisted this was "not a jaded effort just to go through the process to get to a bankruptcy filing."

The emergency manager's proposal went to great lengths to detail the city's financial ruin, declaring in a stark subheader: "THE CITY IS INSOLVENT" and cataloguing Detroit's disastrous record of keeping its citizens safe and its streetlights on.

Detroit, the center of the U.S. auto industry, is the poorest large city in the country, with more than a third of its residents living below the official government poverty line.

At a minimum, Orr's opening move could be seen as part of a checklist he needs to tick off in order to meet legal requirements needed to declare a bankruptcy of America's most troubled metropolis. But some restructuring experts see in Orr's approach an attempt to put together a pre-packaged bankruptcy, a strategy that has been adopted for Chapter 11 bankruptcies in the corporate world but never before used for a municipality seeking Chapter 9 bankruptcy protection.

"Kevyn Orr is a bankruptcy lawyer and he's going down a checklist of the things he needs to do," said Michael Sweet, an attorney at Fox Rothschild who helped the city of Richmond, California, restructure its finances to avoid bankruptcy. "He's keeping all the options on the table."

A pre-packaged bankruptcy occurs when an entity has negotiated a deal with creditors and other interested parties in advance, put it into written form and received enough votes from creditors to get a judge's approval - forcing it on objecting creditors. Pre-packaged plans greatly reduce uncertainty and legal fees.

Without a pre-packaged plan, Chapter 9 proceedings for the city of 700,000 could be lengthy, litigious and expensive, and cash-strapped Detroit would have to foot the bill. Proving insolvency and demonstrating a municipality's inability to pay its bills would be critical to filing for Chapter 9.

"He (Orr) will get a pre-packaged plan," said James McTevia of Michigan-based consulting firm McTevia & Associates. "But it will be contentious and it will cost a lot."

"Ultimately, given the size of Detroit, the scale of its problems and the number of issues involved, this could go all the way to the Supreme Court."


Unlike many lawyers in the consensus-building world of bankruptcy, Orr earned his keep as a litigator and he led automaker Chrysler's fight in 2009 to get approval to close a quarter of its dealerships early in its bankruptcy. The Chrysler experience was a factor when Michigan Republican Governor Rick Snyder tapped Orr in March to fix Detroit's finances.

Those who have worked with Orr said he knew how to zero in on an adversary's pressure points and narrow their options. They cited his decision to make one presentation to all creditors on Friday.

"If you want to do it right, you get all creditors in the same room and you tell the story one time so there's no misunderstanding," said Pat O'Keefe, president of O'Keefe and Associates, a turnaround firm based in the Detroit suburbs.

O'Keefe added he expected Orr "will try to get some pre-negotiation done with creditors, then use Chapter 9 to implement his plan." He noted that Orr's warning on Friday to reporters that Detroit should know "within the next 30 days or so" if it can avoid bankruptcy could serve as one more proof of "good faith" if he does file for Chapter 9.

Pre-packaged bankruptcy using Chapter 11 was pioneered by Jay Goffman of law firm Skadden, Arps, Slate, Meagher & Flom in New York. He said it could work for municipalities.

"Whether it is a city or state or county, there's no reason that you can't get smart people together, figure out the right solutions from a business standpoint and essentially prepack the solution," Goffman said.

But getting everyone on board for a pre-packaged plan is easier said than done, said Douglas Bernstein, a bankruptcy attorney at Plunkett Cooney in the Detroit area.

"When it comes to a pre-packaged plan, the big question is whether he (Orr) would have enough acceptance going into court," he said. "He would need sufficient votes from all the creditor classes and that will not be easy."

One problem is that Detroit's creditors or stakeholders have different priorities. The main areas of uncertainty surround its unions and pension funds, which may not have much bargaining room and may feel their best chance lies in bankruptcy proceedings rather than a negotiated pre-packaged deal.

"It's quite possible that we will see infighting between Detroit's creditors," said John Pottow, a University of Michigan law professor who specializes in bankruptcy.


Orr has options available to him that can give him leverage over the competing groups. If he goes to bankruptcy court as the sole representative of Detroit, experts say he would have more options and power, which he alluded to publicly last week.

"I have a very powerful statute," Orr said Monday. "I have an even more powerful Chapter 9. I don't want to use it, but I am going to accomplish this job. That will happen."

Orr would be able to drag recalcitrant creditors into court. While no one can force Detroit to sell assets involuntarily in bankruptcy, he can sell them voluntarily.

Much has also been made of a clause in Michigan's constitution that specifically protects pensions and retirement benefits, and it is unclear how that provision would be treated in a federal bankruptcy.

Fox Rothschild's Sweet said a judge would have to "determine whether the 10th Amendment (of the U.S. Constitution) trumps the notion that federal law is supreme." The amendment states that powers not delegated to the federal government by the Constitution or prohibited to the states are reserved for the states or the people.

"The last thing (union pension funds) may want is for a judge to rule on that," he said. "Because if the judge ruled against them, it would open the floodgates" for similar cases.

Time is also of the essence, as Detroit's default could hurt Michigan along with other municipalities in the state and make them "suffer higher interest costs and more difficulty borrowing," Richard Larkin, senior vice president at investment firm HJ Sims, wrote in a note on Friday.

The longer a deal takes, the more likely Chapter 9 becomes, the University of Michigan's Pottow said, as that will be an indication of how much resistance Orr faces from stakeholders.

"My heart says that Kevyn Orr will be able to get everyone around a table and hammer out a deal," Pottow said. "But my brain says that he is going to have no choice but to file" for Chapter 9.

Sound familiar?
Detroit manager proposes sweeping payment cuts to creditors
By Bernie Woodall and Steve Neavling
14 June 2013 12:42pm EDT

DETROIT (Reuters) - Emergency manager Kevyn Orr said Detroit will stop making payments on some debt, including one scheduled on Friday, and proposed debt holders take a drastic cut in the money they are owed to stave off the largest municipal bankruptcy filing in U.S. history.

In a meeting with creditors, Orr for the first time presented a detailed proposal calling on the holders of nearly $17 billion in Detroit debt to make substantial concessions.  Orr said the city was "insolvent" and needed shared sacrifices from everyone, including debt holders, to have any hope of a revival.

"Financial mismanagement, a shrinking population, a dwindling tax base and other factors over the past 45 years have brought Detroit to the brink of financial and operational ruin," Orr said in a statement.

"We have presented a plan that outlines a comprehensive roadmap for ensuring basic services are delivered to our citizens while aligning our obligations with the reality the City confronts."

The moratorium on principal and interest payments on the city's unsecured debt, including a $34 million payment on pension certificates of participation due on Friday, would allow the city to conserve cash needed to provide services to residents, Orr said.  Unsecured creditors, including bondholders and pension funds, will receive a pro rata share of $2 billion of notes the city would issue and pay off as its financial circumstances improve.  City workers and retirees would also face changes to their pensions and health care coverage "consistent with available funding."

An oversight board would be created for Detroit, similar to one created after New York City's financial difficulties in 1979, that would ensure reforms are sustained, Orr said.

Detroit is the poorest large city in the United States with more than a third of its residents living below the official government poverty line. Its population has shrunk to about 700,000 people and basic services such as police and the fire department have broken down.

Orr, a bankruptcy attorney brought in by the state of Michigan to clean up the city's finances, has said there is a 50/50 chance of a bankruptcy filing.

It would be a first for a major U.S. city as New York, Philadelphia and Cleveland all avoided formal bankruptcy filings, noted Jim Spiotto, a municipal bankruptcy expert at law firm Chapman and Cutler.

Historically, bondholders have not lost the principal amount owed them as a result of financial restructurings of major cities.  Heightened concerns that Detroit's bondholders face payment risks due to a possible bankruptcy filing or debt restructuring led to credit rating downgrades deeper into junk category for Detroit's bonds by Standard & Poor's Ratings Services on Wednesday and Moody's Investors Service on Thursday.

Much of Detroit's debt is insured, giving bondholders protection against future defaults. Two of the insurers, MBIA, Inc and Assured Guaranty, are attending the meeting on Friday, according to their spokespersons.

Also attending the meeting are presidents of the unions that represent Detroit's workers, from civil service to firefighters to police officers.

Detroit’s Davos
May 29, 2013

ONCE a year, business and political leaders from metropolitan Detroit travel to an island resort that bans all motorized vehicles and talk about the regional economy.

For me, memories of childhood vacations at that resort, Mackinac Island — the ferry ride, the fudge shops, the horse-drawn carriages — are primarily olfactory. In the unlikely event I’m ever again hit with the dueling scents of confectioner’s exhaust and horse manure, it would probably trigger some kind of Proustian flashback.

For years, Michigan’s business community seemed bent on flashbacks of its own, to the days when the Big Three automakers towered arrogantly from the safe confines of an insular culture. But now its buzzwords are “innovation,” “entrepreneurship” and a “21st-century global market.” This week’s Mackinac Policy Conference has positioned itself as a sort of Midwestern Davos, with a roster of marquee speakers, including Michelle Rhee, Jeb Bush and the hosts of “Morning Joe.”

The topic on everyone’s mind will be the fate of Detroit, which was placed under state control in March by Gov. Rick Snyder. The governor, a Republican, is attending the conference, and four of the candidates running for mayor in November are scheduled to speak there today — among them, the front-runners: the excellently named former police chief Benny Napoleon, and Mike Duggan, who has a serious shot at becoming the first white mayor of Detroit in 40 years.

That would be a compelling story in normal circumstances. But this year, racial dynamics pale beside the surreal spectacle of candidates campaigning for a job that basically no longer exists.

Detroit, with at least $15 billion in long-term debt, is teetering on the brink of municipal bankruptcy, and is slated to remain under state control for at least 18 months. During this period, the mayor and City Council retain their titles, but little else. (This might explain Mayor Dave Bing’s announcement that he would not seek re-election; neither will four of the nine City Council incumbents.) Instead, the emergency manager appointed by Governor Snyder, the bankruptcy lawyer Kevyn D. Orr, will continue to rule Detroit with sweeping powers that include the ability to privatize city services, sell off municipal assets and alter union contracts.

To critics, emergency managers are unelected dictators, most often installed in poor, majority black cities. Last fall, Michigan voters repealed the emergency manager law in a ballot referendum. But Governor Snyder rammed through a new version during the lame-duck session of the G.O.P.-controlled State Legislature — a flagrantly undemocratic move, seemingly driven less by ideology than fear of what a Detroit bankruptcy might do to the credit ratings of the surrounding suburbs and the state.

The hope is that Mr. Orr, who worked as a lead attorney on Chrysler’s managed bankruptcy, will be able to prevent Detroit from entering Chapter 9. Yet in one of his first acts, he signed off on the hiring of his own former law firm, Jones Day, to help restructure Detroit’s long-term debt — despite the fact that Jones Day already represents some of the very banks holding said debt, including JPMorgan Chase and Bank of America.

Indeed, the least surprising development to anyone following Detroit’s woes has been Wall Street’s continued ability to squeeze money out of a city that can’t afford to keep its streetlights on or police its neighborhoods (there were almost as many murders in Detroit last year as there were in New York, a city with 11 times the population; Detroit officers are working 12-hour shifts with 10 percent pay cuts; and private businesses recently kicked in $8 million to buy the department new squad cars and ambulances).

In recent years, Detroit’s water department has paid Wall Street banks hundreds of millions in termination fees alone in order to get out of bad municipal bond deals. (The city utility is so broke, it issued new bonds in order to pay the fees to get out of the old bonds!)

According to a recent Reuters article, since corporate bankruptcies have declined, investors specializing in “distressed” hedge funds have begun circling troubled municipalities, with no city “attracting more attention than Detroit.” One financial adviser quoted in the story sounded a note of caution to the would-be vultures, noting that unlike a corporation, “you can’t liquidate a city.”

But apparently no one informed Mr. Orr, whose spokesman, Bill Nowling, told The Detroit Free Press that the collection of the Detroit Institute of Arts, including works by van Gogh and Matisse, was being listed as an asset in the event of bankruptcy. “Creditors can really force the issue,” Mr. Nowling said. “If you go into court, they can object and say, ‘Hey, I’m taking a huge haircut, and you’ve got a billion dollars’ worth of art sitting over there.’ ”

Why stop there? Perhaps as part of a settlement, Mr. Orr can negotiate with the Detroit Symphony Orchestra to play at creditors’ annual shareholder luncheons, or work out a deal wherein laid-off autoworkers perform free annual tuneups on the limousines of bank executives. Better yet, he could tear a page from the Chrysler turnaround — which, of course, ended with the company’s being purchased by Fiat. See where I’m going with this? Italians love art, they love cars, and they know how to monetize old ruins!

