Mendocino County Today: December 11, 2013
by AVA News Service, December 11, 2013
PUBLIC DEFENDER LINDA THOMPSON did not attend memorial services for long time public defenders Bert Schlosser and Tom Croak. Zero persons from Thompson's classy operation attended Croak's service, three deputy district attorneys turned out for Schlosser. The boss did not acknowledge either memorial nor did she send flowers or condolences to family members of the departed. Between them, Schlosser and Croak put in 50 years of honest defense work for people who ordinarily get short shrift, if they even get that.
BOTH SIDES to the ongoing pay dispute between SEIU and the County have bungled negotiations, which are now being mediated by the state. The mediation is non-binding and likely to limp along for some time because both sides to the dispute are intransigent. The union wants the County to restore the 10% pay cut that County employees, most of them anyway, had voluntarily, if reluctantly, accepted. But now that the County is claiming a $9 million budget surplus (most of it allocated to “reserves”), the union wants its members to get their 10% back. Both sides have regularly claimed the other has acted illegally. Negotiations are complicated by SEIU's leadership calling the shots for the union from its distant headquarters in the Bay Area, and making all kinds of stupidly fundamental errors as it goes along, while the County pays a lot of money for an outside attorney to represent its interests. Natch, the County's own lawyers can't handle this thing, and one wonders for the umpteenth time exactly what can the County Counsel's office do? So when the union says the County must have plenty of dough because it can afford a high-priced private attorney, the County can only bleat, “Yeah but we don't have enough to give our workers their money back.” The dispute is simple, but, as is the way in Mendo, unnecessarily complicated by people with nothing at stake — the County's highly paid leadership and its attorney on one side, the union's blustery, incompetent leadership on the other.
THREE UKIAH schools, all in the same South Dora neighborhood, went into lockdown mode Monday about 2pm when the Ukiah Police Department received report of a man with a rifle in a parking lot behind Saint Mary of the Angels School. Officers flooded the area in search of the alleged gunman, but found no sign of a person meeting the description of a white man, about 5'11'', dressed in a dark t-shirt and green pants.
EVERYBODY KNOWS that the Federal Reserve’s money-pumping operations have become a replacement for what used to be an economy. Therefore, no more money pumping = no more so-called economy. It’s that simple. But it doesn’t mean that the Federal Reserve won’t make a gesture and I wouldn’t be surprised if they try it during the season that Santa Claus hovers over the national consciousness — or what little of that remains when you subtract the methedrine, the Kanye downloads, the fear of an $11,000 bill for an emergency room visit requiring three stitches, and all the other epic distractions of our time. (— James Kunstler)
ANON'S ON-LINE WISDOM OF THE DAY: “It’s interesting how people’s perception pervade everything they do. I know people who seem to have everything going for them, yet don’t do any of the things they clearly could do to improve their situation. For some reason they don’t perceive that they have as many resources and options as they really do, and telling them so doesn’t help. It’s insanely frustrating to watch. I’ve had the good fortune to travel over the past few years. I love looking out of airplane windows at the landscape below, particularly the human landscape. Flying over China is different from flying over Europe, and both are very different from flying over the good ol’ USA. It’s obvious from 35,000 feet that America was founded by people who thought the world was infinite. Outside our urban centers, housing and roads “sprawl” for mile after mile. Along the Eastern seaboard, it’s impossible to tell where one “community” ends and the next one begins. The gigantic realms of subdivisions turn the whole landscape into not-quite-towns, where everyone has to drive a car to do the slightest errand, not to mention to go to work or to secure the means of basic sustenance. Over China, outside the major cities, one sees little villages surrounded by the fields where the inhabitants work. Three miles over is another little cluster of houses amid the fields. Those people don’t live lives I want to lead, but they live where they work and they really don’t need to go anyplace else. They wouldn’t have a need for a car. Europe isn’t quite the same, nor is Japan, from 35,000 feet. But they have set up their living arrangements in vastly more efficient ways than we Americans have. So, with humanity’s intractable foolishness, we have adopted the social and economic model developed to the highest degree in the USA. We use corporate finance capitalism, which depends at its core on infinite and expanding