Public Sector Costs are Bankrupting Detroit and Illinois

Posted by PITHOCRATES - June 8th, 2013

Week in Review

Public sector pay and benefits are crushing state governments and cities.  The City of Detroit is probably going to file bankruptcy.  And the State of Illinois just saw its bond rating cut (see Illinois Bond Grade Cut as Lawmakers Can’t Fix Pensions by Tim Jones & Brian Chappatta posted 6/3/2013 on Bloomberg).

Illinois had its credit rating cut one level after lawmakers failed to restructure state pensions saddled with almost $100 billion in unfunded liabilities…

The retirement systems cover state workers, teachers, university employees, judges and lawmakers…

“It is disgraceful that this year’s legislative session ended without a new pension plan,” Treasurer Dan Rutherford, a 58-year-old Republican who is running for governor in 2014, said in a statement. The failure “costs the state millions of dollars each day, plus these downgrades could continue to make borrowing additional funds even more expensive…”

Illinois’s growing pension deficit is “unsustainable,” Fitch analysts led by Karen Krop, a senior director in New York, said in a statement. The inaction by lawmakers raises questions about the state’s ability to deal with “numerous fiscal challenges.” They also cited a growing backlog of unpaid bills and borrowing to cover operational costs, indicating another cut may be forthcoming.

These public sector workers have pay and benefit packages unlike those in the private sector.  Which has to pay for the pay and benefits of both the private and public sectors.  So they keep raising taxes on individuals and businesses.  And our politicians never worry about the long-term consequences.  But they can only tax so much.  People can only pay so much in taxes before they can no longer pay their own bills.  So they start borrowing.  And the more they borrow the more risky they are to loan money to.  The more in debt they go and the greater their spending obligations the higher the interest rates they have to pay to get investors to take a chance on buying their bonds.  Because there’s a very good chance something like this will happen (see Detroit to offer creditors less than 10 percent of what city owes -report by Steve Neavling posted 6/7/2013 on Reuters).

Detroit Emergency Manager Kevyn Orr plans to deliver grim news to the city’s creditors next week: Take less than 10 percent of what the city owes or risk losing it all in a bankruptcy proceeding, the Detroit Free Press reported on Friday…

In his report, Orr stated that the city has run annual deficits of $100 million and more since 2008. Detroit is believed to owe about $17 billion in debts and liabilities.

So on the one hand they beg and plead for investors to loan them money.  So they can pay the overwhelming costs of their public sector in the face of a shrinking tax base.  And then when their finances get so bad that they can’t even service their debt any more they say, “Thank you for your money when we could not raise any ourselves.  And because you took that great risk for us we will reward you by screwing you out of 90 cents of every dollar you loaned us.  But stick around after the bankruptcy.  For once we shed this debt we will need to borrow more to pay for the overwhelming costs of our public sector.”

Detroit had annual deficits of $100 million.  Illinois has $100 billion in unfunded liabilities.  Is it any wonder Fitch lowered their bond rating?  For the state of Illinois has a greater financial problem than the City of Detroit has.  The State of Michigan gave Detroit an emergency manager to fix their problems.  They even offered to buy a city park.  Belle Isle.  To help Detroit get out of the mess they put themselves into.  But Illinois cannot help Illinois.  Only the federal government can.  But will they?  If they do you know California will demand a bailout, too.  As will every other state and city with a crushing public sector cost will.  But the federal government can’t bail out everyone.  Not when they have their own trillion dollar deficit problem to fix.

No.  There is only one way to fix the problems these cities and states are having.  They have to cut their public sector costs.  Which means someone else besides the bondholders will have to take a haircut to put these states and cities back into the black.  Meaning the public sector can no longer enjoy the kind of benefits people in the private sector haven’t enjoyed in decades.

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No Economic Recovery, Crushing Debt and a Credit Downgrade, the U.S. inching closer to European-Style Crisis

Posted by PITHOCRATES - August 5th, 2011

The Unemployment Rate is Down even though more People are Unemployed

That stubbornly high unemployment rate that has been dogging the Obama recovery has finally dropped (see Jobs report: A pig in lipstick by Nin-Hai Tseng posted 8/5/2011 on CNN Money).

The unemployment rate in July fell slightly to 9.1% from 9.2%

But…

The unemployment rate might have fallen slightly but that’s mostly because the number of people actively looking for jobs fell back – signaling that perhaps workers are feeling less confident about entering the job market.

So the only reason why it dropped is that more people have just given up looking for a job.  And the smaller the group is that is looking for a job the smaller percentage this group is of the total working population.  Ergo, smaller unemployment rate.  So the actual employment picture isn’t better.  It’s worse.

