(Reuters) - With the threat of a city bankruptcy looming, Detroit city workers and retirees are pushing back against the state-appointed emergency manager, filing lawsuits to limit his options and refusing to accept demands to keep details of their discussions secret.
One lawsuit, filed in Ingham County Circuit Court in the state capital Lansing, seeks to stop Governor Rick Snyder from allowing the emergency manager, Kevyn Orr, to file Chapter 9 municipal bankruptcy. That lawsuit claims Orr's plan to significantly cut vested pensions would violate strong protections in the Michigan constitution for retirement benefits of public-sector workers.
So let's say you win the lawsuit. What good does it do you?
There's no money.
See, this is the problem at its root. The unions bargained in bad faith, either knowing factually or being in possession of enough information to know that what they were asking for couldn't be provided. It was fiscally impossible given the projected increase in cost over the retiree lifetimes.
They didn't care and they bludgeoned the city and its people into approving these "contracts" anyway.
The problem is that the only remaining options are to take some fraction of the original amount which can actually be paid or get nothing. And the longer they wait and the harder they push the closer to zero their recovery becomes, as the cost of litigation takes from the recovery and in addition the city continues to decay and will keep doing so until it is fiscally restored to a sound foundation with its taxes and spending brought both into balance and to a competitive level.
Kevyn Orr doesn't have to concede anything. He holds the whip hand in that the city is a wasting asset and the longer the unions keep screwing around and screaming the less they get.
The myth behind so-called "full faith and credit" bonds, commonly known as "general obligation" bonds in the municipal world, is that a municipality can raise taxes to whatever level is necessary to pay them off. The same fantasy-land view appears to be prevalent when it comes to forward pension obligations.
That view is false.
You can set tax rates anywhere you'd like. You can't force anyone to pay, because they can move and once they do they owe nothing. Since some proportion of the people are non-productive and effectively pay no taxes, as you drive those who are productive out your revenue decreases while costs remain stagnant or rise. The paradox is that by raising taxes you actually wind up reducing free cash flow, and it is free cash flow that you need to pay those obligations.
The unions and retirees refuse to accept this but it doesn't matter whether they accept it or not. Facts just are. All the screaming about "fair share" is meaningless when the only people left in the city to hear you and pay are those who pay nothing as they're leeches, suckling on welfare of one form or another rather than working and thus contributing exactly nothing to the economic welfare of the city.
This is the future of essentially all public-service and other large unions to some degree whether they admit it to their membership or not and whether the membership accepts it or not.
If you're a firefighter, cop, teacher, city or township employee somewhere what's happening in Detroit and what will happen to those pensions and medical benefits is going to happen to you.
And no, it's not the city's fault nor the residents' fault as a whole.
It's yours -- personally and specifically.
Enjoy that which you cooked up for yourself; it tastes like **** and it's what's for dinner, like it or not.
Detroit Emergency Manager Kevyn Orr ordered an investigation into employee benefit programs, including the insurance and pension systems.
Orr told the city’s inspector and auditor general, agencies that both have subpoena power, to report within 60 days in an order dated today.
The document should cover “next steps, and any corrective, prospective, legal, additional investigatory or other action designed to address any waste, abuse, fraud or corruption uncovered,” according to Orr’s order.
Everyone raise their hand if they think this is just about people scamming "disability" and other pension-related things to which they're not really entitled.
Now everyone who raised your hand -- go find the nearest can of Drano and drink it. You're that dumb -- or hopeful.
Remember how I've been talking for years about REMICs and how during the bubble years there were lots of "not quite right" acts when it comes to transfers of documents that simply never happened?
What if Orr finds that in his pretty little (far too little) pension funds?
This is the 900lb Gorilla in the china shop that nobody has wanted to go anywhere near, because it infests virtually everything when it comes to duration-matched funds (which pensions must be in order to "work") to some degree.
It's faded off the front page, of course, as the market has "recovered."
But that you don't smell the dead fish doesn't mean that it suddenly came back to life, or stopped rotting.
It just means that the bag it was put in has held up -- so far.
I've got the popcorn ready...
Remember folks, all crashes initiate in the credit markets.
Now HYG (high-yield corporate credit) has bounced somewhat the last few days. But municipals have not.
Chief among the reason for the "not" is that Detroit has declared that "GO" (general obligation) bonds will be treated as unsecured debt.
May I have a "Duh!" to go with that?
GO bonds have been considered "safe" because they are backed by the "full taxing authority" of whoever issues them. Nobody bothers to ask "what happens when that taxing authority is not matched by the residents ability and willingness to pay?"
