Monday, October 28, 2013

Is Detroit Bankruptcy a disaster for U.S. Muni Bond Holders in the future?

I personally am inclined to think that Detroit should be allowed to go bankrupt even though it will harm all the beneficiaries of pension plans there likely will be financially harmed. The reason is should be allowed is that if Detroit doesn't go bankrupt it's financial problems are likely never to be solved ongoing years into the future.

However, it may also be a lynchpin regarding Municipal Bonds which are state and Federal Tax Free and have always been safe throughout the Great Depression until now.

If you don't know what a Muni Bond is it is what finances most schools, colleges, dams, water projects, sewer projects etc. across the U.S.

However, the problem might be that if Detroit is allowed to go bankrupt it may scare investors away from Muni bonds Nation Wide. The reason for this is that if Detroit is allowed to go bankrupt it will also through precedence allow many other big and small cities to go bankrupt for the same reasons nationwide.

Here is what is causing bankruptcies. As long as property values were going up and never stopped going up, the taxes on properties nationwide could support the benefit packages of city and county employees nationwide. But, when housing values plummeted it destroyed tax bases and drove cities into bankruptcy and still is. However, if the largest cities go into bankruptcy eventually this will scare away all or most muni bond investment and this will cause major projects not to be funded locally unless they can get federal funding. This could decimate muni bond funding nationwide in the long run over the next 10 or 20 years.

So, the short run problem is that there isn't enough money for most benefit packages for most city and county employees nationwide to actually be paid out as they were promised ongoing. It just can't happen. So, likely we will see underfunded or non-funded benefit packages to retiring and medical options for present employees nationwide of cities and counties. In the long run as bankruptcies possibly increase we will potentially see investors in Muni Bonds being scared away by potential bankruptcies of cities. So, it becomes a disaster not only for retirees but for everyone living in that area or region.

    1. New York Times ‎- 1 hour ago
      Lawyers for unions and retirees challenged Gov. Rick Snyder on whether good-faith attempts had been made to negotiate concessions on ...
  1. Detroit EM Says Bankruptcy Filing Unavoidable - ABC News - › US
    2 hours ago - Mich. Gov., Emergency Manager Defend Bankruptcy.
  2. Michigan governor defends Detroit bankruptcy filing approval | Reuters
    3 hours ago - DETROIT (Reuters) - Michigan Governor Rick Snyder defended Detroit's ... Snyder said during his testimony that the bankruptcy filing was the ...
  3. Gov. Rick Snyder Testifies In Detroit Bankruptcy Trial « CBS Detroit
    11 hours ago - Rick Snyder Testifies In Detroit Bankruptcy Trial ... Earlier in questioning, the governor, who holds a law degree from University of Michigan, ...

