7.30.13

Investing for Motown’s Future. Notwithstanding its fiscal distress and bankruptcy, some parts of Detroit are reviving. A key player is Dan Gilbert, the chairman of Quicken Loans , a mortgage provider. In 2010 Mr. Gilbert relocated Quicken’s headquarters from the suburbs to downtown Detroit—an area in which another of his companies, Rock Ventures, owns or controls over 30 buildings. Mr Gilbert’s firms have invested around $1 billion in downtown Detroit and employ some 10,000 people there. There, with the spirit of entrepreneurship, the Detroit Employment Solutions Corporation, a non-profit, has replaced the city’s employment-services department. Charities and big donors have helped raise $140m for a light railway. Quicken Loans has lured 85 other companies into Detroit and brought in 1,000 interns for the summer. It even seems some will stay, attracted by urban living.

Debt Limitations. Unlike the U.S., as Detroit hurtled toward bankruptcy, it managed to stay under a statutory debt limit: according to Detroit’s most recent annual financial statement, it slid under a state-imposed cap with $75 million to spare (or to borrow). How could that have happened? Under state legislation enacted in 1909 at a time when both of my grandfathers were attending the U. of Michigan, Michigan passed a law limiting the amount of debt a city could legally incur, setting a cap at 10% of the total assessed value of all real property and personal property in a city, with some adjustments; however, only a fraction of the debt counts against the state-imposed debt ceiling. It seems counterintuitive: Detroit currently is spending more than 40% of its revenue on borrowing costs and public-employee retiree benefits, according to the city. Mr. Orr, the Emergency Manager, reports that the city owes $9 billion to creditors and has racked up billions of dollars more in health-care and pension liabilities. Nevertheless, courtesy of exemptions in the state law, not to mention loopholes since enactment, the city’s official statements note “significant exclusions to the debt limitations have been permitted.” Such exclusions include revenue bonds for water supply and sewage, lease-financing schemes, swaps and derivatives that permitted the city to convert casino dollars into pension payments. Long-term retiree liabilities also do not count either. Ergo, while Detroit’s debt cap last year was calculated at just over $1 billion, only $957 million of its long-term debt counted against the limit, according to the city’s annual financial report released in December. Most of it consisted of general obligation bonds.

Moody Blues: What does all this mean for other municipalities? Moody’s this week notes:  “Our negative outlook on the local government sector as a whole, in place now for close to five years, reflects a number of substantial economic and fiscal pressures, including a sluggish economic recovery, constraints in key revenue sources, and mounting spending pressures. In spite of the negative outlook, we anticipate that few issuers will follow Detroit into default or bankruptcy. We don’t expect elevated financial stress to lead to pervasive defaults. We expect defaults to remain rare even among outliers. Most local governments exhibit solid credit fundamentals, notwithstanding the recent period of economic and fiscal stress. In fact many local governments are starting to feel the effects of the housing recovery, and while this recovery varies somewhat from region to region, most local governments have seen property tax and other revenues stabilize and in some cases return to growth. Spending pressures have not completely subsided for many local governments, and it may be several years before most can rebuild reserves spent down during the recession.”

Unintended Consequences. As we wrote last week, there have been legislative efforts in the U.S. Senate to bar any kind of federal assistance to Detroit or any other city, county, state, or public school district in severe fiscal distress. This morning, we note in particular Senate legislation by Sen. David Vitter, S.101, which would prohibit the provision of federal funds to State and local governments for payment of obligations, to prohibit the Board of Governors of the Federal Reserve System from financially…etc. There are indications the Senator will seek to offer the legislation as an amendment to legislation pending on the Senate floor. That is, the legislation would apply to public, as opposed to private, corporations―except it would not apply to the federal government or foreign governments. If implemented, the legislation would risk the lives and safety of many, many American families. Without even addressing the issue of retroactivity, the greatest single problem with this legislation is the term “at risk of defaulting.”