In a different world, Mr. Orr might instead consider more aggressively challenging the city’s creditors, or lobbying for the sort of federal cash infusion received by the faltering banks and auto companies. Unfortunately, such scenarios aren’t likely to come up during today’s Mackinac panel on Detroit’s turnaround — moderated by the vice chairman of a bank.

Fear of art sale sparked by Detroit emergency manager asking for appraisal

By Steve Neavling
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.

The 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.

Bankruptcy Lawyer Is Named to Manage an Ailing Detroit
March 14, 2013

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 Thursday.

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 courts.

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 state oversight.

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.

For Detroit, a Crisis of Bad Decisions and Crossed Fingers
March 11, 2013

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 then.”

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 state.

“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 making payroll.

“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 property owners.

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.

A Private Boom Amid Detroit’s Public Blight
March 4, 2013

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 year.”

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 taking place.”

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 state supervision.

“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.”

Snyder to name 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.

State Control Draws Closer for Detroit After Fiscal Review
February 19, 2013

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 has said.

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.”

Detroit fights to keep control of its finances;  State may impose emergency manager
The Washington Times
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 financial manager."

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 major city.

"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. to intervene.

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 totally irresponsible."

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 people."

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 services.

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."

© Copyright 2011 The Washington Times, LLC. Click here for reprint permission.

Looking Up, Detroit Faces a New Crisis
December 23, 2011

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 further intervention.

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 worse time.

“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 state.”

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 step in.

“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 city.

“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.”

A City Borrows So Its Schools Open on Time
August 15, 2013

PHILADELPHIA — Just a month after Detroit became the largest American city to file for bankruptcy, and with major cities like Chicago and Los Angeles struggling, this former manufacturing behemoth is also edging toward a financial precipice. But here the troubles are centered on the cash-starved public schools system.  The situation is not as dire yet as Detroit’s. There is no talk of resorting to bankruptcy. But the problem is so severe that the city agreed at the last minute on Thursday to borrow $50 million just to be able to open schools on time. Even with that money, schools will open Sept. 9 with a minimum of staffing and sharply curtailed extracurricular activities and other programs.

“The concept is just jaw-dropping,” said Helen Gym, who has three children in the city’s public schools. “Nobody is talking about what it takes to get a child educated. It’s just about what the lowest number is needed to get the bare minimum. That’s what we’re talking about here: the deliberate starvation of one of the nation’s biggest school districts.”

Superintendent William R. Hite Jr. had been threatening to delay opening schools if the city did not come through with the $50 million, which he said was necessary to provide the minimum staffing needed for the basic safety of the district’s 136,000 students. In June, the district closed 24 schools and laid off 3,783 employees, including 127 assistant principals, 646 teachers and more than 1,200 aides, leaving no one even to answer phones.

For a number of years, Mayor Michael A. Nutter and the City Council have been working, with some success and a fair amount of taxpayer pain, to shore up the city’s finances, which have been troubled by mounting debt, a shrinking tax base and unfunded pension and health care obligations to retirees. But the school district, supported by the same weary municipal taxpayers, though under the control of a state reform commission for more than a decade, had been largely ignored.

While the city’s own bond rating has been raised, to its highest level in 30 years, the school district’s credit has been downgraded to junk, with warnings that more downgrades may come.

The unusual situation stems from a combination of politics and long-term structural problems. Decades of dwindling population and resources had already greatly weakened the schools, but now the Republican-controlled state government has drastically cut aid to the district. This move struck some in the Democratic-controlled city as punitive, though Gov. Tom Corbett, a Republican, has said the statewide cuts in education had nothing to do with party politics but with the simple need to do something about the state’s own poor finances. Federal aid to the district has also been chopped.

The Philadelphia School District is an anomaly — unlike many school districts across the country, it has no elected board of education, and never has, at least in modern memory. That means the normal political dynamics found in other places with troubled schools cannot play out here. When the voters get fed up, there is no way they can throw out unsuccessful board members.

As was the case with Detroit, the district’s full debt is even worse than what is known because retiree health and pension obligations have not been disclosed. That is about to change, though, because of new accounting rules that require them to be made public.  Even after the June staff cuts, the district had an estimated $304 million deficit for the coming year — at a time when it is already paying nearly that amount, $280 million, to service its existing debt each year.

Now Thursday’s announcement by Mayor Nutter that he would take out general obligation bonds to come up with the $50 million for the schools risks the city’s own hard-won credit rating by taking on medium-term debt to pay for day-to-day operations — a practice that is widely seen by municipal analysts as a sign of desperation.  Mr. Nutter said that he hoped to be able to pay back the debt by using future sales tax revenues, though that will require an agreement with the City Council, whose president, Darrell L. Clarke, wanted to use some of that money for city workers’ pensions.

To help close the district’s deficit, school officials had asked for $180 million in emergency aid — $120 million from the state and $60 million from the city, with the remainder coming from proposed concessions from three unions — including a 10 percent pay cut for teachers — and other trims. But only $45 million has thus far been approved by the state, and that will not be passed along to the school district until Governor Corbett is satisfied that sufficient reforms have been enacted.

The teachers’ union said it believes no further changes are necessary to allow the release of the money. All of this is being fought out in the middle of negotiations over a new teachers’ contract, with the old one expiring on Aug. 31. All told, the district is asking for $133 million in union concessions and other trims, including the teacher pay cut, but the union is so far refusing to surrender.

“There was no agreement to link the $45 million to the collective bargaining agreement,” Jerry T. Jordan, the president of the Philadelphia Federation of Teachers, said in an interview.

This has left school officials, teachers and parents scrambling.  Daniel Lazar, principal of Greenfield Elementary School in central Philadelphia, sent a letter to parents last week asking for a $613-per-student donation to fill a $355,000 budget gap at his school.

Tomika Anglin says she was so stunned by the request that she has decided to home school her 12-year-old daughter from now on.

“I couldn’t think when I got the letter,” she said. “It was just amazing to me that a public school was charging tuition. They couldn’t put that in a movie because no one would believe it.”

Mr. Lazar said in an interview that the letter was a request rather than a demand, and that any funds raised would be used to help rehire employees like school counselors and teachers’ aides who were laid off. “This wasn’t something that I wanted to do,” he said.

Though the drama now unfolding in the city schools comes after more than a half-century of urban decline and population exodus, in recent years, the migration away from Philadelphia has leveled off. Young professionals and empty-nesters have lately been moving back, reinvigorating the downtown.

“The boosters of Philadelphia, which doesn’t include me, love to talk about the vibrant downtown,” said Zack Stalberg, president of the Committee of Seventy, a local group that promotes clean government, and former editor of The Philadelphia Daily News. “But that’s a relatively tiny portion of the city. Center City and the nearby neighborhoods are doing fine, but elsewhere people’s ambition is still to leave the city when they can afford it, so they can count on a better education for the kids.”

As middle-class people have left Philadelphia, the tax base has withered, raising the overall poverty rate of those who remain. Over the years, it has forced both the city and school district to impose more taxes on a population that is more needy of public services, yet less able to pay for them.

That is not telling parents like Helen Gym or students like Madison and Sharon Tyler anything they do not already know.  The two students had been selling rubber-band bracelets for $5 to raise money for the school district, and earlier this week went back-to-school shopping with their parents even though, at the time, it was not clear that schools would even open.

“All my life I have been waiting for my middle school experience, and now I’m told that might not happen,” said Madison, 10.

And for Ms. Gym, as for many parents, the most distressing aspect was that the current crisis, even if it can be resolved, is most likely just a foreshadowing of what is to come.

“I just don’t know where this ends,” she said. “There is no bottom to this situation.”

Jon Hurdle contributed reporting.

Not bankrupt yet...
Scranton mayor slashes pay for all city workers—including police and firefighters—to minimum wage
By Dylan Stableford, Yahoo! News, Senior Media Reporter
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 was $340.

"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."

Scranton's 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
Pennsylvania 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 Pennsylvania legislature.

'Destitute for decades'

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 come."

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 council.

"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.

Pension pitfalls
Lavish retirement benefits create economic crisis for state and local governments
Washington Times
Nita Ghei
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 offer.

The Central Falls Success

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 away.

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 difference.

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, but America’s.

Sweeping Rhode 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 2028.

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 bargaining.

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 plans.

The measure is projected to reduce the state's unfunded pension liability by $3 billion immediately and save taxpayers $4 billion over 25 years.

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 themselves.

"The average Rhode Islander is worse off than the average public employee," she said. "The average Rhode Islander is pretty strapped right now."

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.

Faltering Rhode Island City Tests Vows to Pensioners
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 creditors.

“This will all be up to a court to decide,” Professor Monahan said.

But many cities and states have already signaled that their bondholders take priority.

When Jefferson County, Ala., 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 were untouched.

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.”

Kentucky’s Runaway Pensions:  Nonprofit groups have been living well off the taxpayer, too.
Wasington Times
By Kevin D. Williamson
April 6, 2013 12:00 A.M.

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 people?

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 - out of bankruptcy in 2013?.

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 it has.

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.

In Alabama, a County That Fell Off the Financial Cliff
February 18, 2012

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 anymore.

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 of Wylam.

“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 prison.

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 booths, either.

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 rates further.

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’ work.

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. Carrington said.

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.”

Ala. County Votes to Settle Debt, Avoid Bankruptcy
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," he said.

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 be passed.

"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 statement.

A bankruptcy filing in this case would have overshadowed the record one filed by Orange County, Calif., in 1994 over debts totaling $1.7 billion.

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 and influence-peddling.

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.

Debt Crisis? Bankruptcy Fears? See Jefferson County, Ala.
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 finances.

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 suffer losses.

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.”

Ala. county 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 largest city.

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 said.

"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 quickly.

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 crimes.

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."

New London DAY series:  Part OnePart Two;  how about the CT MIRROR?

At the top, CT Voices for Children analysis;  below, even-handed in our shortfall (l)...Connecticut one of 50 states: here's how we measure up...

His plan may be to sell the Brooklyn Bridge to balance CT budget - a lot coming home to roost (r).

Story in full:

Letter from Treasurer here:

Treasurer: Malloy plan could harm state’s reputation with investors
By: Keith M. Phaneuf | February 20, 2015

State Treasurer Denise L. Nappier warned Gov. Dannel P. Malloy on Friday that one component of his new budget could harm Connecticut’s reputation on Wall Street.

In a letter released to the media Friday evening, Nappier – a Democrat – called the Democratic governor's plan to rely on $325 million in borrowing to cover operating costs “too aggressive...” 

Both Malloy and Nappier have faced increasing criticism from Republican legislative leaders over the past year for the state’s growing reliance on what are commonly referred to as “bond premiums.”

The state, in some instances when issuing bonds, will pay a higher interest rate than originally planned in return for a premium – extra money to the state in addition to the bonds’ face value.  This is a tool that helps the treasurer market bonds, particularly when interest rates are low.

But rather than using those premiums to accelerate debt reduction, the governor and the Democrat-controlled legislature have used them in recent years to build up the state’s fiscal reserves, or to close past budget deficits.  Critics argue this not only involves borrowing to cover operating expenses, but it drives up the interest rates the state pays on many of its capital projects.

The state has taken more than $400 million in bond premiums since Malloy became governor.

And Benjamin Barnes, Malloy’s budget chief, confirmed Thursday when questioned by the legislature’s Appropriations Committee, that the proposed budget would rely on bond premiums to cover the $325 million gap in the biennial debt service account.

“This has been a longstanding practice,” Barnes told the committee, adding that the administration would expect critics to find spending cuts elsewhere in the budget to replace the anticipated bond premiums.

But Nappier warned Malloy in her letter that interest rates are expected to rise this fall – a development that traditionally reduces investors’ willingness to pay premiums.  To count on those funds, “before they are realized,” she added, “is equivalent to counting one’s chickens before they hatch.”

Story in full:

Anti-Detroit-effect:  One CT municipality leads the way or does it?

Madison to hold public hearing on anti-blight ordinance proposal
New Haven Register
By Sean Carlin
Posted: 04/10/14, 8:05 PM EDT | Updated: 1 day ago

MADISON >> After some minor tweaks to its draft earlier this week at the Board of Selectmen meeting, the town has moved forward with a proposed anti-blight ordinance and scheduled a public hearing on the issue for later this month.

The ordinance aims to fend off blight in the town in order to maintain property values and promote public health, according to the ordinance. The public hearing is set for April 30.

