GREED FILES - Wall Street and City Debt

Further proof that Wall Street is the biggest gambling casino, and cities are addicted gamblers.

"When Wall Street offers free money, watch out" by Allan Sloan (Washington Post) and Cezary Podkul (ProPublica), Washington Post 7/11/2015

Excerpt

If there were ever a time not to bet the moon on the stock and bond markets, it’s now, with U.S. stocks at near-record highs and interest rates on quality bonds at near-record lows.  But Wall Street is urging state and local governments to do just that — and they’re listening.

Despite the risks, governments are lining up to issue billions of dollars in new debt to replenish their depleted pension funds and, as a bonus, take some pressure off strapped budgets.  In some cases, the borrowing makes their balance sheets look vastly better.  Bankers, who make fat fees for raising the money, are encouraging this borrow-and-bet trend.  Their sales pitch is that borrowing at today’s low interest rates all but guarantees a profit for the governments because they can invest the proceeds in their pension funds and for decades earn returns higher than the 5 percent or so in interest that they will pay on the bonds.

But there’s a catch:  If the timing is wrong, these so-called pension obligation bonds could clobber the finances of the government issuers.  Pension funds and beneficiaries will be better off because pensions will be more soundly financed.  But taxpayers — present and future — might be considerably worse off.  They will be running huge risks and could get stuck with a massive tab.

“It’s sold as a magic bean,” said Todd Ely, a professor at the University of Colorado at Denver who has studied pension bonds.  “But when it goes bad, it’s not free.  Then it isn’t really magic.  If it could be counted on to work as often as it’s supposed to, then everyone would be doing it.”

Plenty of takers are bellying up to the borrowing bar.  Governments sold $670 million worth of pension bonds through the first half of this year, more than double the $300 million raised for all of last year, according to deal-trackers at Thomson Reuters.

That total would more than double if Kansas completes a pending $1 billion deal, which would be its biggest bond issue.  A $3 billion sale is under consideration in Pennsylvania, that state’s largest as well.  Lawmakers recently rejected record multibillion-dollar deals in Kentucky and Colorado, but those proposals are expected to resurface.  And new proposals are being pitched to other governments.

Pension bonds have waxed and waned since the 1980s, but the current boom is different.  An examination by The Washington Post and ProPublica found that it’s being driven not only by the prospect of investment profits but also by a new accounting quirk that has largely escaped public notice while morphing into a major marketing tool for Wall Street banks.

The quirk stems from a rule change that was meant to force governments to more clearly disclose the health of their pension funds.  But a side effect is to allow governments with extremely underfunded pensions to slash reported shortfalls by $2 or more for each $1 borrowed.

Here’s how:  If a pension plan is so poorly funded that it is projected to run out of cash, the new rules require it to make less optimistic projections about future returns.  That increases the reported pension shortfall.  But if governments infuse a big slug of borrowed money into the fund, they can resume using optimistic projections, and the shortfall shrinks.

It’s like getting a new credit card, borrowing on it to pay off part of an existing loan, then having the total amount owed magically shrink by more than what is borrowed.  Sounds impossible — but it’s true.

The impact can be dramatic.  In March, the town of Hamden, Conn., reduced its unfunded pension amount by about $320 million with a $125 million pension bond and promises of future payments, according to an estimate by ProPublica and The Post.  The Kentucky Teachers’ Retirement System said it estimates that a $3.3 billion bond issue plus payment promises could carve $9.5 billion off its unfunded liability.

Those figures don’t reflect the decades of debt and risk placed on taxpayers.

The rule change, from the Governmental Accounting Standards Board, has been in the making since 2006, but is only now starting to take effect — and to be noticed.  So GASB is fast becoming a recognized acronym in state capitals.

“GASB is certainly a huge concern,” said Beau Barnes, deputy executive secretary of the Kentucky System.  Until this year the term was unfamiliar to state legislators, he said, “but in 2015 when you say ‘GASB,’ most of them have an idea that it’s going to be bad.”

It’s not clear whether anyone involved in the long rulemaking process realized that the change would encourage governments to sell bonds to improve their balance sheets.

We asked GASB Chairman David Vaudt about this but couldn’t get a clear answer.  His response was, “We follow our due process, and the input that we consider is from our stakeholders:  the preparers, auditors and users” of governmental financial statements.

