Federal Bailouts of Illinois and Detroit, Etc., Etc., Etc.

[johnkarls]

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Original proposed by johnkarls » Tue Jan 29, 2013 6:08 am -- 86 views before being transplanted here.

I propose that we study the pending bankruptcies of zillions of municipalities (and even several Blue States) because their pols have promised pensions to their public unions that can never be paid (except, perhaps, by the Federal Government if the credit markets have not already turned the U.S. into Greece!!!).

Even though there appear to be no decent books on the topic, as a result of which we will have to do our own research.

There are several sub-topics that should be studied in detail =

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First, what is the extent of the problem???

There are many news reports that say that the unfunded and unpayable pension liabilities of municipalities is in the tens of TRillions (if not hundreds of TRillions) of dollars!!!

We should sift through these reports to find the source documents and then assess the credibility of the studies reported in the source documents.

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Second, why do municipalities get a “free pass” under the Bankruptcy Law???

Bankruptcy is governed by Federal Law, specifically Title 11 of the US Code.

If homeowners in a geographical area formed a partnership to provide themselves with police and fire protection, public schools for their children, etc., all of the homeowners would be personally liable for the debts of the partnership, including unfunded pension liabilities.

Indeed, creditors such as their employees suing for their pensions, would be able to obtain in Federal Bankruptcy Court such remedies as attaching the salaries of all the residents, and liquidating their assets (INCLUDING THE FORECLOSURE OF THEIR HOMES subject to any so-called Homestead Exemptions) to pay the pensions.

This could, of course, turn the geographical area into a proverbial Ghost Town. Which Detroit, to a great extent, already is.

However, Chapter 9 of The Federal Bankruptcy Law comprises 20 provisions that change all this if the geographical area calls itself a “Municipality” rather than a partnership!!!

[It should be noted that technically, any city or municipality is a creation of one of the 50 states and is created by virtue of a charter (or whatever else the grant might be called in a particular state) from the state government -- which means, of course, that a city even the size of Chicago could have its charter revoked, in this case, by the State of Illiniois and overnight Chicago would cease to exist as a legally-incorporated city.]

It would appear that apologists for the provisions of Chapter 9 might claim that it is based on the English-American Common Law principle of Sovereign Immunity (i.e., the King cannot be sued, except to the extent he consents to being sued, which is why we have the Federal Tort Claims Act which represents, in one area of the law, the extent to which the Federal Government consents to being sued.).

However, for municipal employees, it would appear that the provisions of Chapter 9 are nothing more than a way to complete the fraud that has been perpetrated upon them by the pols who promised them pensions that could never be paid.

And state and federal employees may not be far behind as a practical matter, though the legal analysis would vary slightly.

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Third, what is the capacity, if any, of the Federal Government to Bail Out all the profligate state and local governments???

Even if the pols wanted the Federal Government to bail out the profligate (primarily Blue) states and their local governments, would the Federal Government have the financial capability for doing so???

And what if, for example, the Federal Government could only bail out the pensions for the employees of the profligate (primarily Blue) states and their local governments, by eliminating Social Security for the general population???

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11 USC Chapter 9 = ADJUSTMENT OF DEBTS OF A MUNICIPALITY

SUBCHAPTER I—GENERAL PROVISIONS (§§ 901–904)

· § 901. Applicability of other sections of this title
· § 902. Definitions for this chapter
· § 903. Reservation of State power to control municipalities
· § 904. Limitation on jurisdiction and powers of court

SUBCHAPTER II—ADMINISTRATION (§§ 921–930)

· § 921. Petition and proceedings relating to petition
· § 922. Automatic stay of enforcement of claims against the debtor
· § 923. Notice
· § 924. List of creditors
· § 925. Effect of list of claims
· § 926. Avoiding powers
· § 927. Limitation on recourse
· § 928. Post petition effect of security interest
· § 929. Municipal leases
· § 930. Dismissal

SUBCHAPTER III—THE PLAN (§§ 941–946)

· § 941. Filing of plan
· § 942. Modification of plan
· § 943. Confirmation
· § 944. Effect of confirmation
· § 945. Continuing jurisdiction and closing of the case
· § 946. Effect of exchange of securities before the date of the filing of the petition

[johnkarls]

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Originally posted by johnkarls » Tue Jan 29, 2013 6:09 am

CNBC.com – 1/28/2013
From Reuters – 1/28/2013

Stuck in Reverse, Detroit Edges Closer to Bankruptcy
By Dan Akerson (U.S.), Rick Snyder (Detroit)

At the Detroit Auto Show earlier this month, luxury was in the air. Pricey new Bentleys and Maseratis glittered -- including a Maserati 2014 Quattroporte with a $132,000 price tag; U.S. Cabinet Secretaries and dignitaries rubbed shoulders’ and many of the well-heeled attendees ponied up for a $300-a-ticket black-tie charity ball.

But in a city that is slowly dying, the glitz didn’t extend much beyond the Cobo Center exhibition hall.

General Motors and Chrysler, which along with Ford gave the Motor City its identity, survived near-death experiences after filing for bankruptcy during the financial crisis. Now, Detroit itself is edging closer to a similar precipice, only unlike the automakers, its chances of getting a federal bailout are almost nonexistent.