markets, resources, energy and money to function. At the root of the system is lending at interest, and the use of debt as money, and the use of money as a medium of exchange and a store of value, and also as a commodity in and of itself. Such a system has to expand infinitely or it will begin to consume itself, and collapse. Unfortunately, of these indispensable infinites, only money can be made infinite, and that only by making it abstract. The other factors remain finite. Once everyone who has the money to buy a refrigerator and a power source to plug it into has one, they’re out of the refrigerator market. Now we have to make inferior refrigerators so they burn out and consumers have to replace them. That sets off a self-consuming spiral too. The buyer has to find more money, the manufacturers have to use more resources, and everyone needs more energy. Making energy artificially cheap allows global labor arbitrage, to keep the cost of all these un-needed refrigerators within a range that people can actually accumulate enough money to pay. Anybody can see that this will fail. We’re currently at the stage of fiddling with every possible abstract element in the equation, to make it appear that the overall system still works. It doesn’t, though, and this will become increasingly and unavoidably obvious to all. Those most attached to the current system are those who have profited the most, and they will resist any modification no matter how obvious and necessary. The worst of all will be those who have never fully received the benefits they thought they had earned, and will destroy all efforts to bring in a more sensible and sustainable existence in their vain desperation to get what they feel they have paid for already. Once fraud becomes the only viable industrial enterprise, the end comes up quickly."
SIDELINE AT THE 'STICK
by Zack Anderson
Sunday an hour before kick-off, Niners vs Seattle, I’m on the sideline behind the Seahawk bench. A few players for both teams are on the field, running practice routes, playing soft toss, punting balls high into the ozone. The sideline is a beehive of camera crews, security guards uniformed and not, equipment managers checking tape, phone lines, and gatorade cups… Look, there’s Pam Oliver, Fox sideline reporter, hurrying by, all business, with a 100-yard stare in her eyes. “There’s a big time agent,” someone whispers. Then a few Seahawk legends from years gone by. A small roar from the gang of Seattle fans congregated near the front rows, like autograph seekers in a baseball bullpen. They cheer Seahawk coach and Redwood High (Marin) alum Pete Carroll, the anointed Moses who’ll lead Seattle to the Promised Land. Carroll also coached for the New England Patriots, a mostly unsuccessful stint. And, famously and more successfully, USC. Due to the lack of wins, and his laid-back, upbeat personality he was derided by the Boston press as “California Pete.” His Seattle fans are yelling, “Pete! Hey Pete, kick the Niners’ ass!”
Another local kid who made the big-time trots onto the grass to boos and cheers: it’s Marshawn Lynch, the Oakland native and former Cal star tailback known for his punishing running style. He looks like he’s carved from a solid piece of angry granite, thighs the size of Ionic columns, biceps like cannonballs. Known for going what he calls “beast mode,” Lynch attacks defenders with piston-like knees and straight-arms that any Golden Glover would be proud of. Beside him is a teammate back named Durbin, who somehow seems even bigger than Lynch.
One of our cheerful young female minders asks if we’re in a band, perhaps due to my cousin's red alligator shoes and my crimson combat boots. I admit that I’d rather be a player, but depending on the hours will consider rock star.
We are ushered back upstairs to the luxury box level, where waiters pass out trays of mini-burgers and thimbles of asparagus soup. I’m standing there alone, staring at the five Super Bowl trophies behind glass, when a friendly man sticks out his hand. It’s Hall of Famer Jimmy Johnson, one of my grandfather’s favorite players from the old Kezar days. Johnson played for 16 years in the NFL, mostly at cornerback but got snaps at safety and wide receiver. He has been called the greatest cornerback in history never to play in a Super Bowl. In his presence the clock rolls back and I’m eight years old again, listening to my grandfather talk about the rowdy drunk crowds at Kezar. Jimmy smiles and says yes, it’s all true. He tells me that when he joined the 49ers out of UCLA, 6’9” offensive lineman Bob “the Geek” St. Clair warned him that San Francisco’s home crowd was a rough bunch. He says there was a wire covering the players tunnel because the Niner fans would throw bottles, shoes, the occasional set of worn out dentures at both teams, depending on the outcome of the game. Kezar’s missile defense shield worked pretty well, Jimmy says, but didn’t stop beer, soda and the occasional mystery liquid that they hoped was only a new kind of motor oil.