While First Selectman Fillmore McPherson acknowledges that blight isn’t a dire problem in the town — it sports a median household income of $107,062, according to the U.S. Census — the issue rears its head in smaller doses.

“We don’t have whole neighborhoods blighted, but we may have the occasional house that has been run down,” McPherson said Thursday.

The ordinance is a culmination of the work of a Planning and Zoning subcommittee, which worked on the issue for several months. It defines blight as any property exhibiting at least one of a slew of conditions including an accumulation of garbage, chronically neglected vehicles on the premises for more than 30 days and seriously overgrown grass or weeds, among myriad other conditions.

Though excessive vegetation is listed in the ordinance’s list of conditions for blight, McPherson said it isn’t a way to simply keep residents from letting their lawn get out of hand.

“We’re not talking about residents not having their grass mowed for a couple of weeks,” McPherson said, adding that the town is looking more at abandoned and dilapidated properties.

He said the town has received complaints in the past for issues that are addressed in the proposed ordinance, including an abundance of trash on a property and unused vehicles sitting on lots for extended periods of time.

When asked how he thought the issue would be received by residents, McPherson said there would probably be some who want to make sure that the ordinance does not impinge on their property rights.

“I’m sure there will be some people who make sure we don’t overstep our bounds,” he said. “This is not made to make every house look like it’s off the pages of Home Beautiful.”

After the public hearing, McPherson said the Board of Selectmen likely would take up the issue at one of its May meetings. The board would need a super majority of four out of five selectmen to approve the proposal in order to adopt the ordinance, he said.

Malloy Defends Bonding Policy

by Christine Stuart | Sep 27, 2013 1:42pm

Gov. Dannel P. Malloy and Republicans lawmakers clashed Friday at the state Bond Commission meeting over the amount of money the state is borrowing for things like roads, schools, and bridges.

On Friday the Bond Commission approved $395.5 million in borrowing for dozens of projects including $10 million for school security and $10 million in stem cell research. In addition, it also approved $31 million in bonds for Bass Pro Shops in Bridgeport. About $22 million of that will be repaid to the state over 20 years through sales tax revenue collected by the outdoor retailer.

Rep. Vincent Candelora, R-North Branford, who is one of two Republicans on the Bond Commission, didn’t oppose any of the projects on Friday’s agenda, but he expressed concern about the amount the state is borrowing and the rapid rate at which it’s approving projects.

After today’s meeting the Bond Commission is $20 million away from Malloy’s $1.8 billion self-imposed bonding limit for the year. Republican lawmakers also complained that the state Bond Commission is approving projects at such a rapid rate that it’s about $3 billion behind getting the money out the door to actually fund the projects. The Center for Economic Analysis reported last week that if that money was released it would create 16,000 to 28,000 jobs.

“These projects continue to put pressure on our credit card,” Candelora told Malloy.

But Malloy was ready for the criticism. He said the state’s bonded indebtedness was $19.97 billion the month before he was sworn into office and today that number is down to $19.76 billion.

“As I stand before you today, we have less bonded debt,” Malloy emphasized at a press conference following the Bond Commission meeting.

During the meeting he acknowledged that there’s many ways to look at the numbers, but “what’s important is that we build schools, that we build bridges, that we build housing opportunities, that we invest in economic development so that we turn the corner on the net job loss in the state of Connecticut.”

Sen. L. Scott Frantz, R-Greenwich, the other Republican on the commission, said debt is something in a low interest rate environment “that is very tempting.” But he urged the governor to look at the whole picture.

“You may be getting a good deal on the interest rates out of it, but you still have to put yourself on an amortization schedule and you do have to pay that money back,” Frantz said. “It puts a huge burden on future generations if you take a look at the bigger picture of unfunded liabilities.”

Malloy thanked Frantz for the advice and said he’s already taken it when he decided to cancel $1 billion in bonding authorized by the legislature and former Republican Gov. M. Jodi Rell.

At the press conference following the meeting, Malloy explained that Connecticut shows up in national reports as one of the most indebted states in the country because it does things a little differently. Unlike other states Connecticut has no county government, which typically picks up the tab for school construction. In Connecticut, the state funds school construction projects through bonds.

Malloy also pointed out Connecticut ranks poor nationally when it comes to its roads. The American Society of Civil Engineers 2013 Report Card on the Nation’s Infrastructure says that Connecticut’s roads are tied with Illinois as the worst in the nation. Malloy said Friday that’s because there was little investment in transportation infrastructure before he took office.

Even though he plans on going over his $1.8 billion self-imposed limit, Malloy made a promise to Connecticut residents Friday to structure the debt in a responsible manner.

“What I will do is structure our debt with the need to address the needs of the people,” Malloy said. “And keep them safe, and educate the next generation, and create jobs.”

But the other concern for Republicans was the rate at which the state Bond Commission is approving projects. They pointed to the Center for Economic Analysis report which found that the number of unissued bonds has doubled since 2010.

“We are approving projects at a greater pace than we’re funding them,” Candelora said.

But Malloy said there’s sometimes a reason for that.

He used the new M-8 rail cars for Metro-North as an example of why money isn’t being bonded or released by the state. He said he decided to complete the purchase of the cars initially approved under the Rell administration. As of today, the state has only taken possession of about half those cars, which is why the money hasn’t been released.

Was it hypocritical for his Republican colleagues to vote for the projects on Friday’s agenda, but criticize the overall amount of money the state is bonding?

“This isn’t about any one project,” Sen. Minority Leader John McKinney, who is also running for governor, said. “This is about our overall level of borrowing and the priorities you make.”

He said it’s about “fiscal responsibility. It isn’t about any one project.”

Office of Policy and Management Secretary Ben Barnes shot back with a press release saying that if McKinney wants to be taken seriously he should “show his math.”

“What is the exact level of bonding that he believes is appropriate for Connecticut right now, and exactly which projects would he defund to get there?” Barnes said.

McKinney ticked off a number of projects on past Bond Commission agendas that he wouldn’t approve. The first was the $2.8 million the state spent on a new scoreboard for Rentschler Field. He said he also wouldn’t approve $30 million in borrowing for a Hartford parking garage assessed at much less, and he wouldn’t spend $88 million to move state employees from one office to another state office.

“I’m here today because the $1.79 [billion] to date is a 28.6 percent increase over last year,” McKinney said. “That type of borrowing and increasing our debt is unsustainable and fiscally irresponsible.”

Barnes pointed out that to date the state has less bonded debt than when Malloy took office.
State Has First Bank Failure In A Decade
The Hartford Courant
11:27 AM EDT, September 14, 2013

Connecticut had its first bank failure in more than a decade Friday as a community lender that aspired to better serve urban neighborhoods was declared insolvent by banking regulators.

The Community's Bank, with its headquarters and one branch in Bridgeport, came under the receivership of the Federal Deposit Insurance Corp. late Friday afternoon amid mounting losses from commercial real estate loans.

All of the bank's 1,064 deposit accounts totaling $25 million are fully insured by the FDIC, but regulators said that depositors will not have access to funds over the weekend, and ATM cards have been shutdown. The FDIC will try to work with those that have a demonstrated hardship.

Because the assets of the bank weren't sold to another competitor, checks will be cut for the full amount of account balances and sent to customers, who should receive them Tuesday or Wednesday.

Chartered in 2001, The Community's Bank was the state's only minority-owned lender, and its finances had come under increased scrutiny from regulators since 2010.

The traditional focus of minority-owned banks on urban, rather than suburban, areas, provided a major obstacle to building the bank, said state Banking Commissioner Howard F. Pitkin, who issued Friday's order.

"They found it difficult to grow," Pitkin said. "They never reached the point where they were making money."

The bank's founder, Peter F. Hurst Jr., had tried to raise additional capital to keep the bank afloat but was unsuccessful, Pitkin said. Hurst could not be reached for comment late Friday.

Bridgeport Mayor Bill Finch said in a statement that he was "shocked and saddened" by the bank's failure.

"The closing of this bank means our minority community, which oftentimes does not have the same access to credit as others do, is now bereft without this bank's focus on providing access to credit or capital," Finch said. "It is not clear how the state could allow this to happen."

Before Friday, the most recent bank failure in the state was the Connecticut Bank of Commerce in 2002, but that failure was rooted in mismanagement and fraud, Pitkin said. The last bank failure tied to the economy and a sinking loan portfolio — as in the case of The Community's Bank — was in 1996 when Fairfield First Bank & Trust Co. was declared insolvent.

The failure stirs up memories of the spate of bank failures in the early 1990s in Connecticut during the banking crisis that hit New England. Between 1989 and 1996, 42 banks were declared insolvent in Connecticut, including the old Connecticut Bank & Trust Co., part of Bank of New England.

But there was no indication that Friday's failure was part of a larger trend. Pitkin said he had "no reason to feel there are going to be multiple failures. I don't expect more failures at this point."

Just one other bank in Connecticut — Wilton Bank — is under the same level of increased regulator scrutiny as The Community's Bank. Wilton is now in the midst of being acquired by another community bank.

In the past five years, the mortgage crisis and the recession that followed have toppled hundreds of banks throughout the country, but Connecticut banks have not been among them. Pitkin said that the economic downtown crippled The Community's Bank; as a commercial lender, the residential mortgage lending crisis was not a factor.

The Community's Bank was formed with three branches — in Hartford, Bloomfield and Bridgeport — that had been among the branches divested in the merger of Fleet and BankBoston in 2000. The two Hartford-area offices were former BankBoston branches that were focusing specifically on urban areas.

Hurst, a lawyer and a banker who had built a career in New York, saw the opportunity to form a minority-owned bank in the divestiture. The goal, he told The Courant in 2000, was to serve not only minority group members, but any urban customer, homeowner or small business that had gotten turned away from other, mostly larger, banks. Forming a minority-owned bank was a long-standing goal for Hurst.

Hurst raised $15 million to purchase the branches and their deposits. He started with $90 million in deposits, with a goal of building that figure to $1 billion in five years. On Friday, deposits had sunk to $25 million.

The bank, which employed 14, focused mostly on commercial lending. Challenges surfaced almost immediately because 60 miles separated the community's bank headquarters in Bridgeport from the branches in Hartford and Bloomfield. Soon, the bank found it difficult to make the branches profitable.

The Hartford branch was closed and consolidated into Bloomfield in 2003. The Bloomfield branch was sold a year later to Windsor Federal Savings and Loan Association.

Late last month, an investor group filed an application with the state Department of Banking for approval to invest in the bank and become a minority shareholder. The group was led by TicketNetwork Chief Executive Donald Vaccaro. A spokeswoman for Vaccaro said late Friday that the effort was supported by U.S. Reps. Jim Himes and John Larson.

"The cash infusion that I would have provided [would have] meant more loans for inner city development, fewer blighted properties, and more jobs for inner city folks," Vaccaro said in a statement. "Instead of a rescue by me, closing the bank will cost the state and the federal government millions of dollars and cause a loss of many jobs in the city of Bridgeport."

James Heckman, a banking department spokesman, declined to comment late Friday because the application is pending.

Minority-owned banks first emerged in response to Jim Crow laws, and they multiplied during the 1960s civil rights movement. Almost always short of capital, many have spent their entire existence seeking not to expand, but just to survive.

Prior to the founding of The Community's Bank, Connecticut hadn't had a minority-owned bank for a decade, since the 1991 collapse of Connecticut Savings & Loan Association in Hartford.

