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Two Tales of a City – How Detroit Transcended Ideology to Reform Pensions

“I see a beautiful city and a brilliant people rising from this abyss.”
–  Charles Dickens, Tale of Two Cities

Traveling through suburban Detroit, a sprawling city of 143 square miles whose population has dropped from nearly two million to less than 700,000, you can often imagine you are in rural Tennessee. Rutted narrow roads bend past groves of cottonwood, oak and silver maple. Deer and jack rabbits forage in tall grass. Until you pass a burned out ruin of a home, not yet removed, obscured by greenery, it is difficult to imagine that these neighborhoods once were filled with homes, set 35 feet apart and carpeting the land for mile after mile.

According to the so-called “right wing propaganda machine,” the tale of Detroit’s demise is attributed to the unchecked power of labor unions. Private sector unions were inflexible in the face of foreign competition, driving Detroit’s auto industry into irreversible decline. Public sector unions gobbled up every dime of taxpayer revenue they could bully and intimidate politicians into granting, further straining the finances of an already imploding city. Financially unsustainable pension benefits, ultimately, drove the city of Detroit into bankruptcy.

20140722_DetroitDetroit’s Brightmoor neighborhood  –  Homes used to stand 35 feet apart along this street.

 A different tale emerges from the left side of the ideological spectrum. Taken from a guest column written for MSNBC.com, here’s a quote from Jordan Marks, executive director of the National Public Pension Coalition, a group largely funded by public sector unions:

“While public coffers were running dry, Wall Street banks were out to make millions. Mayor Kwame Kilpatrick, who now sits in jail, worked with Wall Street banks that designed an illegal borrowing scheme that evaded state debt limits and piled on unwise interest rate swaps. When interest rates plummeted, Wall Street demanded more than $300 million from Detroit to terminate these swap deals – making a bad situation even worse. These same Wall Street firms stand to make millions if other cities move to privatize their pension plans.”

These two tales of Detroit’s struggles both have elements of truth. With respect to Detroit’s municipal bankruptcy, it is unfair to blame public sector unions as the primary cause. While the city’s unions were unwilling to adjust their pensions and benefits until it was too late, even if they had, the city’s finances would have failed anyway because it lost nearly two thirds of its tax base. And while the automotive industry’s unions were unwilling to adjust their pensions and benefits until it was too late, that industry would have shrunk anyway, because very capable foreign competitors gained strength starting back in the 1960’s. It is unrealistic to expect, under any circumstances, that Detroit’s auto industry could have maintained the overwhelming global market share it had up to and through the 1950’s. Without economic diversification, Detroit was destined to fall hard.

The tale that comes from the left, however, strains credulity even further. First of all, public sector unions don’t represent the “left.” They represent the state. When Jordan Marks writes about banks colluding with corrupt politicians, he is referring to politicians elected and controlled by public sector unions. His assertion that “Wall Street banks” exploited Detroit does not reflect reality. Bankers issue bonds – debt – to cities who willingly borrow the funds because their union agenda forces them to spend more than they collect in taxes and fees. Government pension fund managers pour billions of dollars into Wall Street investment firms every year. Bankers and city governments – controlled by government unions – work together to exploit taxpayers and private businesses. They use the state power of imprisonment to enforce punitive levels of taxation, to pay down debt and unfunded liabilities incurred so they could live beyond their means. Wall Street bankers and municipal government unions work together to build a financial house of cards, and when it collapses they deserve equal blame.

How Detroit has solved its pension crisis will not please the ideologues. For the libertarian right, the failure to throw everyone into 401K plans must rankle. For the left, the new plan’s built in “triggers” that adjust benefits when necessary to compensate for possible future shortfalls in investment returns violates their goal of an immutable defined benefit. But it works. And the libertarian’s ideological enthusiasm for individual 401Ks contradicts their entirely valid criticism of overly optimistic investment return projections on the part of pension funds (Detroit’s was 7.9% a year). When the market tanks, and periodically it does, only a pooled plan with multi-generational, active payees plus retired participants, with adjustable benefits, can maintain solvency through a balance of contributions from active workers and returns from invested assets. A pooled 401K plan is nothing more than an ideologically impure version of individual 401K plans. An adjustable defined benefit plan is nothing more than an ideologically impure version of a fixed defined benefit plan. They can be functionally identical, two tales of the same thing, and they are both practical compromises.

Detroit’s failures, and Detroit’s probable ascendancy from now on, is easy to describe using hyperbole and polemics. But ultimately there is one destiny, one tale in reality, that will define Detroit’s future. Cutting through the rhetoric, cities around the nation may look to Detroit for answers, especially regarding their new pension plan, because Detroit has passed through a clarifying crucible of pain and self-evaluation that cities with better weather and more diversified economies have deferred. One big market correction will erase those advantages. The tale of Detroit makes for compelling analysis, from New York to LA.

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Ed Ring is the executive director of the California Policy Center.

The Fragility of "Can't Fail" Thinking

CalPERS, the large California public pension plan, has filed an amicus brief in the case of Detroit’s bankruptcy.

Calpers does not like the Detroit pension plans being treated like unsecured creditors in a bankruptcy proceeding, and cites the constitutional (state constitutional, that is) protections for pensions. Thing is, there’s law, and there’s reality.

But let’s see what Calpers had to say on this matter:

“U.S. Bankruptcy Judge Steven Rhodes ruled last year that Detroit was entitled to creditor protection under Chapter 9 of the U.S. Bankruptcy Code and could try to alter the terms of workers’ pensions. The decision, which would let a bankrupt municipality fail to meet its pension obligations in spite of state prohibitions, was ‘wrong on several levels,’ Calpers said.

‘Congress did not envision that Chapter 9 would become a haven for municipalities that seek to ignore and break state laws and constitutional provisions in order to adjust their debts,’ the pension fund said.

Calpers, which has been involved in disputes with the bankrupt city of San Bernardino, California, said the judge’s decision raises issues of critical importance to its 1.7 million members. If a municipality in bankruptcy is allowed to break state laws and ignore its obligations to the pension system, it ‘may threaten the actuarial soundness of the system as a whole,’ Calpers said.”

I do not agree.

What actually threatens the actuarial soundness of public pension plans is behavior like the following:

  • Not making full contributions.
  • Investing in insane assets so that you can try to reach target yield. Or even sane assets that have high volatility to try to get high return, forgetting that there are some low volatility liabilities that need to be met.
  • Boosting benefits when the fund is flush, and always ratcheting benefits upward.

Calpers should be extremely familiar with that sort of behavior.

Here is the problem: all sorts of entities directly involved in public pensions have thought that the pensions can’t fail. Because of stuff like: constitutional protections of benefits (so paying pensions would take precedent over other spending needs, like paying for current services), “government doesn’t go out of business”, the supposedly infinite taxation power of the government, and so forth.

Because they thought that pensions could not fail in reality, that gave them incentives to do all sorts of things that actually made the pensions more likely to fail. Because, after all, the taxpayer could always be soaked to make up any losses from insane behavior.

Public employee unions have been pretty quiet over the years as states and municipalities have undercontributed to pensions. Using the state of Illinois as an example, take a look at this graph:

Changes to unfunded pension liability for Illinois from 1996 to 2013

20140512-Campbell

That’s the components of the changes to unfunded pension liability for Illinois from 1996 to 2013. Far and away, the biggest reason for the extremely low funded ratio in Illinois is that Illinois made far less than the full contributions needed to keep the plan at full funding. Note that the second highest component comes from not meeting investment targets (8% return for that period, iirc). [Editor’s note: It would be interesting to see this graph for California public sector pensions, taking into account the impact of  benefit increases]

If the employee unions in Illinois knew that it was possible that they might actually only get 40% of what was promised, they might not have been so blasé about the undercontributions. They might have asked for more realistic investment targets.

The explicit ability to renege on pensions (known by all parties) would make them less likely to fail, because employee unions would then have some incentive to make sure pension contributions are made, and they would be less likely to ask for benefits that may make their pension plan insolvent. If they knew that no, the taxpayer wouldn’t be there to bail them out of stupid investment decisions, they might not be so happy with all the opaque investments.

Detroit’s bankruptcy is making it clear that pensions are not safe, and that they can go down with the ship. They really aren’t much different than any other creditor. It may not be fair that they get whacked, but then, it’s not the bondholder’s fault either (though, really, bondholders are more faultless than those directly involved in boosting pay and benefits…and bondholders always knew they could be defaulted on.)

Calpers does not like this veil being lifted.

It was one thing when it was a puny place like Prichard, Alabama, where the pensions actually failed (and the bankruptcy itself was ultimately rejected, but the pension was gone anyway. Reality always trumps law.) Central Falls, RI, was also troubling but similarly puny. In both these cases, the pension plans were in horrid shape, and the direct cause of bankruptcies.

Detroit is much larger, and the pension plans supposedly were in good funded status. Calpers is in a similar position. And Detroit is very big. Calpers is even bigger.

Calpers may very well win the legal argument. In the short-run.

But they’re not going to win the argument with reality. It always wins.

If they only knew that ahead of time.

About the Author:  Mary Pat Campbell is an actuary who takes an interest in Mozart, public pensions, math, education, and math education, amongst other things. She publishes on her blog STUMP, where this post – used with permission – originally appeared in April 2014. Campbell is a resident of Illinois.

Controversy in Detroit: What's a Fair Settlement of Bondholder and Pension Obligation Claims?

A huge battle between pensioners and bondholders is on. Last week, a Bond rating agency blasted Governor Rick Snyder’s $350-million Detroit pension rescue plan as being too favorable to creditors at the expense of bondholders.

Today, the New York Times reports Detroit Turns Bankruptcy Into Challenge of Banks.

