My town has REAL troubles!

[DTEJD1997]

Hey all:

 

The other day I was flipping through the local free newspaper that gets delivered to every household once a week.

 

Inside was a small article about how my town has a pension and retirement benefits shortfall.  Those two combines liabilities is about $75mm.  That comes to about $2,400 for every resident of the town.  Most of that comes from Police & Fire, but also clerks & road workers & one other group.

 

City government wanted to put together an advisory board to deal with this.

 

The city manager was quoted as saying that the town ACTUALLY has an emergency, even though under MI law, it is not required to report it.  He further went to say that if the city sold all it's buildings, equipment, parks, roads, etc.  It could not even come close to closing the pension gap.  He further went on to say that unless things change, every PENNY of city tax revenue would be going to pay pension obligations in about 10 years.

 

I called up & spoke with the city manager for about 45 minutes.  The situation is pretty bad.  The city is going to try and negotiate with the unions on the pensions & benefits...but I don't see how things work out.  Property taxes for residences are at OR close to the maximum allowed.  Pensions are protected under the MI Constitution.  Health & other benefits are NOT...so there is some room to renegotiate there.

 

The expected rates of returns on the pension plans assets are 8%.

 

The expected rates of return on healthcare is 6.75%

 

I don't think those rates of returns will be realized in the long term.  There is another problem!  WHAT HAPPENS IF THE STOCK MARKET GOES DOWN?  What if there is a 20%+ correction?  Then the pensions & health care funds are that much further underwater.  Instead of CH. 9 bankruptcy, the city will be looking at "super duper bankruptcy".

 

The plan of the city is to try and trim a bit of workers & other expenses...rework some capital expenditures...but the city simply can't cut enough of the operating budget to shore up the shortfall.

 

There is talk of starting a city income tax...but that is HIGHLY frowned upon by residents.  MI is already a high tax environment.

 

The crazy thing is that my city is not as bad off as some other cities in the area.

 

In the end, the pensions & healthcare are going to HAVE be adjusted down.  Services will get cut a bit, taxes will rise.  The real problem though is if there is a market correction.

 

Most people simply don't know/realize how much they depend on market returns.

 

So the problem is pretty bad here in MI, but it is even worse in other states such as IL.

 

In a few years, this is going to be a MASSIVE problem all across the USA.

 

 

[rkbabang]

Yes, but when I say there has got to be a better way of doing things than through coercive government, which has no incentive to make any reasonable real world decisions, I am the crazy one.  This is what government does, it steals and it spends until it just can't steal and spend anymore.  Government creates no wealth, it can only take it from others.  So exactly like any other Ponzi scheme, when it can no longer continue it won't.

 

[LC]

Why are the implications if the city declares bankruptcy?

 

These poorly constructed pension plans are generally legacy problems from the days of old, but they are a real PIA. Look what happened to Chrysler.

 

If it were me, and the unions refused to logically negotiate and make concessions, declare bankruptcy and f*(@ em. 

[Spekulatius]

Why are the implications if the city declares bankruptcy?

 

These poorly constructed pension plans are generally legacy problems from the days of old, but they are a real PIA. Look what happened to Chrysler.

 

If it were me, and the unions refused to logically negotiate and make concessions, declare bankruptcy and f*(@ em.

Well, Detroit went through a bankruptcy in 2013, and the Pensions obligations took a much smaller haircut than other debt obligations. Buffet wrote about this and clearly stated that moving a company to location with a pension problem implies a liability for the company or their employees and needs to be considered. Buying a property or house in such a Location is pretty much the same.

[rb]

Even without the pension liabilities, why would anyone want to buy a house in Detroit? I think most people living there do so because they can't afford to leave.

[wachtwoord]

Buffet wrote about this and clearly stated that moving a company to location with a pension problem implies a liability for the company or their employees and needs to be considered. Buying a property or house in such a Location is pretty much the same.

 

This doesn't just hold true for cities and states but your chosen country of resident too (and in the case of US nationals whether or not you choose to revoke citizenship with their insane worldwide taxes on non-resident nationals).

[DTEJD1997]

Even without the pension liabilities, why would anyone want to buy a house in Detroit? I think most people living there do so because they can't afford to leave.

 

Strictly speaking, this is NOT Detroit, but a close in suburb.

 

Detroit is getting wild & woolly.  A section of the city that a few years ago had science fiction movies filming in (as the area looked like a dystopian nightmare) it, now has houses that are $300k or even $400k.  10 years ago, this neighborhood's property value truly would have been negligible. Now every neck bearded hipster wants in.  Heck, Ford Motor Company is spending something like $700mm on the abandoned train station!