See, people can leave. They can move somewhere else, specifically, at which point their tax revenue walks with them. If you squeeze people too hard they will leave.
So the premise that GO bonds have an "unlimited" guarantee is in fact false. No such "guarantee" in fact exists.
The 900lb Gorilla in the room is that virtually no government entity actually pays off debt these days for a given project or function. They just roll it over again and again, relying evermore on the "unlimited" faith and credit they claim is available to them.
If you've been believing that line of crap you may have just gotten a wake-up call.
This particular one is small, in that Detroit's actual obligations are, in scale, not all that large.
But the precedent is clear, and if you look at municipal and state finance generally you see the same patterns throughout the nation -- selling off assets to fund current liabilities, rolling debt and compounding it for depreciating assets.
The executive of Sacramento County in California recently attributed the increase in his county’s pension costs to “investment losses during the recession.”
The official, Brad Hudson, is right that public pension costs are growing, but not that investment losses are to blame. To the contrary, these expenses are rising despite gains in pension-fund investments.
The article goes on to say that the Dow is up 15% from December 31st 2007 to June 3rd of this year. True. But annualized this is less than a 3% rate of return, while the pension fund claimed it could make 8% -- and costs went up even faster than that!
This has now come home to roost in Detroit, where pensioners are being told they'll take pennies on the dollar -- or get nothing.
Reality is this: A promise based upon an impossibility is not a promise, it's a fraud, and frauds are felonies.
What's going on right now is a furious attempt to cover up those felonies and find ways to spin flax into gold. It won't work because it can't work.
This doesn't mean they won't try. But the attempts will not only fail they will destroy the capital foundation of the people and then the cities that are nothing more than the aggregate of the people. Those who can leave will leave, and those who can't leave aren't the producers.
We must hold the public sector unions and their members accountable for these frauds along with the city managers, governors and others who all conspired to make knowingly false promises.
That accountability comes in two forms -- financial and "other", commonly known as civil and criminal.
The financial side of this is simple -- a promise made upon fraud is void at inception and the sooner we tell people the truth about this the better off they will be, as they will have at least some opportunity to rearrange their lives to meet what is reality rather than the fantasy they were "sold."
We do nobody any good when we obfuscate things as this article does. The simple fact of the matter is that pension funds, like all other large-scale plans, cannot grow faster than economic output and in real terms cannot grow faster than economic output less monetary inflation.
The problem with facing this truth is that over the last 30 years the real economic output picture looks like this:
And nobody wants to talk about the inevitable reversion to the mean that must come as a consequence.
You only thought it was just your cellphone tracking you; the states want into the game too:
A South Carolina company is proposing that the state abandon regular license plates and switch to electronic plates controlled by the Department of Motor Vehicles.
There's that phrase: controlled by.
And, of course, monitored by.
The plates can be, of course, instantly changed to display various status messages. Such as, for example, if anyone linked to the plate has an open want or warrant on them?
Note that one of the examples is "if the driver's license is expired."
Of course this doesn't mean that the person who owns the car is driving it.
This comes back to the fundamental question -- what happened to the fundamental liberty interest in being able to travel from one place to another?
Oh, and as for that car? You don't own it. Yes, you paid for it, but you don't own it.
The State does.
PS: **** you "Compliance Innovations" -- sideways with a chainsaw.
Where We Are, Where We're Heading (2013) - The annual 2013 Ticker
The content on this site is provided without any warranty, express or implied. All opinions expressed on this site are those of the author and may contain errors or omissions.
NO MATERIAL HERE CONSTITUTES "INVESTMENT ADVICE" NOR IS IT A RECOMMENDATION TO BUY OR SELL ANY FINANCIAL INSTRUMENT, INCLUDING BUT NOT LIMITED TO STOCKS, OPTIONS, BONDS OR FUTURES.
The author may have a position in any company or security mentioned herein. Actions you undertake as a consequence of any analysis, opinion or advertisement on this site are your sole responsibility.
Looking for "The Best of Market Ticker"? Check out Ticker Classics.
Market charts, when present, used with permission of TD Ameritrade/ThinkOrSwim Inc. Neither TD Ameritrade or ThinkOrSwim have reviewed, approved or disapproved any content herein.
The Market Ticker content may be reproduced or excerpted online for non-commercial purposes provided full attribution is given and the original article source is linked to. Please contact Karl Denninger for reprint permission in other media or for commercial use.
Submissions or tips on matters of economic or political interest may be sent "over the transom" to The Editor at any time. To be considered for publication your submission must include full and correct contact information and be related to an economic or political matter of the day. All submissions become the property of The Market Ticker.