  • The legislation would immediately cut off any kind of federal assistance to a state or local government at risk of default.  It would not, of course, apply to the federal government, which is now at a very significant risk of default; it would apply to any of the thousands of states and localities in harm’s way from terrorist attacks, so that it would make it against federal law to provide assistance to New York City; Arlington County, Va., the home of the Pentagon; the Commonwealths of Pa., NY, and Va., for instance in the event of a future 9/11. The legislation provides an exception for natural disasters, but not “unnatural disasters” such as the Deepwater Horizon disaster off the coast of Louisiana.
  • The proposed legislation would set a new precedent in that it would single out U.S. states and local governments―not foreign governments at risk, such as Syria, Greece, Libya, Egypt, South Sudan, etc., nor corporations–such as AIG (which received a federal bailout of $180 billion), Wall Street firms, which, in some instances, have contributed to both municipal bankruptcies, such as in Jefferson County, and Ford, GMAC, etc.
  • There is significant consensus the municipal bankruptcy in Jefferson County was caused by Wall Street. This legislation thus would constitute a double wrong: 1) it provides no withholding of bailouts or federal subsidies to Wall Street firms that precipitated any “risk of default,” such as UBS and Bank of America in the case of Detroit, and multiple parties in the case of Jefferson County; 2) It includes no limitation or non-application of the federal penalties where the risk of default is caused by a private party; and 3) It provides, apparently, for the Federal Reserve to determine whether a grave outbreak of disease that affected millions of American lives or a severe disaster (like a chemical runaway train that mostly destroyed a parish or town) constituted a natural disaster. Certainly, a massive chemical spill could, in no way, be defined as a “natural disaster,” so the proposed legislation prohibiting aid and credit would contribute to a significantly greater loss of American lives.
  • Because there is no definition of “at risk of default” or “likely to default,” presumably such a decision would be left to some federal agency to assess. Presumably it would put into federal law a double standard: one for the U.S. Government, which is now at a heightened risk of default in the next few months, and a different standard for state and local governments and public school districts. It is unclear why such a threat should apply to all governments in the U.S. except the federal government and foreign governments.

Mayhap the most grave shortcoming and misapprehension of the proposed legislation is its conflation of municipal bankruptcy with “a request for a bailout.” In a corporate bankruptcy, the business simply ceases to exist and its assets are divvied up among its creditors as refereed by a U.S. Bankruptcy Court. In sharp contrast, in a municipal bankruptcy, the corporation continues to operate. Indeed, the critical purpose is to ensure the operation of the city, county, or school district to provide essential public services from 9-1-1 to water and traffic lights, etc., but to create a temporary shutoff to creditors until a plan to emerge from bankruptcy is accepted by a U.S. Bankruptcy court. There is no provision in chapter 9 of the federal code for a federal bailout. It is uniquely designed to ensure that after a default, if an American dials 911, there will be a lifesaving response.

Motown Post Retirement Benefits. Mr. Orr’s plan proposes to shift retiree healthcare to Michigan’s Health Insurance Exchange (HIE), a key feature of the Affordable Care Act which is intended to facilitate consumer choice of health insurance for the uninsured and encourage price competition. As enacted, the law is aimed at enabling lower income individuals to afford health care insurance in the marketplace. Moody’s has noted that: “Ironically, this structure appears to make it easier for cash-strapped municipalities to drop retiree healthcare benefits.” Chicago, in fact, last month became the first large municipality to propose such a shift when it announced a three-year phase out of the city’s 55% contribution to retiree health insurance premiums starting in 2014. Under the Windy City’s plan, the bulk of the city’s 30,000 plus retirees would be migrated to Illinois’ health insurance exchange by 2017. Chicago estimates savings of $109 million in annual benefit costs and expects federal premium subsidies to cover most of the city’s pre-Medicare eligible retirees.

And speaking of blues, and to give each of you a little lift for today: who could forget hearing through the grapevine what Motown have given us over the years: below, the Top 30

1. I Heard It Through The Grapevine – Marvin Gaye
2. My Girl – Temptations
3. Reach Out I’ll Be There – Four Tops
4. Where Did Our Love Go? – Supremes
5. What’s Goin’ On? – Marvin Gaye
6. Dancing in the Street – Martha & The Vandellas
7. I Want You Back – Jackson 5
8. Superstition – Stevie Wonder
9. Please Mr. Postman – Marvelettes
10. My Guy – Mary Wells
11. (Love Is Like a) Heat Wave – Martha & The Vandellas
12. Do You Love Me? – Contours
13. Let’s Get It On – Marvin Gaye
14. Ain’t No Mountain High Enough – Marvin Gaye & Tammi Terrell
15. The Tracks of My Tears – Smokey Robinson & The Miracles
16. Shotgun – Jr. Walker & The All Stars
17. I’ll Be There – Jackson 5
18. Baby Love – Supremes
19. Papa Was a Rollin’ Stone – Temptations
20. Uptight (Everything’s Alright) – Stevie Wonder
21. I Can’t Help Myself (Sugar Pie Honey Bunch) – Four Tops
22. The Tears of a Clown – Smokey Robinson & The Miracles
23. Stop! In the Name of Love – Supremes
24. You’ve Really Got a Hold On Me – Miracles
25. Just My Imagination (Running Away With Me) – Temptations
26. Baby I Need Your Lovin’ – Four Tops
27. You Are the Sunshine of My Life – Stevie Wonder
28. Ain’t Nothing Like the Real Thing – Marvin Gaye & Tammi Terrell
29. Money (That’s What I Want) – Barrett Strong
30. Leavin’ Here – Eddie Holland

 

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