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Detroit: D is for DISASTER

Posted by Larry Doyle on June 18, 2013 10:29 AM |

Those in Washington and elsewhere have little interest in drawing attention to the municipal disaster that is the City of Detroit, Michigan.

While nobody likes dealing with disasters, there is no other single appropriate word to describe this once proud burgeoning metropolisAs recently reported by The Wall Street Journal,

The city of Detroit’s manifold problems are coming to a head. Emergency manager Kevyn Orr warned the city’s 150 or so creditors and unions on Friday that Chapter 9 bankruptcy is in the offing if they don’t accept the steep cuts he’s presented.

I will allow others to opine on the multitude of reasons that has brought Detroit to its current state but lets not deny that corruption and fiscal malfeasance have played a very real role in decimating this city.

Let’s dive into this disaster so we can gain a greater appreciation for life within this city. To do so, let’s navigate and review the City of Detroit: Proposal for Creditors released last Friday. What do we learn?

> Declining Population: The City’s population has declined 63% since its postwar peak, including a 26% decline since 2000

> High Unemployment: Despite some recent improvement, the City’s unemployment rate has nearly tripled since 2000 to a rate of 18.6% at end of 2012.

> RESIDENTS AND BUSINESSES ARE LEAVING DETROIT TO ESCAPE HIGH TAXES AND INSURANCE COSTS.

> THE CITY IS INSOLVENT: Absent ongoing cash intervention (primarily in the form of payment deferrals and cost cutting), the City would have run out of cash before the end of FY 2013.

> In 2012, the City had the highest rate of violent crime of any U.S. city having a population over 200,000 (based on the FBI’s Uniform Crime Reports database). The City’s violent crime rate is five times the national average.

> Residents and business owners have been forced to take their safety into their own hands; some relatively well-off sections of the City have created private security forces.

> As of April 2013, approximately 40% of the City’s street lights were not functioning.

> In regard to the Detroit Police Department, employee accountability is limited. Individual employee performance metrics do not exist for either positive or negative police activity. Morale is extremely low. Disciplinary processes are slow and cumbersome, preventing leadership from effectively managing the department.

> There are approximately (i) 78,000 abandoned and blighted structures in the City, nearly half of which are considered “dangerous” and (ii) 66,000 blighted and vacant lots within the City limits.

> The City estimates that, as of the close of its 2013 fiscal year (i.e., June 30, 2013), the City will have liabilities reflected on its balance sheet of approximately $9.05 billion.

> Off-Balance Sheet Liabilities: unfunded liabilities increased from $4.8 billion to $5.7 billion from June 30, 2007 through June 30, 2011 (the most recent actuarial data available).

> During fiscal year 2012, more than 38% of the City’s actual revenue was consumed servicing legacy liabilities. Going forward, legacy liabilities are expected to consume increasing portions of City revenues.

> UNSUSTAINABLE RETIREE BENEFITS: Liabilities are large and unfunded consist of the Health and Life Insurance Benefit Plan and the Supplemental Death Benefit Plan; 99.6% of the City’s OPEB liabilities are unfunded.

> PENSION CONTRIBUTIONS; The City has consistently deferred year-end pension contributions by using a payment plan financing arrangement paying 8% interest.

> IN THE ABSENCE OF A COMPREHENSIVE FINANCIAL RESTRUCTURING, BUDGET DEFICITS WILL CONTINUE FOR THE FORESEEABLE FUTURE: The City Has Limited Options for Further Revenue Generation and, in the absence of a Comprehensive Financial Restructuring, Cost-Saving Measures.
— Legacy obligations continue to increase;
— Limited or no access to capital markets;
— Diminishing, if any, returns from further tax increases; and
— Minimal potential for further payroll related reductions.

> The City’s already high tax rates are widely believed to have contributed to its population loss and economic decline. For a number of reasons, higher tax rates could have a negative effect on revenue.

> The City is currently levying taxes at or near the statutory maximums.

> The City believes that lowering selected tax rates – primarily income and property tax rates – to levels that are at least competitive with surrounding jurisdictions is critical to reversing the City’s crippling population and job losses.

CONCLUSIONS BASED UPON PROJECTIONS
> The City acknowledges that it must exert reasonable efforts to maximize recoveries for all creditors.