The question of whether governments will come out ahead in the real world — as opposed to the accounting world — with pension bonds is far from clear.  In large part, it depends on governments’ willingness to make substantial payments to their pension funds after the bonds are sold.

A review by ProPublica and The Post of the 20 largest pension bonds issued since 1996 found that in three-fourths of the deals, governments did not make their full required contribution in the years after the bonds were sold.  Those bonds account for nearly two-thirds of the pension debt issued since 1996, according to Thomson Reuters.  In more than half the deals, some proceeds even went on to make annual pension contributions — borrowing from the future to pay today’s expenses.  Because of the underfunding, most of the pension funds now are worse off than before the bonds were issued.

In all five recent or proposed bond sales examined — by Kentucky, Kansas, Pennsylvania, Colorado and the town of Hamden, Conn. — the issuers and potential issuers said they were planning to make less than full payments for many years.

“These bonds are pernicious,” said Alicia Munnell, director of the Center for Retirement Research at Boston College.  “They discourage pension funding.  They shift costs forward to future generations.”

DETROIT - The 'Grand Bargain' Apporved

"Behind Detroit’s ‘grand bargain’ to emerge from bankruptcy" PBS NewsHour 11/7/2014

Excerpt

JUDY WOODRUFF (NewsHour):  Nearly 16 months after Detroit filed for bankruptcy, a federal judge approved an unprecedented and complex plan today that would bring the city out of bankruptcy and is designed to give it a fresh start.

The plan allows Detroit to shed $7 billion of debt, reinvest more than a billion dollars into neglected public service, cut pensions of general city retirees, and cut payments to bondholders.

Hari Sreenivasan has more on the story.

HARI SREENIVASAN (NewsHour):  One crucial component of the plan that came together in the past few months is a so-called grand bargain.  It allows the city to accept more than $800 million from nonprofit foundations, the state and others over two decades.  That deal protects the city from selling a noted art collection at the Detroit Institute of Arts and reduces the size of pension cuts.

The Ford Foundation has donated the most money to the grand bargain, $125 million in all.

Its president, Darren Walker joins me now.

Thanks for being with us.

So, my first question is, what are nonprofit foundations doing in what seems like a bankruptcy bailout?

DARREN WALKER, Ford Foundation:  Well, we’re not in the business of solving bankruptcies, but we do solve big problems and work with leaders at the city level and the community level, public and private sectors, to help solve community problems.

And this is one example of a group of foundations coming together at the behest of Judge Gerald Rosen to help solve this challenge.

HARI SREENIVASAN:  So, is this a template for other cities that might be in financial straits?

DARREN WALKER:  This is not a template for other cities, but there are many lessons here.

This was a complicated $20 billion bankruptcy with thousands of creditors and many contested issues.  But our focus, which was on saving the Detroit Institute of the Arts and ameliorating the situation for the workers of the city, particularly those retirees under the pension fund, were — that was what we were able to help accomplish.

But this doesn’t mean that other cities are going to look to foundations to solve their bankruptcy issues.  This is not a template for that.

AMERICA - Should Pensions Be Part of Debt-Shedding

"Chicago Pursues Deal to Change Pension Funding" by RICK LYMAN, New York Times 12/5/2013

Excerpt

First came the State of Illinois, now comes the City of Chicago.

The hard-fought passage here Tuesday of a landmark bill trimming retirement benefits for state workers, aimed at fixing the vastly underfunded pension system, has become instantly relevant to the nation’s third-largest city, which has its own pension systems in various stages of financial collapse.

And if anything, the reckoning in Chicago is even nearer and more difficult than the one the state had faced, putting its Democratic mayor, Rahm Emanuel, in a difficult position under a tight deadline.

Under state law, the city must increase its contributions to its workers’ pension funds by $590 million in 2015, to a total annual contribution of $1.4 billion for current and future retirees.  If no pension deal can be reached by November of next year, when the city will draft its next budget, the city will either have to raise taxes or cut services or some combination of both.

But city officials are hoping there is now momentum on their side to force a compromise solution.  They come armed not only with Tuesday’s state vote but also with a federal judge’s ruling, also on Tuesday, to formally send Detroit into bankruptcy.  Chicago is not facing bankruptcy, but the Detroit case produced a development being watched closely by cities and unions across the country: It explicitly permitted changes to public pension funds to help the city shed its debts and reorganize.

