2013-05-13

Update on the Slow Death of Democracy

In The Slow Death of Democracy, I looked at the emergency takeover of Detroit. No matter how it is spun, it is a failure of democracy and based on current trends in politics and public finances, it is the start of a trend. Now we have the results of the emergency manager's assessment, and as expected by everyone with a brain, it's far were than people were led to believe.

Detroit insolvent, EM Kevyn Orr says
Emergency Manager Kevyn Orr says the city of Detroit's cash-flow crisis makes it "insolvent" and unable to borrow more money to mask over debts being made worse by skipping millions in payments for retiree pensions and health care.

After 45 days on the job, Orr's initial assessment of Detroit's perilous finances is laid bare in a 41-page report to be delivered today to state Treasurer Andy Dillon.

Calling it "a sobering wake-up call about the dire financial straits the city of Detroit faces," Orr said he will use the report as a baseline for paring down the city's $15.6 billion in debt and long-term liabilities.

Orr, a Washington, D.C., bankruptcy attorney, did not use the word "bankruptcy" anywhere in his report but said the city is "insolvent" and has "effectively exhausted its ability to borrow" after years of issuing long-term debt to pay its bills. Previously, he has said he hopes to avoid a Chapter 9 filing.

The report hints that city employees who were not hit by last year's wage reductions could face pay cuts in the near future and that Wall Street bondholders will be asked to take a haircut to relieve a city that shelled out $133 million in debt payments last year on a $1.23 billion budget.

Orr also says he will evaluate "options to reduce or eliminate certain health care costs for both active and retired employees" in light of a $5.7 billion unfunded health care benefit for 18,500 retired city workers and 10,000 active employees.

"No one should underestimate the severity of the financial crisis," he said Sunday in a statement.

......The Detroit General Retirement System and Police & Fire Retirement System claim to have been 83 and 100 percent funded, respectively, as of June 2011. But Orr and a team of consultants aiding the restructuring of city government are beginning to question mathematical assumptions used to determine the value of the funds.

The city's June 2011 report showed the pensions having a $646 million accrued unfunded liability. But Orr said the market value of the two pension funds' assets — such as real estate — were more than $1 billion less than the actuarial assumptions.
Much more to the story. I expect this will become a huge issue in the coming days and weeks because there are dozens of cities in similar situations, not as bad as Detroit perhaps, but bad enough that they will need to take similar steps. If Detroit takes out "holy grail" items like retiree pensions and healthcare, other cities will take advantage of the precedent. This is a huge, huge battle.

If you're wondering how they got into this mess, just look to the idiocy of union leaders who had the prior government's ear:
Ed McNeil, a representative for the city's largest union, AFSCME Council 25, said the rising legacy costs are nothing new and as the city continues to privatize and reduce its workforce, it is losing funds that could have been paid back into the system.

"If you stop hiring people to pay into the system, then your money is gone," said McNeil, whose union represents about 2,000 city workers. "This is a 'set up to fail' situation."
By this logic, increasing payrolls exponentially would result in an exponential rise in tax revenue.

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