One time Jimmy was walking to the parking lot after the game and St. Clair, who was called The Geek because he ate raw steak, was waylaid by a crew-cut goon of a Niner fan hopped up on the good stuff. The fan threw one haymaker, but St. Clair easily dodged it. Then the unhappy fan launched a left hook that missed by a mile. Finally, realizing that this guy wasn’t going away, Bob nailed his assailant straight on the button. One punch, another win. Jimmy says the guy falls to his knees, eyes rolling back, then tilts over to the side like a redwood. Timber!
Halfway through the first quarter we’re back on the field, this time near the SF bench. There’s Phil Dawson, the kicker, five feet from me. He’s in his own world, kicking footballs into the net over and over. No one talks to him. He doesn’t talk to anyone. I’m so close that I notice former linebacker Keena Turner looking at me, wondering who the hell let this guy on the field.
While I gawk at the players resting on the bench between possessions, the game is tense and brutal. After a vicious tackle a Niner defensive back stands over his downed prey, “Get up, bitch!” When the Seahawks score on a pass play, position coaches immediately start telling our players what they did wrong. Justin Smith takes off his helmet. His eyes are even wilder when you see him up close. Steam rises from his head. Aldon Smith, who might look a little spindly on TV, has arms like knotted pine. He is younger in person, still traces of a babyface. All-Pro linebackers Navorro Bowman and Patrick Willis crash around on every play like stampeding bull elephants.
Smith and Ahmad Brooks
The sound of the hitting is unbelievable. The screaming. The chaos. It’s like watching human lightning bolts careen off a stand of old growth fir — crack, boom, opera! Even Kaepernick’s passes whiz through the air with pace and venom. He fires a fastball to Crabtree on an out. The star receiver plucks what seems like a 90-mile an hour fastball out of the air as casually as a lovestruck poet gathers dandelions for his beloved. Crabtree only gets one foot down, but pass and catch? Only in the NFL.
Crabtree & Vernon Davis
I turn to look at the stands, which are a roiling ocean of bloodthirsty 49er Faithful. Their twisted faces reveal desperation, hope, a communal desire to beat back these foreign invaders and save our flag from barbarian darkness. Their faces remind me of me, and I don’t know how that makes me feel.
The rest of the game is a blur. Though I remember watching the Niner Nuggets spreading their special dipping sauce around, and wondering how they stay alive in the arctic chill. Then my curiosity is shattered by the sight of Jesse Sapulo, out of Hawaii, the former Niner guard from the Niner's glory years of the 1980's. I’m reminded of my grandfather, a fellow Aloha spirit who anchored Honolulu’s Punahou High line back in the days without facemasks or fade routes. Grandpa, look at this! Two of your grandsons are on the sidelines! The sidelines! Who’d have thought we’d make it this far.
CORRECTION: Back in June, the PACE was voted down 4-1 with only Gjerde in support back in June. In a petulant move, Supervisor Hamburg reversed himself after seeing that three of his fellow associates were going to vote no because of concerns about the affect PACE might have on residential home borrowing.
by John Pappa
A new report by Human Rights Watch titled "An Offer You Can't Refuse" revealed that only 3% of US drug defendants in federal cases chose to go to trial instead of pleading guilty in 2012. The report explains that the reason only 3% go to trial is because prosecutors warn defendants that if they refuse the plea and go to trial, they will be charged with a more serious crime and end up with a much longer sentence.
Prosecutors live and die for convictions and they use mandatory minimum sentencing as a prosecutorial tool to secure convictions and get people to plead guilty without getting their right to a fair trial.
People's fear of angering prosecutors by going to trial is real. The reports shows that defendants who choose to exercise their constitutional rights to go to trial routinely face sentences three times greater than the original plea deals. This is an astounding revelation.
