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Appearing Sunday on CBS’ “Face the Nation,” Snyder told host Bob Schieffer that the state cannot bail out Detroit, which became the largest municipal bankruptcy in U.S. history last Thursday. But the governor added that the bankruptcy has been “60 years in the making,” adding that bondholders are “going to be part of this process.” “And realistically, if you step back, if you were lending to the city of Detroit in the last few years, didn’t you understand there were major issues and problems?” Snyder said. “Look at the yields they’re obtaining compared to other bonds. They were getting a premium….Basically, Detroit hasn’t had a positive fund balance since 2004 in its general fund. 2004. So this isn’t a recent concern.”
Unlimited tax general obligation municipal bonds (ULTGO) have long been considered good investments because of their tax-free status and the fact that they are secured by a jurisdiction’s pledge to raise taxes as high as necessary to pay off investors. However, Kevyn Orr, hired in March as emergency manager to restructure Detroit’s $18.5 billion debt (half of which is for pension obligations), has proposed paying General Obligation bond holders less than 20 cents on the dollar.
Credit rating agencies Fitch, Moody’s and Standard and Poor’s have all said they will review their recommendations if the bankruptcy judge allows Detroit to treat municipal bondholders the same as unsecured creditors. In June, Detroit’s general obligation bonds were downgraded to junk status in anticipation of the bankruptcy filing. In a statement released last Friday, Fitch noted that “there has been little precedent for the classification of ULTGOs as general unsecured debt and the bankruptcy court’s treatment of this issue will inform future credit analysis of ULTGO.”
So the fallout from the Detroit bankruptcy could be felt nationwide as investors reevaluate the risks and rewards of purchasing municipal bonds. “If the unlimited tax GO bonds are not paid in full, and instead treated similarly to creditors that we feel have less security, such as pensions and healthcare benefits, then we have to re-evaluate that tax pledge.” Fitch analyst Amy Laskey told the Financial Times.
- See more at: Gov. Rick Snyder: Bondholders Should Have Seen Detroit's Bankruptcy Coming | CNS News
“I don’t want to make this a black and white issue. It’s a financial issue, and it’s green. We’ve got to get some funding that’s necessary to help us fix our problem right now. I don’t want to stir the pot and bring up all kinds of racial issues. We’ve got to get beyond that,” Bing said on ABC’s “This Week with George Stephanopolous.” On Thursday, Detroit became the largest U.S. city to file for bankruptcy with what is believed to be a $380 million budget deficit. State-appointed emergency manager Kevyn Orr asked a federal judge for permission to place the city into Chapter 9 bankruptcy protection.
“Over the last 50 years Detroit has gone from more than 80 percent white to more than 80 percent black city, and Keith Richburg, an African-American reporter for the Washington Post points out that Detroit is one of the most racially polarized cities in America, and he adds this,” Stephanopolous said. “He says, ‘Older Detroiters are correct that the city was surrounded by a ring of often hostile white suburbs, in a largely conservative state that had little time for poor, destitute Democratic and black city … The governor’s appointment of an emergency financial manager … is again seen as a hostile, racist takeover by the state over the city’s elected black leadership.’ How do you respond to that?” Stephanopolous asked Bing.
“I don’t want to make this a black and white issue. It’s a financial issue, and it’s green. We’ve got to get some funding that’s necessary to help us fix our problem right now. I don’t want to stir the pot and bring up all kinds of racial issues. We’ve got to get beyond that,” Bing replied. “The polarization between our city and our suburbs is something that’s been going on for the last 60 years. We’ve got to change it,” he added. Bing said Detroit’s troubles would affect the surrounding suburbs as well. "Once again if Detroit fails, doesn’t make it, then all of these surrounding suburbs are going to feel the brunt of it also. So it behooves us to see how we can work together to make this entire southeastern region livable for all of us,” he said.
- See more at: Detroit Mayor on City?s Financial Woes: Not a Black and White Issue | CNS News
Pension benefits are likely to be cut drastically if a federal court approves action for Chapter Nine bankruptcy for the city. When a company goes bankrupt in the United States workers' pension benefits are often saved because premiums had been taken out with the Pension Benefit Guaranty Corporation, a federal government entity.
The same scheme is yet to be extended to municipal and state governments.
While the Detroit pension is mainly the traditional defined-benefit pension plan, which has remained dominant in America's public sector, the city is essentially insolvent, which means public retirees are not likely to have their pensions paid in full.
Up until now, defined benefit pensions have been regarded as an efficient tool for recruiting and retaining public workers. However there has been a groundswell against some state governments which have been warned by tax payers that officials are wasting taxpayer money by maintaining defined benefits instead of the introducing newer pension models.
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