Copyright © 2013, The Hartford Courant

Lavielle Concerned about Connecticut’s Pension Obligations: Cites Recent CNBC Report
HARTFORD – In the wake of Detroit’s municipal bankruptcy filing, CNBC has released a report this month on the condition of state and municipal pension obligations. The report found that Connecticut’s level of unfunded pension liabilities is one of the highest in the country. State Representative Gail Lavielle (R-143) today released the following statement on the report.
“As of its last biennial actuarial evaluation in 2012, Connecticut had $9.7 billion in assets and $23 billion in liabilities in its State Employees’ Retirement System (SERS), meaning that only 42.3% of its obligations were funded, and $13.3 billion, or about 58%, were unfunded. While an 80% funded ratio (20% unfunded) is generally considered healthy, Connecticut is one of nine states, according to CNBC, that have a ratio of less than 60%, and among those nine, it is near the bottom of the list. Viewed another way, almost 60% of Connecticut’s employee pension fund liabilities are unfunded, which is nearly three times the 20% level that would be considered healthy.
“When new rules imposed by the Government Accounting Standards Board are implemented next year, Connecticut’s funding ratio may deteriorate further. This is because, among other things, the rules require public pension fund managers to adopt more realistic assumptions when estimating future investment returns.
“The effect of Connecticut’s unfunded pension liabilities on the state’s bond ratings is certainly cause for concern. In early 2012, Moody’s downgraded its rating for Connecticut from Aa2 to Aa3, citing ‘Connecticut's high combined fixed costs for debt service and post employment benefits relative to the state's budget’ and ‘pension funded ratios that are among the lowest in the country and likely to remain well below average’. This year, Fitch has downgraded its outlook for Connecticut’s bonds from ‘stable’ to ‘negative’, citing ‘significant pension obligations’ as one of the reasons. Lower ratings make borrowing money more expensive for the state and, by extension, for its taxpayers.
“It’s also worth noting that the $13.3 billion in unfunded SERS obligations represent only a portion of the state’s unfunded long-term liabilities. Unfunded obligations related to the Teachers’ Retirement Fund and post-employment health and life benefits for both teachers and other state employees total about $25 billion. The state also has outstanding long-term debt of about $19 billion. The total is about $65 billion.
“Looking just at SERS, since 2007 Connecticut’s funded ratio has declined from 53.6% to 42.3%. As the unfunded obligations increase, the annual contributions necessary to cover them by the time they come due increase as well. Finding the money to make those contributions means either generating more revenue or cutting spending in other areas. Residents feel the effects either way. For the current year, the planned contribution to SERS is about $1.27 billion, around 6% of the total budget.
“Given the state’s level of debt, its heavy borrowing to pay operating expenses, and sluggish economy, it will be difficult to sustain annual contributions at that level or to increase them. Other states that have faced this problem, like Rhode Island and California, have determined that keeping up with or even increasing the contributions isn’t enough and are attempting to slow the growth rate of the obligations themselves in order to reduce their unfunded pension liabilities. Examples of their proposals include raising the minimum retirement age for state employees, moving active employees to hybrid defined benefit/defined contribution systems, suspending cost-of-living adjustments for retirees until funding ratios improve, increasing employees’ share of contributions to the pension fund, and changing the way base salaries are determined for pension payment calculations.
“In Connecticut any changes like these must be negotiated between the governor and state employee union leadership. Although it has not exercised it in recent years, the legislature does have the right – and many of us believe, the obligation – to vote on any negotiated changes. It should do its part to ensure accountability and taxpayer representation. While it’s understandable that state employees may not think such changes are in their best interests, the alternative may well be not receiving what they’ve been promised when they retire. Without a frank, open, and realistic dialogue between the administration and union leaders to explore and select options like these now, state employees risk a disappointing retirement, residents risk further steep tax increases and service cuts, and the state risks further debt rating downgrades and serious threats to its solvency and its economic survival.”
Information on the CNBC report on pensions is available at:
State Representative Gail Lavielle represents Wilton, Norwalk, and Westport. She is Ranking Member of the General Assembly’s Commerce Committee and a member of the Appropriations, Education, and Higher Education Committees.

Report Details CT’s Fiscal Challenges
by Christine Stuart | Apr 19, 2013 9:30am

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 benefits.”

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 unsustainable.”

Unfunded pension debt isn’t the only thing making Connecticut less competitive as a state. There’s also the tax burden.

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 average.

“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 technology.”

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 report concludes.

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 Connecticut.”

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.

Post Gubernatorial election 2014 report from CT MIRROR:  http

"...At issue is a tool that helps the treasurer’s office market the state bonds sold on Wall Street to finance school construction and other major capital projects.  The state, in some instances when issuing bonds, will pay a higher interest rate than originally planned, in return for a premium – extra money to the state in addition to the bonds’ face value.  Besides being an effective marketing tool, bond premiums also provide states with additional funds that then can be used to pay off high-interest-rate debt, or to avoid future debt by paying cash for certain projects..."
  See article from 2013 below.

Report: 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 almost nothing..

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 whole state.

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," Carstensen said.

Unfunded Liabilities Loom Just Down The Road
Hartford Courant
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, too.

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 time.

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 promises.

•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 ever have.

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 reckoning.

David M. Walker is former U.S. comptroller general and CEO of the Comeback America Initiative based in Bridgeport.

Two different takes on state's finances, economy
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 be slashed.

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, R-Norwalk.

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 worst."

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."

Is Mayor Finch saying size matters?  Detroit has the largest area of all and look where that got them.
"The median-sized American city is about 120 square miles," Finch said, stressing that Bridgeport is 16 miles, New Haven is 17 and Hartford, 18.

Big-city mayors seek more state aid

Ken Dixon, CT POST
Published 11:57 pm, Wednesday, March 19, 2014

HARTFORD -- The state's mayors and first selectmen on Wednesday asked the Appropriations Committee for more state aid, including enhanced education funding, to help them battle inexorable rises in local property taxes.

Bridgeport Mayor Bill Finch, this year's president of the Connecticut Conference of Municipalities, said big and small communities alike also need to avoid mandates from state government that hike local taxes.

"New Haven, Hartford and Bridgeport are extraordinarily different from every other town and city," Finch said. "The bulk of the state's prison re-entry, the bulk of the state's poverty, the bulk of the state's homeless, the bulk of all special-needs populations -- all live in those three cities."

He said those cities' small footprints and non-taxable college, hospital and church properties create special problems...

"The state of Connecticut is the most Balkanized state in the country," Martin said during a 2½-hour presentation from members of CCM and the Council of Small Towns.

"We are also an urban city surrounded by wealthy suburbs," Martin told lawmakers. "We like to think of ourselves as the economic engine of Fairfield County and the economic engine of the state. This engine, like any engine, needs gasoline to keep running..."  Story in full here.

(l) City of Winsted and Town of Winchester (in rural Northwest CT).  (c) Winsted is an unicorporated place within Winchester;  (r) Winsted Town Hall.
Population of Winchester the same as Weston.  Year 2000 numbers found on the Wikipedia link here;  The City of Winsted is run by a Council-Manager system, while Town of Winchester has a Town Meeting form of Government.  So which form of government permitted this hijacking of Winsted?  Not the Town Meeting!!!

OP-ED | Winsted’s Misery Reads Like A Movie Script
by Terry D. Cowgill | Nov 15, 2013 5:30am

The next time you’re down on your hometown or complain that things have gone horribly awry, you can always rest assured that someone else’s misery is even greater. Such is the case with Winsted, a faded mill town in the Litchfield Hills that is in such deep trouble that some are hoping the state will come in to clean up the mess.

The trouble had been brewing for decades but came to a head in late August when Henry Centrella, the town’s finance director since 1983, was arrested by State Police and charged with embezzling at least $2 million, but perhaps as much as $7 million. Partly as a result of the alleged thievery, the town, formally known as Winchester, is flat broke, has a dismal bond rating, and has virtually nothing in its cash reserves.

Centrella’s tale reads like a made-for-television movie. Police say he had a mistress in Florida to whom he had become engaged. He was looking into buying property in the Sunshine State. When asked by the woman where he got the money to support his extravagant lifestyle, Centrella told her he was an early investor in Google stock and he had sold 88 acres of real estate to Disney. Suspicious about all the cash Centrella carried, the mistress traveled to Centrella’s modest Winsted home, where his wife answered the door.

But the rude awakening that confronted Centrella’s paramour paled in comparison to the seismic activity that rippled through the town when he was eventually taken to Troop L and charged with five counts of first-degree larceny, even as Winsted struggled to pay its bills and the school superintendent said the town’s public schools could close in December for lack of cash.

But elected officials and town taxpayers cannot absolve themselves of any blame in this fiasco. A revolving door of town managers, poor supervision of Centrella, mostly flat budgets to avoid tax increases, and constant bickering between the boards of selectmen and education set the stage for a fiscal calamity only made worse by Centrella’s chicanery.

The town’s history of strife and instability goes way back. Inside the Winsted post office is a mural of men arguing and threatening each other on the street during the administration of Abraham Lincoln. Back-to-back hurricanes in 1955 brought devastating floods to downtown, wiping out retailers, uprooting slums on Main Street, and carrying tenants down the Mad River to their deaths.

Even the good people in the town — and ironically, there are many — struggle to bring order to the chaos and the parsimony. Two and a half years ago, the state Education Department took over the schools in Windham, a hardscrabble town roughly the same size as Winchester. Pushed by the General Assembly, the state took control of the Hartford public schools in 1997. Many of Winsted’s most level-headed residents are hoping the state will do the same to ensure that the schools stay open and the finances are straightened out.

Deferred maintenance has caused infrastructure to crumble. Some pothole-ridden roads are in such deplorable condition that they will have be rebuilt rather than simply resurfaced. The streets and bridges are in such bad shape and the town’s political situation so unstable that a highly respected public works director resigned in frustration last year to take a similar job in distant New Milford.

Three years ago, a fifth-grade teacher suffered severe burns and shock-related injuries when she turned on the light switch in her classroom in the town’s middle school. An explosion and fireball sent her to a burn center in Bridgeport and necessitated the closing of the school for three days. Literally adding insult to the injury of public servants, a pension program for retired town police officers has been discontinued for lack of funds, resulting in the cancellation of retirement and healthcare benefits to nine former cops. Meanwhile, the school board is under investigation for chronically failing to meet the state’s minimum budget requirement.

Of course, one solution to Winsted’s woes would be improved economic development, with its resulting increase in tax revenues. But there seem to be few viable ideas for the empty mills that dot downtown. Elsewhere, the town is considering applications for a medical marijuana dispensary. Winsted native and former presidential candidate Ralph Nader has agreed to convert a former bank building on Main Street into a museum celebrating tort lawsuits. This has led to the inevitable jokes about what the legendary consumer advocate will do when a patron slips and falls on the steps of his museum.

It seems like the best hope is for the state to swoop in and save the day but officials at the Office of Policy and Management are balking, insisting that the town hasn’t exhausted all of its options yet.

Still, if a recent move to enact a supplemental tax and take out a bank loan doesn’t keep the schools open, OPM may very well reconsider. More than anyone, the state knows that the children in a once-proud town shouldn’t suffer because its adults can’t provide adult leadership.

Picture of Seymour, CT firetruck, not related to story..

State: Poquonnock Bridge district has options to consider before bankruptcy
By Deborah Straszheim Day Staff Writer
Article published Sep 6, 2013

Groton - The financially troubled Poquonnock Bridge Fire District has two options short of bankruptcy that it has not yet explored, according to the under secretary for legislative affairs in the state's Office of Policy and Management.

Under Secretary Gian-Carl Casa said Wednesday that state law allows a fire district to issue a supplemental tax bill to residents if funds are insufficient to pay yearly expenses.

Casa said this power is intended to prevent bankruptcies.

In addition, the state's Municipal Finance Advisory Commission, whose members are appointed by the governor, works with municipalities referred by the secretary of OPM to provide financial help.

The eight-member commission can require a fire district's chief executive officer to appear and discuss finances, to take remedial action to improve finances and to submit written reports of what actions it has taken based on commission recommendations. The commission also may review audits, budgets, accounting and other district financial practices.

The commission includes four financial or executive officers of municipalities, three non-officers with financial or other expertise and one representative of the OPM.

The tax rate in Poquonnock Bridge is 5.2 mills, based on the current budget. The owner of property assessed at $200,000 would pay $1,040 in annual taxes. The Poquonnock Bridge tax rate is the highest among Groton's nine fire districts.

Legal advice

Glenn Carberry, a lawyer for the Poquonnock Fire District board, said the board has asked his firm and a special counsel from a Providence law firm to look at any possible financial remedies.

"We're in the process of doing that and expect that there will be a broad list of options made available for them to consider," he said.

District board member Deb Monteiro said she knows the board may levy a supplemental tax. She said she has suggested that, but some other members won't support it.

Monteiro said she believes the board is creating more debt by seeking legal advice about bankruptcy.

"Who do you think is going to pay all these legal fees in the long run?" she said. "The taxpayers are going to wind up paying much more for their fire district than if they'd just established a reasonable budget."

Discussion at the fire district so far has centered on a possible bankruptcy filing or receivership, and trying to come up with a way to make the district's funds last through the fiscal year. But bankruptcy would require approval of the governor, Casa said.

Union wins

The district board also learned last week that it must honor a 10-year union contract that provides annual wage increases of 3 percent.

The State Board of Labor Relations ruled in favor of the firefighters' union Aug. 28. The decision means the fire district must pay back wages and benefits it owes from the date of the agreement in July 2012, and must notify the labor board within 30 days of how it has corrected the situation. Fire Chief Todd Paige said the district would need about $400,000 more this fiscal year to honor the contract.

The board's next regular meeting is at 7 p.m. Thursday at the Groton Senior Center.