    In Testimony, Michigan Governor Says Bankruptcy Was Right Call for Detroit

    Joshua Lott for The New York Times
    Demonstrators in Detroit held cutouts depicting Gov. Rick Snyder on Monday as they protested outside the federal courthouse where he was testifying.
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    DETROIT — Gov. Rick Snyder of Michigan, in testimony on Monday, forcefully defended Detroit’s bankruptcy filing as a last-ditch effort to stem the city’s decades-long financial decline.
    “This is a crisis,” the governor said in United States Bankruptcy Court. “It still is a crisis today.”
    The governor’s highly anticipated testimony came at a pivotal point in the trial on whether Detroit met federal eligibility rules when it filed for Chapter 9 bankruptcy in July.
    Mr. Snyder had been subpoenaed by union lawyers trying to block the bankruptcy and its potential to undermine pension benefits for thousands of city workers and retirees.
    The governor — a former venture capitalist and computer executive — approved the bankruptcy filing on July 18 on the recommendation of Kevyn Orr, whom Mr. Snyder had selected in March as Detroit’s emergency manager.
    Mr. Orr also testified on Monday and gave a detailed description of Detroit’s mounting debts, substandard city services and lack of options for a turnaround other than bankruptcy.
    But it is Mr. Snyder who is widely considered responsible for forcing the state’s largest city into the biggest municipal bankruptcy filing in American history.
    During his nearly three hours on the stand, Mr. Snyder said he considered Detroit’s financial free fall among the most pressing problems he inherited when he took office in 2011.
    “There are not many problems of this magnitude in our country,” he said.
    According to its Chapter 9 filing, Detroit is an estimated $18 billion in debt, including billions of dollars in obligations to its 23,000 retirees. The city is also running a budget deficit of almost $1 million per day, and is unable to provide basic levels of police and fire protection for its 700,000 residents.
    Mr. Snyder said he took several measures to address the city’s troubles over the past two years, including negotiating an agreement with its mayor, Dave Bing, under which the city would cut some of its losses and streamline operations in return for $137 million to pay its bills.
    But the governor said the city’s failure to honor the agreement led him to declare a financial emergency under state law. He then appointed Mr. Orr to the powerful post of emergency manager, giving him nearly unilateral control of the city’s finances and operations.
    Still, Mr. Snyder said he had no preconceived plan to steer Detroit into bankruptcy, and acted only after Mr. Orr recommended that the city file for Chapter 9 in mid-July. “It was a tremendously difficult decision to make, but the right one,” he said.
    Lawyers for unions and retirees challenged Mr. Snyder on whether Mr. Orr had made good-faith attempts to negotiate concessions on pensions before recommending bankruptcy.
    Peter DeChiara, a lawyer for some city workers, bristled when Mr. Snyder’s lawyer objected to questioning the governor on the impact of bankruptcy on retirees receiving pensions averaging about $18,000 a year.
    “To say that the impact of these cuts on retirees is irrelevant is incorrect,” he said.
    For his part, Mr. Snyder said he believed unions and retirees had an opportunity to bargain with Mr. Orr after he made a blanket proposal to reduce pensions at a meeting with creditors in June.
    The governor avoided answering specific questions about what level of cuts might be sought during bankruptcy proceedings. “Any plan that comes out of this has to be a legal plan,” he said.
    Union lawyers argue that public-employee pensions are expressly protected under the Michigan Constitution.
    The issue will be decided by Judge Steven Rhodes as part of the trial. The city also has to meet several specific benchmarks for eligibility, including proving that it is technically insolvent and that it pursued good-faith negotiations with creditors before the filing.
    The Republican governor’s appearance on the witness stand added drama to the case, and galvanized street protesters to call for Mr. Snyder’s defeat when he faces re-election next year.
    While Mr. Snyder was characteristically soft-spoken in court, Mr. Orr was more demonstrative during his testimony. A veteran bankruptcy lawyer, Mr. Orr said he was “shocked” at the state of the city’s finances and services when he took over as emergency manager.
    “I knew things were bad, but it was somewhat shocking just how dire it was,” he said.
    He described a city so destitute that payroll checks were bouncing, and frightened children armed themselves with rocks and sticks to fight off assaults on their way to school. He said some of Detroit’s electric grids could not be fixed because conditions were too dangerous for repair crews.
    Mr. Orr sparred with union lawyers who accused him of seeking concessions under the threat of bankruptcy. He also said he welcomed counterproposals from the unions about cost savings, but did not receive any after the initial creditors meeting.
    At the end of his testimony, Mr. Orr offered a blunt opinion of what would happen to Detroit if Judge Rhodes rejected the city’s Chapter 9 filing.
    “To put this city back to the status quo is clearly unacceptable,” he said. “If we do not go through Chapter 9 this city will continue to fail.”
    The trial is expected to last several more days, with union leaders likely to testify that they had little opportunity to negotiate with Mr. Orr before the bankruptcy filing.
    One legal expert said a decision by Judge Rhodes to reject the Chapter 9 filing would likely prompt an appeal. But even a final rejection would not necessarily end the protracted struggle over how to fix Detroit.
    “The state’s emergency manager law for managing the city’s finances would still be the governing authority if that decision stands,” said Keith Mason of the law firm McKenna Long and Aldridge. “More negotiations and other alternatives would then be able to be explored.”

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