Amy Laskey,a managing director at Fitch Ratings, said in a recent report that she sensed an “us versus them” orientation toward debt repayment. And in the view of bondholders, bond insurers and other financial institutions, it only grew worse last week after the city circulated its plan to emerge from bankruptcy and filed a lawsuit on Friday.

The suit, brought by the city’s emergency manager, Kevyn D. Orr, seeks to invalidate complex transactions that helped finance Detroit’s pension system in 2005. In a not-so-veiled criticism, the city said the deal was done “at the prompting of investment banks that would profit handsomely from the transaction.”

Of even greater concern to creditors is the city’s 99-page “plan of adjustment,” the all-important document that details how Detroit proposes to resolve its bankruptcy and finance its operations in the future. Banks, bond insurers and other corporate creditors think they are being asked to share a disproportionate amount of pain under the plan, still in draft form and not yet filed with the bankruptcy court.

“The essential issue is the near-total wipeout of the bondholders,” said Matt Fabian, a managing director of Municipal Market Advisors. He said Detroit’s case appeared to be heading toward a “cramdown,” or court-ordered infliction of losses on unwilling creditors.

The plan calls for the city to give pensioners up to 50 cents on the dollar for their claims, while other unsecured creditors, like those that bought Detroit’s general-obligation bonds, would end up with about 20 cents on the dollar. The pensioners’ claims would be paid with cash, while general-obligation bondholders would receive notes that Detroit proposes to issue.

The debt that raised $1.4 billion for the city pension system in 2005 would suffer bigger losses still. The plan of adjustment does not accept the entire $1.4 billion as a valid claim, only about half of it. So the investors who bought that debt, called “certificates of participation,” often called COPs, would end up with about 10 cents on the dollar. It would come in the form of a different series of notes, which has lags built into the payment schedules.

What’s a Fair Settlement?

Last summer, Gov. Rick Snyder of Michigan said the intent was to “determine the best path forward that respects, and is fair to, pensioners and all parties.”

In bankruptcy, the court has an obligation of fairness. However, it’s not unprecedented for judges to take one side or another. Until now, the article claims “municipal bondholders have not had losses of principal forced on them by a court.”

Here is a key point: Both the pension obligations and bondholder debt are unsecured debt.

Why not treat both pensioners and bondholders equally? The proposal currently on the table is for pensions to get 50 cents on the dollar (a 50% haircut) and bondholders 20 cents on the dollar (an 80% haircut).

I have a simple proposal. Give everyone 35 cents on the dollar (a 65% haircut). Neither side would be happy, but the ruling would be fair.

I also recommend the court trash the city’s defined benefit plan entirely, or Detroit will be back in bankruptcy in a number of years.

Finally, if bondholders do not think they got a fair shake, they will demand higher interest rates going forward. Regardless of what the judge decides, the Detroit bankruptcy settlement will affect municipal bond interest rates going forward, not just in Michigan, but nationally.

About the Author:  Mike Shedlock is the editor of the top-rated global economics blog Mish’s Global Economic Trend Analysis, offering insightful commentary every day of the week. He is also a contributing “professor” on Minyanville, a community site focused on economic and financial education.

 

Detroit’s Emergency Manager Threatens Pension Fund Takeover

Detroit’s emergency manager Kevyn Orr says a pension fund takeover is a “right, if not an obligation” after Orr learned of extra, unwarranted pension payments.

Please consider Emergency Manager Weighs Pension-Fund Takeover.

Kevyn Orr said in a recent interview that at the current pace, the city’s General Services System pension fund could lose its ability to pay pensions owed to current and future retirees within 12 years. A takeover is a “right, if not an obligation, that I have to consider under the statute, and we’re considering that right now,” he said.

Representatives of the pension board said Mr. Orr’s figures were faulty.

The Oct. 25 draft report by the city’s auditor general and inspector general, which was reviewed by The Wall Street Journal, found that during the 12 years ended in fiscal year 2012, the pension funds paid $1.22 billion of interest credits into retirees’ savings accounts while the funds had losses of $2.05 billion, or 29% of their net asset value.

Earlier this year, Mr. Orr unveiled a proposal calling for the city to pay 20 cents on the dollar for the $3.5 billion that the city says it owes its two pension funds, one for 20,500 nonuniformed retirees and one for 12,700 retired police and firefighters.

“When workers in Chicago and L.A. realize that their pension benefits are no longer inviolate, unions are going to say what they really want is not bigger benefits but better funding. And that’s going to put enormous pressure on current budgets,” said Robert Novy-Marx, associate professor of finance at the Simon Business School at the University of Rochester.

A person familiar with the matter said Mr. Orr would like to engineer a takeover of the city’s General Retirement System for nonuniformed employees and retirees. Mr. Orr’s office estimates that the fund has only 64% of what it needs to meet its obligations, while fund officials put the figure at 80%. The separate fund for the city’s police and firefighters is in better shape, both Mr. Orr and fund officials say.

Michigan’s emergency-manager law allows for the takeover of a municipal pension system that is less than 80% funded.

20 Cents on the Dollar

Twenty cents on the dollar sounds about right to me. But Orr ought to take over both funds. More importantly, new rules are needed.

From my Lesson for Union Dinosaurs post …

I propose the final settlement should include …

  1. An agreement to end collective bargaining for all city workers
  2. An end to defined benefit pension plans for new workers and also for workers with less than 10 years of service
  3. A sustainable benefit model for existing workers with over 10 years of service, with pension plan assumptions equal to the long-term treasury rate
  4. Automatic provisions for further pension cuts if plan assumptions were not met
  5. An end to the right to strike for public safety workers
  6. An end to all prevailing wage laws

Point number 4 highlighted in red would in theory allow the union to value the pension fund however optimistically it wanted.

Unfortunately, that would unfairly benefit those first on the totem pole (the already retired) over everyone else.

Mish’s Eight-Point “Bold” Plan 

On April 23, 2012 in Public Unions Bankrupt Illinois I proposed a similar “bold” plan.

  1. Immediately kill public defined benefit plans going forward
  2. End collective bargaining of public unions
  3. Scrap prevailing wage laws
  4. Tax at an 85% rate all defined benefits above $80,000
  5. Claw back all pension-spiking
  6. Lower corporate tax rates to previous levels to attract businesses.
  7. Set long-term pension plan assumptions at 5% or the 30-year Treasury rate, whichever is lower (currently 3%).
  8. Default, if necessary on pension benefits above a certain level, whatever it takes to make the state solvent within 10 years, using conservative pension plan assumptions.

Points 4, 7, and 8 are the critical ones.

The “bold” plan has considerable merits vs. an across the board 20 cents on the dollar offer of Orr.

I am not sure what the cutoff should be in point number 4.  Perhaps it’s lower or higher. It depends on plan funding.

It’s the concept that is important. And I strongly suggest unions openly embrace the idea as being more fair.

What’s Fair?

From Yahoo!Finance … Juanita Sailes-Jackson, 64 years old, a Detroit retiree who worked as a typist and parking enforcement officer, said she opposed the idea of any takeover of the city’s pension funds, because she believes the system works well. Ms. Sailes-Jackson, who collects $500 a month in pension, said, “I can’t have any cuts because I wouldn’t be able to pay most of my bills.”

I don’t know how long Sailes-Jackson worked to accumulate her promised benefit. Thus such quotes only exist to play on emotions.

But cuts are coming. And they should come, because the system clearly doesn’t work! But how to distribute them?

Negotiated Settlements

The fairest possible thing to do is sit down at the table and negotiate a settlement, with everything taken under consideration, but with a 100% premise of no taxpayer responsibility.

As a starting point, I suggest, those with the least pension benefits get the smallest cuts, and those with the most benefits get the biggest cuts.

Indeed, if unions were smart, the majority could come to negotiated terms with a starting point along the lines of

  • No cuts in benefits for the bottom 30%
  • Small cuts in benefits for the next 30%
  • Big cuts in benefits for the top 40%, on a sliding scale

Such a negotiated settlement would be the fairest thing for everyone, pensioners and taxpayers alike.

Two Choices to Deal With “Collective Theft” 

In Two Choices to Deal With “Collective Theft” I outlined the choice unions have to make, whether they like it or not.

 Two Choices!
At this point, unions have two choices.

  1. Negotiation ahead of bankruptcy
  2. Negotiation in bankruptcy court

Blame the Unions 

Unfortunately, it’s highly unlikely unions would ever do what I suggest. So, the most likely consequence is an across the board cut even if it means Sailes-Jackson collects $100 a month instead of $500, regardless of how long she worked.

When that happens, don’t blame me, and don’t blame Orr. Blame the unions (and the crooked politicians who went into bed with the unions).

About the Author:  Mike Shedlock is the editor of the top-rated global economics blog Mish’s Global Economic Trend Analysis, offering insightful commentary every day of the week. He is also a contributing “professor” on Minyanville, a community site focused on economic and financial education.

Saving Pensions Will Require Unions To Face Reality

“Not surprisingly, within moments of news of Detroit’s bankruptcy, pension scare mongers took to their pedestals to place all the blame on pensions. California, Los Angeles, and other governments would surely follow Detroit’s footsteps in short order, they cried. It’s simply not true, like most of the claims made by the anti-pension soldiers who have been trying for years to take away the retirement security of firefighters, teachers, police officers and other public servants.”

Ralph Miller, President, LA County Probation Officers’ Union, AFSCME, Fox & Hounds, August 20th, 2013

Miller has a point. California is not Detroit. California’s population has not imploded, nor will it. Detroit’s economy was reliant on one industry, California’s huge economy is diverse and relatively healthy. Turning California around, while daunting, is going to be a lot easier than turning around Detroit. And, yes, it was a collapsing industrial base and an imploding population that did as much or more than unsustainable pay and pensions to destroy the city of Detroit’s finances. Fair enough.