I know the pressure to take a deal and the disastrous consequences of taking my case to trial. In 1985 I refused a plea deal of three years and end up being sentenced to 15 years to life under the mandatory provisions of New York's Rockefeller Drug Laws.
I was duped into delivering an envelope containing four ounces of cocaine for $500 by a bowling buddy. During the criminal proceedings the district attorney's office discovered I was not a drug dealer but nevertheless, they wanted to secure a conviction.
During the trial the assistant district attorney approached me and asked how old my daughter was. I told him she was seven years old. He told me if I chose to go to trial the next time I would see my daughter was when she was 22, take the plea offer of three years to life because you will never win. I was afraid of being away from my wife and daughter for three years. I refused the offer and a few days later I was convicted and sentenced to 15 years to life. I could not believe it.
Not taking the plea deal of three years to life was the biggest mistake of my life. Because I refused the offer I was sentenced to more than five times the amount of time I was offered in the plea bargain. During my years of imprisonment I tried to commit suicide, I was stuck with a knife, and I was beat down with a pipe.
But nothing hurt me more than my separation from my daughter, Stephanie. Her child-like innocence gave me the will to live when I wanted to die.
Although I tried to keep a relationship with her, she suffered greatly from my prison sentence. No child should have experienced the horrible conditions she had to go through, such as body searches, long waiting lines and abusive correction officers.
Little by little, her beautiful child-like demeanor disappeared, and was replaced with a sadness and depression generally seen in a much older person. By the time she was 12, she had become psychologically damaged, and so traumatized by the prison experience that she could no longer visit me.
From my relationship with my daughter I learned that prison did not end at the wall that separated me from society. It went far beyond it, reaching loved ones and friends of those incarcerated. When I refused the plea offer my life changed forever.
I commend Human Rights Watch for exposing how prosecutors get drug defendants to accept plea bargains by charging them with extraordinary long sentences under mandatory minimums. It is time to end harsh mandatory minimums that both destroy lives and make a mockery of our "justice" system.
COVERED CALIFORNIA, California's health insurance marketplace is up and running. Covered California is the only avenue for the federal premium assistance which makes health coverage more affordable for many. Also through Covered California, Californians can find out if they are eligible for low-cost or no-cost Medi-Cal, which can make the difference between coverage or no coverage for many. This holiday season, Covered California encourages you and yours to share the gift of well-being and peace of mind. With family coming home to visit, now is the time to talk about the need to have health insurance. Young adults, most of whom have never dealt with the process of acquiring a suitable health insurance plan tailored to their needs, will especially benefit from a dialogue with older, wiser family members who have experienced how suddenly one's life can change from unexpected medical challenges with often shockingly high costs. These same young adults can also help other members of the family use the computer to engage the Covered California website successfully. Take a moment to pledge that you will spend time talking to your family about the need for health coverage and the variety of healthcare options available: https://www.coveredca.com/pledge/ Beyond your family, consider local colleges and universities. Some colleges and universities are promoting enrollment in Covered California on campus, but since there is no mandate to do so, other institutions have no organized efforts. If your branch has a college/university partner, consider ways that your branch and college partner could work to promote the benefits of enrollment, which may have little or no cost to students. Open enrollment runs through March 31, so while time is short, there is still time to act. Learn more on the Covered California website: https://www.coveredca.com
THE DETROIT BANKRUPTCY
Could it happen in Mendo?
(An analysis by Wallace Turbeville (Senior Fellow, Demos/Demos.org), former VP of Goldman-Sachs specializing in municipal finance.)
* * *
The City of Detroit’s bankruptcy was driven by a severe decline in revenues (and, importantly, not an increase in obligations to fund pensions). Depopulation and long-term unemployment caused Detroit’s property and income tax revenues to plummet. The state of Michigan exacerbated the problems by slashing revenue it shared with the city. The city’s overall expenses have declined over the last five years, while its financial expenses have increased. In addition, Wall Street sold risky financial instruments to the city, which now threaten the resolution of this crisis. To return Detroit to long-term fiscal health, the city must increase revenue and extract itself from the financial transactions that threaten to drain its budget even further.
