In a relatively unreported story, Detroit exited Chapter 9 Bankruptcy,
last year Detroit was the largest american city forced into Bankruptcy by the State of Michigan. 2 days ago, the court approved the reorganization plan.
Good news, they didn't have to sell the Detroit Institute of Art and Howdy Doody.
Bad News The Non-Police, Non-Fire pensioners take a 4.5% pension cut and its
going to happen again
More below the Orange Death Spiral
Good Bad or Indifferent, Detroit proper has been in terrible trouble for 40 years.
The big home industry is no longer 80% of the Global industry but, about 35% of the global industry and 90% of the profits swapped from making cars to financing cars.
the population of the city has declined some 50% and unemployment is some 35% and
the city council and mayors have been incompetent, corrupt and ridiculous for decades.
but it's still the home for the auto industry, the dominant city for Michigan and
gateway to canada.
so let's see what happened
http://america.aljazeera.com/...
What happened in Detroit must never happen again," Judge Steven Rhodes said in bringing the case to a close a remarkably speedy 16 months after Detroit — the cradle of the auto industry — became the biggest city in U.S. history to file for bankruptcy.
The plan calls for cutting retiree pensions by 4.5 percent, erasing $7 billion of debt and spending $1.7 billion to demolish thousands of blighted buildings, make the city safer and improve long-neglected basic services.
so it looks like the bondholders take it in the shorts, hard, the pensioners take a haircut,
and I suspect city workers take some layoffs.
The most unusual feature of the plan is an $816 million pot of money funded by the state, foundations, philanthropists and the Detroit Institute of Arts. The money will forestall even deeper pension cuts and also avert the sale of city-owned art at the museum — a step the judge warned "would forfeit Detroit's future."
I like this judge....
Selling the DIA would just slaughter reasons for people to go to detroit and wreck their cultural heritage.
http://america.aljazeera.com/...
however risks still remain
http://dealbook.nytimes.com/...
Even after the benefit cuts, the city’s 32,000 current and future retirees are entitled to pensions worth more than $500 million a year — more than twice the city’s annual municipal income-tax receipts in recent years. Contributions to the system will not be nearly enough to cover these payouts, so success depends on strong, consistent investment returns, averaging at least 6.75 percent a year for the next 10 years. Any shortfall will have to ultimately be covered by the taxpayers.
yeah, assuming a 6.75% return is probably a disaster and the payouts to the system is significantly more then they take in revenues.
Detroit’s pension fund for general city workers, now said to be 74 percent funded, is scheduled to go into a controlled decline to just 65 percent by 2043; the police and firefighters’ fund will slide to 78 percent from 87 percent. After that, the city’s contributions are scheduled to come roaring back, bringing the plan up to 100 percent funding by 2053.
Detroit and most public service pensions use a very dangerous funding formula
cited two popular actuarial methods, used in Detroit until now and still in many other places: “rolling amortization,” which pushes costs endlessly into the future, and pension contributions calculated as a percentage of an assumed rising payroll, which “backloads” the funding.
Those methods “do not pay down principal,” Mr. Cramer wrote.
That means they can work the same way interest-only mortgages with low teaser rates did in the subprime crisis: They can allow the growth of invisible debt, which, if not understood and managed carefully, can snowball and harm unsuspecting people.
This isnt' the diary and I don't have the time, but, Actuarial science has a lot of Voodoo
in it.
It sounds like many cities use Backloading and Rolling Am....
If you read the NYTimes article you will see the SEC barred that for private companies.
however if states and local government are using this, well, with the fed crushing interest rates, i'd expect that the wave of pension failures is just beginning.
if i were a detroit pensioner, the next time around, they will be the only ones there.
I also wouldn't ever want to buy a detroit Muni ever again.