Where Miller goes off the rails is when he then infers that equally bogus are “most of the claims made by the anti-pension soldiers who have been trying for years to take away the retirement security of firefighters, teachers, police officers and other public servants.”

Few, if any pension reformers want to take away anyone’s retirement security. But as a nation, we are currently on track to pay more money each year in pensions to retired government workers than we pay in Social Security to everyone else. The average pension for a recently retired government worker in California who logged at least 30 years of full-time service is about $65,000 per year. The average Social Security benefit for a private sector retiree who logged 40 years or more of full-time work is $15,000 per year.

This is not a valid social contract. Government workers, through these pensions, are no longer required to endure the economic challenges facing the taxpayers they serve. And despite rhetoric and reporting that confuses these issues, Social Security is a relatively healthy system that can remain solvent with minor adjustments to withholding and benefit formulas, whereas public sector pensions are going to catastrophically collapse the very next time there’s a bear market.

There are really two primary issues that ought to be the focus of debate: (1) What is a realistic rate of return, after adjusting for inflation, for pension funds over the next 30 years? (2) If you don’t believe that pension funds are going to continue to deliver 7% returns, 4% real returns after inflation, year after year for the next three decades, do you fix the system by converting participants to an adjustable defined benefit, or by converting participants to a 401K?

To the first question, if you truly believe real rates of return are going to hover somewhere north of 4% per year, forever, then you should have no trouble agreeing to an adjustable defined benefit. This would simply be a modification of pension formulas, whereby pension benefits would be reduced by a uniform percentage, applied to everyone – new hires, active employees, and retirees – by as much as necessary to maintain an adequate funding ratio. By applying this formula to everyone equally, the amount of sacrifice for any given participant is minimized.

The alternative, should markets turn downwards, is to intensify attempts to protect veteran employees and retirees at the expense of new entrants to the public workforce. The fatal problem with this method is that new entrants have lower rates of pay and a very long wait until they retire, both factors that minimize any benefit to the fund’s solvency by reducing their pension formulas.

The other alternative, which many pension reformers have determined is inevitable given the intransigence of public sector unions to even consider options such as an across-the-board adjustable defined benefit, is to go to a 401K defined contribution plan. That would force every individual to hope they successfully pick the best investments, subjecting them to the caprice of a highly volatile, highly manipulated global market. It would also force every individual to hope they die before they run out of money. It is not a preferable option. It is as brutal as it is whimsical.

What government union leaders and their members must realize is they have set themselves apart from the rest of the American people during a unique period in our nation’s history. Between 1980 and 2030 the percentage of Americans over age 65 is projected to double, from 11% to 22%. At the same time, the costs of healthcare march relentlessly upwards – partly because medicine can do so much more to improve the length and quality of life. Moreover, we are entering the terminal phase of a global debt bubble that has been inflating at least since 1980. It’s about to pop. Passive investment funds are not going to be coining money like they used to.

Government unions can continue to demonize wealthy people, hoping enough voters will be duped by this scapegoating, but they must understand that “wealthy people” is becoming synonymous with “old people.” Their rhetoric, therefore, will foment discord between generations. Yet the reality is quite different. If things continue the way they are today, the discord, and the wealth disparity, will not be between old and young, but between old government workers (and the super rich, of course), and everyone else – young and old private sector workers, as well as newly hired government workers.

Ensuring that every American can enjoy sufficient retirement security to allow them to live their final years with some measure of dignity is not going to be easy. The solution is to lower defined benefits for all government workers to financially sustainable levels, as needed, and more generally, to move towards applying the same set of taxpayer funded benefit formulas and incentives to all American workers equally, for them to earn regardless of whether or not they work for the government.

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Ed Ring is the executive director of the California Public Policy Center and the editor of UnionWatch.org.

Social Security is Healthy Compared to Public Sector Pensions

Last week yet another missive on the lessons to be learned from Detroit’s bankruptcy was published, this time in Forbes Magazine by Jeffrey Dorfman, an economist at the University of Georgia. Dorfman’s article, “Detroit’s Bankruptcy Should Be A Warning To Every Worker Expecting A Pension, Or Social Security,” clearly implies that future Social Security benefits are as financially imperiled as public sector pensions.

This is patently false, and spreading this falsehood has dangerous consequences.

Not only are the financial adjustments necessary to fix Social Security far easier to implement than what it’s going to take to rescue public sector pensions, but the sheer size of the public sector pension liability is actually bigger than the total liability for the entire Social Security fund. It is imperative that American voters understand this fact.

In the United States today about 20% of workers are employed by the government (or public utilities that offer benefits on par with government). For recent retirees, their average pension after a 30 year career is over $60,000 per year, and their average retirement age is 58. Because they retire ten years before full Social Security benefits are eligible to private citizens at age 68, retired public employees actually comprise nearly 30% of the retired population. The average Social Security benefit is less than $20,000 per year. Critically, the ratio of workers to retirees in the Social Security system is more than 3-to-1, set to move downwards marginally within the next 20 years, whereas the ratio of workers to retirees participating in government worker pension plans is already less than 2-to-1 and is on track to move to roughly 1.5-to-1 within the next 20 years. Here’s how that math stacks up:

According to the U.S. Census Bureau, in 2030, when Social Security will be supposedly approaching insolvency, there will be 99.4 million citizens over 58 years old, and 59.5 million citizens over 68 years old. This means that by 2030 (assuming no public employees also participate in Social Security – which many of them do) there will be 19.9 million government retirees collecting pensions that average $60,000 per year, and there will be 47.6 million private sector retirees collecting Social Security benefits that average $20,000 per year. Got that? The total pension payouts to government retirees, who were only 20% of the workforce, will be $1.2 trillion, whereas the total Social Security payouts to private sector retirees will be $952 billion, only 80% as much.

Now let’s talk about solvency, something that trained economists like Jeffrey Dorfman ought to understand thoroughly. Assuming government’s share of the workforce remains at around 20%, in 2030 we will have 247 million citizens over the age of 25. On a pay-as-you-go basis, to pay $1.2 trillion annually to 19.9 million government pensioners, 29.6 million active government workers would each require $40,343 per year withheld from their paychecks; to pay $952 billion annually to 47.6 million retired Social Security recipients, 150 million private sector workers would require $6,337 per year withheld from their paychecks – one sixth as much.

You can tweak the numbers all you like. Use medians instead of averages. Assume the public sector worker actually keeps working, on average, to age 60. Take into account disability payments, which are drawn from the Social Security fund. Assume people collect Social Security benefits before age 68. The stark fact remains: Our government pays more money to its own retirees – who represent 20% of the active workforce – than it pays in Social Security retirement benefits to everybody else put together. Financing Social Security, forever, can be accomplished with relatively minor incremental adjustments to withholding and benefits.

It is in this context that two powerful special interest groups, public sector unions, and public/private investment fund managers, would have you believe Social Security is the bigger problem. Government labor unions want our attention drawn away from the cataclysmic disaster facing public sector pensions for as long as possible. They want voters to perceive the problem of retirement security to be one that requires shared sacrifice, when nothing of the sort reflects reality. Pension fund managers are getting filthy rich investing public sector pension fund money, and would love to get their hands on the nearly equivalent funds that currently flow into Social Security.

Dorfman’s final insult is to suggest 401K funds provide a more secure retirement than defined benefits. Sure, if you are a fund manager collecting commissions on individual 401K accounts, regardless of their volatility.

The reality is that defined benefits are always preferable to 401K accounts because they greatly reduce market risk and they virtually eliminate mortality risk – i.e., in a pooled fund you don’t have to hope you die before your money runs out. The problem with public sector pensions is simple: (1) They rely too much on asset appreciation, something that is going to be increasingly problematic in our debt saturated, deficit ridden, aging society, and (2) they are way, way out of line with what ordinary citizens can ever hope to expect from Social Security.

Fixing public sector pensions is furthered by borrowing some concepts from Social Security, which might be characterized as an “adjustable defined benefit.” Here is the solution:

(1) Base pension benefits on career earnings, not final years of earnings.
(2) Stop using taxpayer’s money to manipulate global investment markets and just put all the funds into Treasury Bills; better yet, put pensions onto a pay-as-you go financial footing where current workers pay for retiree benefits.
(3) Calibrate benefits so highly compensated participants get a lower pension as a percent of their career earnings than participants with low or average career compensation.
(4) Put a ceiling on annual pension benefits of twice the maximum annual social security benefit.
(5) Whenever necessary, lower pension benefits for all retirees on a pro-rata basis (subject to a floor equivalent to 75% of the average Social Security benefit) to the extent the system is underfunded, in order to restore full funding.
(6) Raise the age at which participants become eligible for pension benefits to a minimum of age 60.

Public sector unions and private investment fund managers are allies in what is probably the most egregious fleecing of taxpayers in American history.

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Ed Ring is the Executive Director of the California Policy Center.

Public pension data belongs to the public

What goes up must come down.

That’s precisely what happened – in record-setting time – when the California Public Employees Retirement System, the state employees’ pension agency, attempted to provide to the public information about its retirees’ pensions and making it accessible to the public on the CalPERS’ website.

The need for pension reform has consumed much political capital, not only in Sacramento, but nationally as well, as more and more municipalities either fall into, or teeter on the brink of, bankruptcy. Pensions – and their unfunded obligations – led Detroit to become the biggest city in the nation to be driven into insolvency. Stockton and San Bernardino are engaged in court proceedings regarding their unmet pension obligations. Los Angeles is the most likely candidate to become a West Coast Detroit, in part, due to the generosity of the pension deals that public sector-unions have extracted from City Councils beholden to union campaign money.

The public has awakened to California’s pension crisis, concerned over questionable practices of “spiking” that appear to game the pension system and enable far too many public sector employees to gouge taxpayers. As a result, the public has demanded greater transparency in understanding the extent of pension obligations in California. There’s nothing wrong with that.

