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Comment by rayiner | Hacker News Reader

I think this bankruptcy is an exciting thing for Detroit. The purpose of bankruptcy is a reboot and if anyone needs a reboot it's Detroit. Of course, Detroit isn't the only city going through or considering bankruptcy. Unlike most people, I view the nationwide phenomenon of municipal bankruptcies positively. Years of unsustainable policies have left the big cities of the U.S. in a financial state where they can no longer effectively provide services. In 2013, 40%+ of Detroit's revenues went to bond payments, pension benefits, and health benefits to retirees. This is money taken away from providing services to current residents of the city. Bankruptcy will mean bond money will no longer be so easily forthcoming, but that's a good thing. Cities will be forced to grow within their means, and that pressure will force more prudent fiscal policy going forward.

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It is my hope, and this is unpopular I know, that Detroit successfully unburdens itself from all obligations associated with pension plans. I certainly support pensions for people who dedicate their life to public service, but seeing cities and counties decimated by poorly managed pensions is crushing. Between early qualification, and 'punching' or otherwise basting your pension salary based on your last year worked, have been policies that have robbed other pensioners and citizens alike of benefits and services. Without a reasonable discussion about what can be expected of the taxpayers to bear, and what cannot, we will see more Detroits.

I'm not sure I'm understanding you. Are you suggesting that current retirees should get nothing of what was promised to them? What are they supposed to do? Seems like this would put a lot of old folks into a desperate situation and only worsen the city's downward spiral.

I am pretty sure you do understand. Your appeal to compassion for "those for whom commitments are made" is a powerful one, but ultimately fails as fiscal policy. The city dies, the remaining 706 thousand people of Detroit get to watch their city turned into a cesspool of crime, uncollected garbage, and unreliable services. And those old folks lose their pensions too. Governments have made commitments that they are mathematically unable to keep. You need look no further than the unfunded CalPers (California's Pension) fund to see what is coming on the horizon.

At this point there are no "good" answers, but the path to the "right" answer is pretty clear, it is unsustainable to balance the retirement of a few on the labors of others.

I've made a number of suggestions to folks in Sacremento, pretty much anyone who asks and some that don't. On various ways the system might work. One outcome though is you don't get "lifetime income" unless you do what Mr. Money Mustache suggests and convert your lifestyle into something that can survive on a 3-4% annual withdrawal rate of your accumulated benefit.

retirees, regardless of position, should get a set amount. It really should not be more than they made per year while an employee - many systems let them game it by popping overtime on it, unpaid vacation, and the like. There are cops with 100k+ pensions who retired at 50!. There are politicians with even bigger payouts, judges making over 200k in retirement.

There needs to be a "retirement" value for government employment that results in a good retirement but not extravagant. Sorry, but once you start passing the fifty thousand in retirement your getting a bit much. I would cap any retirement at median for your region, with minor and I mean MINOR boosts to cover medical for special circumstances, like really hurt in line of duty.

Go look at the bad retirements that people are paying.

Not to be too cynical, but I wonder how many government employees see themselves as dedicating their lives to public service, as opposed to those who simply prefer a government job over a private sector job.

I think the whole public servant thing is largely a myth.

I can't speak for all of them, or even a majority of them, but I do make a point to get to know my representatives (and the candidates who would like to be elected) and have found a number of people who would rather not have to be in government but have found themselves forced their by a sense of "if no one else will do this I guess I will" sort of duty.

For what its worth, its pretty easy to talk to these people. Its hard not to talk to them when an election is coming up.

I sometimes think voters that care enough to engage are a myth. :-)

Not in my experience.

I did one contract for a state government long ago. A friend of a friend brought me in because she knew I'd be unable to comprehend the normal pace of government work, and would therefore cluelessly batter my way though institutional inertia to get things done in time to meet certain goals.

I am definitely not suited for large organization, private or public. And there certainly were people who were just punching a clock. But a lot of people were, despite decades of service, still coming in every day determined to make things better.