Detroit’s emergency manager, Kevyn Orr, asserts that the city is bankrupt because it has $18 billion in long-term debt. However, that figure is irrelevant to analysis of Detroit’s insolvency and bankruptcy filing, highly inflated and, in large part, simply inaccurate. In reality, the city needs to address its cash flow shortfall, which the emergency manager pegs at only $198 million, although that number too may be inflated because it is based on extraordinarily aggressive assumptions of the contributions the city needs to make to its pension funds.
Cash flow crisis.
In a corporate bankruptcy, the judge takes stock of a company’s total assets and liabilities because the company can be liquidated and all its assets sold to pay down its debts. However, municipal bankruptcies are inherently different because they do not contemplate the liquidation of a city. Municipal bankruptcies are about cash flow — a city’s ability to match revenue against expenses so that it can pay its bills. Under Chapter 9 of the United States Bankruptcy Code, a municipality is eligible to file bankruptcy when it is unable to pay its debts as they come due.
This means that Detroit is bankrupt not because of its outstanding debt, but because it is no longer bringing in enough revenue to cover its immediate expenses. According to the city’s bankruptcy filing, the emergency manager projects a $198 million annual cash flow shortfall for fiscal year (FY) 2014 (though, as explained below, the portion of this amount that is related to pension fund contributions is an estimate that requires deeper analysis). To get out of bankruptcy, the city needs to address this annual shortfall — whether it is $198 million or a smaller number — not its total outstanding long-term debt.
Total outstanding debt.
Not only is the $18 billion outstanding debt figure irrelevant to Detroit’s bankruptcy, it is also misleading and inflated. There are several reasons, including the following examples:
The emergency manager includes $5.8 billion of the Water and Sewerage Department’s debt as a liability of the city, even though the Water and Sewerage Department serves more than 3 million people all across southeastern Michigan, an area far larger than just the city of Detroit, which has just 714,000 residents. This debt is not a liability of the city’s general fund; and, even if it were, only a fraction of it would allocable to the city.
The emergency manager’s assertion that the city’s pension funds have a $3.5 billion shortfall is an estimate, very different from the certain liability of a financial debt, based on calculations that use extreme assumptions that depart from most cities’ and states’ general practice.
To pinpoint the causes of Detroit’s bankruptcy, it is necessary to identify the reasons for the city’s cash flow shortfall, which are best understood through an analysis of the city’s revenue and expenses.
Detroit has been in a state of decline for several decades. The city’s population has fallen from a high mark of nearly 2 million residents in 1950 to just 714,000 in 2010. This long-term decline has also taken a toll on the city’s revenue base, causing both property and income tax revenues to shrink as homeowners and jobs have left the city. Altogether, Detroit’s revenues have decreased by more than 20 percent since FY 2008, declining by $257.7 million.
Because of the Great Recession, this gradual decline in revenue became a massive leak. Detroit was hit particularly hard by both the foreclosure and unemployment crises. The number of employed Detroit residents fell by 53 percent from 2000 through 2012, but half of that decline occurred in a single year, 2008, as the recession took hold.
During the recession, property values declined substantially, eating into the city’s property tax base. The recession has cut deeply into key property and income tax revenue and fee revenue from utilities owned and operated by the city.
State revenue sharing.
The state of Michigan has exacerbated Detroit’s revenue crisis by slashing $67 million in state revenue sharing with the city. About $24 million dollars of these cuts were due to revenues shared pursuant to the Michigan State Constitution, allocated among cities and towns based on population. Detroit’s allocation was reduced because of population loss in the 2010 census. However, the remaining $42.8 million (64 percent of the total state cuts) were due to statutory revenue sharing and were at the discretion of the state Legislature. By cutting revenue sharing with the city, the state effectively reduced its own budget challenges on the backs of the taxpayers of Detroit (and other cities). These cuts account for nearly a third of the city’s revenue losses between FY 2011 and FY 2013, coming on the heels of the revenue losses from the Great Recession and tipping the city into the cash flow crisis that it is now experiencing. Furthermore, the Legislature placed strict limits on the city’s ability to raise revenue itself to offset these losses.
