Member Since: 3/18/2012
Posts: 1,413
|
Chicago's the next city to go bankrupt?
Why Detroit is not alone
Detroit may be a unique basket case, but it’s not the only case.
Which is why its bankruptcy is being watched so closely.
One of the key issues in the looming legal battle is the high cost of pensions, which is why unions and pension funds are gearing up for a major battle as Detroit goes through Chapter 9 bankruptcy proceedings.
A lone vacant graffiti covered house sits in an area that used to be filled with houses in Detroit's east end on March 20, 2013. Over years of decline, many homeowners have lost their homes and they have been torn down if they become uninhabitable.
Indeed, in an interview with the Detroit Free Press, the chief of Detroit’s Police and Fire Retirement System put it this way: “Welcome to war.”
Many other cities are watching how this all plays out, with several facing some of the same issues if not the same dire straits.
“The era of 7 per cent to 8 per cent actuarial interest rate assumptions to deflate the value of these pension obligations is, thankfully, over,” said chief economist David Rosenberg of Gluskin Sheff + Associates.
“And Detroit is only the opening act even if its problems are unique to a city in secular decline and dilapidation (35 per cent of its residents are on food stamps, the population is down some 2/3 since the city’s peak as an industrial powerhouse in 1960),” Mr. Rosenberg said in a report today.
“Chicago is the next culprit, underlined by its huge credit rating downgrade last week (three notches to A3 due to, surprise, surprise, ‘very large and growing pension liabilities’). Not to mention various municipalities in California.”
Mr. Rosenberg said he wouldn’t make a call on a similar bankruptcy filing by Chicago, because of the unique nature of Detroit’s troubles. But, he added, “Chicago has too many similarities to ignore.”
Last Wednesday, a day before Detroit’s emergency manager Kevyn Orr filed for the biggest city bankruptcy in U.S. history, Moody’s Investors Service downgraded Chicago, citing its general obligation debt of $7.7-billion (U.S.) and its “large adjusted net pension liability.”
“The downgrade of the [general obligation] rating reflects Chicago’s very large and growing pension liabilities and accelerating budget pressures associated with those liabilities,” Moody’s said as it announced the downgrade, noting a total unfunded liability, as reported by the actuaries of the four pension plans, of $19-billion.
Using its own “more conservative assumptions,” however, Moody’s pegged the amount at $36-billion.
“The negative outlook is based on the dramatic spike in annual pension payments scheduled to take effect in the 2015 budget year (payable in 2016) under state law, which will place material strain on the city’s operating budget,” Moody’s said.
In 2015, according to Moody’s, state laws will mean the city must boost its pension contributions to $1.2-billion, from just $467-million in 2014.
“The outlook incorporates the likelihood of continued growth in unfunded liabilities in the city’s four pension plans given currently suppressed contributions from the city. The outlook also reflects the States of Illinois’ … constitutional protection of pension benefits.”
It was referring to the fact that the state constitution protects pension benefits, and move to cut benefits would thus face a court battle. Add to that the “limited political appetite” to hike taxes to help cover those costs.
Chicago Mayor Rahm Emanuel has called for “comprehensive pension relief" from the state.
In Detroit on Friday, a state judge ordered Detroit to withdraw its application because of similar constitutional guarantees of pension benefits.
That was the first salvo in what is bound to be a lengthy fight in Detroit.
Michigan, which authorized the move, is appealing that ruling, posing the first issue for Steven Rhodes, the U.S. bankruptcy judge who’s overseeing what has fast become a case that will set a U.S. standard.
Judge Rhodes will hear the first arguments on Wednesday related to Detroit’s bid to suspend retiree lawsuits over the pension issue.
As Detroit Mayor Dave Bing noted yesterday, more than 100 American cities are in trouble, which is why all eyes are on the Motor City.
“We may be one of the first,” Mr. Bing told ABC. “We are the largest. But we absolutely will not be the last. And so we have got to set a benchmark in terms of how to fix our cities.”
Mr. Orr wants it done by next fall, but that seems a long shot. It’s the equivalent of a corporate restructuring, but far more complex.
As for the creditors, who face substantial haircuts, Michigan Governor Rick Snyder fired a warning shot over the weekend.
“Realistically, if you step back, if you were lending to the city of Detroit in the last few years, didn’t you understand there were major issues and problems?” he told CBC.
Read more here: http://www.theglobeandmail.com/repor...ticle13340570/
|
|
|
|