It was for this reason that CalPERS, the nation’s largest pension fund, amid much fanfare, trumpeted the posting of its online pension data bank. Then, the Retired Public Employees Association of California, representing retired and active state employees, vehemently objected and exercised some political clout. CalPERS’ posted data was removed the very next day.

Opposition to making the data public was characterized as a defense of privacy, a right guaranteed by the California Constitution. The RPEA, which lobbies for improved pension and health benefits for its members, also argued that it was seeking to protect senior citizens from becoming victims of Internet predators.

Hogwash.

The opposition was more about stifling a growing public outrage over the need for pension reform than the potential abuse of some elderly members.

The removal of the online pension data by CalPERS demonstrates the political obstacles California faces in achieving any meaningful pension reform. It also underscores the growing disconnect between the public’s demand for transparency and state leaders’ efforts to stifle reform on behalf of powerful special interests.

While privacy is vital to every Californian, attempting to obscure our access to information about the scope and depth of pensions is unjustifiable. The public should not settle for an admonishment that we have no right to “follow the money” when it comes to pensions – the singular most significant issue correlated with the rise of municipal bankruptcies. Furthermore, courts have ruled that information about how public money is spent belongs in the public domain, underscoring that the right to privacy is not – nor should be construed to be – in conflict with the public’s right to know.

Public information is essential to a democracy. We’ve already seen multiple efforts in recent months to erode the public’s right to know, including the Legislature’s blatant efforts to gut the state Public Records Act. Only an outcry by open-government groups and media outlets – including the Register – convinced the Legislature to backtrack on their effort to reduce the amount of sunshine in government.

CalPERS has buckled to political pressure by shutting down the pension website. Now is not the time to deny the public the right to know the depth of the pension iceberg, and how it will impact our cities and municipal bond market in the future.

What went down, needs to go back up. Now.

Gloria Romero is an education reformer and former Democratic state senator from Los Angeles. This article originally appeared as a guest column in the Orange County Register and is republished here with permission from the author.

Social Security is Healthy Compared to Public Sector Pensions

Last week yet another missive on the lessons to be learned from Detroit’s bankruptcy was published, this time in Forbes Magazine by Jeffrey Dorfman, an economist at the University of Georgia. Dorfman’s article, “Detroit’s Bankruptcy Should Be A Warning To Every Worker Expecting A Pension, Or Social Security,” clearly implies that future Social Security benefits are as financially imperiled as public sector pensions.

This is patently false, and spreading this falsehood has dangerous consequences.

Not only are the financial adjustments necessary to fix Social Security far easier to implement than what it’s going to take to rescue public sector pensions, but the sheer size of the public sector pension liability is actually bigger than the total liability for the entire Social Security fund. It is imperative that American voters understand this fact.

In the United States today about 20% of workers are employed by the government (or public utilities that offer benefits on par with government). For recent retirees, their average pension after a 30 year career is over $60,000 per year, and their average retirement age is 58. Because they retire ten years before full Social Security benefits are eligible to private citizens at age 68, retired public employees actually comprise nearly 30% of the retired population. The average Social Security benefit is less than $20,000 per year. Critically, the ratio of workers to retirees in the Social Security system is more than 3-to-1, set to move downwards marginally within the next 20 years, whereas the ratio of workers to retirees participating in government worker pension plans is already less than 2-to-1 and is on track to move to roughly 1.5-to-1 within the next 20 years. Here’s how that math stacks up:

According to the U.S. Census Bureau, in 2030, when Social Security will be supposedly approaching insolvency, there will be 99.4 million citizens over 58 years old, and 59.5 million citizens over 68 years old. This means that by 2030 (assuming no public employees also participate in Social Security – which many of them do) there will be 19.9 million government retirees collecting pensions that average $60,000 per year, and there will be 47.6 million private sector retirees collecting Social Security benefits that average $20,000 per year. Got that? The total pension payouts to government retirees, who were only 20% of the workforce, will be $1.2 trillion, whereas the total Social Security payouts to private sector retirees will be $952 billion, only 80% as much.

Now let’s talk about solvency, something that trained economists like Jeffrey Dorfman ought to understand thoroughly. Assuming government’s share of the workforce remains at around 20%, in 2030 we will have 247 million citizens over the age of 25. On a pay-as-you-go basis, to pay $1.2 trillion annually to 19.9 million government pensioners, 29.6 million active government workers would each require $40,343 per year withheld from their paychecks; to pay $952 billion annually to 47.6 million retired Social Security recipients, 150 million private sector workers would require $6,337 per year withheld from their paychecks – one sixth as much.

You can tweak the numbers all you like. Use medians instead of averages. Assume the public sector worker actually keeps working, on average, to age 60. Take into account disability payments, which are drawn from the Social Security fund. Assume people collect Social Security benefits before age 68. The stark fact remains: Our government pays more money to its own retirees – who represent 20% of the active workforce – than it pays in Social Security retirement benefits to everybody else put together. Financing Social Security, forever, can be accomplished with relatively minor incremental adjustments to withholding and benefits.

It is in this context that two powerful special interest groups, public sector unions, and public/private investment fund managers, would have you believe Social Security is the bigger problem. Government labor unions want our attention drawn away from the cataclysmic disaster facing public sector pensions for as long as possible. They want voters to perceive the problem of retirement security to be one that requires shared sacrifice, when nothing of the sort reflects reality. Pension fund managers are getting filthy rich investing public sector pension fund money, and would love to get their hands on the nearly equivalent funds that currently flow into Social Security.

Dorfman’s final insult is to suggest 401K funds provide a more secure retirement than defined benefits. Sure, if you are a fund manager collecting commissions on individual 401K accounts, regardless of their volatility.

The reality is that defined benefits are always preferable to 401K accounts because they greatly reduce market risk and they virtually eliminate mortality risk – i.e., in a pooled fund you don’t have to hope you die before your money runs out. The problem with public sector pensions is simple: (1) They rely too much on asset appreciation, something that is going to be increasingly problematic in our debt saturated, deficit ridden, aging society, and (2) they are way, way out of line with what ordinary citizens can ever hope to expect from Social Security.

Fixing public sector pensions is furthered by borrowing some concepts from Social Security, which might be characterized as an “adjustable defined benefit.” Here is the solution:

(1) Base pension benefits on career earnings, not final years of earnings.
(2) Stop using taxpayer’s money to manipulate global investment markets and just put all the funds into Treasury Bills; better yet, put pensions onto a pay-as-you go financial footing where current workers pay for retiree benefits.
(3) Calibrate benefits so highly compensated participants get a lower pension as a percent of their career earnings than participants with low or average career compensation.
(4) Put a ceiling on annual pension benefits of twice the maximum annual social security benefit.
(5) Whenever necessary, lower pension benefits for all retirees on a pro-rata basis (subject to a floor equivalent to 75% of the average Social Security benefit) to the extent the system is underfunded, in order to restore full funding.
(6) Raise the age at which participants become eligible for pension benefits to a minimum of age 60.

Public sector unions and private investment fund managers are allies in what is probably the most egregious fleecing of taxpayers in American history.

*   *   *

Ed Ring is the editor of UnionWatch, and can be reached at editor@unionwatch.org.

Detroit Bankruptcy Protection Affirmed by Judge

As hoped and expected Detroit Bankruptcy Protections Affirmed, Snyder Shielded.

 Detroit can enjoy the protections of bankruptcy, including immunity from lawsuits related to the case, a federal judge ruled, extending that shield to Michigan Governor Rick Snyder.

U.S. Bankruptcy Judge Steeven Rhodes in Detroit today blocked lawsuits by public employee groups and pension funds who alleged the state overreached in seeking court protection from creditors. Such claims must be heard in bankruptcy court, Rhodes said. His ruling gives the city the opportunity it said it needs to address $18 billion in debt without disruptions.

Chapter 9 of the U.S. Bankruptcy Code, which covers municipalities, typically prevents creditors from taking actions against the debtor that might interfere with reorganization.

City unions and pension officials claim Snyder, 54, violated Michigan’s constitution by authorizing Orr to file for bankruptcy. Pension funds for retired city workers sued in state court to have the filing declared illegal.

Barring lawsuits against Snyder related to the bankruptcy would be unfair to Michigan’s citizens, said Sharon Levine, an attorney for the American Federation of State, County & Municipal Employees, part of the AFL-CIO.

“We’re taking away very fundamental constitutional rights,” Levine said.

Michael Artz, a lawyer for the American Federation of State, County & Municipal Employees, said outside court after the hearing that while the question of the constitutionality of the Chapter 9 filing should have remained in state court, the union “will fight whatever court we’re in.”

Fights by AFL-CIO Welcome

I welcome these fights by the AFL-CIO. Indeed I hope they spend every cent they have because they are going to lose.

And when they lose, others cities will decide to escape preposterous unions contracts and pension benefits via bankruptcy.

General Obligation Bondholders Beware

Several people emailed me that that bondholders should have nothing to worry about because the bonds are backed by tax revenue.

Really?

If that was the case, then there should be little to no difference in interest rates between such bonds. But there is. Just like there is a difference between Greek bonds and German bonds, even though we heard the ECB say for years “we say no to default”.

Well guess what? The market was correct, not the ECB.

All bets are off in bankruptcy court because you cannot tax a hollow shell. And what is Detroit but a hollow shell?

Triumph of Math Over Unions

As for pension claims and the Michigan constitution? Same thing: You cannot pay what you do not have. This is the triumph of math and common sense over union greed, arrogance, threats, and coercion.