"States and cities grapple with cuts to pensions that workers have already earned" PBS Newshour 12/4/2013

Excerpt

SUMMARY:  Illinois joined other cities and states in cutting pensions as way to curb costs.  Should public employees who have already earned their retirement be subject to cuts?  Judy Woodruff talks to Andrew Biggs of the American Enterprise Institute and Steven Kreisberg of the American Federation of State, County and Municipal Employees.

DETROIT - Bankruptcy Ruling

"Pensioners will face negotiations as Detroit starts road to financial recovery" PBS Newshour 12/3/2013

Excerpts

JUDY WOODRUFF (Newshour):  Finally: the choices ahead as Detroit moves forward with bankruptcy.

Today's ruling by a federal judge begins to clear the way for it to happen, and he said public pensions could be cut as part of other changes aimed at shedding billions in debt.  Unions and pension funds had argued that Michigan's state Constitution protected those pensions.
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CHRISTY MCDONALD, Detroit Public Television: It was.

But, Judy, he had to answer several legal questions before he could clear the way for Detroit's eligibility for Chapter 9.  One of those is, is the city insolvent?  And the judge found, yes, the city is insolvent.  It can't pay its debts.  And no one really argued that point there.  There is an $18 billion debt.

The other question he had to answer was, did the city negotiate in good faith with its creditors before they even filed for bankruptcy?  And while he chastised the city and said, you know what, the city really didn't negotiate in good faith, he moved to the next legal question was, did the city -- was it even possible for them to negotiate?

And he said it really wasn't, given the fact they had 100,000 creditors and an $18 billion debt.  And then the other question he had to answer was, was it constitutional to file for bankruptcy?  And, indeed, he said, yes, it was.

And, interestingly enough, the judge said that Detroit should have and could have filed for bankruptcy even years ago, given the financial situation it is in.

AMERICA - City of Detroit's Debt, Default?

"Painful Options Ahead:  Detroit to Default on $2.5 Billion Debt" PBS Newshour 6/14/2013

Excerpt

SUMMARY:  The city of Detroit is facing difficult decisions in the face of billions of dollars of debt.  Emergency manager Kevyn Orr laid out a last-ditch plan to 150 creditors to accept pennies on the dollar to keep the city running.  Some residents are skeptical of Orr's approach.  Ray Suarez talks to Matt Helms of the Detroit Free Press.

AMERICA - Detroit Under Fiscal Dictatorship

"Michigan Gov. Puts Detroit Under Emergency Fiscal Management" PBS Newshour 3/14/2013

Excerpt

MARGARET WARNER (Newshour):  It was once a bustling Midwestern city alive with people, the humming heart of the auto industry.  But Detroit today is just a shell of that, with widespread decay and population loss.  The 2010 census showed one person moved away from the city every 22 minutes in the last decade.

WOMAN:  It makes me sick.  I want to leave.  I wish I had somewhere else to go, because I would leave and never come back.

MARGARET WARNER:  Detroit is also the poorest major city in the U.S., running big annual deficits and $14 billion dollars in debt.  All of that led Michigan's Republican governor, Rick Snyder, today to declare a financial emergency and recommend the appointment of an emergency financial manager for the city, Kevyn Orr.

GOV. RICK SNYDER, R-Mich.:  And if you look at the history of the city, this is a problem that's been evolving for 50-plus years.  This is a problem that now has reached a true crisis point.

In many respects, it's a sad day, to say we have this day, but again I like to view it as a day of opportunity.  This is an opportunity for us to work together.

MICHIGAN - Giving Up on Democracy to Solve Detroit Fiscal Problem

"Detroit Faces State Takeover After Governor Declares Fiscal Emergency" PBS Newshour 3/1/2013

Excerpt

SUMMARY:  Gov. Rick Snyder of Michigan declared a state of fiscal emergency for Detroit, which is facing a deficit of more than $300 million and a possible state takeover.  To learn more about this move and why it has been years in the making, Judy Woodruff talks with Christy MacDonald from Detroit Public Television.

