Think Motown is the only major U.S. city in a boatload of financial trouble? Think again. By Stephen Moore
“Detroit’s bankruptcy filing sent shivers down the spine of municipal bondholders, government employees, and big-city urban residents all over the country. That’s because many of the 61 largest U.S. cities are plagued with the same kinds of retirement legacy costs that sent Detroit into Chapter 9 bankruptcy this summer.
These cities have amassed $118 billion in unfunded healthcare liabilities. These are legal promises to pay healthcare benefits to municipal workers beyond the employee contributions to finance those funds. This is a giant fiscal sink hole — and because of defined benefit plans, the hole keeps getting deeper.
Detroit may be the largest city in American history to go bankrupt, but it is not alone. The city raced to the financial insolvency finish line before anyone else in its class.
Keep an eye on “too big to fail” cities like Chicago, Philadelphia, and New York.
According to an analysis by the Manhattan Institute, several Chicago pension funds are in worse financial shape than the worker pensions in Detroit. One is only 25 percent funded, and where the other 75 percent of the money will come from is anyone’s guess. And there are about a dozen major California cities having systemic problems paying their bills.
Here is my worry list, based on bond ratings and other data, of the top 20 cities to watch for financial troubles in the wake of the Detroit story:
1. Compton, CA
Compton has teetered on the brink of bankruptcy after it accrued a general-fund deficit of more than $40 million by borrowing from other funds, depleting what had been a $22 million reserve.
2. East Greenbush, NY
A New York state audit concluded that years of fiscal mismanagement — including questionable employment contracts and illegal payments to town officials — left East Greenbush more than $2 million in debt.
3. Fresno, CA
Fresno had the ratings of its lease-revenue bonds downgraded to junk-level by Moody’s, which also downgraded its convention center and pension obligation bonds due to the city’s “exceedingly weak financial position.”
4. Gulf County, FL
Fitch Ratings warned that Gulf County’s predominately rural economy is “narrowly focused,” with income levels one-quarter below national averages and economic indicators for the county also comparing unfavorably to national averages.
5. Harrisburg, PA
Harrisburg is at least $345 million in debt, thanks largely to municipal bonds it guaranteed in order to finance upgrades to its problematic waste-to-energy trash incinerator.
6. Irvington, NJ
Irvington has a violent crime rate six times higher than New Jersey’s average, with Moody’s citing “wealth indicators below state and national averages and tax-base and population declines due to increased tax appeals and foreclosures.”
7. Jefferson County, AL
Jefferson County, home to the city of Birmingham, has been dealing with the collapse of refinancing for a sewer bond. It filed for bankruptcy protection in 2011 over a $3.14 billion sewer bond debt.
8. Menasha, WI
Menasha defaulted on bonds in 2007 it had issued to fund a steam plant which has since closed and left the city permanently in the red and, as of 2011, had $16 million in general fund revenue, but had $43.4 million in outstanding debt.
9. Newburgh, NY
Newburgh was cited by Moody’s for “tax base erosion and a weak socioeconomic profile,” with 26 percent of its population below the poverty line and its school district facing a $2 million budget gap.
10. Oakland, CA
Oakland is trying to get out of a Goldman Sachs-brokered interest rate swap that is costing it $4 million a year. According to a recent city audit, Oakland has lost $250 million from a 1997 pension obligation bond sale and subsequent investment strategy.
11. Philadelphia School District, PA
Philadelphia’s school district, the nation’s eighth-largest, faces a $304 million deficit in its $2.35 billion budget, and is seeking $133 million from labor-contract savings to prevent further cutbacks.
12. Pontiac, MI
Pontiac, where the emergency manager has restructured the city’s finances, was downgraded by Moody’s, reflecting the city’s history of fiscal distress and narrow liquidity.
13. Providence, RI
Providence, rumored to be filing for bankruptcy for more than a year, experienced consecutive deficits through fiscal 2012, has a high-debt burden and significant unfunded pension liabilities, as well as high unemployment and low income levels.
14. Riverdale, IL
The credit rating for Riverdale is under review by Moody’s because the city has not released an audit of interim or unaudited data for the year that ended April 30, 2012.
15. Salem, NJ
Salem is under close fiscal supervision after it issued bonds to finance the construction of the Finlaw State Office Building, which was delayed by construction issues, and its leasing revenues are not enough to cover the debt payments and the maintenance fees.