The city has provided significant tax subsidies to a large number of enterprises as incentives to engage in development projects in downtown Detroit. In some years, the city handed out as much as $20 million to private interests. To the extent that the development would have occurred without these tax subsidies, or with less subsidies, the program was a burden on city revenues at a time when it was particularly damaging. In any event, the subsidies that have not yet been received should be treated as obligations of the city, in the same category as debt service and funding of future employee benefits, subject to readjustment to help resolve the cash flow crisis to the extent revenue is not increased to cover the demands on cash.
Contrary to widely held belief, Detroit does not have a spending problem. Since the onset of the Great Recession, the city’s total expenses have actually decreased by $356.3 million, driven by a 38 percent reduction ($419.1 million in absolute terms) in operating expenses, although its financial expenses have gone up.
Between FY 2008 and FY 2013, the city drastically cut operating expenses by $419.1 million. This was accomplished in large part by laying off more than 2,350 workers, cutting worker pay, and reducing future healthcare and future benefit accruals for workers. The city reduced salary expenses by 30 percent between FY 2008 and FY 2013. Total operating expenses have been reduced by nearly 38 percent during that same time.
The city’s “legacy expenses” increased by $62.8 million between FY 2008 and FY 2013. These legacy expenses include the city’s debt service and financial expenses as well estimates of its future liability for healthcare and pension benefits it pays to retirees. A close look at the city’s legacy expenses reveals that this $62.8 million increase was driven heavily by the city’s complex financial deals, not retiree benefits.
The city’s financial expenses increased by $38.5 million between FY 2008 and FY 2013, accounting for more than 60 percent of the total increase in legacy expenses.
The city’s pension contribution expenses remained relatively flat, rising only $2 million during this time. The city’s contribution might have been larger if it had had more money, but increases in the actual contributions it did make did not contribute materially to the cash flow crisis.
The city’s healthcare contribution expenses increased by $24.3 million. This constitutes an increase of 3.25 percent, per year, which is less than the nationwide annual increase in healthcare costs of 4 percent.
The city’s pension contributions in particular did not play a role in pushing it into bankruptcy because they did not contribute materially to the increase in the city’s legacy expenses that added to the cash flow shortfall. While the city’s healthcare contributions did increase, this was largely because of rising healthcare costs nationally, not because the city’s benefits were too generous. In fact, a comparative analysis of Detroit’s retiree benefits shows that its pension and healthcare benefits are in line with those of other comparable cities.
Detroit’s financial expenses have increased significantly, and that is a direct result of the complex financial deals Wall Street banks urged on the city over the last several years, even though its precarious cash flow position meant these deals posed a great threat to the city. The biggest contributing factor to the increase in Detroit’s legacy expenses is a series of complex deals it entered into in 2005 and 2006 to assume $1.6 billion in debt. Instead of issuing plain vanilla general obligation bonds, the city financed the debt using certificates of participation (COPs), which is a financial structure that municipalities often use to get around debt restrictions. Eight hundred million dollars of these COPs carried a variable interest rate, which the city synthetically converted to a fixed rate using interest rate swaps.
These swaps carried hidden risks, and these risks increased after the Federal Reserve drove down interest rates to near zero in response to the financial crisis. The deals included provisions that would allow the banks to terminate the swaps under specified conditions and collect termination payments, which would entitle the banks to immediate payment of all projected future value of the swaps to the bank counterparties. Such conditions included a credit rating downgrade of the city to a level below “investment grade,” appointment of an emergency manager to run the city and failure of the city to make timely payments. Projected future value balloons in low, short-term rate conditions. This is because the difference between the fixed swap payments made by the city and the floating swap payments projected to be paid by the banks increases. Because all of these events have occurred, the banks are now demanding upwards of $250-350 million in swap termination payments.
