Detroit Files for Bankruptcy

Trying to pay for stuff you can’t afford will do that to you:

It’s the largest municipal bankruptcy in U.S. history, dwarfing Jefferson County, Ala.’s $3.1 billion sewage district restructuring.

In June 2012, the City of Stockton became the largest-ever city to file for bankruptcy, at the time.

The Motor City faces $20 billion of long-term liabilities. The Wall Street Journal’s Matt Dillon says those holding onto $11 billion in unsecured debt are basically staring into the abyss, facing the prospect of getting next to nothing from the city’s obligations.

The pension funds want to block Orr’s attempt to drastically reduce the amount of benefits owed to current and former city workers.

Pension funds for unionized city employees are one of the reasons Stockton went bankrupt.

Stockton, CA Declares Bankruptcy

Stockton bankruptcy can move forward, judge rules:

The $900 million Stockton owes to the California Public Employees Retirement System to cover pensions is its biggest debt -– as is the case with many cities in California.

Stockton slashed its police and fire departments, halted bond payments, cut employee benefits and adopted an emergency spending plan that cut many city services. But the city continues to pay into the state pension.

CalPERS – California’s retirement system for government employees – has a long history of problems itself. Some of it is due to ridiculously over-generous pensions, with some state retirees pulling down more than $100,000 every year in retirement. CalPERS let’s employees retire as early as 55, so those retirement payments can stretch out for decades. CalPERS’s own actuary says the pension costs are “unsustainable.”

State auditor: California’s net worth at negative $127.2 billion:

Were California’s state government a business, it would be a candidate for insolvency with a negative net worth of $127.2 billion, according to an annual financial report issued by State Auditor Elaine Howle and the Bureau of State Audits.

The report listed the state’s long-term obligations at $167.9 billion, nearly half of which ($79.9 billion) were in general obligation bonds, with another $30.8 billion in revenue bonds, many of which were issued to build state prisons, whose “revenue” is lease payments from the state general fund.

The list of long-term obligations did not include the much-disputed unfunded liabilities for state employees’ future pensions, nor the $60-plus billion in unfunded liabilities for retiree health care. The Governmental Accounting Standards Board and Moody’s, a major bond credit rating house, have been pushing states and localities to include unfunded retiree obligations in their balance sheets and were they to be added to California’s, it could push its negative net worth down by several hundred billion dollars.

So that $127 billion doesn’t even include the underfunded liability for CalPERS and other government employee retirement and healthcare. This report lists the underfunded liabilities for just three programs – CalPERS, CalSTRS, and the University of California Retirement Plan – at $137 billion. This is what happens when politicians operate on the “buy votes now, pay debts after you’ve left office” plan.

Stockton, CA Going Bankrupt

Reuters – Stockton, Calif. to take up bankruptcy budget plan:

Stockton, California was poised on Tuesday to take a major step toward becoming the largest U.S. city ever to file for bankruptcy after talks with its creditors on Monday at midnight.

Despite the cuts, Stockton has not been able to avoid recurring deficits. Its revenue is weak and its financial troubles have been compounded, according to city officials, by generous pay and benefits for city workers and retirees and too much debt taken on by the city when it enjoyed a home-building boom in the early part of the last decade that transformed it into a distant bedroom community for the San Francisco Bay area.

Repo Man Visits Stockton, CA; Tows Away City Hall and Parking Garages

MishWells Fargo Seizes Stockton California City Hall, Parking Garages; City Prepares Bankruptcy Contingency Plans; Bondholder Mediation Underway:

The Stockton City Council announced Wednesday that they will look at bankruptcy contingency plans after Wells Fargo seized the new city hall building.

The city paid $35 million to buy the 8-story building, but was not able to move in because of its money problems, and recently stopped making debt payments all together. This is the fourth building that was repossessed by Wells Fargo; the bank seized three city parking garages for the same reason.

I thought it was nice of the banks not to repossess the orphanage and kick out the orphans. Or to shut down the schools and turn them into all night casinos with hookers and blackjack. But the city fathers better hurry up and either get caught up on their payments or declare bankruptcy. The banks are running out of buildings to repossess that taxpayers won’t miss.

PreviouslyStockton, California Shuffling Towards Bankruptcy

Stockton, California Shuffling Towards Bankruptcy

MishStockton California, Population 292,000, Takes Steps Toward Bankruptcy, City Manager Says:

Stockton, California, may take the first steps toward becoming the most populous U.S. city to file for bankruptcy next week because of burdensome employee costs, excessive debt and bookkeeping errors that misrepresented accounts, city officials said today.

They’ve cut city workers, including a 25% cut in the police force. Now they want bondholders to take a cut.

As these bankruptcies proceed, how will it affect rates for other municipal governments?

Biggest municipal bankruptcy in US history

BloombergJefferson County, Alabama, Votes to Declare Biggest Municipal Bankruptcy:

Jefferson County, Alabama, commissioners voted 4-1 to file the largest U.S. municipal bankruptcy after reaching an impasse over concessions with holders of $3.14 billion of bonds. JPMorgan Chase & Co. (JPM), which arranged most of the debt to fund a sewer renovation, will likely take the biggest loss in the process, which begins with a hearing 10 a.m. local time tomorrow.

How did Vallejo, California go bankrupt?

George Will in the Washington Post – Pension Time Bomb:

Joseph Tanner, who became city manager after this municipality of 120,000 souls was mismanaged to the brink of bankruptcy, stands at a whiteboard to explain the simple arithmetic that has pushed Vallejo over the brink. Its crisis — a cash flow insufficient to cover contractual obligations — came about because (to use fiscal 2007 figures) each of the 100 firefighters paid $230 a month in union dues and each of the 140 police officers paid $254 a month, giving their unions enormous sums to purchase a compliant city council.

So a police captain receives $306,000 a year in pay and benefits, a lieutenant receives $247,644, and the average for firefighters — 21 of them earn more than $200,000, including overtime — is $171,000. Police and firefighters can store up unused vacation and leave time over their careers and walk away, as one of the more than 20 who recently retired did, with a $370,000 check. Last year, 292 city employees made more than $100,000. And after just five years, all police and firefighters are guaranteed lifetime health benefits.

Credit Suisse estimates that state and local governments have a cumulative $1.5 trillion shortfall in commitments for retiree health care. But it is the pension crisis that most dramatically illustrates Lowenstein’s thesis about the slow accretion of power by the unions. Pensions “are a perfect vehicle for procrastination; in the financial world, they are the most long-enduring promises that exist.” Human nature — the propensity to delay the unpleasant — rears its ugly head: When pension benefits come due, the people who promised them, thereby buying labor peace and winning elections, are long gone.

The insanity here is that public service unions are allowed to donate to candidates. The system allows taxpayer money skimmed from public employee salaries to fund political campaigns to elect more politicians to give more money to government employees … and the system just reinforces itself.

Previously: