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The problem is its own solution. Whether we try to stop the Status Quo, or let it stop, it WILL stop.
Longtime correspondent Eric A. has a new essay describing a key dynamic of the years ahead: Extortion and skimming create their own antidotes. As the costs of skimming, extortion and corruption reach new heights, the savings to be gained by bypassing the Status Quo systems also increase.
Here are a few of Eric’s previous essays:
A Brief History of Cycles and Time, Part 1 (May 13, 2013)
A Brief History of Cycles and Time, Part 2 (May 14, 2013)
Generation X: An Inconvenient Era (May 23, 2013)
The essence of my key analytic concepts, neofeudalism and neocolonialism, is that debt and other state-cartel schemes enclose and imprison the bottom 90% while leaving the illusions of liberty, democracy and “prosperity” intact so the debt-serf inhabitants of the home-country neocolonial plantations love their servitude.
Eric’s point is that the incentives to escape the home-country plantation are rising in parallel with the skimming of the state-cartel Elites.
Here’s is Eric’s provocatively insightful essay:
But that means that ANY ONE who goes around them in ANY WAY, has enormous payoff. Also creating a solution, like micro-loans, digital clearing, etc, has enormous incentive.
Simply put, so long as the out-sized pay exists, the out-sized incentive to avoid them, ignore them, go around them, re-think them, will always exist. Every minute, to every participant. So they’re really creating the solution as fast as they can.
Same with these other issues. Health Care? The kickoff of ACA (Affordable Care Act, a.k.a. ObamaCare) was the starting gun for cash-only medical care which until now only lived in the slimmest shadows. Since basically the co-pay alone is more than paying in cash–and the entire premium is 110% of direct welfare to the health lobby (a business model usually called “extortion”)– there’s no possible incentive not to ignore the system entirely and pay cash. The penalty would have to be 2x, 3x, 5x higher to come anywhere near tipping the balance. And thanks to a decade of previous screwing, the young people don’t actually HAVE the money, so even if the penalty were raised, it would have no practical effect.
Although college, with their 3x more admins, paid 2x more is a clear example, it’s the same with military, government, all these. All we have to do to save 50%, 90% or more is ignore them and let them collapse.
What do you think Detroit is doing for their present residents? As far as I can tell, basically nothing–and that’s true for cities nationwide. All we have to do is tell them to cease existing, go bankrupt, for-the-love-of-God stop helping, and we’ll all save 50% of our money and scarcely have a lower level of service. I mean, you can hardly exceed abominable.
The NYC school system is a great example: something like 66% of students drop out, while many of the remainder are uneducated and illiterate. What possible harm would it be to close the school system and stop paying for it altogether? With rates that bad, basically only the students who would study at home and pass anyway are passing now. Teachers, administration, programs, are therefore measurably providing ZERO benefit over the baseline. So it’s easy to see that we can’t possibly do worse, BUT WE CAN SAVE 100% OF OUR MONEY.
That’s incentive. Especially when most of us haven’t got a nickel to spare. By demanding ALL THE THINGS, they have only destroyed themselves.
Unfortunately, they’ve taken most of us with them.
Just for anecdote, a friend of mine works for a group home. They had a resident with a 105-degree fever who had been to the E.R., but had returned as his heart was racing–a thing easily noticed by pre-nurses and healthcare-oriented staff.
This patient had chest pains as well, and although hard to quantify it was worrisome stuff. So they took him back to the E.R. and waited 2 hours to be seen because there were… wait for it… two patients that evening.
The doctor prescribed Motrin. … I didn’t skip over a part there, the doctor heard the healthcare employee say the patient had chest pains with an irregular heartbeat, refused to hear it, refused to examine, said they’d seen the patient yesterday and they had a cold. Yes, they’d been in already. Because they didn’t diagnose it the first time. The hospital then forgot to fill the prescription Motrin and issued an empty envelope, releasing the patient on a Sunday, presumably to DIE OF HEART ARRHYTHMIA, and/or fever, and/or whatever it was they might have had, which they didn’t know, because they never looked.
If we were in a log cabin, in 1820 Kentucky, and I spent 2 hours walking my sick Pa down to the neighboring cabin and said, “Well Billy-Joe, Pa’s been sick and now his heart sounds funny,” what do you think you would do? You’d probably say, “let me listen and see if you’re right.” We’ve descended below the level of instinctual primate behavior here, and are into some sub-basement reserved for PhD’s.
Doctors and mis-prescriptions are now a leading cause of death–26x more deadly than firearms, 800,000 vs. 30,000/yr.
Death by Medicine (Estimated Annual Mortality and Economic Cost of Medical Intervention)
Granted that as people see doctors when already ill, the numbers are not neatly comparable. However, medicine is considered “safe” or “exemplary”, we are encouraged to use it, while guns are often considered the standard for “unsafe” and “dangerous.” While many would die without medicine, this suggests the baseline is that 800,000/year would be saved by banning medicine altogether. In short: We’re doing it wrong. Considering we pay twice (on a per person basis) what other developed nations pay for care, net-net could we really do much worse by having no doctors or medicine whatsoever?
Not really an unusual case either. They tried to kill someone a few weeks earlier and a different patient that weekend. They have tried to kill family members several times. I’m sure most readers have a similar scare stories. But death by neglect is still fatal, the fault of just not giving a damn.
Surely I exaggerate?
800,000 people were statistically killed via paid-for quack science that incorrectly (and illegally) promoted statins in Europe.
Medicine Or Mass Murder? Guideline Based on Discredited Research May Have Caused 800,000 Deaths In Europe Over The Last 5 Years (Forbes)
The earlier paper demonstrated the potentially large and lethal consequences of the current European Society of Cardiology guideline recommending the liberal use of beta-blockers to protect the heart during surgery for people undergoing non cardiac surgery. There is, it has now become clear, a general lack of concern and response to evidence of scientific fraud and misconduct.
This was quickly followed by a few thousand probable deaths of blood clots due to a newer configuration of the Pill.
(Note that 800 deaths are only the U.K.) –Just two random articles in the last few days, probably hundreds of others with millions of deaths if I looked. The over 60,000 deaths from provably corrupt research authorizing Vioxx comes to mind.
I somehow feel that if I killed 800,000 people through fraud, abuse, or neglect, that the police would be –I don’t know– MAD at me or something. Or killed even one group home patient by refusing to lift a finger. There were once quite a number of laws concerning it: neglect, reckless endangerment, manslaughter–murder even.
But that’s so 20th Century. Consequences, I mean. Laws and enforcing them. Like so many, we’re now considering flying out of the country for healthcare, but unlike so many we don’t have money for 5-star hospital spas in Goa or Singapore. So we were thinking maybe the Belgian Congo for better medical care than rural NY. I hear they may have stethoscopes there.
THAT’S what I mean when I say you could close the whole system and have it be a measurable benefit to mankind.
The problem is its own solution. Whether we try to stop, or let it stop, it WILL stop.Because anything that can’t go on, won’t. When you’re at 100% costs and 0% benefits, congratulations, you’ve reached the Singularity.
Detroit U.S.A.: Once the most prosperous city in America. With a booming manufacturing sector and cultural magnetism, the city had bright horizons after World War II. But as the 1960?s rolled in, the marriage of Big Business and Big Government overtook Detroit. The central planners in government needed the powerful corporations, and the powerful corporations came to depend on the bureaucracy, too. The marriage worked well for the politicians and for their corporate cronies, but Detroit itself entered a decades-long decline. America watched as Detroit slowly bled people, jobs and revenue. Politicians tried spending money. They tried raising taxes. The more they taxed and spent, the faster the city declined.
Detroit still had its “Big Three” auto manufacturers, until two of its crown jewels, General Motors and Chrysler, imploded in 2008 under the weight of reckless and subsidized mismanagement.
Instead of allowing market forces to rebuild Detroit and the auto industry, the United States handed billions of dollars to General Motors and Chrysler.
Five years later, the city of Detroit is bankrupt and almost $20 billion dollars in debt. Meanwhile, General Motors has a cash balance of over $20 billion, still owes the taxpayers over $10 billion dollars that outgoing CEO Dan Akerson said will not be paid, and the company continues to benefit from an unprecedented $18 billion tax gift from the bankruptcy.
Why is General Motors walking away with billions while Detroit dies?
How did so much money change hands between the world’s most powerful corporate leaders and government officials while delivering on so little of the promise sold to America by central planners? Bankrupt: How Cronyism & Corruption Took Down Detroit answers this question, and many others.
Complete with the candid analysis of pundits, journalists, analysts and government officials, sourcing of historical news and government archives, and on-scene interviews with everyday Detroiters, Bankrupt sheds light on what happened to Detroit, and who is to blame.
And most importantly, it asks “What is next for the Motor City?”
First, the Obama administration showed during the course of the GM and Chrysler bankruptcy proceedings, that when it comes to Most Preferred Voter classes, some unsecured creditors – namely labor unions, and the millions of votes they bring – are more equal than other unsecured creditors – namely bondholders, and the zero votes they bring. Five years later we are about to get a stark reminder that under the superpriority rule of a community organizer for whom “fairness” trumps contract law any day, it is now Detroit’s turn to make a mockery of the recovery waterfall. As it turns out, bankrupt Detroit is proposing to favor pension funds at roughly double the rate of bondholders to resolve an estimated $18 billion in long-term obligations, according to a draft of a debt-cutting plan reviewed by The Wall Street Journal.
The breakdown to unsecured stakeholders would be as follows: 40% recovery for pension funds, 20% for unsecured bondholders – all this to the same pari class of unsecured creditors. Because just like in Europe when cashing out on CDS in insolvent nations is prohibited as it would suggest that the entire Eurozone experiment is one epic farce, regardless of how much “political capital” Goldman Sachs has invested in it, so in the US municipal creditors are realizing that in the worst case scenario, they will be layered first and foremost by all those whose votes are critical in keeping this crony administration in power.
According to the WSJ the plan calls for recovery to be divided among the unsecureds amounting to $4.2 billion, more than the originally planned $2 billion to settle claims which included about $11 billion in unsecured debt, including $6 billion in health and other benefits for retirees; $3.5 billion for retiree pensions; and about $530 million in general-obligation bonds.
There is a possibility that final “math” in the Plan of Reorg is changed before the final draft.
It was unclear from the plan reviewed by the Journal whether the city is using all of the same estimates for the money owed to unsecured creditors in its draft plan. A person familiar with the draft plan said the recovery rate for the pension funds could end lower than the balance sheet shows.
Details of the plan sent to creditors on Wednesday have been kept under wraps as the city and its debtholders continue to talk in closed-door mediation. The city sent its working draft to creditors in the hopes that the plan with a richer payout might spur some of them to settle with the city individually or, in the least, offer their own suggestions toward modifying the overall proposal, according to another person familiar with the matter.
The formal plan is expected to be filed in federal court in Detroit within two weeks, officials said. Creditors will vote on the plan, but the final decision rests with the court.
Still, the probability is that Kevyn Orr has finally gotten cold feet on playing hard ball with the unions. “The proposed plan provides the road map for all parties to resolve all outstanding issues and facilitate the city’s efforts to achieve long-term financial health,” Detroit Emergency Manager Kevyn Orr said in a statement Wednesday. Mr. Orr’s spokesman declined Thursday to comment on the plan’s details. Several creditors, who were opposed to the city’s early plans to offer creditors, including bondholders and pension funds, less than 20 cents on the dollars owed to them, also declined to comment.”
One can only imagine the amount of “Steve Rattnering” that must have gone on behind the scenes, and how much more is still set to happen, for such a skewed plan to pass the bankruptcy judge over creditor objections. Which it will once the president makes a phone call.
Then again, with contract law abrogated as was made very clear with this administration’s first steps into the “Fairness Doctrine” back in 2009 and the bankruptcy of GM and Chrysler, nothing can, or should, surprise one any more.
The market just hit a fresh all time high today which means another major default must be just around the horizon. Sure enough, the FT reported moments ago that a Puerto Rico default “appears increasingly likely” and is why creditors are meeting with lawyers and bankruptcy specialists (most likely Miller Buckfire, fresh from its recent league table success with the Detroit bankruptcy) on Thursday in New York. The FT cited a restructuring advisor, supposedly desperate to sign the engagement letter with creditors and to force the bankruptcy, who said that “the numbers are untenable” and “to issue new debt the yield would have to rise and where they can’t raise new money they will have to stop paying.”
The untenability of PR’s cash flows results from a “debt service burden that requires paying between $3.4bn and $3.8bn each year for the next four years. As doubts grow about the ability of the commonwealth to service that debt, the cost of doing so will inevitably rise.”
For Puerto Rico bonds, such an outcome would not be exactly a surprise, most recently trading at 61:
The rest of the story is largely known:
If Puerto Rico is forced to take that step, the effects will ripple through the entire $4tn municipal bond market. Because the debt is generally triple tax free, in a world of zero interest rates demand is high and it is distributed widely, including in funds that imply they have no exposure to Puerto Rico.
But yields have gone up nevertheless – and prices down – suggesting the markets are increasingly nervous about prospects for repayment. Estimates on how much of that debt is insured range from 25 per cent to 50 per cent of total issuance.
“Everyone thinks they can get out in time,” the restructuring adviser said.
Puerto Rico cannot really raise taxes much more, since the debt per capita is more than $14,000, while income per capita is almost $17,000, a ratio – at 83 per cent – that makes California, Illinois or New York – each at 6 per cent – models of prudence. Meanwhile, at 14 per cent, the unemployment rate is twice the national average.
What would make a Puerto Rico default more interesting is that as in the case of GM, political infighting would promptly take precedence over superpriority and waterfall payments. According to the FT, “any radical step, which the local government denies considering, would involve significant legal wrangling. Congress could step in and create an insolvency regime, lawyers say, since it has comprehensive jurisdiction, but that too would give rise to partisan fighting. The Democrats would say that pension claims have priority while the Republicans would uphold the priority of payments to bondholders, citing the constitutional sanctity of contracts.”
Of course, since in the US a bond contract now is only worth the number of offsetting votes it would cost, nobody really knows what will happen. And so, we sit back and watch, as yet another muni quake appears set to hit the US, in the process obviously sending the S&P to higher, record highs.
In the meantime, keep an eye on bond insurers AGO and MBI which have taken on water in today’s session precisely due to concerns over what a Puerto Rico default would do to their equity.
So far, city employees of bankrupt Detroit have stoically withstood all direct and indirect eliminations of their entitlements and retirement benefits, which was to be expected: after all as per a recent finding, they are merely an unsecured claim in an insolvent entity. However, following the latest shot across the bow from Detroit’s emergency manager Kevyn Orr, which freezes pension plans for all non-uniform employees, said stoicism will likely be acutely tested.
Emergency Manager Kevyn Orr has frozen the city’s pension plans for all non-uniform employees, closing the General Retirement System effective Jan. 1.
Orr’s Dec. 30 action freezes earned pension benefits for employees in the General Retirement System and creates a new 401(k)-style defined contribution retirement plan for existing and future city workers, according to a copy of the emergency manager’s order obtained by The Detroit News.
As part of the order, Orr also eliminated the pension “escalator,” effectively eliminating any future cost-of-living increases for all retired city employees in the General Retirement System.
The emergency manager’s order also closes the pension system’s Annuity Savings Fund, an added benefit for some municipal workers.
City employees who were not already vested in the retirement system “shall not be entitled” to pension benefits, according to the order.
Tina Bassett, a spokeswoman for the General Retirement System, called Orr’s pension freeze “an outrageous and over-zealous action.”
“Again the EM’s office demonstrates a lack of integrity and willingness to make a good faith effort when negotiating with our pension system,” Bassett said in a statement. “Currently we are in the midst of mediations that we thought were going rather well. We can only wonder, why take this action now and for what purpose?”
Investors from multi-billion dollar hedge funds to individuals buying as few as 10 properties have acquired more than 1 million homes across the U.S. in the past three years, transforming a mom-and-pop business into one of Wall Street’s hottest investments. As we noted here, Blackstone Group LP alone has acquired more than 40,000 properties in 14 cities to become the largest single-family landlord in the country. As Bloomberg notes, the new landlords are transforming the way Americans live and accumulate wealth. But while Wall Street is becoming America’s largest residential landlord, it appears China wants to get paid for commercial properties… and Detroit.
Chinese investors, the second-biggest overseas buyers of U.S. residential real estate, are building up portfolios of U.S. commercial property as they look for new avenues of diversification.
Chinese entities announced more than $5.89 billion in projects in January-October, nearly six times the $996 million for all of 2011 and 2012 combined, showed data from New York-based consultancy Rhodium Group.
“There is a lot of upside,” said Thilo Hanemann, Rhodium’s research director. “We are at the beginning of a structural increase of Chinese investment in U.S. commercial real estate.”
China’s push into U.S. property is underpinned by declining investment returns at home, a growing desire by wealthy individuals and developers to diversify their holdings overseas, and property companies looking to capitalize on offshore migration.
Chinese nationals bought more than $8.1 billion worth of real estate in the year ended March 31, representing 12 percent of the estimated $68.2 billion of domestic property purchased by overseas nationals
Not everyone is convinced that Chinese investment in the U.S. property market will continue uninterrupted. Other options for expansion include Europe, Australia and Singapore, which account for about two-thirds of offshore Chinese real estate investment, according to Jones Lang Lasalle.
Zhang Xin, the chief executive of SOHO China Ltd, who paid $700 million through her family trust to buy a stake in the General Motors Building in Manhattan, said that while the U.S. regulatory and legal environment remained attractive, valuations were getting expensive.
“I would not feel as comfortable today putting in money as I did a few years ago,” Zhang said.
So reform and liberalization in China sees hot money flowing not just into Bitcoin but now commercial property in America.
While Wall Street becoming America’s largest residential landlord, it appears China wants to get paid for commercial properties… and Detroit.
With still more than half the homeowners with a mortgage in the state of Nevada underwater on their mortage and a hoped for recovery in prices now petering out as ‘investors’ realize banks have completed foreclosures and are set to unload their huge inventories, fear is growing that Las Vegas (and for that matter Atlantic City) could be the next Detroit. However, as FoxNY reports, the nascent dreams of the good old days face an even bigger headwind – that of gambling regulation easements (online gambling for instance) and globalization which are impacting their biggest industries. Time will tell if these two cities will end up like Detroit.
With the closure of the recent Atlantic Club Casino Hotel, rumors of the bankrupt Revel being sold to Hard Rock, more than half of the mortgages in Las Vegas under water, casinos opening up all around the country and online gambling legislation underway in various states, it seems as if the reasons for the very existence of Atlantic City and Las Vegas are in serious jeopardy.
However in the late 1980s, a landmark ruling considered Native-American reservations to be sovereign entities not bound by state law. It was the first potential threat to the iron grip Atlantic City and Vegas had on the gambling and entertainment industry.
Then Macau, formally a colony of Portugal, was handed back to the Chinese in 1999. The gambling industry there had been operated under a government-issued monopoly license by Stanley Ho’s Sociedade de Turismo e Diversões de Macau. The monopoly was ended in 2002 and several casino owners from Las Vegas attempted to enter the market.
Under the one country, two systems policy, the territory remained virtually unchanged aside from mega casinos popping up everywhere. All the rich ‘whales’ from the far east had no reason anymore to go to Las Vegas to spend their money.
Then came their biggest threat.
As revenue from dog and horse racing tracks around the United States dried up, government officials needed a way to bring back jobs and revitalize the surrounding communities. Slot machines in race tracks started in Iowa in 1994 but took off in 2004 when Pennsylvania introduced ‘Racinos’ in an effort to reduce property taxes for the state and to help depressed areas bounce back.
As of 2013, racinos are legal in ten states: Delaware, Louisiana, Maine, New Mexico, New York, Ohio, Oklahoma, Pennsylvania, Rhode Island, and West Virginia
From June 2012 to June 2013, Aqueduct matched a quarter of Atlantic City’s total gaming revenue from its dozen casinos: $729.2 million compared with A.C.’s $2.9 billion. It has taken an estimated 15 percent hit on New Jersey casino revenue and climbing.
The situation in Vegas isn’t much better. The Great Recession of the late 2000s hit Las Vegas hard. As the recession wore on, and as gambling received approval in various jurisdictions throughout the United States, folks realized they didn’t need to travel thousands of miles just to gamble.
More than half of all home owners with a mortgage in the entire state of Nevada owe more than their homes are worth.
But according to Bloomberg.com this so-called bubble is simply from banks completing their foreclosures and holding onto inventory. The increased value of properties has been attracting various investors and speculators, which is helping fuel this latest rise in real estate prices.
Experts say once banks start releasing the foreclosed homes into the market to start selling them, the prices may begin to get depressed again.
One local said “The reality is, people just won’t fly to the middle of a desert to play some slots, watch shows and sit down for some blackjack when they can drive right near their town or city, or play legally online.”
And now it looks like the feds may soon allow online gambling across the United States.
With this in mind, it seems the niche that Las Vegas and Atlantic City once offered as a gambling and entertainment hub is heading toward the dustbin of history.
Time will tell if these two cities will end up like Detroit. However, the fact that they are losing their biggest industries to major competition, much like Detroit did, with depressed housing, casinos bankrupting/closing and businesses fleeing, makes their fate seem eerily similar.
by John Rubino on December 8, 2013 · 26 comments
The main difference between well-run and badly-run countries is certainty. In well-run countries, money is worth pretty much the same from one year to the next, the police come when called and protect rather than prey on the caller, and contracts, including pensions and other retirement plans, behave as advertised. In badly-run countries, not so much.
With the contract part of this story, Americans have been living in two different countries, depending on whether they’re in the private or public sectors. Private sector workers discovered years ago that things like pensions and employment contracts are just so much scrap paper. But until recently the public sector had been spared such nasty surprises. Baby boomer teachers, firefighters and college professors have spent lifetimes doing their jobs and watching their pensions accrue. They’ve known for decades that when they retire they’ll get X amount per year for life and have X amount of their health care covered. This certainty makes them perhaps the last segment of US society to retain a belief that the system works.
But that changed earlier this month, when Detroit’s bankruptcy judge declared that pensions can be cut along with everything else:
A federal judge’s ruling clears the way for Detroit to proceed with the largest municipal bankruptcy in U.S. history
For 90 minutes Tuesday, as snow fell on protesters outside, Judge Steven Rhodes laid out his rationale for allowing Detroit to seek the biggest municipal bankruptcy in American history.
“This is indeed a momentous day,” Rhodes told the hushed courtroom. “We have a finding that this proud and once prosperous city cannot pay its debts.”
By the time the soft-spoken federal judge had finished, it was clear that from worker pensions to the city’s art treasures, nothing in Detroit is completely safe in Chapter 9 bankruptcy.
The effect of his ruling is likely to touch all corners of the city and could serve as a legal precedent for other municipalities reckoning with unsustainable debt. Here are three of the most important takeaways:
Pensions Aren’t Sacred. Lawyers for the city’s 48 organized-labor groups argued strenuously that Michigan law protected state employees’ pensions. Rhodes disagreed, noting that the state’s constitution classified pensions as a contractual obligation on cities’ part, not something requiring special treatment.
That means the city can treat pensions like any other potentially voidable contract. Expect it to do so. On Tuesday afternoon Detroit’s emergency manager, Kevyn Orr, said he couldn’t fix the city’s financial problems simply by restructuring the debt owed to banks. “It can’t be done without impacting pensions,” Orr said.
“For the image of labor, Detroit is a catastrophe,” said Gary Chaison, a professor of industrial relations at Clark University in Worcester, Mass. “The aristocrats of labor have become the paupers of labor. What affected yesterday’s manufacturing workers is now affecting policemen and firefighters. Nobody is safe.”