Future Rating Impact

The Bond Buyer says Detroit Filing Could Impact Future Rating Analysis

 CHICAGO – As Detroit enters into what would be the largest municipal bankruptcy in the U.S., ratings agencies said the outcome may have a negative impact on unlimited-tax general obligation bonds in future credit analysis.

Detroit emergency manager Kevyn Orr’s restructuring plan treats the city’s unlimited-tax general obligation bonds as unsecured, on par with the its lowest-secured debt, such as retiree health care benefits.

The move marks a departure from traditional treatment of ULTGOs, typically considered among the strongest municipal debt.

Orr’s plan, if accepted by a bankruptcy judge, may affect the way Fitch Ratings analyzes ULTGOs in the future, the ratings firm said in a comment released Friday.

Fitch analyst Amy Laskey said in a telephone interview that it’s still uncertain how broad the impact would be if a bankruptcy judge approved Orr’s plan.

“These are issues we’re talking about internally, how broadly that might extend,” Laskey said. “It would certainly make us reexamine the value to credit quality of having that unlimited-tax pledge versus other tax-supported obligations,” she said.

“Our feeling was that with unlimited-tax general obligation bonds you have the pledge to levy property tax without limitation to pay the debt, and that seemed somewhat more secure [than other tax-supported bonds],” said Laskey. “They do give you a little more financial flexibility because you have the ability and the obligation to pay for them, which you don’t have for limited-tax bonds, certificates of participation, or lease revenue bonds.”

If the city moves into Chapter 9, the case could set precedents when it comes to treatment of ULTGOs, she said.

Once again, I cite common sense: you cannot tax a hollow shell. Bondholders took a risk for higher yield, just as did buyers of Greek debt. If there was no risk, yields on Detroit bonds would not have been higher in the first place.

So, pensioners and bondholders both should take it on the chin.

Detroit Will Be In Bankruptcy ‘For A Long Time’ 

Harvey Miller, partner at Weil, Gotshal & Manges, tells Bloomberg Law’s Lee Pacchia that Detroit’s recently filed Chapter 9 bankruptcy case will not be an easy restructuring. In addition to the profound economic challenges facing the city and the limited ability of a bankruptcy court to force changes on its government, the fundamental tension between bondholders, pensioners and taxpayers could mean Detroit will remain in tangled up in litigation for a long duration of time. “There’s going to be a lot of legal fighting in this,” he says.

Link to video: Harvey Miller on Detroit Chapter 9

Expect a lot of municipal bond downgrades before too long. Downgrades are coming, deserved, and welcome.

About the Author:  Mike Shedlock is the editor of the top-rated global economics blog Mish’s Global Economic Trend Analysis, offering insightful commentary every day of the week. He is also a contributing “professor” on Minyanville, a community site focused on economic and financial education. Every Thursday he does a podcast on HoweStreet and on an ad hoc basis he contributes to many other websites, including UnionWatch.

Union Watch Highlights

Here are links to the top stories available online over the past week reporting on union activity including legislation, financial impact, reform activism, etc., from California and across the USA.

Detroit bankruptcy case heads to Wednesday hearing on labor union pension challenges
By Bernie Woodall, July 23, 2013, Reuters
Labor unions trying to stop Detroit from cutting pensions filed a new challenge to the city in bankruptcy court as the federal judge overseeing the case said he would hear arguments on Wednesday. U.S. Bankruptcy Court Judge Steven Rhodes agreed on Monday to a request by Detroit Emergency Manager Kevyn Orr to fast track a hearing on whether other courts can hear lawsuits against Detroit, while it seeks federal bankruptcy court protection. Concerned that retirement benefits will be slashed, Detroit retirees, workers and pension funds have filed three lawsuits, including one backed by the United Auto Workers union, in state court in an effort to derail the biggest Chapter 9 municipal bankruptcy in U.S. history. A Michigan court judge, for instance, has ordered Orr to withdraw the July 18 bankruptcy filing. The American Federation of State, County and Municipal Employees Council 25, which represents about 70 percent of Detroit’s civilian workforce, on Monday argued if the other lawsuits were stopped, Orr, Michigan’s governor and others would be able to continue to operate beyond state constitutional authority. However, many legal experts said they expect Judge Rhodes to put the other cases on hold. “Federal bankruptcy law generally trumps state law,” and is designed to do so, said Stuart Gold, a Detroit-based bankruptcy lawyer at Gold Lange & Majoros PC. (read article)

With Diminished Clout, Unions in Detroit Face Uphill Battle
By Christina Rogers and Matthew Dolan, July 23, 2013, Wall Street Journal
Detroit’s municipal unions on Monday stepped up protests against proposals to slash worker benefits as part of the city’s bankruptcy, but they face an uphill fight. A series of political setbacks has left union leaders scrambling for leverage as Detroit emergency manager Kevyn Orr, with the backing of Michigan Gov. Rick Snyder, works to restructure the city’s $18 billion in long-term liabilities through bankruptcy court. United Auto Workers President Bob King, speaking publicly on the Detroit bankruptcy filing for the first time Monday, said he is outraged at how the city’s 20,000 public-sector employees have been treated by the governor and the city’s new leadership. “I know how bargaining can work in difficult crisis situations,” Mr. King said. “In the auto industry, labor with management, the community and government, we all worked together and look at the industry now.” Al Garrett, head of American Federation of State, County and Municipal Employees Council 25, said the city didn’t try to bargain with unions in good faith. “Part of this is to create a narrative that people say there is nothing else they can do” but file for bankruptcy, Mr. Garrett said, referring to comments by Messrs. Snyder and Orr about the dire state of the city’s finances. “We say there is something they can do. They can sit down at the bargaining table.” (read article)

Many Tennessee labor contracts unfinished, state says
By Hannah Hoffman, July 23, 2013, Statesman Journal
Nearly 6,000 state employees still have contracts being negotiated, now that the state’s Department of Administrative Services has reached tentative agreements with its two largest unions. Tom Perry, the state’s labor relations manager, said Monday that about 10 contracts are still in negotiations. Those cover 5,961 employees, he said, many in criminal justice fields. The state announced last week it had reached deals with its two largest unions, Service Employees International Union Local 503 and the American Federation of State, County and Municipal Employees Council 75. The contracts had very similar terms, and Perry said most of the smaller unions typically follow suit when negotiating their own contracts. General provisions of those contracts, which union members have yet to ratify, are: • Cost-of-living adjustments of 1.5 percent on Dec. 1 of this year, and 2 percent on Dec. 1, 2014. • Maintenance of a 5 percent employee share of health insurance premiums, the state picking up the rest. The split was instituted two years ago. • Restoration of experienced-based pay increases, commonly called “step” increases. • An end to unpaid furlough days, which most state employees — including those not represented by unions — have had to take during the past four years. • No change in the 6 percent state pick-up of employee contributions to the Public Employees Retirement System. The contracts also provide a path for a 3 percent employee co-pay by 2015 for some workers. It will apply to employees who choose the less-expensive health care option as long as that option is available to at least 95 percent of employees statewide. Perry said most of the remaining contracts likely will follow those general lines. He said the most unusual request from any union came from SEIU Local 503, which wanted a variety of social justice provisions included in the deal. Among them was a request that the state aggressively sue banks that lost money for investors during the 2008 market crash. (read article)

A prime time to organize? A look at the latest UAW campaign at Alabama’s Mercedes plant
By Dawn Kent Azok, July 23, 2013, Alabama.com
The United Auto Workers union has an active organizing campaign at Alabama’s Mercedes-Benz plant, and now might be the group’s best chance of securing a foothold in the state’s auto industry. Previous attempts to organize at Alabama’s first auto assembly plant have been unsuccessful. But this attempt at the Tuscaloosa County factory has the backing of the German labor union, IG Metall, which also is aiding UAW efforts to organize the Volkswagen plant in Chattanooga. It’s also the UAW’s first significant effort at Mercedes since the automaker, like the rest of the global industry, cut jobs and production in response to the deep sales slump of 2008 and 2009. These days, output has grown to record levels, and the company is adding jobs and new products. But the memories of the tough times remain, for some. And, the UAW has stepped up its efforts across the Southeast. UAW President Bob King has said the union’s longterm survival depends on organizing auto plants in the region. (read article)

Worker Centers Offer a Backdoor Approach to Union Organizing
By Kris Maher, July 23, 2013, Wall Street Journal
Community Groups Aren’t Restricted by National Labor Laws Governing Unions. Juan Campis was sweating in the 90-plus degree heat as he whipped a white towel across a gleaming black Chevy TrailBlazer at a carwash here—one of six in the city that was unionized in recent months with help from two nonprofit community groups. “They’re the ones that kept us all together and showed us the steps we needed to take,” Mr. Campis, 20 years old, said of the community groups. Workers probably wouldn’t have joined the union without daily contact from the two groups, he said. The community groups, called worker centers, are often backed by unions. But they aren’t considered “labor organizations” by law because they don’t have continuing bargaining relationships with employers. That gives them more freedom in their use of picketing and other tactics than unions, which are constrained by national labor laws. The new approach is sparking a backlash from some businesses, who call it an end-run around labor laws that can be used to help unionize new groups of workers. Community groups exempt from national labor laws governing unions are giving rise to a new approach to union organizing, prompting backlash from some businesses. Kris Maher reports on Lunch Break. Photo: David Kasnic for The Wall Street Journal. The Center for Union Facts, which opposes organized labor and gets much of its funding from corporations, said it is launching an advertising campaign criticizing ties between unions and worker centers. (read article)

