MuniLand

A stronghold of America’s establishment may be about to be toppled. The world’s largest Masonic Temple in Detroit will be foreclosed for unpaid taxes. The bones of twentieth-century America are withering away. Detroit’s WXYZ reports:

It’s a nationally registered historic landmark built in the 1920s.

It’s a symbol of art, culture and grandeur.

And according to county tax documents; it’s in foreclosure.

Wayne County says the owners of the Masonic Temple have forfeited their right to the Detroit building because of more than $150,000 in back taxes.

The Masons once represented one of the strongest fraternal organizations in America. Their “lodges” or “temples” are found across the states as relics of a once strong national organization. In many ways, the decline and abandonment of these edifices is a mirror-image of the decline of American manufacturing. Detroit, once the wealthiest city in America, had both the largest and grandest Masonic Temple and manufacturing base. Now both have crumbled to ruins.

Recent commentary from the GW Bush Institute talks about Detroit’s decline:

Detroit has demonstrated that a city can go backward, passing its ‘take-off’ stage and thus presenting the phenomenon of what might be called ‘de-development.’ It may just be possible that a city’s economy can fail so badly it might be said to be crossing the ‘turn-off’ barrier, a point of no return. With a shrinking population, no capacity to generate tax revenue, and no new businesses of scale that would provide a consequential number of new jobs, the city might just find itself in a place from which there can be no self-generated recovery.

Detroit is just one of many U.S. cities in this situation:

Detroit is not alone in this process of reverse growth. There are at least 25 cities in the U.S., including Buffalo, Gary, and Hartford, where indigenous economies have shown no capacity to expand for over five decades. In the 1960 census, each was counted among our 100 most populous cities. Today, each of these cities has conditions similar to those of Detroit, albeit smaller in scale, but with equally devastating impact.

You have seen the headlines from Detroit; how Michigan Governor Rick Snyder appointed an emergency manager, Kevin Orr, to take over the functional management of the city, how the water and sewer system is moving to a regional rather than municipal system and how 6,700 abandoned homes have been demolished. Big things are happening in the Motor City.

My attention was recently caught by a small story in the Detroit News that talked about efforts by the city’s emergency medical services to examine how their services are being used. Aside from education, EMS is one of the most expensive services that municipalities provide to citizens. In the case of Detroit, some citizens were under the impression that the EMS was some sort of a concierge service. From the Detroit News:

“A lot of times they’ll call the 911 system because they don’t know who else to call,” Detroit EMS Lt. Anthony Wade said. “They’ll say, ‘I’m sick, and I can’t see my doctor this week, so I’ll just call 911 to take me to the hospital.’”

Political moves have drawn some financial data to the surface about Detroit as the city’s long spiral downward continues. Detroit’s Financial Review Team, appointed by Michigan Governor Rick Snyder, filed its report after a study of the ailing city’s finances.

The review team essentially gave the city an “F” and pointed to multiple instances where actual spending did not match budgeted spending (see Table 3 in the Report). Part of this is because Detroit public officials had very little control of the budget process and the city has substantial deficits and declining revenues. However, one bright spot in the numbers is how city’s expenditures have been declining. You can see this in the chart below:

These numbers don’t look like the city has problems, but they also don’t tell the entire story. There are other expenses that have created deficits. There have been bond offerings to fill the deficits, which have increased annual debt service to about $150 million per year. But operationally a lot of credit must be given to Detroit Mayor Dave Bing for tightening the fiscal ship.

There are two sides to the story of Detroit.

One is the political and civic story of how the mayor and city council will manage the multi-year process of shrinking the city government to fit a population of 700,000. At its peak in 1950, Detroit had about 1.8 million citizens. The Motor City has undergone a 60 year contraction in population, and now the city’s geographic and infrastructure footprints need to shrink to survive.

The Detroit News transcribed Mayor Dave Bing’s interview with CNN (embedded above):

Bing said he took the job to “make the hard decisions so this city would have a future.” But the toughest part of the job is “managing expectations,” the mayor said.

It was just six weeks ago that I wrote: ”Detroit is standing on the precipice of fiscal collapse.” Now, however, I may nominate Detroit as the turnaround story of the year. Make no mistake, hard times lie ahead for the Motor City, but it has since stepped back from its own fiscal cliff.