> As demonstrated by the 10-year projections, however, the City’s expected revenues will fall significantly short of the levels required to fund the City’s operations and fully satisfy its liabilities.

> Given the City’s (i) substantial debt levels (ii) significant labor related liabilities and (iii) continuing operating expenses, shared sacrifice will be required from all stakeholders to achieve the City’s dual (and complementary) goals of maximizing returns for its stakeholder constituencies while simultaneously establishing the framework for a healthy and growing Detroit moving forward.

Detroit today . . . where tomorrow?

Navigate accordingly.

Larry Doyle

For those reading this via a syndicated outlet please visit my blog and comment on this piece of ‘sense on cents.

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I have no business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

 

  • Ted

    What are the Ten Most Dangerous Cities in America?

    10. Buffalo

    9. Cleveland

    8. Stockton, California

    7. Baltimore

    6. Atlanta

    5. Birmingham

    4. Memphis

    3. Oakland

    2. St. Louis

    1. Detroit

    For a pictorial display here you go

  • AJ

    Detroit is a struggling city, that’s for sure.

    The Tech and Auto industries seem to be doing well.

    Jobs are coming back, but the devastation is evident.

  • Russ

    And, Detroit has been led by Democrat Mayors for decades.

    • Peter Scannell

      And so has Boston. What’s your point Russ?

  • David

    If you bought Detroit debt without making sure it came with support from credit enhancement or a revenue lien, you will now pay the price, Detroit emergency manager Kevyn Orr says.

    “If you lent money to an insolvent city that has been going insolvent as openly and notoriously as possible since 2000, and you don’t have a security interest, then you are an unsecured creditor,” Orr told The Bond Buyer in a telephone interview Tuesday.

    “This has been building for decades and decades. They understood the risk.”

    Detroit’s Orr: Investors in Bonds Headed for Haircut Should Have Known

  • Jim

    Add this to the list: Cook County, Illinois

    Study: Cook County Debt a Staggering $34 Billion,
    More than $17,000 Per Household

    CHICAGO (June 20, 2013) – The 518 taxing districts within Cook County have a combined “financial burden” of almost $34 billion – an average of $17,147 per Cook County household – according to a study released today by The Heartland Institute and Truth in Accounting (TIA).

    Thirteen taxing districts in Cook County have a worse financial burden than Stockton, California, which is currently proceeding with bankruptcy.

    Click here to download the report: The Municipal Government Debt Crisis.

    Sheila Weinberg, founder and CEO of TIA and coauthor of the study, said, “This study is the first comprehensive analysis of Cook County’s taxing districts. It reveals how officials in many districts have been misrepresenting their financial conditions by telling citizens their budgets were ‘balanced,’ when in fact they have been accumulating an overwhelming amount of debt.”

    Coauthor John Nothdurft, director of government relations for The Heartland Institute, warned, “The current fiscal state of many of the county’s municipalities is unsustainable, and citizens will continue to see more tax increases or municipal bankruptcies unless drastic pension and spending reforms are made.”

    Weinberg and Nothdurft found:

    Unfunded pension liability for the Cook County taxing districts totals $31.07 billion

    Unfunded retirees’ health care benefits liability totals $7.18 billion

    Other debts and liabilities total $24.88 billion

    The total amount of bills stands at $63.13 billion

    Assets available to pay bills totals $29.41 billion

    The public’s financial burden (total bills minus assets) equals $33.72 billion

    There are 1,966,356 households in Cook County. Simple division produces the following average per-household amounts:

    Unfunded pension liability, $15,799

    Unfunded retirees’ health care benefits liability, $3,651

    Other debt and liabilities, $12,655

    Total amount of bills, $32,105

    Assets available to pay bills, $14,957

    Financial burden (total bills minus assets), $17,147

    In addition to the findings reported above, the analysis includes the following information:

    The five worst municipalities in Cook County according to this measure are the Village of McCook with a per-household financial burden of $316,671; Bedford Park at $259,320; Rosemont at $90,468; Hodgkins at $22,990; and Melrose Park at $19,352.

    The City of Chicago has the sixth highest per-household burden at $18,202.

    More than $27.1 billion worth of retirement liabilities are maintained off the county’s balance sheet.

    The financial burden created by the federal government is $574,042 per household, while the financial burden of the

    Illinois government is $32,905 per household.

    The total federal, state, and local financial burden on the average household in Cook County is a staggering $624,094






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