Obama NLRB Picks Seen as Pro-Union as Two Republican Oust
By Laura Litvan and Jim Efstathiou Jr.,July 23, 2013, Bloomberg
President Barack Obama’s labor board nominees are seen as being at least as pro-union as the two forced out by Republicans last week, giving businesses little reason to expect a change in board decision-making.
The new National Labor Relations Board nominees — Nancy Schiffer, a former AFL-CIO associate general counsel, and Kent Hirozawa, chief lawyer for the board’s Democratic chairman — testify today to the Senate’s labor panel after Obama agreed to drop two picks he named in 2012. The swap helped end a stalemate and allowed confirmation of other stalled nominees. Business can’t breathe easy, because Schiffer, 63, and Hirozawa, 58, have views on labor issues that are similar to the positions of the candidates they would succeed, said Randel Johnson, senior vice president at the U.S. Chamber of Commerce. “They are both pro-union and they will likely follow the same tack as the people that they replace,” Johnson said yesterday in an interview. “Business faces some tough battles in front of the newly appointed board.” (read article)

Small victory: BART, unions both negotiating
Michael Cabanatuan, July 22, 2013, SF Gate
With a possible second BART strike just 13 days away, the transit agency and its labor unions still seemed far apart on Monday but did agree on one thing: Both sides said they want to knuckle down at the bargaining table and work out a deal. The unions and BART management were meeting with state mediators Monday at Caltrans headquarters in downtown Oakland. Still, the disagreements continued away from the table. Service Employees International Local 1021, BART’s largest union, held a press conference outside bargaining to release what it called an “investigation” into BART’s chief negotiator, outside labor attorney Thomas Hock. The union alleges that Hock is a union buster accused of a long record of labor law violations and a history of provoking strikes. It also blasted him for being unavailable for 10 of the final 14 days of bargaining. BART held a press conference at MacArthur Station to unveil a wooden mockup of the interior of its new rail cars – and to promote its need to buy 1,000 new rail cars, modernize its train control system and build a larger and upgraded train maintenance center. Meanwhile, an Aug. 4 deadline for a potential second strike looms. BART’s two biggest unions, SEIU and Amalgamated Transit Union Local 1555, agreed on July 4, at Gov. Jerry Brown’s request, to call off their four-day strike, resume train service and extend their contract for another 30 days while negotiations continued. (read article)

In casino fight, Orlando tourism leaders raise the specter of unions
By Jason Garcia, July 22, 2013, Orlando Sentinel
Led by Walt Disney World, the Orlando tourism industry is lobbying hard to prevent the construction of Las Vegas-style casinos in Florida, arguing that the multibillion-dollar resorts would undermine the state’s family-friendly reputation. But the industry is wary of something else, too: unions. Orlando tourism businesses fear the arrival of casinos, which are heavily unionized in markets such as Las Vegas and Atlantic City, could spur efforts to organize in more Florida hotels, according to a report prepared by Spectrum Gaming Group, a firm hired for nearly $400,000 by the Florida Legislature to study the impact of expanding gaming. Hoteliers would face higher costs if new unions successfully negotiated better wages, benefits and work conditions for employees. Spectrum, which issued its first report this month, said the concerns about unions were raised in a meeting with executives and lobbyists representing several prominent Central Florida tourism interests, including Disney World, whose work force is already organized, and non-union employers such as Universal Orlando and the Orlando World Center Marriott. Representatives for Disney, Universal and Marriott all declined to publicly discuss the issue. Rich Maladecki, the president of the Central Florida Hotel & Lodging Association and another participant in the meeting with Spectrum, did not respond to repeated requests for comment. (read article)

Labor Expert: Prison Guard Split Is ‘Warning Shot’ To Unions
By Shawn Johnson, July 22, 2013, Wisconsin Public Radio
Labor expert Gary Chaison says the split of prison guards from the Wisconsin State Employees Union (WSEU) is a “warning shot” to unions nationwide. Chaison is a professor of labor relations at the Massachusetts-based Clark University where he teaches courses on collective bargaining and the history of strikes in America. He says the decision by prison workers to split off from the once-powerful Wisconsin State Employee Union and form the Wisconsin Association for Correctional Law Enforcement was “gutsy,” but that only time will tell if it was a smart one. “In times of uncertainty, you can’t necessarily say that smaller is better in the world of unions,” says Chaison. Chaison says with a shift toward more austerity in government, unions nationally are in more of a defensive mode. Big public employee unions that don’t have the negotiating power they once did are constantly looking for ways to keep their smaller bargaining units happy. “Every public employee union in the United States right now is essentially asking itself ‘What can we do to keep the folks happy on the local level whether they’re teachers or firefighters or police?’” says Chaison. “And if you don’t do a good job, then what’s happened in Wisconsin serves as a warning to them, you can lose them.” Chaison says public employee unions in other states have generally succeeded at sticking together. He expects Wisconsin’s unions did not because they lost so much bargaining power here. (read article)

California Labor Group Lists Controversial Consultants
By Abby Livingston, July 22, 2013, Roll Call
The California Labor Federation has issued a “Do Not Hire” list that includes six consultants who allegedly took part in creating direct mail that slammed two Democratic state lawmakers for supporting unions in their races against Democratic challengers. “The following Democratic political consultants were involved in two campaigns in 2012 that directly attacked labor unions and caused damage to the labor movement,” read a statement on the CLF’s website posted earlier this month. “In response to those actions, the Executive Council of the California Labor Federation approved a motion submitted by the California Professional Firefighters, the American Federation of State, County, and Municipal Employees, and the State Building and Construction Trades Council of California to encourage all unions, labor councils, allies and candidates seeking our support to not hire these consultants until further notice.” The same controversy prompted the break-up of the direct-mail firm Mack|Crounse Group last winter. An arm of the Western Growers Association, a trade association that bills itself as representing “family farmers,” sponsored the 2012 mail pieces. The two candidates on the receiving end of the mailers lost, and furious California Democratic operatives started to investigate the creative source of the mailings. “It was really an exhaustive research effort and there were a number of sources and interviews that were conducted in that effort,” CLF spokesman Steve Smith told CQ Roll Call in a phone interview last week. (read article)

City and unions argue Anchorage labor law in court
Associated Press, July 22, 2013, NewsObserver.com
A battle over a new Anchorage labor ordinance is making its way through court where a Superior Court judge will rule on whether voters should get an opportunity to repeal the law through a referendum. The city and two labor unions have presented preliminary filings, and oral arguments are set for Aug. 19, according to the Anchorage Daily News. The fight stems from a lawsuit targeting a rewrite of the labor law spearheaded by Mayor Dan Sullivan. The ordinance was narrowly passed by the Anchorage Assembly in March. The new law limits annual raises for city employees, restricts incentive pay and bonuses in future contracts and takes away the right to strike. The city rejected a referendum proposed by workers and labor officials, setting up the unions’ legal challenge. A decision by Superior Court Judge Eric Aarseth is expected to hinge on his interpretation of a 2009 state Supreme Court decision. That ruling said citizens could bring forward referenda only on laws that make significant changes and set new policies, as opposed to laws that clarify measures already on the books. The unions argue that the new labor law makes both small and large changes, but its wide overall sweep makes it legislative and subject to a popular vote. “(T)he breadth of the changes and the uniform direction — all increasing control by management and decreasing the rights of unions and union members — cannot reasonably be dismissed as administrative changes,” the unions’ brief states. “Collectively, the changes establish new law.” (read article)

Why the Revival of US Labor Might Start With Non-Union Workers
By Amy B. Dean, July 22, 2013, Huffington Post
For workers in America, it can be hard to know where to turn when a boss pays you late or not at all, doesn’t provide benefits, or just yells at you for no good reason. That’s why a Working America, a “community affiliate” of the AFL-CIO that focuses specifically on nonunion workers, launched a website last month that makes it easy to get that kind of information. FixMyJob.com is a bit like WebMD, but instead of typing in your aches and pains, you tell it about problems at your workplace. Launched on June 5, the site has already garnered 5,000 visitors, according to Working America organizer Chris Stergalas. After choosing from a comprehensive list of workplaces and problems, visitors to FixMyJob.com get a set of resources and options for taking action. While unionization is a part of the solution for many problems, the site also informs workers about labor laws and instructs them on how to advance proposals to defend their rights. The site is a part of Working America’s expanded new campaign to organize people in their communities in all 50 states, says Executive Director Karen Nussbaum. In both online and offline campaigns, Nussbaum said, the aim of Working America is to reach beyond the workplace and rally support at the local level for a pro-labor agenda. Working America’s list of priorities includes living wage laws, expanded health care, adequately funded public schools, and the protection of voting rights. Before the launch of Working America, Nussbaum had served as founder and director of 9to5, National Association of Working Women; as director of the Women’s Bureau of the U.S. Department of Labor; and as an advisor to former AFL-CIO president John Sweeney. I recently spoke with her about her vision for Working America, about FixMyJob.com, and about what the 50-state expansion means for the prospects of union revival. Working America was founded in 2003 partly as an answer to the question of how to mobilize people who are not union members but would benefit from activism by and for working people. (read article)

Butte hosts one-of-a kind labor school: Labor union experts
By Renata Birkenbuel, July 21, 2013, Montana Standard
Even while in the throes of labor, Butte union stalwarts can have some fun while networking among similar souls this week at Montana Tech. For the first time since 2006, historically union top-heavy Butte plays host to the 57th Grace Carroll Rocky Mountain Labor School at Tech all week, from July 21 to 26. “Butte’s rich union history provides a fitting backdrop for the comprehensive training that will cover everything from labor law and union organizing to leadership development and communications,” touts Sandi Luckey, event organizer and Montana AFL-CIO communications director. Historically, each region in the country held its own school. Only the Rocky Mountain Labor School survives. “It is the only school of its kind in the United States,” said Luckey. “I’m excited about it. It was a really strong decision to have it in Butte.” But union-entrenched Butte will not be the only representative, as participants hail from all over the United States. As of Friday, at least 220 union members from across the country have registered for the annual school. They hail mostly from the Western states, but also from the Eastern seaboard. Butte’s John Roeber, 58, president of the Montana State Building and Construction Trades Council and business manager for Boilermakers Local No. 11, will send several younger union members. “We want them to be able to understand organization and collective bargaining,” said Roeber, a 35-year union member. “For the administrators, we want them to know how to do the financing and work with the Department of Labor.” (read article)