As far as I can tell, it's the same thing with the teachers I know. It is a hard job, much more difficult than I could ever do. But despite that, most teachers I've met are doing the work because they really like teaching, and they care about what happens.

It blows my mind, really. My short attention span and desire to stir up trouble mean I'm well suited for startups, but could never spend 40 years doing the same thing. That, however, is exactly what we want out of government: stability, reliability, predictability.

>Years of unsustainable policies...

Yeah like kicking cans down roads with funny bond schemes http://blogs.marketwatch.com/fundmastery/2010/03/12/goldman-...

>pension benefits, and health benefits to retirees. This is money taken away from providing services to current residents of the city.

It's called paying your bills. Honoring commitments made to those retirees, some of which are current residents of the city.

It's all well and good to talk about "honoring commitments made to retirees", but if the city can't provide basic services because 40 cents of every dollar it spends goes to debt service, the city isn't in a position to honor those commitments anyways; it will simply fail harder and more painfully for all its residents in the futile attempt to honor those intractable commitments.

I know, it's a shame for Detroit that it isn't "Too Big to Fail."

Is there some constructive alternative you have? In your dream world, how would Michigan have handled its Detroit problem?

In dream-world, we'd never have problems like this! A constructive alternative to Detroit's problem? They should have declared bankruptcy a long time ago, before levering up their debt with bond schemes.

I'm not sure it counts as a constructive alternative if it requires time travel.

I do. Raise property taxes and sales taxes until you can pay your bills. The solution is actually simple. It is impossible for elected officials to do and keep their job, but simple.

That might not actually work, seeing as how Detroit already has a population problem and higher taxes will probably force even more of them out, leading to flat or lower overall revenue.

Wouldn't work in the least. Property tax delinquency in Detroit is already > 50% (http://www.detroitnews.com/article/20130221/METRO01/30221037...)

You can't squeeze blood from a stone.

Fnord is also being a bit misleading...

Not to put too fine a point on it...

But the VAST majority of the money spent "honoring commitments made to retirees" is not made to "current residents of Detroit". Most of it was just a one-way funnel of money from Detroit out to the suburbs, other areas of Michigan and beyond.

It makes no sense for Detroit... to essentially be funding people in the suburbs... by taking on debt. That was just craziness.

A lot of those bond schemes were undertaken because overly generous pension promises had left the governments in a situation of having to meet unreasonable growth targets in order to meet their obligations. A lot of the craziness in 2008 was the result of pension fund managers struggling to recoup the losses of 2001 and get back on track.

And how is bankruptcy going to prevent this from occurring again? Will future politicians still have the ability to grant crazy pensions knowing their term won't endure its negative effects? Not sure what the solution is but I don't think bankruptcy will solve it.

1) Those lofty retirement guarantees were much easier to bargain for before everyone realized that the days of heady growth in America were done.

2) The bankruptcies will dramatically weaken the public sector unions.

LOL, what public sector unions?

In 2009 the U.S. membership of public sector unions surpassed membership of private sector unions for the first time, at 7.9m and 7.4m respectively.

http://en.wikipedia.org/wiki/Public-sector_trade_union#cite_...

http://www.nationalaffairs.com/publications/detail/the-troub...

From your second link "dramatic decline in overall union membership." which is what I meant to imply. Unions are fairly impotent today.

Unions in general are impotent, but the public unions (teachers, police, etc) are among the only ones that still have a lot of leverage.

Public-sector unions are the only unions left in the U.S. with much political zorch, more's the pity.

Why should unions have any political zorch? Why must collective bargaining require any amount of state intervention (besides, obviously, protecting individual liberty and property)?

I think the pattern has been established in cities which avoided bankruptcy, like San Jose - you hire a barebone skeleton of public employees, re-negotiate the contracts in light of macroeconomic conditions, and subcontract everything else - those employees are now eligible for 401k or IRA or other more exciting things.