Lori Watrous, a member of Representative Town Meeting and a resident of Poquonnock Bridge, said she believes the district should go back to taxpayers and ask for more money.

"There's something about that word, 'bankrupt,' that's not right," she said. "If you know what those obligations are, you're supposed to fulfill them."

She said the board knew $3.5 million wasn't enough to run the fire district when the amount was proposed at its annual meeting. Board Chairman Alan Ackley put forth the figure but said in an earlier interview that he thought it would be amended.

Debt remains

Casa said another option would be for fire district residents to vote to end the district's existence. But, he said, taxpayers would still have to pay the remaining bills even if this were done.

If the district dissolved and the town didn't want to take over, it's unclear what would happen next, Casa said. But, he said, the burden of sorting things out ultimately could fall on the town's shoulders. The town then potentially could levy a supplemental tax on fire district residents.

"We don't believe the statutes are clear," he said. "Ultimately, someone's going to have to pay that debt, and ultimately someone is going to have to take responsibility for providing fire service in that district. And I don't know who else would do it but the town."

Professor Mark Robbins, head of the department of public policy at the University of Connecticut, said special taxing districts are common and may be deeply rooted.

Some districts were started more than 100 years ago because residents needed fire protection and set up a taxing district to pay for it, he said. The Poquonnock Bridge Fire District was established in 1943.
Meanwhile, the government and community have grown. But people often maintain strong ties to a district, Robbins said.

"You don't see local towns giving up their charters and regionalizing into county governments," he said.

Like a local government, fire districts are obligated to follow their charters when taxing residents, to file financial statements and to meet their financial obligations, Robbins said.
In Poquonnock Bridge, one of the key questions has been whether taxpayers have the right to refuse to pay to support union contracts.

Robbins said there are legal questions about whether government can walk away voluntarily from long-term obligations or whether they can be forced to honor them even if taxpayers refuse.

He said the standard for many municipal labor disputes has been taxpayers' ability to pay, not their willingness to pay. There may be obligations that taxpayers can't decline to pay because they're legal obligations, he said.

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 increasing debt?
Construction 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, reaps low interest rates
Neil Vigdor, Greenwich TIME
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 percent.

"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 board.

"I think it shows how strong we are as a town financially," Simon said.

GE Takes Constitution Plaza Building In Foreclosure
The Hartford Courant
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 foreclosure.

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.

And a link back to financial crisis page and prediction...

Or maybe you think this is the next big crisis...

How many economists does it take to figure out that we are on a downward trend to financial free fall?  And here is a 2010 comment from Alan Greenspan.

More pension perfidy
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 punch.

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 this 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 been 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 runaway 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 building for years.

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 pension 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 benefit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 else.  Which explains why teacher wages and benefits remain high, and pension costs are out of control.

Will this sad cycle never end?

Fiscal Crisis in States Will Last Beyond Slump, Report Warns
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 experts.

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 rejected.

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 others.

How Taxes Drive Down Home Values:
What state and local officials can do to help the housing market recover.
National Review
Nicole Gelinas
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 cheaper houses.

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 investment value.

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 equity.

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 debt costs.

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 expire.

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 down.

Municipal 'millionaires'
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 millionaires.

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 annual supplement.

(Of course, public-sector workers also receive lavish health-care retirement benefits.)

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 longer afford.

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.

Funny finance and the pension puzzle
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 problems.

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 comes due.

Nicole Gelinas is a contributing editor to the Manhattan Institute’s City Journal.

Gov.Paterson came to office after scandal sank Gov. Spitzer.

Weston CT's Board of Finance sets up funding mechanism for O.P.E.B.
To Pay New York Pension Fund, Cities Borrow From It First
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 fund’s growth.

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 town board.

“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. Cuomo.

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 business groups.

“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 consequences.

“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 libraries.”

CALIFORNIA: Almost like weather systems, everyting seems to begin in the West and move East, and "so goes the nation...eventually"...

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 smallest states it!  Growth trend for San Bernadino County:  U.S. Census
For localtion of any good-sized California place, click here.  Oakland's Occupy a threat?

Bankruptcy Judge in California Challenges Sanctity of Pensions

By Mary Williams Walsh   
October 1, 2014 9:15 pm

A federal bankruptcy judge on Wednesday upended the widely held belief that public workers’ pensions have a special status in California that makes them impossible to cut, further chipping away at the idea that pensions are sacrosanct in a municipal bankruptcy.

The ruling, which came during a hearing on a plan by the City of Stockton to exit bankruptcy, did not order the city to cut its pension plan or take any specific action. The judge said that he needed more time to reflect on Stockton’s situation and that he would decide Oct. 30 whether the city could emerge from its two-year bankruptcy or whether it still had more work to do.

But the decision, by Judge Christopher M. Klein of the Eastern District of California, dealt a blow to California’s giant state-led pension system, known as Calpers, which has been leading efforts to preserve defined-benefit pensions nationwide.

It echoed a decision made last year by Detroit’s bankruptcy judge, but went even further. While Detroit’s pension system was a struggling local entity with few friends in the state capital, Calpers is a powerful arm of the state, with statutory powers that include liens allowing it to foreclose on the assets of a city that fails to pay its pension bills.

Calpers had argued that if Stockton stopped making payments and dropped out of the state pension system, the lien would let it claim $1.6 billion of its assets. But Judge Klein said those statutory powers were suspended once a California city received federal bankruptcy protection.

“Why should I take that lien seriously?” he asked a lawyer for Calpers, Michael Gearin. “I may avoid it as a black-letter matter of bankruptcy law,” he said, referring to well-established legal principles...story in full here:

Insight: Battle over police pensions in U.S. cities takes ugly turn
By Tim Reid
Thu, Jan 16 2014

(Reuters) - A drive by some American cities to cut costly police retirement benefits has led to an extraordinary face-off between local politicians and the law enforcement officers who work for them.

In Costa Mesa, California, lawmaker Jim Righeimer says he was a target of intimidation because he sought to curb police pensions. In a lawsuit in November, Righeimer accused the Costa Mesa police union and a law firm that once represented them, of forcing him to undergo a sobriety test (he passed) after driving home from a bar in August 2012.

That followed a call to 911 by private detective Chris Lanzillo, who worked for the police union and the law firm that represented it, according to the suit. Lanzillo is also named as a defendant, accused of following Righeimer home from the bar.

Disputes such as these have intensified as Detroit and two California cities, Stockton and San Bernardino, have gone bankrupt in the past two years. Police pension costs were a major factor in the financial troubles facing all three. Now large cities, including San Jose and San Diego, say they have no choice but to alter pension agreements lest they end up in bankruptcy too.

The suit by lawmaker Righeimer also said that an FBI raid of the law firm last October uncovered evidence that an electronic tracking device had been attached to the underside of the car driven by another lawmaker, Steve Mensinger, one of Righeimer's allies in the pension fight.

"What we are alleging is a conspiracy to gather information against political opponents", said John Manly, a lawyer representing Righeimer and Mensinger.

Calls to Lanzillo's lawyers went unanswered. Lanzillo is not listed in any public directory.

The FBI confirmed that some of its agents were present at the raid, but referred all other questions to the Orange County district attorney, which applied for the search warrant. Robert Mestman, senior deputy district attorney, said: "I cannot comment. It is a pending investigation."

The police union, the Costa Mesa Police Association, denies any knowledge of the purported tactics. It fired the law firm, Lackie, Dammeier, McGill & Ethir, after allegations of the harassment first surfaced. Several calls to the lawyer representing the firm, which is in the process of being wound down, went unanswered.


For many city and county governments, police are by far their largest single cost. For example, in the California city of Desert Hot Springs, which is teetering on bankruptcy, 70 percent of the budget is spent on police salaries and pensions.

"There was a time when no politician would dare to cut back on public safety, let alone their pensions," said David Harris, a law professor at the University of Pittsburgh and a specialist in police and police behavior. "Now we are in a different age."

Police union officials claim there is a push by conservative political operatives to take away promised pensions from public servants who do a physically demanding and dangerous jobs, and that police officers are being forced to pay for officials' incompetent management of city finances.

In Stockton, when then city manager Bob Deis warned in 2011 that police layoffs might be necessary, the police union bought the house next to his and immediately began noisy renovations.

"It's like being a party in a law case and the other side buys the house next to yours," said Deis, who retired late last year. He and his wife sued with allegations of intimidation, in a case that has since been settled. The noise has stopped and the police union has agreed to sell the house within two years.

The police union had also erected a giant billboard welcoming visitors to the "2nd most dangerous city in California" with Deis's phone number on it. The billboard has been taken down.

Kathryn Nance, president of the Stockton Police Officers' Association, denied that the union ever tried to intimidate Deis. "Obviously that is his opinion," Nance said. "His allegation is ridiculous, at best."


There also have been allegations of intimidation by police in Cranston, Rhode Island.

On January 9, Cranston Mayor Allan Fung announced that state police will take over an investigation into a flurry of parking tickets issued in the wards of two council members. The pair claim the tickets were issued as retribution after they voted against a new contract for police that would have given them a pay raise.

Fung announced that Police Chief Marco Palombo Jr. had been placed on administrative leave while the Rhode Island state police investigate the parking ticket allegations.

Fung said "new allegations" had emerged about the conduct of police that was troubling, and that a number of police officers are under suspicion of misconduct.

"The Cranston police were definitely sending us a message," said Paul H. Archetto, one of the councilmen. "It's intimidation and an abuse of power."

Major Robert Ryan, a spokesman for the Cranston Police Department, said: "The matter is under investigation, and pursuant to law enforcement's bill of rights, no-one is going to comment on this."

Ryan said the police chief was unavailable for comment.


Police union leaders say their members are being victimized by some local politicians.

"They are using scare tactics by telling the public that cities are going broke because of public pensions," said Chuck Canterbury, the national president of the Fraternal Order of Police, which represents more than 325,000 officers.

"Most police officers contributed every month to their pensions. The cities in trouble did not do the same," Canterbury said. "When the economy got bad and the investment returns did not live up to the standard, all of a sudden they say it was the unions that got greedy."

Ron DeLord, a former Texas policeman and consultant to police unions in the United States and abroad said the view of many rank-and-file officers is that they are up against forces who do not wish to negotiate.  In 2008 DeLord told officers in American Police Beat Magazine to "get dirty and fight to win," by getting personal with reformist council members and to "bloody their noses."

DeLord told Reuters last month that he had learnt to be more collaborative since 2008, but said of the "get dirty" message: "I wrote it. I believe it."

Police Salaries and Pensions Push California City to Brink
December 27, 2013

DESERT HOT SPRINGS, Calif. — Emerging from Los Angeles’s vast eastern sprawl, the freeway glides over a narrow pass and slips gently into the scrubby, palm-flecked Coachella Valley.

Turn south, and you head into Palm Springs with its megaresorts, golf courses and bustling shops. Turn north, and you make your way up an arid stretch of road to a battered city where empty storefronts outnumber shops, the Fire Department has been closed, City Hall is on a four-day week and the dwindling coffers may be empty by spring.

The city, Desert Hot Springs, population 27,000, is slowly edging toward bankruptcy, largely because of police salaries and skyrocketing pension costs, but also because of years of spending and unrealistic revenue estimates. It is mostly the police, though, who have found themselves in the cross hairs recently.

“I would not venture to say they are overpaid,” said Robert Adams, the acting city manager since August. “What I would say is that we can’t pay them.”

Though few elected officials in America want to say it, police officers and other public-safety workers keep turning up at the center of the municipal bankruptcies and budget dramas plaguing many American cities — largely because their pensions tend to be significantly more costly than those of other city workers.

Central Falls, R.I., went bankrupt in 2011 because its police and firefighters’ pension fund ran out of money. Vallejo, Calif., went bankrupt after more than 20 police officers suddenly retired from its force of 145, fearing that if they waited they would lose their contractual right to cash out their unused sick leave and vacation time; the payouts totaled several million dollars, and Vallejo did not have the money. Miami weathered such a run in September 2010, when 154 police and firefighters retired en masse after city commissioners voted to make it harder to retire before age 50, use intensive overtime to raise pensions, and earn cash payouts.

Here, under the budget enacted last spring, about $7 million of the city’s $10.6 million annual payroll went to the 39-member police force. The situation was so dire that an audit, compiled weeks before municipal elections in November but not made public until later, showed that Desert Hot Springs was $4 million short for the year and would run out of money as early as April 2014.