These swap deals were particularly ill-suited for a city like Detroit, which had been hovering on the edge of a credit rating downgrade for years. Because the risk of a credit downgrade below “investment grade” was so great, the likelihood of a termination was imprudently high. The banks and insurance companies were in a far better position to understand the magnitude of these risks and they had at least an ethical duty to forbear from providing the swaps under such precarious circumstances. The law recognizes special duties that sophisticated financial institutions owe to special entities like cities in providing complex financial products. A strong case can be made that the banks that sold these swaps may have breached their ethical, and possibly legal, obligations to the city in executing these deals.
Detroit’s bankruptcy is, at its core, a cash flow problem caused by its inability to bring in enough revenue to pay its bills. While emergency manager Kevyn Orr has focused on cutting retiree benefits and reducing the city’s long-term liabilities to address the crisis, an analysis of the city’s finances reveals that his efforts are inappropriate and, in important ways, not rooted in fact. Detroit’s bankruptcy was primarily caused by a severe decline in revenue and exacerbated by complicated Wall Street deals that put its ability to pay its expenses at greater risk. To address the city’s cash flow shortfall and get it out of bankruptcy, the emergency manager should focus on increasing revenue and extricating the city from these toxic financial deals. Here are some recommendations for doing that:
The emergency manager, ideally in collaboration with the state, needs to increase revenue by $198 million annually to bridge Detroit’s budget gap until structural programs can be put in place and the city can benefit from increased general economic improvement. This includes enlisting state involvement on an emergency basis and restoring discretionary state revenue sharing to pre-crisis levels. The shortfall amount can be reduced as FY 2014 proceeds by factors such as improved collection of unpaid taxes (which has yielded modest results to date).
The emergency manager should drop his proposal to move city workers to a defined contribution pension plan and abrogate vested pension benefits. The city’s pension fund contributions did not cause the crisis. Reducing benefits runs counter to the long-term goal of structurally improving city services. Moreover, converting to a defined contribution plan at just the moment when new active employees will be added as services are improved (a goal of the emergency manager) would adversely affect the financial dynamics of the pension fund for existing retirees and other beneficiaries who have already vested under the defined benefit system. Over time, the new active employees will rebalance a fund that is currently top-heavy with retirees and will improve the long-term investment horizon of the plan, to the benefit of city cash flow.
The emergency manager should drop any plans to privatize or otherwise monetize the Water and Sewerage Department, since the asserted benefits of such a plan are not likely to be realized and, even if they were, would have no net effect on the current cash flow crisis. The sale price of the system or components represents an investment by a buyer that must be repaid by system revenues, the same as bonds issued against those revenues. If the sale price is applied to retire existing bonds, the effects balance out. If they are not used to retire bonds, it is just like issuing new debt, which presumably the system could do without selling off parts of itself. The plan calls for an annual payment to the city, but this payment is from user fee revenues net of operational expenses and debt service (and return on equity investment if true privatization is used), a financial structure that is parallel to the current system.
The emergency manager’s plan to pay the swap termination fees outside of the bankruptcy process should be abandoned. The bank counterparties should be made to bear the consequences of the original swap transaction, and they should be pushed to forego their projected profit (the measure of the termination payment), given the large profits they have already earned as a result of the unusually low interest rates that resulted from the financial crash. The emergency manager should also press for prorated rebates on the premiums for insurance on the swaps. And, if necessary, the state should be enlisted to guarantee the city’s swaps to avoid payment of termination fees. The termination fees will become smaller as interest rates rise over time, which they are likely to do.
The emergency manager should negotiate directly with the holders of the pension financing certificates of participation, apart from other unsecured creditors. The circumstances of the COPs issue are unique. Unless these circumstances are shown to have benign explanations that are not currently available generally to the public, the leverage that the emergency manager has over this negotiation is high.
The emergency manager should reclaim tax subsidies and other expenditures to incentivize investment in the downtown area. These tax subsidies should be treated similarly to the city’s other financial obligations. The residents of Detroit have already suffered as a result of the crisis, as have the public employees. The recipients of tax expenditures should share in the sacrifice as well.
Once Detroit gets through this immediate crisis, the city’s elected officials, hopefully working collaboratively with the state Legislature and the governor, can turn their attention to post-crisis, structural programs that would grow the city’s tax base and allow it to return to prosperity over time.