It will be interesting to see how pension liabilities and current pension guarantees are handled. This is a very large scale problem not just in Detroit but across America, where the retirement guarantees given to retiring politicians and government workers is very costly.

If they force the bond holders to eat it all then the market for municipal bonds will be hurt badly. The irresponsible largess in the current government pension system needs to come to an end.

>It will be interesting to see how pension liabilities and current pension guarantees are handled.

Pensioners will be last in line as usual, I assume.

>If they force the bond holders to eat it all then the market for municipal bonds will be hurt badly.

Good.

> The irresponsible largess in the current government pension system needs to come to an end.

1. It's always the working stiffs who have to sacrifice, isn't it?

2. It has come to an end.

Pensions are a joke. I hate to say this but look at the teachers of Mass as a good example of just how much so. 20 years ago teachers paid 2% of their salary into the pension, today they pay 10%. Do you expect that in any reality today's teachers are going to see that returned to them?

Basically, promises are made that have no bearing on reality and the now has to suffer for it. I wish they'd give them the opportunity for a 401k. At least then they'd have an option of seeing something after 40 years of dedicated public service.

Is it really a sacrifice if you promise yourself something impossible and then fail to make good on it?

Oh, please. These pensions are impossible now, but that's because of decades of underinvestment and out-of-control health care costs.

Also, the workers didn't promise themselves anything. They made a deal with their employers. The employers didn't have to agree to anything. They did, and those deals should be honored.

There's little to no adversarial aspect in a negotiation between government employees over the size of government employee pensions.

Yep, especially when the unborn who are footing the generational robbery don't vote.

Do you have any evidence for that?

The employees getting the pensions are not the same ones doing the negotiating. By your theory, government employees would always get what they wanted and therefore never strike, but that's demonstrably not the ase.

It's not as though they let the garbage man write his own pension.

It's funny, when a bank NINJA-loans a half-million dollars for a 1000ft^2 bungalow, it's always the-purchaser-took-advantage-of-the-bank, and never, the-bank-should-have-known-better-and-deserves-to-go-broke.

The banks are presumably going to take a huge bath on bonds they bought from Detroit.

Is there reason to think that banks are major unhedged bondholders who will actually take losses?

I'd expect Detroit pension funds to be the bigger bond holders of Detroit bonds... No bank of note will have much exposure, the banks aren't stupid.

Any one know what kinds of perks Michigan as for state munis? In colorado you get a tax break on them.

If they do, it's only because Detroit literally has nothing of value left that can be taken.

"If they do"? Help me understand the word "if" there?

If, as in if the Federal Gov't doesn't bail them out.

No, certainly the garbage man doesn't write down his own pension. His union negotiates with the government over how much money (that doesn't belong to either of them at the time) to promise to all garbage men.

Banks deserve to be exposed to the risk they assume in general, but this issue has problems in addition to the problem of banks being sheltered from risk.

Yup. Bankers get bailed out, everyone else must give up what they worked for.

Pensioners will take some of the hit. Cities are too dependent on bond financing to want to totally cut ties with the municipal bond market.

I think, in the case of Detroit, they will both be taking pretty painful hits. Snyder is serious about this. The bankruptcy administrator is likely to be unsympathetic. And very little help is likely to come from DC. Couple all of that with Chapter 9 providing all creditors with FAR fewer rights, and I think the writing is pretty much on the wall.

The only thing the creditors can try at this point is to get a judge to rule that Detroit is not eligible for bankruptcy. Slim chance there... but we've all seen stranger things happen.

>>> If they force the bond holders to eat it all then the market for municipal bonds will be hurt badly

Everything Detroit was rated 'junk' for a while, so much of it is already priced into 'high-yield' portfolios.

Hmm. I've been thinking about your comment for a while.

I don't see the feedback loop. In normal bankruptcies, or any other mistake in management, there's a feedback loop to help self-correct and prevent this from happening again. So politicians made a lot of promises they couldn't keep, got in bed with the folks running the city and created all sorts of sweetheart deals, made lots of speeches about making the city a better place and so forth while running it into the ground.