So at a tense meeting last week, the new City Council voted unanimously to slash all city salaries, including those of the police, by at least 22 percent, as well as to cap incentive pay and reduce paid holidays and vacation days. For some officers who took advantage of overtime and the other extra payments, the cut could be as much as 40 percent, the union says. Management had already taken a hit: the former police chief and one of two top commanders retired this month, not to be replaced.

Wendell Phillips, a lawyer for the Desert Hot Springs Police Officers Association, quickly filed a fact-finding request with the state’s Public Employment Relations Board, calling the cuts illegal and vowing to go to court if they were not overturned.

“All they are going to end up doing is driving away their best, experienced officers and creating a police force made up of people who couldn’t get a job on another force,” Mr. Phillips said.

Even those trims, draconian as they were, will not be enough to close the budget gap, Mr. Adams said. More than $2 million more needs to be found before the end of the fiscal year in June, promising months more of bitter wrangling and cuts.

“My idea is that we put up a thermometer outside City Hall, showing how much progress we are making as we close the budget gap,” said Russell Betts, a city councilman and a supporter of the newly elected mayor, Adam Sanchez, who came into office promising to deal with the chronic budget problems once and for all.

“I think we’re going to turn this crisis into a positive,” Mayor Sanchez said. “We are not going to go into bankruptcy. That is not an option. We stumbled, but we’re going to get back up again.”

Cities have run into fiscal difficulties for many reasons, and few are as all-encompassing as the decades of economic decline and official mismanagement that made Detroit the nation’s largest city ever to enter bankruptcy. California cities have had particular trouble with public-safety pensions, which are among the richest in the nation.

Calpers, the huge and politically powerful state-run pension system that covers Desert Hot Springs’ workers, has steadfastly maintained during California’s recent spate of municipal bankruptcies — Vallejo in 2008, San Bernardino and Stockton in 2012 — that under state law, cities cannot reduce the pensions of public employees. San Jose, the state’s third-largest city, passed a ballot initiative in 2012 that authorized it to lower city workers’ pensions, but a state judge ruled on Monday that this path, too, is illegal.

Police officers here, as in many California cities, can retire as young as 50 with 30 years of service and receive 90 percent of their final salary every year — drawing those pensions for decades. Police unions say the fault lies with state and local politicians who failed to adequately fund the pension system over the years, and inflated benefits during boom years. Others wonder whether such salaries and pensions were ever affordable, particularly in cities as small and struggling as this. In Desert Hot Springs, for example, for every dollar that the city pays its police officers, another 36 cents must be sent to Calpers to fund their pensions.

The average pay and benefits package for a police officer here had been worth $177,203 per year, in a city where the median household income was $31,356 in 2011, according to the Census Bureau. All of this had gone largely unnoticed until becoming the center of debate during the recent municipal election.

“I was in shock, like everybody else was,” said Regina Robinson of the day she learned how much some city workers were earning. She owns Just Gina’s hair salon, one of the few businesses on the downtown stretch of Palm Drive, the main street.

Mr. Adams said that California’s rich police pensions were first offered to prison guards by former Gov. Gray Davis more than a decade ago. The move set off a chain reaction, with the California Highway Patrol soon clamoring for the deal, and then city police officers all over the state.

This is not Desert Hot Springs’ first experience with fiscal problems. In 2001, it went bankrupt after losing a $10 million lawsuit brought by a developer who complained that the city was thwarting his efforts to build affordable housing. The city had to borrow to pay the judgment and is still paying off that debt — a struggle for a working-class town.

A sharp increase in gang and drug crimes in the 1980s led the city to disband its police force and contract with the Riverside County sheriff for law enforcement, but that proved highly unpopular and, in 1997, the city re-established its force.

A sweep by the local police and the county sheriff in 2009 led to dozens of arrests and was credited with easing what had been a growing gang crime problem. This was followed by the hiring of a dozen more officers onto the small force and the overwhelming passage of a new utilities use tax and a public safety tax, both dedicated to the police and other public safety departments.

Now residents are wondering whether the city will be forced to disband its police force a second time.

“Nobody wants to get rid of the police force,” Mr. Betts said. “People just don’t think the county would do as good a job.”

Mr. Phillips, the police union lawyer, said the current crisis had been driven by the new majority on the City Council — including Mayor Sanchez and Mr. Betts — that was philosophically opposed to tax increases. The union’s own proposal to address the budget shortfall — by cutting the size of the force and filling in with overtime work for which the officers would defer payment for 17 months, as well as raising the local sales tax — was rejected by city officials, who said it would only delay the reckoning.

What makes Desert Hot Springs’ troubles so heartbreaking is that a potential solution lies beneath the hard-baked ground. The resort sits atop one of the world’s finest sources of mineral water: piping hot, unusually clear and free of the sulfurous odor that many springs produce.

Small spas have been a part of the landscape here for decades, and there are still 22 of them, though many are struggling and in poor repair.

One of them, however, Two Bunch Palms, became a hot destination for Hollywood celebrities and global wellness tourists until it went into foreclosure in 2010 and briefly closed. Now, a new team of Southern California investors has bought the property with hopes to revive and expand it.

Mayor Sanchez hopes that the revitalized Two Bunch Palms will help spur the growth of other businesses in the city.

“We must get back to marketing and promotion,” he said. “We’ve got to return a sense of pride to Desert Hot Springs.”

Rick Lyman reported from Desert Hot Springs, and Mary Williams Walsh from New York.

Pension Ruling in Detroit Echoes West to California
December 3, 2013

A judge’s decision in Michigan is resonating all the way to California.

The ruling by Judge Steven W. Rhodes, who is presiding in Detroit’s bankruptcy case, that public pensions are not protected from cuts could alter the course of bankrupt cities like Stockton and San Bernardino, Calif., that had been operating under the assumption that pensions were untouchable.

Stockton’s bankruptcy case, for instance, is further along than Detroit’s, and until Tuesday it seemed likely to leave public pensions fully intact. Stockton sought bankruptcy protection last year and has already filed a plan of debt adjustment with the bankruptcy court in Sacramento. Its plan, which is subject to court approval, would leave city workers’ pensions unchanged: They would continue to accrue benefits at the same rate as they did before the bankruptcy. (A new state law does permit Stockton to provide smaller pensions to workers hired after Jan. 1.)

That is a better deal than workers at bankrupt companies often receive. City leaders based it on the thinking that public workers had already sacrificed enough, given that the plan of adjustment already calls for them to give up contractual pay increases and valuable retiree health benefits.

Opponents of that plan have raised concerns that it would not save enough money. They point to the city of Vallejo, Calif., which spent three years in bankruptcy, emerged in 2011 without touching its workers’ pensions, and is again having trouble balancing its budget. Many cities in California are struggling with pension costs because of a big benefit increase in 1999 that has been much more expensive than anticipated. State laws make it hard for cities to raise taxes enough to keep up with the costs, and because pensions are considered untouchable, local officials have had to reduce services, like policing, to balance their budgets.

Some say the situation is unsustainable. Last month, another city, Desert Hot Springs, said that its pension costs were unaffordable and that it might have to declare bankruptcy.

Early in Stockton’s bankruptcy, several financial institutions tried to block its case, arguing that it had not negotiated as required with the California Public Employees’ Retirement System, known as Calpers, which administers pensions for many municipalities. Those motions were denied, and in the months since then, all but one of the institutions have reached settlements with the city and stopped arguing about pensions.

The one remaining creditor is Franklin Templeton Investments, a mutual fund company that holds about $35 million worth of Stockton’s bonds. Stockton’s plan of adjustment proposes to give Franklin less than a penny on the dollar for its bankruptcy claims, according to court filings. Federal bankruptcy law allows for such “cramdowns” — deals that force big losses on unwilling creditors — but for a cramdown to be approved by a bankruptcy judge, it must meet certain requirements. It must be “fair and equitable,” for example, and it must not discriminate against one creditor in favor of others.

Even before Tuesday, Franklin was warning that it would challenge to Stockton’s plan. Documents on file with the court suggest it was planning to argue that no plan could be “fair and equitable” if Calpers were paid in full while Franklin received less than a cent on the dollar.

“Their argument just got strengthened,” said Karol K. Denniston, a bankruptcy lawyer at Schiff Hardin in San Francisco who has been advising a taxpayers group that formed after Stockton declared bankruptcy. Referring to the judge’s decision in Detroit, she said, “Franklin Templeton is going to have a lot to say about this ruling.”

Another bankrupt city in California, San Bernardino, has taken a different tack from Stockton. It wants to reduce its pension obligations in bankruptcy and has already stopped sending its regular contributions to Calpers. That is something a company in Chapter 11 bankruptcy would normally do, but Calpers is fighting the move in San Bernardino’s Chapter 9 case. It argues that the city does not sincerely wish to adjust its debts, as required by bankruptcy law, but simply wants to “languish” in court. Calpers maintains that pensions cannot be reduced in California and that the only way for a city to freeze its plan is to pay a giant fee.

So far, San Bernardino’s bankruptcy judge, Meredith A. Jury, has ruled against Calpers and refused to grant it an expedited appeal to the United States Court of Appeals for the Ninth Circuit. The city’s creditors are now trying to come up with a settlement plan in mediation.

“This gives them clarity,” Ms. Denniston said. “It changes the dynamic at the negotiating table in a major way, because we’ve now had a bankruptcy judge say you can impair pensions. We’re going to go through a huge period of uncertainty because that’s going to be appealed, but for right now, that’s the law.”

Judge Rhodes’s decision in Detroit’s bankruptcy case was also noteworthy for what it did not say: It did not offer specific instructions for how large or small any pension cuts should be. Instead, he said the question should be resolved in mediation, which is already running in Detroit but has so far borne little fruit.

James E. Spiotto, a bankruptcy lawyer at Chapman & Cutler in Chicago, said officials in other cities might want to change course now if they worried that they might have promised more than they could deliver.

“If you’re not able to pay, the best thing to do is address it now,” Mr. Spiotto said. “Pay as much as you can without adversely affecting the future of the city.”

Struggling, San Jose Tests a Way to Cut Benefits
September 23, 2013

SAN JOSE, Calif. — This metropolis of nearly a million residents is the third-largest city in California, home to tens of thousands of technology industry workers, as well as many thousands more struggling to get by. Yet even here, in the city that bills itself as the capital of Silicon Valley, the economic tidal wave that has swamped Detroit and other cities is lapping at the sea walls.

San Jose now spends one-fifth of its $1.1 billion general fund on pensions and retiree health care, and the amount keeps rising. To free up the money, services have been cut, libraries and community centers closed, the number of city workers trimmed, salaries reduced, and new facilities left unused for lack of staff. From potholes to home burglaries, the city’s problems are growing.

“We’re Silicon Valley, we’re not Detroit,” said Xavier Campos, a Democratic city councilman representing San Jose’s poor East Side. “It shouldn’t be happening here. We’re not the Rust Belt.”

The situation in San Jose is not anywhere near as dire as it is in Detroit or two other California cities, Stockton and San Bernardino, already in bankruptcy. But government officials and municipal bankruptcy experts across the country are watching San Jose closely because of a plan to reduce benefits — drafted by Mayor Chuck Reed, a Democrat, and passed by 70 percent of voters in a referendum last year.

The plan is being opposed in court by unions that represent city workers and say it is illegal under state law. It would introduce a second tier for new city employees involving much lower pension and health benefits. It would also alter pension benefits for existing workers, allowing them to choose either a similar, second-tier benefits plan or to pay significantly more out of their own pockets for the benefits they had come to expect.

The outcome of the case is expected to have a major impact on municipal budgets around the state and, perhaps, the country. If a state court rules later this year or early next year that the referendum allows San Jose to alter pension plans for existing workers, and it survives appeals, similar measures are expected to pop up elsewhere.

By pushing the cuts, Mr. Reed joins a small but growing group of Democratic officials, including Mayor Rahm Emanuel of Chicago and the Rhode Island treasurer, Gina Raimondo, who are talking about altering municipal pension plans in ways that unions do not like, and that Democratic officials have avoided because of their traditional alliance with labor. “I think it needs to be led by Democrats,” Mr. Reed said. “It can’t become something Republicans are doing to unions.”

City unions, led by the San Jose Police Officers’ Association, say that by California law, the pension deal in effect when government workers are hired cannot be lowered for the rest of their career. Mr. Reed and his supporters believe that state law, backed by the referendum, allows the city to cut future pensions as long as it does not touch the benefits that workers have already accrued. The mayor has gone forward with the lesser benefits for new employees.

Mr. Reed said he was also contemplating a campaign with other California mayors to mount a statewide ballot initiative for November 2014 that would grant city officials even greater power over pension and health care benefits.