 

As to why somebody would want to be here?  With all the problems comes opportunity for somebody who is sharp & willing to hustle.  Heck, I bought perfectly "functional" office buildings for $11-$12 a square foot.  Property can be cheap here, along with the cost of living.  Detroit & Michigan has electricity, interwebs, mail & package delivery, telephones (most of the time), partially paved roads, streets & highways, tasty food & such.  If you can make $40k a year, you'll have a good lifestyle.  If you make $100k a year, you are living large...If you are making $150k+ a year, it is "models & bottles".

 

There are plenty of stupid people here too unfortunately!

[SharperDingaan]

Why are the implications if the city declares bankruptcy?

 

These poorly constructed pension plans are generally legacy problems from the days of old, but they are a real PIA. Look what happened to Chrysler.

 

If it were me, and the unions refused to logically negotiate and make concessions, declare bankruptcy and f*(@ em.

Well, Detroit went through a bankruptcy in 2013, and the Pensions obligations took a much smaller haircut than other debt obligations. Buffet wrote about this and clearly stated that moving a company to location with a pension problem implies a liability for the company or their employees and needs to be considered. Buying a property or house in such a Location is pretty much the same.

 

The typical arrangement with these is that existing pension participants are protocted as as date X, and the plan closed to new participants. Go-forward inflation/cost-of-living adjustments then become zero until the plan becomes manageable again. Inflation, and early deaths essentially take care of the problem.

 

SD

 

[LC]

And that sounds like a decent compromise. The plans were poorly thought out and created in a time of extra-ordinary middle class growth, with no adjustment mechanisms. They are simply no longer sustainable, as Buffett pointed out in his letter to K Graham.

 

But the unions also need to respect the hand that feeds - and the temporary suffering of the entire community (ch9) is the price to let the inmates know they are not running the asylum.

[Castanza]

And this is why unions and pensions should not exist if they are representing/for employees who are being funded by tax dollars. At the very least they shouldn't be "guaranteed".....cough cough teachers I'm looking at you. Same goes for all the firefighters, police etc who run up their salary before they retiring. If pension contributions can't be met then that's on them. Save your own money. Live responsibly. Pay what you owe.

[rb]

Even without the pension liabilities, why would anyone want to buy a house in Detroit? I think most people living there do so because they can't afford to leave.

 

Strictly speaking, this is NOT Detroit, but a close in suburb.

 

Detroit is getting wild & woolly.  A section of the city that a few years ago had science fiction movies filming in (as the area looked like a dystopian nightmare) it, now has houses that are $300k or even $400k.  10 years ago, this neighborhood's property value truly would have been negligible. Now every neck bearded hipster wants in.  Heck, Ford Motor Company is spending something like $700mm on the abandoned train station!

 

As to why somebody would want to be here?  With all the problems comes opportunity for somebody who is sharp & willing to hustle.  Heck, I bought perfectly "functional" office buildings for $11-$12 a square foot.  Property can be cheap here, along with the cost of living.  Detroit & Michigan has electricity, interwebs, mail & package delivery, telephones (most of the time), partially paved roads, streets & highways, tasty food & such.  If you can make $40k a year, you'll have a good lifestyle.  If you make $100k a year, you are living large...If you are making $150k+ a year, it is "models & bottles".

 

There are plenty of stupid people here too unfortunately!

LOL! Maybe the hipsters will make Detroit great again. Then you won't have to worry about Detroit or your town covering their pension liabilities. Growth and revenue cure all ills. It could happen but somehow I doubt it.

[rb]

And this is why unions and pensions should not exist if they are representing/for employees who are being funded by tax dollars. At the very least they shouldn't be "guaranteed".....cough cough teachers I'm looking at you. Same goes for all the firefighters, police etc who run up their salary before they retiring. If pension contributions can't be met then that's on them. Save your own money. Live responsibly. Pay what you owe.

This is nonsense.

 

The reason why unfunded pension liabilities exist is because they weren't funded. Basically you've cut a deal (how much you'll pay) and then you didn't keep your end of the bargain (i.e. you didn't pay). The reason you didn't pay is because you we're selfish. You gave yourself a tax cut. Then in order to reneg you try to deflect and obfuscate. You get on your righteous horse and start bloviate: those damn pensioners, those damned unions, teachers... watch out. But really the reason why the situation exists is because you were a selfish deuce and you didn't pay what you owed.

 

Just in case it's not clear when I say "you" I don't refer to you personally, but to certain groups.

 

When you look at the private sector you have a similar situation where most of the pension plans are underfunded. The principle is the same. It's also greed. You've underfunded the pensions to show better financials. This in turn led to higher bonuses, and gains on stock options from higher valuations. However virtually all the companies that have unfunded pension plans for employees have fully funded pension plans for executives. Funny how that works no? GE is probably the worst private offender on pensions, but I know for a fact that in 2011 the executive pension plan at GE was overfunded. So workers and teachers should watch out but God forbid that Jack Welch should pay for light bulbs and toilet paper.