The story of Detroit’s decline is decades old: Its tax revenue and population have shrunk and labor costs have remained out of whack. But the city’s budget problems have deepened to such an extent that it could run out of cash in a matter of weeks or months and ultimately be forced into what would be the largest-ever Chapter 9 municipal bankruptcy filing in the United States.

Frustrated by the lack of concrete progress, Michigan Governor Rick Snyder, a Republican, last month appointed a team to scour the city’s books. The audit could result in a state takeover of Detroit’s finances through the appointment of an emergency financial manager. Such a manager, who would seize control of the city’s checkbook, could then propose federal bankruptcy court as the best option.

Snyder, who has called the situation “a crisis in terms of financial affairs,” said the team would deliver its report in February.

“Detroit is teetering on the verge of bankruptcy after the City Council has failed to make the necessary cuts to deal with having a smaller population,” said Rick Jones, chairman of the Republican majority caucus in the state Senate.

Jones, who has indicated he does not favor a bankruptcy, said he would like to see an emergency manager installed to fix the city’s problems. If that failed, there would be a case for finding a way to shrink the Detroit municipal area, he argued.

Detroit’s population is now just over 700,000 -- down 30 percent since 1990 -- but the city still has to provide services to an area encompassing more land than San Francisco, Boston and the borough of Manhattan.

While Democratic Mayor Dave Bing [Reading Editorial Note = Bing was an NBA all-star for 7 of his 10 season with the Detroit Pistons 1966-1975, being among the first NBA players to use the jump shot which, in his day, was considered indefensible!!!] and the Detroit City Council have moved to reduce spending and initiate some reforms to stave off a takeover, including layoffs and wage and benefit cuts, the progress may not be enough for Michigan officials and lawmakers.

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STREETS WITHOUT LIGHTS

In the booming post-Second World War era, Detroit was America’s fifth-largest city. Today it ranks 18th. In addition to a sharp population decline, it suffers from high unemployment related to a loss of businesses, a flood of home foreclosures and a cut in state funding. That has led to shriveling revenue, leaving the city unable to afford a workforce of more than 10,000 and the surging health and pension costs that go with them and with its retirees. As a result, credit ratings on Detroit’s approximately $8.2 billion of outstanding debt have sunk deeper into junk territory.

The city’s labor costs, including health care and pensions, are shrinking in absolute terms but rising as a share of the budget. They are slated to drop to $968 million, or nearly 49.5 percent of the operating budget. In the fiscal year ending June 30 versus $1.14 billion, or 45.5 percent, a hear earlier.

Signs of decline are everywhere -- in a rising crime rate, streets without lights and block after block of abandoned buildings. The murder rate of one per 1,719 people last year is more than 11 times the rate of New York City. The jobless rate is above 18 percent, more than twice [the] rate for the country as a whole.

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COLLISION COURSE

A bankruptcy would be messy.

The interests of creditors would likely collide with those of labor unions wanting to protect workers’ benefits, said Eric Scorsone, a Michigan State University economist who has written papers on municipal bankruptcy and on the state’s emergency manager laws.

“It is going to require the players -- the City Council, the mayor, the state -- to be on the same page. If you go into bankruptcy with a lot of conflict and dissent, it’s going to cost more,” said Scorsone.

It could also be racially explosive. Detroit has the largest percentage of black people of any U.S. city, with 83 percent of the population identifying themselves as African American, black or Negro, according to the 2010 U.S. census. Most of Michigan’s state government, including the governor’s office, is run by white Republicans.

Detroit Council Member JoAnn Watson, who along with two other members of the city’s all-black City Council has been resisting reform measures, said she is still hopeful OF A FEDERAL BAILOUT or an injection of state money that she claims the city is owed. [Emphasis added by Reading Liberally.]

Mayor Bing would not comment for this story.

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CONSEQUENCES, WHAT CONSEQUENCES?

The automakers have little to say publicly about the crisis. Most of their operations in Michigan are now outside Detroit, and getting any top executive to even discuss the possibility of a city bankruptcy was almost impossible at the auto show. “I don’t want to get into the politics,” said GM CEO Dan Akerson, while Chrysler CEO Sergio Marchionne said: “I don’t’ see what the consequences would be for us.”

One of the city’s biggest challenges is its complex set of labor agreements with a shopping 48 bargaining units that represent most of the city’s workforce.

Max Newman, a bankruptcy attorney at Michigan-based Butzel Long, said a Chapter 9 bankruptcy could help the city throw out its collective bargaining agreements with unions.

Costs would have to be tackled since Detroit cannot just jack up taxes to reduce the cumulative budget deficit, which grew to $326.6 million in fiscal 2012 from $196.6 in fiscal 2011. The state would likely resist tax increases, and they might only make matters worse anyway. “If taxes go up any further it would exacerbate the flight out of the city,” Newman said.

But for some of those who have seen Detroit struggle for years, bankruptcy is starting to look like the lease awful option -- even though it will be painful.

“I think…off and on, that it wouldn’t be a bad idea,” said former Ford chief financial officer Allan Gilmour, now the president of Detroit’s Wayne State University. “Let’s clean this out once and for all.”