A decision on whether to go ahead with the initiative must be made by early next month, Mr. Reed said.

Even some supporters of Mr. Reed’s plan do not blame the workers or the unions.

“These employees did nothing wrong, and their unions did nothing wrong for pushing for these benefits,” said David Crane, a lecturer at Stanford University and special adviser to former Gov. Arnold Schwarzenegger on pensions and other issues. “Nobody forced government officials to make these promises and not fund them. And now you have some really brutal things happening to people who had counted on a certain level of retirement.”

Staff cuts, lower salaries, uncertainty about their pensions and the threat of having to pay higher contributions for lower benefits are causing hundreds of San Jose officers to try to move to less troubled police departments, union officials say.

“They’re kind of encouraging us to leave,” said Officer Pete Urrutia.

Officer Steve Gibson said he intends to join the exodus of experienced San Jose officers. “I’m leaving as soon as I get my 25 years in,” he said. That will happen in a few months.

Officer Gibson and three others had pulled their patrol cars into the center of St. James Park, on the edge of downtown, following complaints of a fight among homeless people living there.

“What they’re doing is destroying what had been a great police department,” said Officer Deborah Manion as she oversaw the scene of the dispute.

The impact has been hard on families hit by both lower salaries and possible benefit cuts.

“I have to sell my house,” Officer Steve Brownlee said as he directed city workers toward a pile of debris. The only alternative, he said, was to work endless overtime to make up the difference. “I’d rather lose my house than do that,” he said.

Cities in California are under particular pressure because it is so difficult to raise property taxes in the state, and because in 1999, at the height of the tech bubble, the Legislature voted for a huge benefit increase allowing, for instance, police officers to retire at age 50 with 90 percent of their salaries.

“We have this all over the state of California,” said Karol K. Denniston, a bankruptcy lawyer with the firm of Schiff Hardin in San Francisco, who is advising a number of local taxpayer groups. “There is growing recognition that there is not enough money to keep doing what they’re doing, and something’s got to change.”

Picturesque, prosperous Sonoma County has cut road maintenance to just $4.2 million a year to make way for the growing cost of its workers’ pensions.

The seaside city of Pacific Grove is considering whether to form a combined fire service with other municipalities nearby.

San Diego, which has been in pension-related turmoil for a decade, has fallen hundreds of millions of dollars behind on its program of fixing roads, sidewalks and storm sewers. Last year, voters there approved their own ballot measure requiring all new city employees, except police officers, to be given 401(k)-style retirement plans instead of defined benefit pensions.

As in San Jose, public employees’ unions sued. In March, a state administrative labor-law judge found that the city had failed to bargain as required with its workers. The city went ahead with the ballot-measure change, but the administrative finding portends further litigation.

Mr. Crane blames the political leadership in Sacramento, San Jose and all similarly struggling cities for failing to deal with the pension problem while it was still manageable. Mr. Reed agreed. “I have to accept my share of the responsibility,” he said. “There’s plenty of blame to go around.”

Now, he said, city workers must understand that the 10 percent pay cut they accepted a few years ago, in a previous attempt to right the city’s imbalance, was not sufficient to solve the problem and that deep, painful pension and retiree health care changes were needed.

Already, the city payroll has dropped by thousands of workers in recent years — a decline that in the case of the police has been exacerbated by the departure of veteran officers.

“It was pension layoffs,” said Sharon W. Erickson, the city auditor. “We had to lay off employees because pensions were going up. The park department alone was cut 47 percent.”

Joe Nieto, president of the Plata Arroyo Neighborhood Association in the heart of the city’s East Side, said he has definitely noticed the service cutbacks. Vandalism in the neighborhood’s park has gotten so bad that he said he has stopped trying to keep ahead of the graffiti that festoons its sprawling skateboard ramps.

“What’s the point in cleaning it up?” he said. “It’ll look just the same in two weeks’ time. The bottom line is that we don’t feel as safe as we used to feel here.”

No one wants to cut workers’ wages and benefits, Ms. Erickson said, least of all Democrats. Providing city services was the reason most Democrats went into government, she said.

“But for every one of us, there was a tipping point,” she said. “For me, it was when they announced that swimming pools wouldn’t open in the summer. Then you drive around the city, and roads are in abysmal shape.”

Police response times for Priority 1 calls, meaning a violent crime that is still under way, have stayed steady, at about seven minutes, Ms. Erickson said. But response times for Priority 2 calls, involving violent but not active crimes, have crept up, and lower priority calls are taking hours and sometimes more than a day to generate a response.

“We have a huge opportunity here to get it right,” Ms. Erickson said. “And if we can’t get it right here in San Jose, where can we get it right?”

Unions, heal thyselves
Last Updated: 12:43 AM, June 24, 2013
Posted: 11:33 PM, June 23, 2013

Imagine you’re a retiree with chronic health problems on a fixed income, but too young for Medicare. You open your mail to find out your former employer is taking away your health insurance.

If you’re a retired city worker in Stockton, Calif., you don’t have to imagine. And if you work for New York City, you should be paying attention: The same thing could happen to you unless you wake your union leadership up.

Stockton declared bankruptcy last year — making the city of nearly 300,000 the biggest bankrupt city ever, and the third California city to go belly up since 2008.

The conventional wisdom is that California cities are broke because they borrowed too much. Wrong: Because their state Constitution limits property taxes, California cities have little debt, because they have no way to pay it back.

No, the main reason they’re declaring bankruptcy is to wriggle out of a different burden: the promises they made to workers to pay for lifetime health care.

As Stockton officials explained in their bankruptcy filing, “Throughout the 1990s, the city of Stockton approved contracts with labor groups that provided life-long, fully paid medical premiums for a retiree and one dependent. . . Unfortunately, prior administrations did not fund retiree medical benefits.”

The city said such payments now are “simply not affordable . . . without devastating” public services.

Hence the letter that went out last year. “Dear retiree,” it read. “Effective July 1, 2013, all retiree medical benefits will be eliminated.”

The city’s been paying partial stipends for the past year. But in a couple of weeks, retirees will be looking at $1,600-a-month premiums for a married couple ($800 for Medicare).

For most people, that’s life-changing money.

But it was for Stockton, too. By snatching away these benefits, it’s trying to shave a $417 million long-term “debt” to, well, nothing. (It’s also now forcing current workers to pay 20 percent of their health-care costs.)

Retirees sued. But the city is winning so far.

And its two bankrupt sister cities — Vallejo and San Bernardino — have made similar moves. Vallejo cut benefits to reduce its retiree-health-care “debt” by 40 percent, to $84.2 million. San Bernardino wants to chop its $63 million burden to little or nothing.

And Detroit, teetering on bankruptcy, plans to slash its “large and unfunded” retiree-health-care debt by 70 percent — by dumping younger retirees on ObamaCare and older ones on Medicare.

New York City’s government workers should pay attention.

Just like in pre-bankruptcy Stockton, New York City workers get free retiree health care. And just like in Stockton (and elsewhere), New York City hasn’t put money aside to pay the $88.2 billion future bill. (Mayor Bloomberg set some cash aside in the flush years, but then used it to fill budget holes these last few years.)

Other similarities should make New York workers nervous, too.

New York City spends as much — about 2.5 percent — of its budget on retiree health care as Stockton does. And the long-term bill for those costs equals about 125 percent of a single year’s budget — just like Stockton.

New York workers may comfort themselves in saying that Stockton is poorer than we are — the media keep calling it a “poor city.” But Stockton’s median income was 7.6 percent below ours between 2007 and 2011 — it’s close to the national average. Its poverty rate is higher than our 19 percent, but not by much — it was 22 percent.

And, yes, the property bust sent Stockton into a steep spiral — but that just shows how quickly things can change.

Sure, we have more rich people. But not even Public Advocate Bill de Blasio, the most liberal of the bunch running for mayor, wants the rich to pay for retiree health care. He wants new taxes to fund universal pre-K, so union workers can make money baby-sitting.

And, yes, we have strong unions. So did Stockton — that’s why it had to declare bankruptcy.

Plus, a richer city might not be willing to put up with what Stockton has already put up with. Murders there have doubled since 2009, because fewer officers can’t keep school-gang members from killing each other.

Stockton’s bankruptcy judge has agreed the city is “service-delivery insolvent” — meaning it needs to cut back things like health care to pay for cops.

New York union leaders have demonized Bloomberg for asking them to pay something for health care. But it is in older workers’ interest to make a deal — before the city one day makes retiree-health-care costs vanish.

Nicole Gelinas is a contributing editor at the Manhattan Institute’s City Journal.

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 contributions.  There's 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 public.

"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," Reed said.

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," Pacheco said.

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 termination fee.

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.


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 years.

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 process law.

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 debt.

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' pension costs.

(Reporting by Tim Reid in Los Angeles; Editing by Tiziana Barghini and Leslie Adler)

© Thomson Reuters 2011. All rights reserved. Users may download and print extracts of content from this website for their own personal and non-commercial use only. Republication or redistribution of Thomson Reuters content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters. Thomson Reuters and its logo are registered trademarks or trademarks of the Thomson Reuters group of companies around the world.

Thomson Reuters journalists are subject to an Editorial Handbook which requires fair presentation and disclosure of relevant interests.

This copy is for your personal, non-commercial use only. To order presentation-ready copies for distribution to colleagues, clients or customers, use the Reprints tool at the top of any article or visit:

Rating pressure 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," Ribble added.

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.

Exclusive: California city could face SEC lawsuit
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 to Reuters.

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 expedition."

The exact focus of the SEC investigation is not known. The SEC declined to comment.

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 questionable."

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 "forthcoming shortly."

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.


Red flags over cities' bankruptcy filings
Wyatt Buchanan, STGate
Published 10:35 p.m., Saturday, July 14, 2012

Sacramento --

San Bernardino's stunning news last week that it was broke and needed to file for bankruptcy protection has some observers wondering who's next.

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 the city.

"It's in the public interest for them to be very, very careful about it," said Chris McKenzie, executive director of the League of California Cities.

While city 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 adversity.

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 agencies.

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 fiscal distress.

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 manager.
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:

California County Weighs Drastic Plan to Aid Homeowners
July 14, 2012

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 years ago.

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 us.”

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 plan.

“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 that.”

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 problems.”

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 market.

“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 buyers.

“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 quickly.”

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.”

Not California’s last bankrupt city

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 week.

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 high-foreclosure state.

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 protection.

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 Angeles.

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 come.

Mediation Fails, Pushing Stockton Toward Bankruptcy
June 27, 2012

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 suspend 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 March.  But 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 long 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 distress.”

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 this 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.”

California facing higher $16 billion shortfall
Associated Press
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 Saturday.

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 county jails.

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 tax hikes.

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 office hours.

Many big cities face serious pension debt, report says
Washington POST
By Michael A. Fletcher, Published: September 26, 2013

Most of the 50 local governments with the largest pension debt have worker retirement liabilities that are greater than their annual tax revenue, according to a new report from the credit-rating firm Moody’s.

The pension burden posed by current and future municipal retirees is significant and apparently troublesome for many local governments, the report said. Others, including Washington, D.C., have liabilities that appear manageable.  The report was issued the same day that Detroit’s emergency manager, Kevyn Orr, indicated that he wanted to freeze the city’s pension plans and move workers into 401(k)-type accounts.

Under the freeze, retirees would still collect pensions but current employees could not accrue further benefits, and some cost-of-living adjustments would end, according to news reports. The freeze must be approved by Michigan’s treasurer and could come under legal challenge because of prohibitions in that state’s constitution against trimming pension payments.  The move in Detroit, which filed for bankruptcy in July, came after an auditor’s report found that the city’s pension system made questionable bonus payments to retirees.

The Moody’s report found that other than Detroit, the most severely underfunded local government entities were in the Chicago area, which is also in the state that has the nation’s most severely underfunded pension system.

The city of Chicago, whose credit rating was downgraded in recent months, has pension liabilities that are 678 percent of its annual revenue, Moody’s said. Cook County, which includes Chicago, has the second-worst pension liability burden, at 382 percent of revenue. Meanwhile, the metropolitan water system had the sixth-worst ratio at 323 percent.

Chicago Mayor Rahm Emanuel (D) has warned that the city’s required pension contributions will nearly triple, to $1.2 billion, between 2014 and 2015 — about one out of every five dollars spent to run the city. He has called for the state to restructure the pension system, saying essential city services would otherwise suffer.

But any deep cuts would also hurt retirees and future retirees. Many of the city’s nearly 72,000 retirees are not eligible for Social Security and have pensions that average a little more than $41,000 a year, according to the city.