[scorpioncapital]

I guess the irony is the human nature can't even counter human nature by following a pension plan.

 

 

 

[rb]

Well it's human nature meets incentives right? Kinda what you'd expect when you put the fox in charge of the hen house. The unions may have negotiated the deals but they were not in charge of their pension funds. In the private sector where the executives are in charge of their pension plans the plans are fully funded. It's not rocket science lol.

 

Up here in Canada we have some unions that are in charge of their pension plans. Care to guess their funding status?

[Castanza]

And this is why unions and pensions should not exist if they are representing/for employees who are being funded by tax dollars. At the very least they shouldn't be "guaranteed".....cough cough teachers I'm looking at you. Same goes for all the firefighters, police etc who run up their salary before they retiring. If pension contributions can't be met then that's on them. Save your own money. Live responsibly. Pay what you owe.

This is nonsense.

 

The reason why unfunded pension liabilities exist is because they weren't funded. Basically you've cut a deal (how much you'll pay) and then you didn't keep your end of the bargain (i.e. you didn't pay). The reason you didn't pay is because you we're selfish. You gave yourself a tax cut. Then in order to reneg you try to deflect and obfuscate. You get on your righteous horse and start bloviate: those damn pensioners, those damned unions, teachers... watch out. But really the reason why the situation exists is because you were a selfish deuce and you didn't pay what you owed.

 

Just in case it's not clear when I say "you" I don't refer to you personally, but to certain groups.

 

When you look at the private sector you have a similar situation where most of the pension plans are underfunded. The principle is the same. It's also greed. You've underfunded the pensions to show better financials. This in turn led to higher bonuses, and gains on stock options from higher valuations. However virtually all the companies that have unfunded pension plans for employees have fully funded pension plans for executives. Funny how that works no? GE is probably the worst private offender on pensions, but I know for a fact that in 2011 the executive pension plan at GE was overfunded. So workers and teachers should watch out but God forbid that Jack Welch should pay for light bulbs and toilet paper.

 

I agree with what you say, the private sector certainly isn't void of these issues. I used to work for UPS and their pension situation is becoming a major issue quickly. The Teamsters Union is mostly to blame. I remember talking with a driver who was 63 (amazing he was still working). When they switched to the pension, whatever company it was pitched the idea that they would be making 11% returns on average......11%! Do pensions ever work out? Even pensions where people do pay fail.

 

As for the public sector my biggest gripe is that these are "guaranteed." For example in PA during the 2008 financial crisis lots of people hit hard times. The pension fund had a lot of issues following 2001 when state lawmakers increased benefits. Turns out 7 years later they started noticing this major issue that was looming. My issue with public sector pensions is its always raiding the taxpayers pocket to make up for the difference needed. It's difficult "increase" benefits when you have a projected model with a static sum but you need to apply that static sum of money to something that can change. As we've seen with healthcare, col, etc (not saying these are directly related to pensions). The public sector is riddled with these "adjustments." I believe it was in Illinois where teachers who retired were expected to receive a 46k a year pension. Turns out when you do the adjustments for COL and everything else they were getting over 70k a year. These pensions are riddled with all kinds of loop holes, issues, etc. It's unsustainable.

 

Again, I am not faulting individuals who retire with these pensions. Who wouldn't take advantage of they system? What they do (teachers, firefighters, police, etc etc....everyone but tax officials  ;) ) is overall good for the country. But the system needs changed. Why shouldn't they just receive a 401k like everyone else?

 

Makes you wonder after a while who the real "public servants" are.

[dwy000]

Not to turn this into a pension discussion but there are other issues contributing to underfunding that are not "greed" related.  Start with the fact that the average retirement has extended consider considerably since most of those plans were created and the actuarial requirements have led to increased funding need. Then add the perverse requirements that if you overfund you cant get the money back but if you inderfund you're still on the hook.  Why would anyone overpay into that kind of reality.  It's the primary reason we have switched nationwide from defined benefit to defined contribution.  It will take a long time to work thru.

[rkbabang]

It comes down to incentives.  City governments know that they can spend now and tax or issue bonds later to take care of pension liabilities.  And anyway the politicians that are in office now can do the spending and let someone else deal with the long run consequences.  As long as it isn't going to collapse during your tenure in office, the long run consequences will be someone else's problem.  This works year after year, decade after decade, ... until it doesn't.

 

[DTEJD1997]

Not to turn this into a pension discussion but there are other issues contributing to underfunding that are not "greed" related.  Start with the fact that the average retirement has extended consider considerably since most of those plans were created and the actuarial requirements have led to increased funding need. Then add the perverse requirements that if you overfund you cant get the money back but if you inderfund you're still on the hook.  Why would anyone overpay into that kind of reality.  It's the primary reason we have switched nationwide from defined benefit to defined contribution.  It will take a long time to work thru.