The lawyers come in, nullify the promises made to many of the participants, including bond holders and dedicated employees, all of whom acted in good faith. The politicians walk away. Heck, some of them are probably busy right now continuing to move up the political ladder.

So where's the feedback loop? The fact that bondholders will be more careful next time around? That's all I can see, and it's a very flimsy thing to hang that much optimism from. My bet is the state picks up the bonds, takes over managing the city budget, and gives everybody involved a 30-40% haircut. This may prevent the particular city named Detroit from repeating the same mistake for a few years, but it does absolutely nothing for all the other mismanaged cities. I'm not even sure Detroit will remain in the doghouse very long. In fact, from a certain political angle, looks like a very well-played strategy. At the end, all the players walk free and continue making speeches about how awesome Detroit is and "if they had only listened to me" things would have worked out.

Doesn't look too encouraging for anybody, but heck, maybe I missed it.

You're right, the feedback loop isn't as strong. Basically, I'm hoping the bankruptcy can spur political change. Ideally, after a couple of years of being run by a bankruptcy judge, and residents feeling the sting of things being cut, new blood comes into city management and takes advantage of the stabilized financial position to put the city on a course for the future. I think even if the bankruptcy process can't bind the city government in the future, it does change the political climate. I think it will weaken the public unions, and I think the end of easy money through bond issuances will force greater fiscal discipline.

This might be overly optimistic.

There's really no feedback loop against doing anything stupid with the current monetary system; quite the opposite - becoming insolvent is apparently subsidized by the federal reserve apparatchiks. The banks cant lose no matter what, so you can't expect very much rational economic activity to occur.

Now rewrite your post in the context of the federal government's promises. (Total unfunded liabilities).

>Doesn't look too encouraging for anybody

Indeed, save perhaps private security guards.

When a company is forced to reorganize due to bankruptcy often a change of management is required. However, the "management" of Detroit is elected by the people, and they will likely choose to simply send the same folks or the same sorts of folks back into power after this happens.

How is this a reboot? To me it seems more like the typical infinite "just one more last chance" that enablers give to drug addicts.

As a practical matter, for the next year or two, Detroit will be run by Kevyn Orr and a U.S. bankruptcy judge. After the bankruptcy, the governor might keep an emergency manager around, otherwise, the mayor and council will retake the reigns. But they'll be bound by: 1) the political fallout of the bankruptcy (it will be painful for everyone involved); 2) agreements entered into as part of the bankruptcy; and 3) more skeptical creditors going forward. Significantly, I think the bankruptcy is going to greatly reduce the power and influence of the public unions, as the emergency manager and the bankruptcy court spend a year or two restructuring things while going over their heads.

There's a great article on this: http://www.freep.com/article/20130603/NEWS01/306030014/City-....

I'm no Ch9 expert, but my understanding is that a receiver will be appointed. That person is not elected. So while the politicians retain executive power, the purse strings are taken away from them.

There will be much unhappiness and gnashing of teeth before it's all finished.

The city government is still corrupt and incompetent, and the remaining population is largely unemployable. Yes it's a good thing that the city is going from broke to just poor, but I don't know if it will every truly recover.

Can you really call municipal bankruptcy a nationwide phenomenon? You have: Jefferson County, Alabama that got mixed up in some interest rate swaps they had no business getting involved with; a couple of cities in California that got punished especially badly when home prices collapsed; and now Detroit which has been suffering from an ever shrinking tax base. I don't think you can really look at it and say there's a trend.

Detroit, San Bernardino, Mammoth Lakes, Stockton, Harrisburg, Central Falls (RI). Cities all over the country are on the verge of bankruptcy. States can't go bankrupt, but Illinois has stopped paying many of its bills--as state support for municipalities dries up, that could case many municipalities to go into bankruptcy.

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