The Moody’s report said four other local governments carried overall pension liabilities that were at least four times their annual revenue: Denver County School District; Los Angeles; Jacksonville, Fla.; and Houston. Overall, 30 of the top 50 local governments examined in the report have pension liabilities that exceed the revenue collected in a year.

The degree of pension burden varies widely across the government entities included in the Moody’s report. Some had very low pension burdens. Among them were Washington, where the pension liability is only 11 percent of annual revenue, and Wake County, N.C. where pension liabilities add up to 15 percent of annual revenue.  The District’s old pensions were taken over by the federal government as a result of the city’s budget crisis in the mid-1990s. Meanwhile, the city has not run into any financial problems with its newer pensions.

Since pension liabilities are estimates projected over decades, the financial pressure they place on local budgets varies widely. In prosperous places with growing tax bases, the pension costs are easily managed. Strong investment gains also can relieve the fiscal pressure.  In other cities, the liabilities pose more of a burden, which Moody’s says is a reality confronting a growing number of municipalities.

“Keeping up with pension contributions will be a pervasive negative pressure,” Moody’s analyst Tom Aaron said in a statement.

Moody’s report comes as investors are paying closer attention to the debt burden of municipalities since Detroit became the largest city in U.S. history to file for bankruptcy. That city is more than $18 billion in debt, and about half of that is for pension and health-care obligations owed to workers and retirees.

Detroit was in a uniquely precarious place because the city’s population and tax base have plunged for decades, a situation that has grown more extreme over the past decade.

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 of 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. municipal obligations that were rated based on standby bond purchase agreements and other third party supports also were cut.  Also downgraded were 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 certain times.

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 said.

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 rating cuts.

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 said.  In 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.

Connecticut’s Top 10 Pensioners for 2012
by Christine Stuart | Sep 3, 2013 1:59am

Last month the U.S. Census released a report that found Connecticut offered the highest average annual benefit payment in 2011.

With an average annual payment of $35,079 to retirees, Connecticut was one of six states with average annual benefit payments above $30,000. In 2011, 469 pensioners received annual pensions of more than $100,000.

Just one year later in 2012, Connecticut’s top pensioner was Michael Panciera, a former Transportation Department employee, who received an annual pension of $282,166. John Raye, a former physician with the University of Connecticut Health Center, came in 10th with an annual pension of $200,597. In 2011, Raye was paid an annual pension of $198,120.

The rest of the top 10 pensioners in 2012 were as follows:

—John Veiga, a former professor at the University of Connecticut, received $276,364;
—Jack Blechner of the UConn Health Center, received $270,234;
—Eleanor Henken also of the UConn Health Center, received $239,708;
—Dr. Edward Blanchette, a doctor with the Department of Correction, received $226,658;
—Harry Hartley, a UConn professor and former president of the university, received $211,652;
—Richard Judd, former president of Central Connecticut State University, received $208,335;
—Eugene Sigman of the UConn Health Center, received $204,352, and;
—Anthony Dibenedetto, another UConn professor, received $203,594.

In 2011, pension benefits for state employees were changed under the agreement made by the coalition of unions with Gov. Dannel P. Malloy.

As part of those negotiations Malloy asked all state employees to contribute 3 percent of their salaries for 10 years to the “other post retirement benefits” account, which includes mostly retiree health care benefits. That portion of the pension fund is underfunded to the tune of $26 billion and accounts for a greater portion of the state’s unfunded liabilities.

According to the U.S. Census report released in August, Connecticut isn’t unlike the rest of the states when it comes to asking employees to contribute a greater amount.

From 2010 to 2011, total contributions for state—and locally—administered pension systems increased 8.7 percent, from $125.5 billion to $136.5 billion. Employee contributions increased 3.1 percent, from $39.1 billion in 2010 to $40.3 billion in 2011 (and comprised 29.5 percent of total contributions in 2011), according to the U.S. Census report. Government contributions increased 11.3 percent, from $86.4 billion in 2010 to $96.2 billion in 2011 (and comprised 70.5 percent of total contributions in 2011).

On balance though, “government contributions outweighed employee contributions with a 2.4 to 1 ratio, total contributions were only 22.2 percent of the revenue source for state and local pensions in 2011. Most of the revenue (77.8 percent) was from earnings on investments.”

Connecticut has done well with its pension investments, seeing a return this past year of 11.49 percent. However, the state still has one of the highest unfunded pension liabilities in the nation.

The most recent actuarial valuation of the pension funds showed that as of June 30, 2012, the State Employees’ Retirement System was funded at 42.3 percent and the Teachers’ Retirement Fund was funded at 55.24 percent.

"Brother can you spare a Metro Card Swipe?"
The Great Depression really was this way (l).  Meet NYC subways today (c).  Remember 1981 sci-fi movie of what New York City would have become in 1997 (r)?

Nicole Gelinas explaining outsourcing to the LWVCT Convention.

Mayor Bloomberg’s parting gift
By Nicole Gelinas
December 22, 2013 | 10:36pm
Michael Bloomberg has left Bill de Blasio a gift: a blueprint to how to be a progressive mayor.

How the new mayor treats this present will tell New Yorkers lots about de Blasio: whether he’s competent, how beholden he is to labor unions and if he’s aware of the city’s defining problem.

Last week, Bloomberg made the most important speech of his mayoralty, warning of the threat the “labor-electoral complex” poses to New York.

As he put it, “The future that most elected officials worry most about is their own. Winning election — or re-election — is the goal.” And how do pols get votes? Overwhelmingly, via endorsements from public-sector labor unions — who can get out the vote.

And how do they get those endorsements? By offering ever-higher salaries and benefits, even when the city has more than enough qualified applicants for each job.

To give an example: New cops and firefighters can still retire after 22 years with a guaranteed pension that equals their final-year’s pay, including overtime. Plus, all city workers and retirees get free health care. The city even pays Medicare premiums.

The mayor outlined the “explosion” in pension and health benefits costs. The city will spend $8.2 billion on pensions during de Blasio’s first year, Bloomberg said, up from $1.5 billion when Mayor Mike took office. Health costs for city workers and retirees have reached $7.1 billion, from $2.7 billion.

When Bloomberg took office, these two costs were 17 percent of the city-funded budget. Now they’re a third.

Money spent on pensions is money we can’t spend on other things we need. The example Bloomberg gave was that since he took office, the city has spent $68 billion on pensions, and “only” $5.3 billion on affordable housing.

But if subsidized housing isn’t your thing, what about better subways? The city just spent $2 billion extending the No. 7 line from Times Square to the Far West Side. That, in turn, encouraged developers to build thousands of new apartments. Bloomberg rode in the first train westward Friday (it opens to the public come summer).

Imagine what the city could have done with $10 billion dollars in such investments.

As the mayor said: “The $7 billion additional that taxpayers are forced to spend on pensions every year is $7 billion that cannot be invested in our schools and our parks and our social safety net.”

The issue isn’t unique to New York. As Bloomberg said, the problem “comes up again and again in my conversations with mayors around the country,” and has “already bankrupted a number of cities.”

And it’s a progressive issue. Why should the city hire a worker today who’ll be able to retire in his 40s — when it means, eventually, that the city has to cut back on pre-school to pay the bills?

The mayor-elect is supposed to be the progressive guy. But through the campaign, he never said a word about this problem.

De Blasio’s progressive path is clear: Bloomberg has plowed it for him.

Three years ago, Bloomberg said he wouldn’t allow city workers to get raises (beyond what they already get for seniority and the like) unless their unions agreed to pension and health-benefit reform in their next contracts.

Labor refused. Now the unions expect the next mayor to grant them “retroactive raises” worth as much as $7.8 billion.

Bloomberg is leaving de Blasio a balanced budget — but it’s barely balanced, and the problem is long-term. And it has no money for those retroactive raises.

De Blasio should tell labor leaders — in private, if he doesn’t like negotiating in public — that they won’t get a better deal from him. And if they want to pick a fight with a new mayor, he’ll happily tell the public that he won office to help the poor, not to protect workers’ right to free health care forever.

In fact, he should direct labor to do a quick deal with Bloomberg now.

De Blasio can do this. Big unions didn’t endorse him until he had the election wrapped up.

But will he?

After Bloomberg’s speech, the mayor-elect said ungraciously that “he can give his speeches, and that’s his right. We’re the ones who will have to resolve” the labor issues.

That’s the Democratic line: Outgoing city Comptroller John Liu also said last week that Bloomberg left this issue “unresolved.”

Nope — Bloomberg resolved it. All de Blasio has to do is keep it resolved.

The high price of ‘Milking the rich’
Last Updated: 1:14 AM, September 3, 2013
Posted: 10:25 PM, September 2, 2013

Mayoral candidate Bill de Blasio has a tax plan that rivals call a political “fantasy.” It’s a fiscal dream, too. If de Blasio, the city’s elected public advocate, thinks New York can hike taxes on the rich and not suffer for it, he didn’t learn much from the 2008 crash. Gotham must become less dependent on the “top 1 percent” to be able to provide services to everyone in a downturn, not more.

De Blasio’s scheme is this: Hike income taxes by 13.8 percent on New Yorkers making above half a million dollars annually.  He’d use this bounty — $530 million a year — to pay for 38,177 pre-kindergarten students to go to school all day instead a half-day. He’d create 10,000 new pre-K slots, too.  The rest, $188 million, he’d spend on older kids’ after-school activities. After five years, de Blasio would let this tax surcharge lapse, and — he says — find another way to pay.

De Blasio’s plan has pushed him to frontrunner status in the Democratic primary.  But many voters don’t realize: We already spend $24.6 billion a year on education — 52.7 percent more, adjusted for inflation, than we did when Mayor Bloomberg took office nearly 12 years ago.

De Blasio’s Dem rivals have hit out on the political problem. Former city Comptroller Bill Thompson says it’s fantasy, because Albany would never agree (the city needs Albany’s OK to raise taxes). Quinn points out: De Blasio was against tax hikes just a few years ago. But the bigger danger is fiscal.

In 2009, the top 1 percent of taxpayers (the 34,598 households making above $493,439 annually) paid 43.2 percent of city income taxes (they made 33.9 percent of income), according to the city’s Independent Budget Office. Each of these families paid an average $75,477.

No, most people won’t up and leave (though if 20 percent did, they’d leave New York with less money than before the tax hike). But they can rearrange their incomes.

Unlike most of us, folks making, say, $10 million have considerable control over how and when they get paid. That’s because much of their money comes from cashing out a partnership, or selling stock or a house or a painting. To avoid a tax hike, it’s easy enough for them to pay themselves earlier by selling their stuff earlier — before the tax hike.  The city made $800 million in extra taxes last year because rich people sold their stuff before President Obama increased investment taxes in December.

Or, people can pay themselves later — after the five years’ worth of higher taxes are up. That’s if everything goes well. What if there’s another downturn?

In Fiscal Year 2008, before Lehman Brothers collapsed, City Hall collected $8.6 billion in income taxes. By 2009, the figure plummeted to $6.5 billion, widening the deficit by $2.1 billion. More than half a decade later, personal-income taxes are still below that 2008 figure; $8.2 billion is expected this year.

It’s been a long, slow climb. But de Blasio doesn’t get that things have changed. He says his plan is based on “a similar surcharge implemented between 2003 and 2005” on “earners over $150,000.”

First, people making low six figures have less control over their income and location than top earners. Indeed, the 3,505 families who would provide 37.7 percent of de Blasio’s new tax revenue have a lot of discretion of how they get paid.  Second, back then, New York was embarking on a record credit bubble. We should have learned something since 2008.

And we should worry that today New York is still missing 19,000 high-paying Wall Street jobs compared to half a decade ago. It’s hard to attract new high-paying jobs to replace the old ones when potential entrepreneurs not on Wall Street are singled out for higher taxes. Plus, back then, the federal government was cutting taxes, not raising them — easing the burden for New Yorkers.

If having well-paid government workers look after 4-year-olds is critical, it would be sensible for de Blasio to find a way to pay for it without hiking taxes. Teachers’ pensions will cost $3.1 billion this year. A 401(k)-style plan for new teachers would be in order.  De Blasio’s rivals should point out these facts. Instead, Thompson and Quinn said in a recent debate that they wouldn’t rule out tax hikes on the wealthy.

By contrast, listen to GOP candidate Joe Lhota. “Talking about raising taxes is about as tone-deaf as you can get,” he said Friday. “Mr. de Blasio seems unfazed by the consequences of taxing people out of our city.”

Race to the Bottom
NYTIMES editorial
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 off.

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,, 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