JUDY WOODRUFF (Newshour):  And it turns out local governments in the U.S. are facing their own budget woes.  One in especially big trouble is Detroit.

The city faces a budget deficit of more than $300 million dollars, and has lost a quarter-million residents in the past decade.  Today, Michigan's governor, Rick Snyder, announced plans to appoint an emergency manager to oversee the city's finances and operations.  That would make it the largest U.S. city under state control.

Snyder spoke at a community forum today.

GOV. RICK SNYDER, R-Mich.:  It's time to say we should stop going downhill. It is time to say we need to start moving upward with the city of Detroit.

There have been many good people that have had many plans, many attempts to turn this around. They haven't worked.  The way I view it, today is a day to call all hands on deck, to say there's been too much fighting, too much blame, not enough resources, not enough people working together, to say, let's resolve these issues.

JUDY WOODRUFF:  Detroit's mayor, Dave Bing, said in a statement that he remains opposed to the move, but would look at all options.

The Rachel Maddow Show
MSNBC 3/1/2013

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SAN DIEGO - Public Funding of New Football Stadium

This article refers to candidates for Mayor.

"5 Things the Candidates Aren't Telling You About Football" by Scott Lewis, Voice of San Diego 9/5/2012

A pretty innocuous piece in U-T San Diego on Saturday got me fired up.

"DeMaio, Filner oppose public funds for a new stadium," is the headline.

In it, mayoral candidates Bob Filner and Carl DeMaio swear off public funding for a new Chargers stadium and the Chargers tactfully try to scold them for it.

It's not what the candidates for mayor are saying in the piece that got me. It's what they're not saying.

Let's take a look at five things they're not telling you.

I. That they're calling the Chargers' bluff: Both candidates have determined that there is no public appetite for a big taxpayer investment in a new stadium. I don't have any polling, but it makes sense. Even diehard Charger fans don't seem all that excited about plowing hundreds of millions of public dollars into a stadium while roads and neighborhoods crumble.

At the same time, the team says that it needs a new stadium and it reminds us that, every year, it has the option to leave.

There's currently no precedent for building an NFL stadium without public funding.

That means that telling the voters you are against public funding for a stadium is, to the Chargers, equivalent to telling the team to leave or shut up about it.

The two brash and outspoken candidates, however, are not willing to say that outright.

II. That this is a change for DeMaio: Not long ago, DeMaio, the staunch fiscal conservative, had one of the most liberal positions on public funding for a stadium. The city already loses $12 million or more every year maintaining Qualcomm Stadium for the Chargers. DeMaio was one — of many — who believed you could package that annual loss and turn it into a subsidy for a new stadium.

But at the last NBC televised debate, and here in the U-T, he's taken a much more direct stance: No city taxpayer dollars for a new stadium.

"I will not allow for a public subsidy for a new stadium. I do not believe it is necessary," he said at the NBC debate.

If anything, the city's financial health has improved since he had a more open view of a subsidy. So what changed? He's not saying.

III. That no alternative financing model exists: Both candidates seem to believe that it might be possible to build a stadium without public subsidies.

DeMaio is being more proactive about this, as he pushes a task force to find this public-private unicorn.

But his task force will find the same thing I did: Across the country, NFL stadiums are built according to a simple formula: An owner hints at, or threatens to leave. Fans clamor. Mayors capitulate. A tax increase, or bunch of them, is passed. A new stadium rises. The owner's equity in the team skyrockets.

Chargers special counsel Mark Fabiani regularly notes now (and did again in the U-T piece) that the average public subsidy for an NFL stadium makes up 65 percent of its cost.

Note the important feature there: A tax increase is passed.

Most other cities can pass tax increases much more easily to handle that. For instance, in conservative Texas, a city needs only get 50 percent of voters, plus one, to get a tax increase passed for a stadium. But in California, you need 66.7 percent of the vote. It's a much higher hurdle.

This is why we're trying to be so clever about how to finance new stadiums in San Diego and Los Angeles. The way most other cities do it is not available to us.

The candidates don't seem to want to embrace this reality. It'd be fine if they were painting a different picture. But simply saying you can build a stadium without a public subsidy right now is no better than saying you have a magic potion that cures baldness but don't know what's actually in the potion.

