3 huge cities flirting with bankruptcy
Staggering under pension obligations and debt, any of these could follow Detroit into court.
Detroit's looming bankruptcy is making news again, this time focusing on current restructuring plans aimed to wipe out $18 billion in debt by axing pension checks of city retirees, including police and fire.
Massive long-term retirement and healthcare promises were by no means solely responsible for the city's fall, but these massive pensions coupled with a tax base weakened by high unemployment and housing vacancies caused the budget to bleed out quicker.
The Michigan city may be the most recent victim of bankruptcy, but many of the 61 largest U.S. cities have adopted the same retirement legacy leading to $118 billion in unfunded healthcare debts. Retired city workers stop contributing to the system; the system keeps paying them; and before you know, a fiscal crisis has begun.
If you think the three cities below are too big to fail, think again.
The solid performance in the stock market in 2013 may have allowed some of their investments within pensions to grow and cover costs. However, when the growth rate of investments slow, and the payout rate speeds up, expect to see any one of these cities next in line at bankruptcy court:
New York City
When adjusted for population, New York owes $20 billion more for retiree health care than Detroit, or a total of $88.2 billion.
On top of those obligations, the Big Apple owed pensioners $69.9 billion more than it set aside as of last year's annual report. Again, adjusted for population, that's $28 billion more than Detroit owes.
One of the reasons New York City can't balance its annual budget is because it has to spend one-third of its revenues on health, retirement benefits, and debt. New York's budget has run an operating deficit six of the past seven years (with the shortfalls covered by pre-2008 surpluses).
The Windy City may be closer to bankruptcy than New York. Fitch Ratings recently downgraded the city three notches because of pension liabilities for its 30,000 retired workers and a struggling economy.
Makes perfect sense when you consider that Chicago's four pension systems -- for police, firefighters, laborers and municipal workers -- were short by $19.5 billion at the end of 2012. That does not include the ailing pension fund for Chicago teachers, which had its own $8 billion shortfall at the end of the last fiscal year.
The option to raise property taxes to cover the annual required pension contribution is simply out of the question considering homeowners would be looking at a 35 percent tax increase.
Next year, Chicago must come up with a state-mandated $590 million increase in its contribution to police and fire pension funds, so it’s going to get worse before it gets better.
When former Los Angeles Mayor Richard Riordan gazed into his crystal ball in 2010, he told the Wall Street Journal, "Los Angeles is facing a terminal fiscal crisis: Between now and 2014 the city will likely declare bankruptcy."
The tremendous growth in payouts for retirement benefits over the years certainly lends merit to his prophecy. According to Stanford Institute for Economic Policy Research, pension costs in L.A. increased from 8.5 percent of total city expenditures in 1999 to 15.4 percent for fiscal 2012.
Stanford's study also estimated that each of the city's three independent pension funds is unfunded by billions of dollars: the city of Los Angeles Fire and Police Pension System is $9.25 billion unfunded; the Los Angeles City Employees’ Retirement System is $11.32 billion unfunded; and the city of Los Angeles Water and Power Employees’ Retirement System is $6.59 billion unfunded.
Many cities have begun to make reforms like trimming benefits, upping the retirement age, increasing employees’ contributions, shifting retirees into Medicare, or reexamining the meaning of "defined benefit" pension plans.
It's likely, though, that reform can't come fast enough for some cities and bankruptcy may be imminent.
One good bit of news in all of this is that municipal bonds are very resilient even when a city files for bankruptcy. For instance, in the well-known and large municipal bond default of Orange County, Calif., the recovery rate was 100 cents on the dollar. Bondholders that held on to maturity did not lose any money because Orange County did not miss a single interest payment or principal payment.
Just be sure to pay attention to a municipal bond's rating. If it falls to junk status, you might want to bail out.
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what do you expect when the mayors of each city is a communist and/or democrat...personally, I don't see a difference, but...
who's the governor of Illinois, New York and California? oh yeah, that's right, democRATs!
I hope they file bankruptcy and force the leftist-liberal idiots and union thugs who voted for them have their taxes raised to pay for it, rather than have the rest of American society bail them out.
Most of these people paid into their pensions and it takes years beyond life expectancy to
ever touch tax payer money. The cities simply found pension money as a source of money to
spend as they please putting off the day when it would have to be paid out hoping a new
revenue source would appear but it never did. It was like a piggy bank free to raid when
vocal groups were demanding more free stuff. Social Security was used the same way never
collecting investment dollars because they spent it as fast as it came in raiding the piggy bank
for projects that made politicians popular with voters. Does this sound like what is going on right
now with the Federal Government. So now the people who retired will not even get their own
money back and their employers matching dollars because its gone. Can you spell corruption?
How did we allow this to happen? Is there a difference between corrupt governments around
the world, no much just in the way they do it. I say bankrupt people on pensions force them
out of their homes and onto welfare rolls, lets see how that effects the economy.
Welcome, one and all, to the "Permanent Government Haircut" for investors. Just look at Greece, and you see municipalities, Counties, States, the U.S. of A., and virtually all other governmental entities. Investors, bondholders, pensioners all taking the haircut. After wiping out debt to the tune of about $0.10-$0.20 on the Euro, in order to meet expenses Greece had to borrow again! New debt replacing old debt.
All countries have debt that can not be repaid. And to finance after a "restructuring", they have to borrow some more, thus continuing the Debt-Default-Haircut-Debt cycle. The result of all of us (private, corporate, and Government alike) living on credit and borrowing.
Some entities are in good shape and won't have this happen, but most will.
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