Mayor Dave Bing, the new city program manager and the city’s chief financial officer are using the powers granted to them under the consent agreement with the state to make big changes. Under the direction of the financial advisory board, which was also put in place under the consent agreement, the mayor used his new authority to cut the pay of city workers in 40 unions by 10 percent and make other changes to labor agreements:

[Mayor] Bing has said the changes are needed in order to make the city fiscally solvent. Among the changes: a 10-percent wage reduction, the elimination of longevity pay for longtime employees and increased co-pays on health care, to 20 percent from 10 percent on some plans. Other so-called work rule changes include using civilians in positions currently held by police officers.

Detroit is standing on the precipice of fiscal collapse. The Detroit Free Press reported on Friday:

The city of Detroit will run out of cash a week from today if a lawsuit challenging the validity of a consent agreement is not withdrawn, city officials said this morning.

Jack Martin, the city’s new chief financial officer, said the city will be broke by June 15, but it should be able to make payroll for its employees. He said the city will be operating in a deficit situation if the state withholds payments on a portion of the $80 million in bond money needed to help keep the city afloat.

If you were thinking of buying some of the city of Detroit’s bonds, you might want to tread lightly. Although the city was able to come to terms with the state and avoid the appointment of an emergency manager, it still faces enormous challenges. The biggest threat to Detroit’s fiscal stability is the risk that its derivatives counterparties will activate triggers in their interest rate swaps. If this happens, the counterparties will force a lump-sum payment, draining cash from an already shaky situation.

From the outside it’s difficult to know exactly what is happening in the city. A recent Moody’s report says that counterparties may have already activated these triggers, but it’s impossible to get any public information from the city. There is a big regulatory gap or loophole that shields Detroit from having to tell investors, or their citizens, the status of these derivatives contracts.

Here is how I described the situation facing Detroit on Mar. 24:

Detroit has about $3.8 billion in interest-rate swaps outstanding, according to its most recent public filing (CAFR of June 30, 2011, page 113). These Wall Street weapons of mass destruction were sold to the city in a series of transactions since 1997, allegedly to hedge interest-rate risk….

I was a little shocked to read a recent Bloomberg op-ed that eviscerated Detroit Mayor Dave Bing for his failure to agree to any real reforms, even as he petitioned Lansing for funds to avoid bankruptcy for the city. Written by Detroit resident Shikha Dalmia, a senior policy analyst at Reason Foundation, the op-ed basically implies that Mayor Bing doesn’t have the necessary skills or personality to engineer a soft landing for the city.

As I wrote last week, Detroit’s fiscal problems have been well chronicled in the media, but little attention has been paid to the underlying financial issues at stake. Dalmia fell straight into that trap and went for hyperbole rather than reason-based criticism. Her piece is full of errors and smells of condescension.

While you couldn’t tell it from Dalmia’s lede, which said that Bing and city leaders would rather drown than share fiscal oversight of their city, the mayor and city council have been hard at work trying to negotiate a way to share power with the state in a way that does not exclude local officials. Meanwhile, Michigan Governor Rick Snyder has been working to wrest full fiscal control away from Detroit (as reported in the Detroit News):

Detroit is increasingly in the news as the mayor tussles with the governor over who will control the restructuring of the city and its finances. The media are doing a good job reporting on the politics, but I thought a quick study guide to the city’s finances might be useful. The reference document is the 2011 Comprehensive Annual Financial Statement for the City of Detroit, filed at MSRB’s EMMA system. If you are familiar with reading a public company 10-K, the CAFR will feel very familiar. If you are considering buying any of the debt of Detroit, you should study this document.

Here’s the statement of the overall economic condition of the city:

Although the City’s current economic condition is poor, the future outlook for recovery and improvement is positive. The City in 2011 had an increase in the issuance of building permits for new construction. Quicken loans and Blue Cross Blue Shield transferred a total of 4,700 employees from suburban cities to the City of Detroit in 2011.

On the constitutionally imposed limit on the city’s debt (Page 29):

The City’s legal [general obligation] debt limitation at June 30, 2011 was $1.2 billion, of which $184.9 million is available for use.

The New York Times food writer, Mark Bittman, has written the loveliest piece about his visit to our nation’s most devastated urban area, Detroit. He says there are little seeds of hope and change growing there:

Imagine blocks that once boasted 30 houses, now with three; imagine hundreds of such blocks. Imagine the green space created by the city’s heartbreaking but intelligent policy of removing burnt-out or fallen-down houses.

Now look at the corner of one such street, where a young man who has used the city’s “adopt-a-lot” program (it costs nothing) to establish an orchard, a garden and a would-be community center on three lots, one with a standing house. (The land, like many of the gardens, belongs to the city and is “leased” for a year at a time. But no one seems especially concerned about the city repossessing.)