In July, labor participation fell by 193,000.

What’s more, though the economy added 117,000 jobs, it falls short of the 125,000 jobs a month needed just to keep up with population growth and prevent the unemployment rate from trending higher. And it would take at least twice that many to rapidly reduce unemployment.

“The bigger picture, then, is that two years after the recession ended the labor market has not really recovered at all, and may even have gone backwards,” writes economist Paul Dales of Capital Economics.

The economy is worse.  Not better.  So just how much ‘not better’ is the economy?

The Real Economic Recovery not as good as the Made-up One

Apparently pretty ‘not better’ according to the people who count the numbers.  They revised their past numbers.  And the new numbers are even worse than the not-so-great numbers of numbers past (see Distress signal by R.A. posted 7/29/2011 on The Economist)

BEA revised its national accounts numbers back to 2007 for this release, and the picture revealed is far darker than anyone previously believed. From 2007 to 2010, real output declined by 0.3% per year on average. Previously, BEA had estimated annual growth of 0.1% over that period…

Projected growth rates were simply overstated, and current unemployment is exactly what we’d expect given such a feeble recovery. Those overly optimistic assessments of the likely impact of interventions, from fiscal stimulus to QE, also make much more sense now. Policymakers were fighting a fire far more intense than they recognised.

So I guess the Obama administration was a little premature with that Recovery Summer talk.  Or they are not good at reading economic numbers.  Or they are good at reading economic numbers but they were stretching the truth a bit for political purposes in hopes that the real economic recovery would catch up with the made up one.

All right, so the economy isn’t doing so well.  What do we do?

The dire economic situation undergirds this point: Washington should delay immediate fiscal cuts. Indeed, it ought to be spending more now and revisiting the possibility of a payroll tax cut.

Really?  After the recent budget debate to raise the debt ceiling to avoid default and a credit downgrade because of excessive spending and debt?  The same kind of excessive spending and debt that has put Europe in an even worse financial crisis?  Shouldn’t we take a lesson from the European Union sovereign debt crisis?  And not follow them into a similar sovereign debt crisis? 

I mean, it was going to be Armageddon if they lowered our bond rating.  Don’t we care about that anymore?  (By the way, S&P did lower their bond rating today.  So hello Armageddon.)

A Small Negative Return in the U.S. is Preferred over any Investment in the Eurozone

Apparently not.  At least investors appear to be more worried about the debt crisis in Europe.  They’re so worried, in fact, that they’re dumping their European holdings and running to the safe harbor of U.S. banks.  Despite that possible downgrade (which has since happened).  And Armageddon (see Thanks a lot, Europe by Cyrus Sanati posted 8/5/2011 on CNN Money).

The massive selloff in U.S. markets on Thursday appears rooted in Europe as fears of a sovereign debt default in Italy and Spain caused traders to panic and run for cover…

The European Central Bank attempted to ease the market’s fears, but it seemed to have only exacerbated the problem. European leaders are now scrambling to avoid an all-out run on the euro as the European sovereign debt crisis enters a possible terminal phase. They will need to act fast to restore market confidence or the current correction could turn to capitulation.

This crippling debt crisis may very well take down the European Central Bank.  With the fear of default, investors don’t want to buy anything in the Eurozone.  They fear anything they buy today may lose most of its value in the not so distant future.  So they’re pulling their cash out of Europe and parking it in the United States.

All this cash is being dumped into custodial banks in the U.S. This led the Bank of New York Mellon (BK), the largest custodial bank, to start charging its institutional clients a fee for depositing what they consider an “extraordinarily high” amount of cash — it has no place to invest it either, and higher cash levels mean higher FDIC fees.

You know it’s bad when even the banks don’t want your money.

Indeed it is.  So investors will pay a bank to hold their cash.  Because that’s the safe ‘investment’ right now.  A small negative return versus what could be a catastrophic negative return.

The Economy may not be able to Survive much more Government Help

Employment numbers are bad.  GDP is bad.  Talks of an economic recovery appear to have been hopelessly premature.  Debt crises have gripped Europe.  And S&P downgraded U.S. credit and pushed them towards Armageddon.  The Keynesians advice, though, is the same.  More government spending.  Only this can stimulate the economy back to recovery.  Even though it was excessive government spending that gave Europe and the U.S. their crises in the first place.

It’s like Ronald Reagan said.  Government isn’t the answer to our problems.  Government is the problem.  It needs to do the things it does best.  And leave the economy to the private sector.  Because the economy just may not be able to survive much more government help.

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