City of Anchorage, unions argue labor law in court
By Nathaniel Herz, July 20, 2013, Anchorage Daily News
The five-month-old fight over the city’s new labor ordinance is now winding its way through court, where a judge will decide whether or not voters should get a chance to repeal the law through a referendum. The two sides — the city, and a pair of union officials — have both made their preliminary filings in the case, and oral arguments are scheduled for Aug. 19, with a decision from Superior Court Judge Eric Aarseth expected after. The lawsuit is targeting a rewrite of city labor law spearheaded by Mayor Dan Sullivan that passed the Assembly in March by a 6-to-5 vote. The law sharply limited annual raises for city employees, took away their right to strike, and restricted incentive pay and bonuses in future contracts. That infuriated workers and labor officials, who then moved to repeal the law through a referendum. But the city rejected the referendum proposal on legal grounds — which set up the unions’ challenge in court. Aarseth’s conclusion will likely hinge on his interpretation of a single relevant decision from the state Supreme Court in 2009, which said that citizens could only bring forward referenda on laws that make big changes and set new policies, rather than laws that clarify measures that are already on the books. “This case is an interesting test of the extent to which the Anchorage electorate can and should be able to participate in direct lawmaking,” said Jason Brandeis, an assistant professor and constitutional law scholar at the University of Alaska Anchorage’s Justice Center. “It’s getting at: Does this qualify as one of the types of matters that citizens should be allowed to vote on, or not?” Aarseth, the judge, was appointed by Gov. Frank Murkowski in 2005. He is a registered Republican, though both sides said they saw him as nonpartisan in his decisions. (read article)

Labor Cleans Corbett’s Clock In Legislative Session
Editor, July 18, 2013, Philly Record
On a sunny afternoon in early July, Fredrick Anton was finishing his lunch at a popular Harrisburg café. As Anton, the CEO of the Pennsylvania Manufacturers Association and a long-time prominent voice in conservative circles of Pennsylvania politics, headed for the door, he nearly bumped into Rick Bloomingdale, president of the Pennsylvania AFL-CIO, an umbrella group for a wide range of labor unions. “Congratulations,” Anton said, shaking Bloomingdale’s hand, an acknowledgement of political victories scored by the unions in the recently completed budget season in Harrisburg. “We’re not done yet,” Bloomingdale said in return. It was hard to tell exactly what he meant. In Pennsylvania and across the nation, the fight between business groups and their Republican allies against organized labor and its Democratic defenders surely will continue. But something in Bloomingdale’s tone seemed to indicate a deeper significance. At a time when powerful labor unions in other industrialized states were watching their influence wane, the significance of unions in Pennsylvania politics is not done, at least not yet. (read article)

Cantor cites labor union concerns to knock ObamaCare
By Justin Sink, July 18, 2013, The Hill
House Majority Leader Eric Cantor (R-Va.) on Thursday cited a letter from union groups slamming the president’s signature healthcare reform law as further evidence that the Affordable Care Act should be scrapped.
“The ObamaCare legislation is a total rewrite of the kind of health care that we can expect,” Cantor said in an interview on “Fox and Friends.” “These union leaders say it not only is going to be bad for healthcare, but they say it is going to be bad for jobs. It will actually harm the 40-hour workweek that the union community has for so long been about in this country.” The letter, written to House Minority Leader Nancy Pelosi (D-Calif.) by leaders James Hoffa of the International Brotherhood of Teamsters, Joseph Hansen of The United Food and Commercial Workers International Union and D. Taylor of UNITE-HERE, warns “the law as it stands will hurt millions of Americans.” “The law creates an incentive for employers to keep employees’ work hours below 30 hours a week,” the union leaders wrote. “Numerous employers have begun to cut workers’ hours to avoid this obligation, and many of them are doing so openly.” (read article)

Labor reform needs more than right-to-work
By Rick Berman, July 17, 2013, Daily Caller
After the shockwaves made by the passage of right-to-work laws in the former union bastions of Indiana and Michigan, the Ohio Senate recently rejected a similar law for their state. This development has reformers asking themselves: Where do we go from here? Not very far, unfortunately — labor law is a uniquely federal issue with only a few carve-outs for states to mull. Thankfully, federal legislators have an opportunity that state labor reformers do not with the Employee Rights Act. Co-authored by Senator Orrin Hatch, the ERA shares the same mission as right-to-work: Make the workplace completely fair and democratic for all employees nationwide. Some of the ERA’s provisions are already well-known. Political protection, which requires that union officials receive the explicit written consent from members before spending mandatory dues on political activities, is one. The rationale behind political protection is simple: 43 percent of union households voted for the GOP in 2012, yet 91 percent of union money went to Democrats. This vast chasm between the union officials and their members shows that when it comes to politics, employees from the machine floor to the office are directly funding something they wouldn’t otherwise support. Another key ERA element is the secret ballot. This would require that all unionization votes be conducted in the same manner as elections for public office—with secrecy and anonymity. If a secret ballot is good enough to elect a president of the United States or the president of a labor union, then it’s good enough for union certification as well. (read article)

Labor dispute could cost Escondido $1 million
By David Garrick, July 17, 2013, Union-Tribune San Diego
Escondido may have to pay as much as $1 million in back pay and other compensation to a group of employees who claim they were illegally laid off three years ago during the Great Recession. In a recent decision, the state’s Public Employment Relations Board said it appears Escondido failed to properly negotiate the 2010 layoffs of its entire six-member code compliance division. The board set a trial date of Sept. 16. The workers claim city officials violated state law by replacing them with part-time employees doing the same work and by failing to engage in collective bargaining before the layoffs. City officials have repeatedly said they didn’t violate employee bargaining rights or any other labor regulations. In arguments submitted to PERB, the city said negotiating severance packages for the laid-off employees fulfilled the city’s obligation to engage in collective bargaining. In its March 8 ruling, however, PERB disagreed. Jennifer McCain, assistant city attorney for Escondido, said this week she was confident the city would be vindicated at trial. “The city’s position is we complied fully with the law,” she said. “The layoffs were appropriate.” (read article)

Detroit Files Chapter 9 Bankruptcy; Oakland, LA, Others on Deck

In an inevitable, anticlimactic decision today, Detroit files for bankruptcy.

 Detroit became the largest US city to ever file for bankruptcy on Thursday, seeking protection from its creditors as it restructures more than $18bn in debt.

Richard Snyder, Michigan’s Republican governor, said in a letter included in the filing.

“Detroit simply cannot raise enough revenue to meet its current obligations and that is a situation that is only projected to get worse absent a bankruptcy filing.

Kevyn Orr, who Mr Snyder appointed in March to serve as Detroit’s emergency manager, has stirred controversy by putting the claims of holders of general obligation bonds – which are backed by taxes – on the same footing as those of pension funds and retirees.

Holders of the general obligation bonds argue that they should be paid before other unsecured claimants. Pension funds maintain that their rights are constitutionally protected and should have priority.

“To treat holders of general obligation bonds backed by the full faith and credit of a sovereign entity as unsecured and impaired has implications for the municipal market,” said Peter Hayes, head of municipal bonds at BlackRock, which owns $25m of Detroit’s debt.

Mr Orr said the city’s total debt was at least $18bn and could be as much as $20bn – $11bn of which is unsecured. The remaining $9bn that is secured will probably be paid back at 100 cents on the dollar.

Welcome to Chapter 9, Detroit

FT Alphaville says Welcome to Chapter 9, Detroit

 Beyond the list of derelict buildings and brownfield sites owned by the city — you’ll want to read the approval letter by Michigan Governor Rick Snyder, in Exhibit A.

  

Here is a link to Detroit’s Bankruptcy Filing

Amusing Flashback of the Day

The amusing flashback of the day with a hat tip to ZeroHedge goes to a CBS news headline from  October 13, 2012 Obama: I “refused to let Detroit go bankrupt”.

Gut Kick

Bloomberg says Detroit ‘Gut Kick’ Poses New Test for Long Suffering City

 The move was inevitable, said Steven Rattner, a New York financier who headed President Barack Obama’s auto-industry task force in 2009 that put the predecessors of General Motors Co. and Chrysler Group LLC into bankruptcy reorganizations.

“This will be much messier than the auto companies,” he said. “This will go on for a long time.”

“You’re going to have much bigger haircuts for the workers and that’s going to mean much more pain than the workers for the auto companies were asked to bear,” Rattner said.

Michel Soucisse, manager of Mudgie’s Deli on Porter Street, shares her concern.

“I really fear that Detroit will be cut apart by its creditors and some of our assets will start to be sold off willy-nilly,” he said in an interview. “I really hope it means that we get to keep our assets and get help at the same time.”

10 Pages of Bankruptcy References on This Blog 

I have 10 pages of Detroit Bankruptcy References on this blog. The earliest is in regards to GM and is from 2005.

Here are a few examples:

Clearly this is not a surprise. Nor did the stock market treat it like a surprise.

What’s going to be a surprise (but not to Mish readers) is when Oakland, LA, Houston, Baltimore, and numerous other cities declare bankruptcy to escape untenable pension and health-care promises.

The Bright Side 

Taxpayers should be fed up with ever-escalating property taxes, sales taxes, and fees to pay ridiculous retirement plans for unappreciative public union employees, especially police, fire, and teachers’ unions.

So, look on the bright side.

The Detroit bankruptcy is a good thing, and it will be even better when numerous other cities, bankrupted by public union greed, do exactly the same thing.

