Michigan’s pension problem

Moody’s Investors has been on a ratings downgrade rampage for Michigan’s school districts. Here is its explanation from the new sector comment report:

A majority of Michigan school districts have realized declines in enrollment over the past decade. Of the 549 public school districts in the state, 425 lost students from 2004 through 2012, with total statewide school enrollment (excluding charter schools) falling by 13.2 percent.

Demographic shifts like the one occurring in Detroit are devastating to municipal budgets. Typically fewer taxpayers have to carry a greater share of the costs of a municipal infrastructure, which rarely shrinks in proportion with population loss. But Michigan has another substantial problem: Its charter schools. From Moody’s again:

Beyond these statewide population trends, the increasing presence of charter schools in Michigan is also hurting traditional public school enrollment. Both the share of students enrolled in charter schools and the number of charter schools operating in Michigan have grown steadily in recent years.

How many charter school students are in Michigan?

Enrollment in charter schools increased more than 60 percent from 2004 through 2012 as the number of charter schools grew from 199 to 256. This brisk pace of expansion does not appear to be easing, with charter schools increasing in number by another 8 percent to 277 in the 2012-13 school year and again by 8 percent to 298 in the current 2013-14 school year.

Michigan excludes police and fire unions from “right to work”

Lansing, Michigan is aflame with the anger of union workers who object to how state officials have rammed “right-to-work” legislation through the state house. “Right-to-work” would end the requirement that workers join a union in their workplace if it is unionized. Union workers are especially incensed that the legislation was pushed through during a lame duck session without hearings or debate. The Detroit Free Press reports:

[State Rep. David Rutledge, (D-Ypsilanti)] and many other House Dems decried the manner in which the bills were introduced and passed with no committee hearings or public debate.

“For such a significant policy change that will have lasting repercussions to be taken up with no meaningful debate is absolutely shameful,” said state Rep. Woodrow Stanley, (D-Flint).

Detroit’s fiscal situation gets hotter

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.

Detroit’s derivatives slip through the net

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….

Bloomberg op-ed swings and misses on Detroit

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):

Michigan’s unemployment insurance bonds

Michigan called on Citibank to help repay about $3 billion the state owed to the federal government for expenses racked up during the deepest part of the recession. Like many states, Michigan had to manage soaring unemployment insurance costs and borrowed from the feds to help workers who had lost their jobs. Washington had given these loans on very advantageous terms, but like a teaser rate for a credit card, those are expiring and interest costs will soon jump for borrowers. So Michigan, like Texas and Idaho, has refinanced these payments.

Michigan’s new UI bonds, underwritten by Citibank, use some of muniland’s favorite structures with a few twists. The bonds are “variable rate demand revenue” bonds, which are cousin to the the more commonly known “variable rate demand obligation” bonds (VRDO).

The “variable rate” part of  ”variable rate demand revenue” bonds refers to the interest rate which is reset weekly through a remarketing process. Although these UI bonds are issued for a two-year maturity the weekly resetting allows the borrower to a pay much lower interest rate. The structure also allows the bond’s owner to put the bond back to the “remarketing agent” at the weekly auction.

Muni sweeps: Grand Rapids singing her song

A post-Memorial day salute to all who have served our nation!

Grand Rapids shakes her booty

In Michigan, the decline of the U.S. auto industry has shrunk many cities. In January Newsweek highlighted the decline of American cities and identified Grand Rapids as a city on a downward spiral. Grand Rapids has fought back, producing the video above to show the vitality of their city. Good on you Grand Rapids. Your sense of caring and community shines through. (H/T

San Jose goes the restructuring route

Bloomberg writes about the city of San Jose’s plans to restructure $550 million in short-term debt. With long-term rates fairly low, it could be an excellent strategy for municipal entities to refinance short-term variable-rate debt into fixed, long-term paper:

San Jose, California, the 10th- largest U.S. city by population, plans to restructure as much as $550 million in airport debt this year as it weighs whether to declare a state of fiscal emergency, municipal officials said.

Let’s stack the deck

Deficits at state-pension funds are the real monsters threatening municipal stability. Estimates of shortfalls at these funds range from $1 trillion from the Pew Center on the States to $3 trillion from Orin Kramer, the former chairman of New Jersey’s State Investment Council.

There are numerous strategies that individual pension-plan sponsors are using to stabilize their funds, including:

    Reducing benefits Increasing employee contributions Making additional public contributions to “top up” the fund Trying to increase returns for the fundby increasing investment risk Changing to a defined contribution plans

The excellent graphic above, provided by the Pew Center on the States, shows how many states are adopting the first and second strategies listed above. The upside of these methods is they stabilize fund assets immediately.

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