IV. Filner's stance obligates him to talk about big changes in cities' relationships to the NFL: When Bob Filner approached this discussion, he chose an innovative route. He turned the tables on the Chargers and owner Dean Spanos.

In other words, the Chargers want to force the city to make a decision: Invest in our football team or lose your football team.

Filner flipped it around, very cleverly, and said, essentially: OK, we'll invest in the team if you give us equity ownership in it. It's smart. It forces the Chargers to demand a handout instead. Do investors just hand their capital out? Only to nonprofits.

Unfortunately, no matter how attractive getting equity in the team would make the investment, the NFL doesn't allow cities or normal people to own parts of its teams.

So Filner's idea has evolved into a kind of revenue-sharing vision. City builds a stadium, somehow gets money back.

"What is the city getting back? If I’m going to invest a dollar and get back 10, yeah, I'm going to do it. I’m not going to give them a dollar," he told the U-T.

Sounds great, but he's not even trying to grapple with how hard this would be to pull off. He'd have to convince his buddies in Congress, for example, to push the NFL to stop excluding the public from owning shares of the teams lest they lose anti-trust benefits. Or he'd have to negotiate an unprecedented deal that would open the NFL's books and return the city a profit.

If he's not thinking along those lines, then he's just spouting off.

Will he at least hint at how he can pull such a feat off?

V. That a stadium is a luxury. Buy it if you want it: At the end of the day, a stadium and an NFL team are luxuries for a metropolis. The way the game is rigged, you have to pay to enjoy the luxury (and even if you pay, they'll black out the games sometimes).

I'm giving up hope that the NFL will ever stop depending on government and raise capital for their facilities the way capitalists do: by selling shares.

Let's leave it on an optimistic note, though.

Perhaps California will be the NFL's wake-up call. Maybe it will realize it can't build stadiums here because the broke cities just can't hand them fat checks anymore.

And maybe that will force the NFL to consider some big reforms that give cities better deals. And then, maybe, that will encourage other cities to demand better deals.

The fact is, the rules in this game need to change.

They won't, though, as long as we don't talk about them.

COMMENT: As a San Diegan, especially after the economic boost building the 'new' baseball stadium downtown gave us, I vote for having a new football (Charger) stadium, tax issue aside. Also we DO need a new football stadium, the present venue is much too old.

Although having our city being able to buy shares would be better, but that's in the hands of the NFL and lawyers, therefore does not address the issue today.

CALIFORNIA - City of Stockton Debt Impact

"We Built This City on Debt 'n' Entitlements: Stockton Faces Bankruptcy Threat" PBS Newshour 3/16/2012

Excerpt

JEFFREY BROWN (Newshour): And we turn to a major city in California once riding high in the boom years, now on the verge of bankruptcy, and joining other cities around the country forced to make serious cuts to stay afloat.

NewsHour correspondent Spencer Michels reports.

SPENCER MICHELS: The police department in Stockton, Calif., is getting a new chief, the fifth one in the last eight years. They retired, often early, with generous pensions, one reason, but certainly not the only one, that the city is in dire financial shape.

Stockton, 100 miles east of San Francisco in the agricultural Central Valley, is teetering on the brink of bankruptcy. If that happens, this city of 300,000 would be the nation's largest bankrupt city. Increasingly, cities across the nation are in crisis because of pensions, health care costs, and overspending, all aggravated by the recession.

To prevent bankruptcy, Stockton officials have been slashing the budget. The police have taken the biggest hits. Through cuts and retirements, the force is down 27 percent since 2008. And that has had a big impact, according to public information officer Pete Smith.

COMMENT: Reminder to everyone, including the citizens of Stockton, the "market" (aka Wall Street and everything based on it) is nothing more than our nation's biggest gambling casino. And as any professional gambler will tell you, don't bet what you cannot afford to lose.

AMERICA - State Takeover Coming for City of Detroit?

"With Detroit on Brink of Financial Disaster, State Steps In" PBS Newshour 12/6/2011

Excerpt

JUDY WOODRUFF (Newshour): Now: Detroit's budget crisis.

The Motor City is on track to run out of cash in four months. Today, the Michigan state government began a 30-day review of the city's troubled finances, a move that could lead to a state takeover.

Special correspondent Desiree Cooper of Detroit Public TV has the story.