Detroit is just the first of many. Pension plans across the country have failed to put away enough to cover their obligations while hiding that fact from beneficiaries and bondholders:
Pity the municipal bondholder. Between Detroit’s bankruptcy and the rising concerns over unfunded pensions in Illinois and elsewhere, it has been a rough year for many muni bond investors. While the Standard & Poor’s municipal bond index has recovered from its September lows, it is still off 2.7 percent for the year.
A big problem for investors in this $3.7 trillion municipal market — mostly individuals — is that financial disclosures by states, cities and other issuers of tax-exempt debt can be decidedly inadequate.
Securities laws require issuers of municipal debt to provide the information investors need to make informed decisions when buying or selling these instruments. But lax disclosure practices remain, making it hard to spot signs of problems like those hobbling some states and cities. Disclosures about the soundness of public pensions, for example, can be essential to weighing the health of municipal bond issuers that are responsible for funding them.
Investors aren’t the only ones who need more information. This was on full display last week, when a judge in Detroit suggested in a groundbreaking ruling that the city’s pensioners would not get priority in the city’s bankruptcy, and their retirement pay could be considered an unsecured obligation.
John R. Mousseau, executive vice president and director of fixed income at Cumberland Advisers, a money management firm in Sarasota, Fla., said: “Detroit’s pensioners may be as eligible to take a haircut as the city’s bondholders or vendors. This development should demand more disclosure.”
But better disclosure practices among tax-exempt issuers are slow in coming, investors say.
If issuers make material misstatements or omit information, they can face civil or criminal penalties. The Securities and Exchange Commission has brought eight cases contending disclosure failings by municipal issuers this year.
A large case last March involved accusations that the state of Illinois misled investors about its unfunded pension. From 2005 to 2009, a period when the state issued $2.2 billion in bonds, the S.E.C. said Illinois failed to warn investors about the pension system’s woes and “the resulting risks to the state’s financial condition.”
Among the details missing from the state’s offering statements and filings, the commission said, were those relating to the contributions made by the state to its various pension funds. The commission said investors were not told that the state was contributing far less to the pensions than was required each year. Last week, the Illinois Legislature voted to shore up the pensions by raising the retirement age for some workers and lowering cost-of-living adjustments. The state is facing a pension shortfall of $97 billion.
Illinois settled with the S.E.C., but the agency did not impose fines or penalties. The S.E.C. doesn’t typically exact penalties in such cases, its officials said, because the money would come out of a state or city budget, making matters worse.
A crucial metric that should be found in issuers’ offering statements and filings is one cited by the S.E.C. in the Illinois case: the shortfall in annual contributions that are needed to keep a pension fully funded. Known as annual required contributions, or ARC, many states fail to meet them.
This has the effect of masking an issuer’s financial troubles, Mr. Tobe said. “There almost needs to be a bold statement saying the state is not paying 100 percent of its ARC payments,” he said.
He cites a December 2011 offering statement for $72 million of bonds issued by the University of Illinois. Nowhere does it detail the shortfalls in state contributions to the university system’s pension fund in recent years. Investors seeking this information must go to the Illinois State Universities Retirement System website.
It has been generally understood for a while that pension plans use unrealistic return assumptions to hide the fact that their governments aren’t contributing enough each year. But it’s interesting that even with a raging bull market in equities – which have of late returned a lot more than the typical pension target of 8% – many plans are becoming even more underfunded. Part of this is due to the fact that the bonds in pension fund portfolios have gone down in the past year, offsetting gains in equities. And part is due to governments failing to contribute as much as they’ve promised they would.
Stocks, based on most historical measures, are ripe for a correction, and bonds, even after a recent uptick in rates, yield next-to-nothing. So the average pension fund, instead of making its optimistic 8% return target, might actually lose money in the next couple of years. In that case, their underfunding would be too horrendous to hide.
With a growing number of cities (and some states) devoting unsustainable portions of their operating budgets to paying former rather than current workers, Detroit might become the template for dozens of other cities in 2014 and beyond. And millions of people who thought they’d nailed down a middle class retirement in a well-run country will find out they’re not in that country any more.