 

Yes, there are MANY factors that went into this pension problem.  A lot of them are "greed" related, but not all of them.

 

One of the problems is that people are living longer, ESPECIALLY if they have good health care.

Another problem has been the lowering of interest rates.  These pensions systems were set up in the 70's & 80's.  Interest rates on highly rated bonds were in the high single digits, NOW? Not so much.  Cash & short term investments also got some % return, a few percent.  NOW?  Less than 1%.  With low interest rates, pensions start to get a LOT more difficult.

 

Then you've got some structural problems where police & fire can retire after 20 years.  So then you get retirees in their 40's.  They may easily be "retired" for the next 40 years+

 

Then you've got borderline imbecile asset management firms managing the pensions and taking big kash money fees.

 

Then you've got market volatility....that hasn't helped either.

 

Then you've got the real estate problem...Houses in this particular little city STILL are not back to 2008 level prices.  They are getting close, but still not quite there. 

 

Then you've got commercial real estate problems!  I paid less for my office buildings in 2016 than when they sold in the late 60's!  50 years went by and they went DOWN in value!

 

Finally, you've got a demographics problem.  Over the last 50 years, this community has been "downwardly mobile".  It went from pretty much solid middle class to lower middle class.

 

I can't think of major trend that has helped this community, every thing went against it.

[Guest MarkS]

It comes down to incentives.  City governments know that they can spend now and tax or issue bonds later to take care of pension liabilities.  And anyway the politicians that are in office now can do the spending and let someone else deal with the long run consequences.  As long as it isn't going to collapse during your tenure in office, the long run consequences will be someone else's problem.  This works year after year, decade after decade, ... until it doesn't.

 

 

I would also add that unions like AFGE and the AFT have been traditional supporters of the Democratic Party and when democrats hold power they are often rewarded with lucrative pension provisions.

[DTEJD1997]

Hey all:

 

Another factor of pension problems is that in the 70's and 80's, municipal jobs were kind of seen like "make work" to counter the massive lay offs from heavy industry.  So local governments hired more workers than were actually needed in order to provide employment.

 

Not sure how big that factor is, but it is something.

[rkbabang]

Hey all:

 

Another factor of pension problems is that in the 70's and 80's, municipal jobs were kind of seen like "make work" to counter the massive lay offs from heavy industry.  So local governments hired more workers than were actually needed in order to provide employment.

 

Not sure how big that factor is, but it is something.

 

In a town in MA that I used to live in, someone discovered that this one guy who was on the town payroll as a full time employee for more than 20 years, had another full time job in the private sector the entire time and had never done anything at all for the town.  He had a full time salary, benefits, and pension and had never worked.  The funny part is that after it became public and they fired him, they wanted to replace him. There was an uproar in town, because if the job had never been done and no one had ever noticed, then why should he be replaced?  In the end the position was eliminated, but only because of the publicity.  Had it never been in the newspaper no one would ever have known or cared.

 

[DTEJD1997]

Hey all:

 

Here is another concrete example of how my town is in trouble!

 

I called on a very nice building for sale today.  It has been vacant and for sale for a long time.  It is for sale by owners.

 

The building is a 1 story brick building built in the very late 90's.  It is in very good condition, appearing to be VERY well built.  All brick of course.  Just over 6,000 sq. ft.  It sits back a bit from the road and is on a wooded lot that is a bit more than 1 acre.  It has 60 parking spots.  Extensive security cameras.  I think it is actually one of the nicer/newer buildings in my town.

 

The ASKING price is $300k.

 

Kind of expensive, but it is a newer and quality building.

 

One of the problems (and I suspect why they can't sell), is that the summer taxes are about $28K.  Summer taxes are the higher of the two taxes due per year.

 

The assessed value of the building is just over $700k.

 

The owner is contesting the taxes in a couple of weeks and he assured me that they would be lowered.

 

So the owner is simply stuck with the property...at least for now.  Very few people would buy a building and pay 10%+ property taxes (although I am one!).

 

Up until now, taxes have been paid at the "silly" rate.  In the future, they probably won't, at least not at the current rate!

 

The town is going to lose a chunk of their commercial property taxes, as owners fight to get a realistic taxation rate.  This will exacerbate the pension problem.

[shalab]

Looks like there is a revival in Detroit:

 

https://www.barrons.com/articles/detroit-economic-revival-51552076257?mod=hp_LEAD_2

 

Same going on in other rust best cities - e.g:, Buffalo, NY

 

https://www.goerie.com/entertainmentlife/20161225/buffalo-revival-spurs-revisits

 

Cleveland:

 

https://www.cleveland.com/business/2015/01/cleveland_is_enjoying_economic.html