16. Strafford County, NH
Strafford County regularly borrows money to cover its short-term cash needs after it spent two-fifths of its budget on a nursing home, which lost $36 million from 2004 to 2009.
18. Vadnais Heights, MN
The Minneapolis suburb of Vadnais Heights had its debt rating downgraded to junk last fall by Moody’s after the city council voted to stop payments to a sports center financed by bonds.
19. Wenatchee, WA
Wenatchee defaulted on $42 million in debt associated with the Town Toyota Center, a multipurpose arena, and has ongoing financial issues due to the default.
20. Woonsocket, RI
Woonsocket faces near-term liquidity shortages necessitating an advance in state aid, a high-debt burden and unfunded pension liabilities, with Moody’s citing the city’s continuing difficulties in making spending cuts because of poor management and imprecise accounting.
The stock market rally in the first half of 2013 has helped many of these cities as they invest pension contributions and get higher returns. But another market downturn could send these teetering cities back into the red.
And the states can’t bail them out because Illinois, California, New York, and Pennsylvania face their own money challenges. [Read more]
Some cities are not sitting around waiting for the next shoe to drop or rolling over and giving up their territory to the banks.
Yahoo! Finance By Wallace Turbeville
The city of Richmond, California, has taken bold action to pull the community out of the depths of the residential real estate crisis. Its approach — using eminent domain to forestall foreclosures — promises relief for Richmond homeowners. But it also is a template for cities across the land suffering from their own fiscal crises and facing bankruptcy.
Like so many other cities, the plunge in real estate prices that triggered the Great Recession desperately wounded the community of Richmond. Many homes carry mortgage principal exceeding the market value of the property. The obvious solution would be to write down the mortgage balances to re-align with the new market. That’s what the mortgages are actually worth anyway and it has been shown many times that such a reasonable approach is best for both the homeowner and the lender.
The problem is that it is often hard to identify an actual lender to negotiate with, given the way that mortgages were chopped up and bundled during boom times. Using eminent domain to refinance cuts through this problem.
A workable solution
A number of cities have considered the use of eminent domain. In addition to helping their citizens who were injured by the crash, the cities understand that devastated home prices undermine the financial integrity of the governments. A 2012 study by the New York Fed details how distressed properties distort the tax revenues of cities and states. It turns out that indirect damage to sales and income tax revenues is even larger than the losses in property taxes, at least initially. Property tax losses are delayed as reassessment takes time and some cities increase tax rates to compensate lowered values. But it works the same way during a recovery. The effects will linger for years in some places.
A federal initiative would make sense, but the political will is not there. The effects of the real estate bubble burst vary dramatically from one location to another. It is at the state and local level that the political motivation is at its highest. It is perfectly sensible that cities and counties take the initiative if the federal government does not.
What about investors?
The Richmond approach has driven the securitization industry into a frenzy. Other local governments that have considered the use of eminent domain have pulled back for fear that the costs of threatened litigation would be too great to bear. It does not matter to Wall Street that the investors were ready to take on the risk of early fair market value payout as a result of fire, flood, individual default or more conventional eminent domain. According to the banks, systematic taking of mortgages at fair market value to save communities from the general real estate re-alignment was just not part of the deal. [DC Ed. "Oh, TFB"]
Of course, it was part of the deal. Perhaps the bankers failed to anticipate the possibility and disclose it to the investors. If so, it would be just one of the things they failed to anticipate and disclose. It is not that eminent domain was not part of the deal; it was that the potential for a real estate price crash, and a response such as Richmond’s, was ignored. Richmond’s approach will not kill the securitization market if the crash itself did not.
Key to recovery
Healing the cities is essential to the recovery of the health of the economy and addressing the mortgage overhang is at its core. We have recently seen Detroit file for bankruptcy, and three cities in California did the same last year. There are those who want to make these bankruptcies, and those which will happen in the coming months, into an attack on public employees and their unions.
They will focus the conversation on unfunded pension obligations and the tradeoff between the need to fund future retirement and health care costs and the need to satisfy the holders of municipal bonds. But that serves political interests, especially in a place like Michigan.
Just as redistricting and gerrymandering are battles between urban ex-urban political interests, the devastation of cities from the Great Recession provides an opportunity to realign political power. The eminent domain procedure addresses the real problem, fixing the local economy, and should be the way forward. [Read more]
Wallace Turbeville is a senior fellow at the public policy organization Demos working on financial reform.