Friday, July 26, 2013

Alas Poor Detroit

Detroit is a mess. After an unsuccessful attempt at filing bankruptcy, the city now has court approval to proceed. Detroit owes about $20 billion to over 100,000 creditors resulting in what could charitably be called a mess. However, besides the city employees and those on pensions one wonders who would be crazy enough to extend credit to the city. The answer is not many. The Wall Street Journal reports that there are only $530 million in general obligation bonds. The vast majority of the unsecured debt being $10 billion owed to retirees. However, why are general obligation bonds unsecured debt? True there is no collateral pledged against the bonds, but GOs are secured by the taxing power of the issuer. Therefore, if GOs are allowed to be classified as unsecured, then there may be higher borrowing costs to other municipalities throughout the country. On a more personal note, what is sad about the slow and steady demise of Detroit is not that its current mayor was one of my favorite basketball players - Dave Bing - but it is home of so many of my relatives from Gray, Ga. We have even had family reunions in Detroit. My mother once remarked that most of her family left Gray to take jobs in the automobile factories. Since relative few blacks were drafted during World War II, incredible opportunities opened up to them as they replaced the white workers who went into the service. One of my favorite books is The Promised Land by Nicholas Lemann which documents the great black migration from the south during those years. Highly recommended. Mother used to say that her father was ridiculed for not selling his land and staying in Gray. Their relatives would come visit every year driving fancy cars, wearing expensive suits and furs. They sent their children to Michigan and Michigan State rather than to Fort Valley State or Savannah State in Georgia and looked down their noses at their country cousins. Mom said that my grandfather finally gave in and moved up to Detroit one spring. He returned in less than a month shaking his head with disbelief after finding that there was no place for him to hunt rabbits. If there were, I would not be here for my mother would likely have not met my Dad. one a more somber note, if I were a city employee of any municipality I would be agitating for privatization of the city pension, retirement and health plans to protect myself against any potential bankruptcy filing. City plans are usually defined benefit plans and almost without exception are seriously underfunded. The promises made by these plans result in shortfalls than can never can be fulfilled leaving the states or the federal government to step in and fill the breach. Although I hope that this does not occur because it would encourage even more profligate spending by the cities, I do have feelings for the pensioners in Detroit who now face a very frightening future.