If you are desperate for yield and holding questionable municipal bonds, especially long-term municipal bonds, you may wish to reconsider.

About the Author:  Mike Shedlock is the editor of the top-rated global economics blog Mish’s Global Economic Trend Analysis, offering insightful commentary every day of the week. He is also a contributing “professor” on Minyanville, a community site focused on economic and financial education. Every Thursday he does a podcast on HoweStreet and on an ad hoc basis he contributes to many other websites, including UnionWatch.

Update on Detroit’s Looming Bankruptcy

The hollowing out of Detroit is nearly complete. All that’s left is a bankrupt shell of a city with no services and scattered citizens that do not pay taxes.

The Detroit News reports Half of Detroit Property Owners Don’t Pay Taxes

Nearly half of the owners of Detroit’s 305,000 properties failed to pay their tax bills last year, exacerbating a punishing cycle of declining revenues and diminished services for a city in a financial crisis, according to a Detroit News analysis of government records.

The News reviewed more than 200,000 pages of tax documents and found that 47 percent of the city’s taxable parcels are delinquent on their 2011 bills. Some $246.5 million in taxes and fees went uncollected, about half of which was due Detroit and the rest to other entities, including Wayne County, Detroit Public Schools and the library.

Delinquency is so pervasive that 77 blocks had only one owner who paid taxes last year, The News found. Many of those who don’t pay question why they should in a city that struggles to light its streets or keep police on them.

“Why pay taxes?” asked Fred Phillips, who owes more than $2,600 on his home on an east-side block where five owners paid 2011 taxes. “Why should I send them taxes when they aren’t supplying services? It is sickening. … Every time I see the tax bill come, I think about the times we called and nobody came.”

Update on Detroit Bankruptcy

Detroit is financially and morally bankrupt yet the governor refuses to make that declaration. A Review team says Detroit faces financial crisis, has no plan to fix it so why won’t the governor act?

For the second time in a year, a state review team has found Detroit is in a financial emergency that requires Gov. Rick Snyder to intervene in City Hall.

But this time, if Snyder agrees that a financial emergency exists, the governor’s choices are more limited. He could appoint an emergency manager to keep Michigan’s largest city from plunging into bankruptcy, experts say, or he could continue state financial supervision through a new consent agreement, which seems a faint possibility.

State Treasurer Andy Dillon ruled out a bankruptcy filing at this time.

The six-member review team unanimously concluded in a report released Tuesday that the city failed to restructure its debt-laden bureaucracy under the financial consent agreement signed in April and that Detroit’s financial crisis requires Snyder’s intervention “because no satisfactory plan exists to resolve a serious financial problem.”

Chapter 9 bankruptcy is “always a possibility but I don’t think the city should go through (Chapter) 9 to cure its ailments,” he added.

The review team said the city’s charter adds “numerous restrictions” and hurdles for closing departments, canceling contracts and the type of wholesale restructuring financial experts say is necessary to make city government live within its means.

Restrictions? Who Cares?

In bankruptcy, restrictions go out the window. So do union contracts and pensions. Since all of that needs to go out the window, what’s holding the governor back?

About the author: Mike “Mish” Shedlock is a registered investment advisor representative for Sitka Pacific Capital Management. His top-rated global economics blog Mish’s Global Economic Trend Analysis offers insightful commentary every day of the week. He is also a contributing “professor” on Minyanville, a community site focused on economic and financial education. Every Thursday he does a podcast on HoweStreet and on an ad hoc basis he contributes to many other websites, including UnionWatch.

State Takeover of Detroit Finances Nears

On January 29 Bloomberg reported Bing Races to Beat Michigan Deadline for Union Detroit Deal

Democratic Mayor Dave Bing is racing to wrest concessions from 48 bargaining units to erase a $200 million deficit in the home of General Motors Co. and the cradle of the U.S. auto industry.

Otherwise, the city of 714,000 dominated by Democrats may face a Republican-appointed manager with authority to sell assets and nullify contracts. State Treasurer Andy Dillon has said Detroit will run out of cash by May, and called for concessions by early February.

This week, Bing began firing 1,000 of Detroit’s 11,300 employees. The mayor also proposes a 10 percent cut in payments to vendors and doubling the 1 percent tax on corporations.

Bing, 68, has said the city must trim annual employee benefit and pension costs, which have risen since 2001 to $35,000 per employee from $18,000.

“We are meeting, not daily but more than weekly, and there are sidebar conversations every day,” said Al Garrett, president of AFSCME Council 25, which represents about 3,000 employees. “I’m not sure an emergency manager would be any more Draconian than what the city itself is asking, but it’s a real possibility.”

Deal Reached?

Mayor Bing is taking his script straight from Greece where a deal has been “close” for days, weeks, and now months.

Today’s Bloomberg headline does not match the facts presented. Please consider Detroit Reaches Pact With City Unions to Avoid Takeover, Detroit News Says

Mayor Dave Bing and a majority of city employee unions have reached tentative agreement on concessions aimed at avoiding a state takeover.

“This agreement is the first meaningful step in achieving the necessary concessions and structural changes,” Bing, 68, said via Twitter.

The deal, but no details, was confirmed by Al Garrett, president of AFSCME Council 25. The agreement covers about 6,500 of the city’s about 11,000 employees, not including police and firefighters who have resisted a demand for a 10 percent wage cut, he said.

The city and unions must agree to concessions early this month to avoid state action, such as the appointment of an emergency manager with broad powers to cut spending, said state Treasurer Andy Dillon. Dillon is leading a review of city finances, after a preliminary review found it will run out of cash by May, and that it faces a $200 million operating deficit.

Deal Reached? Really? No, Not Really

According to mayor Bing we have an “agreement”, albeit an agreement with no details, and without covering police or firefighters. What kind of deal is that?

What’s Best for Detroit?

The best thing for Detroit would be if there is no deal, or the state rejects the deal.

Unions are the problem and the solution is to get rid of them entirely. That will not happen under Bing, but it could happen in a state takeover.

Bing is not interested in what’s best for Detroit taxpayers nor is he interested is what’s best for Detroit school children where shockingly only 25% graduate high schools. Rather, Bing is out to save as much of the status quo as he can, including his own job of course.

Detroit Schools Bankrupt

Flashback July 24,2009: The Wall Street Journal reports Detroit’s Schools Are Going Bankrupt, Too

Detroit is like many urban school districts—large, unwieldy and bureaucratic, with a powerful union that makes the system unable to adapt to changing circumstances and that until very recently had an indulgent political class that insulated it from reform. That insulation came in two forms. The first was neglect. Mayor Kwame Kilpatrick spent several years distracted by a scandal stemming from his affair with a staffer. He resigned last year, pleaded guilty to obstruction of justice, and was sentenced to four months in jail. Had he been an effective mayor, he might have also been a powerful advocate for students.

The other insulating force was a conscious decision to wall off Detroit from charter schools. In 1993, Michigan’s legislature made it difficult to create new charters in Detroit by declaring that only community colleges could authorize charters for primary and secondary schools in “First-Class Districts”—defined as those with more than 100,000 students. Detroit was the only First-Class District. In 2003 the state, under pressure from the Detroit Federation of Teachers, turned down a gift of $200 million from philanthropist Robert Thompson that would have established 15 charter schools in the city. Those charters are needed today.

The net result has been a school system that’s been coming apart as the teachers union has dug in its heels. In 2006, the union illegally went on strike, killing a plan to force teachers to take a pay cut to balance the system’s books.

Collective Bargaining has Morally and Fiscally Bankrupted Detroit Schools

Read that again. Under pressure from the Teachers’ Union, Detroit turned down $200 Million. That was in 2003 dollars. Wow. No doubt the union “did it for the kids“.

For more on the appalling behavior of Detroit’s teachers’ unions please see Detroit Public Schools (25% graduation rate) teachers unions opposing highly qualified volunteer teachers.

About the author: Mike “Mish” Shedlock is a registered investment advisor representative for Sitka Pacific Capital Management. His top-rated global economics blog Mish’s Global Economic Trend Analysis offers insightful commentary every day of the week. He is also a contributing “professor” on Minyanville, a community site focused on economic and financial education. Every Thursday he does a podcast on HoweStreet and on an ad hoc basis he contributes to many other websites, including UnionWatch.

Detroit Faces Imminent Financial Crisis

Michigan Live reports Detroit could run out of cash in December, plan must include layoffs

Bing is expected to discuss a confidential Ernst & Young report obtained by the Detroit Free Press that suggests Detroit could run out of cash by April without steep cuts to staff and public services.

That’s a grim prognosis, but according to Brown, the city actually could be unable to make payroll “as early as December.”

“I know the report says April, but there are certain risk assumptions that when you take those into consideration, worst case scenario you could run out (of cash) in December,” Brown said this morning on WJR-AM 760.

In his speech tonight, Bing is expected to propose privatizing the city’s public bus system and lighting departments, both of which have been failing residents but reportedly cost them $100 million a year in subsidies.

Expect to see more stories like these, just as I have said for years. Many major cities are walking dead including Oakland, Miami, Cleveland, Houston, Los Angeles, Newark, and quite frankly too many to list. Public unions, untenable union wages and benefits, and prevailing wage laws coupled with politicians buying votes of public union members are to blame for most of this mess.

Bankruptcy, huge clawbacks on public union benefits, scrapping of all prevailing wages laws, and the end of all collective bargaining of public unions are the solutions.

About the author: Mike “Mish” Shedlock is a registered investment advisor representative for Sitka Pacific Capital Management. His top-rated global economics blog Mish’s Global Economic Trend Analysis offers insightful commentary every day of the week. He is also a contributing “professor” on Minyanville, a community site focused on economic and financial education. Every Thursday he does a podcast on HoweStreet and on an ad hoc basis he contributes to many other websites, including UnionWatch.