Municipal pension crisis

As should have been obvious a long time ago, the issues surrounding Detroit's bankruptcy filing are not limited to Detroit.

Governing.com has provided a list and a map of all 36 of the municipal bankruptcies in the United States snice 2010. A major factor in these bankruptcies has been unfunded pension obligations. This problem exists in municipalities throughout the country. This crisis was predicted more than 30 years ago:

As for state and local pensions, they are in shambles. . . . . A 1975 survey of 44 Pennsylvania cities revealed that over 75% of them had pension programs that were not adequately funded. . . . Pension fund debt literally threatens the future survival of state and local finances.

Gary North, How You Can Profit From the Coming Price Controls, pp. 6-7 (1980).




While the 1975 data may be old, it wasn't old in 1980 when North wrote his book (yet the whole issue has been ignored until circumstances forced it into the headlines). In the last 30+ years, the problem has only grown worse. Those pension programs did not somehow get more solvent since the 1970's. Municipal spending has increased and hiring has increased (until very recently). Tax bases have declined - both in terms of population and property values (especially in the past 5 years).

As the pension crisis spreads and worsens, real estate values in the affected municipalities will reflect that crisis.

Click here for previous commentary on municipal default.

Monroe Township sewer fee collection

Pennlive reports that Monroe Township has been successful recently in collecting tens of thousands of dollars of past due sewer charges from residents. Monroe Township is not the only municipality that has accumulated thousands of dollars of unpaid sewer charges. But it may be one of the few that has made an effort to collect the charges instead of simply waiting for the homeowners to sell the real estate.

Numerous municipalities are strapped for revenue and have resorted to imposing or increasing fees of dubious legitimacy in recent years (inspection fees, fines, occupational taxes, etc.). But how many municipalities have made efforts similar to Monroe Township to collect on delinquent, legitimate, pre-existing sewer charges instead? How many have even seriously considered this option?

Electricity prices rising; War on Coal.

I have written previously about rising electricity costs resulting from the shutdown of coal generators in the northeastern United States.  The coal shutdowns are necessitated by new federal regulations that are expected to cause more than 200 plants to close. Electricity rates are expected to rise drastically by 2015. 

Last week, an advisor to President Obama provided further context, advocating a "war on coal:"

Daniel P. Schrag, a White House climate adviser and director of the Harvard University Center for the Environment, tells the New York Times "a war on coal is exactly what's needed." Later today, President Obama will give a major "climate change" address at Georgetown University.

“Everybody is waiting for action,” Schrag tells the paper. “The one thing the president really needs to do now is to begin the process of shutting down the conventional coal plants. Politically, the White House is hesitant to say they’re having a war on coal. On the other hand, a war on coal is exactly what’s needed."

Record electricity prices were seen in the United States in May. 

This news should affect decisions about how buildings are heated, pricing strategies for rental units and whether utilities should be included in the tenants' rental package.

  

Harrisburg school tax increased by 3 1/2 percent.

Harrisburg School District has announced a three and one half percent (3 1/2 % )  real estate tax increase as part of its new budget.  WGAL has more details. 

Detroit debt default and impact on solvent municipalities

From Bloomberg comes the story of how Detroit's recovery plan may impact the municipal bond market throughout Michigan:

Emergency Manager Kevyn Orr’s plan to suspend payments on $2 billion of Detroit’s debt threatens a basic tenet of the $3.7 trillion municipal market: that states and cities will raise taxes as high as needed to avoid default.

Investors have viewed municipal bonds as "safe" for decades because municipal governments could always raise taxes to pay back the principal and interest.  Should local governments lose that power, local debt would be no more safe than corporate debt (probably less so - as corporations are constrained by the profit motive in their daily operations). 

Should investors lose confidence that cities can or will raise taxes no matter how much debt they acccumulate, the bond market will suffer far beyond Michigan.  Cities have incurred debt and expenses that today's economy cannot support.  Cities and other municipalities have been looking to other sources of revenue for years, as they turn their police and code officials into little more than bridge trolls. Muncipal employees (more and more) now demand money in exchange for safe passage (or permission to conduct business) instead of acting for purposes related to legitimate public safety concerns.  This trend will continue if municipalities have a harder time selling bonds.

Impairment of the bond market will also impact local officials' operation of school districts, sewer plants and public water - with resulting changes in school taxes, sewer rates and water rates.

It will take more than default by Detroit to affect local governments and local taxes in Pennsylvania.  But Detroit is not the only city that is facing or has faced these choices.  Even the federal government cannot print enough dollars to bail out every city in the country. 

Harrisburg is only a little further from the brink than Detroit.  Maybe Harrisburg can count on a massive bailout by the federal government.  Maybe it can't.  But it would be wise for local governments across Pennsylvania to consider scaling back operations and ambitious plans for sewer expansion and other adventures before they face a choice between (1) borrowing in a hostile bond market or (2) raising taxes and fees on already overextended residents. Whether a township is solvent or not, the ability to raise funds through the bond market may be seriously compromised by a municipal default by any city in Pennsylvania.

Gary, Indiana to sell 7,000 properties for $1.00 each.

Gary, Indiana has proposed two steps that may predict the future for cities across the country:

 

(1) The Daily Mail reports that the City would like to operate on 40% less land.  40% of Gary's land would "return to nature" under this plan.

 

(2)  Gary owns 7,000 properties (compared with the roughly 500 owned by Harrisburg, PA).  Gary proposes to sell these properties for $1.00 each. 
  

• In the next few months the city is planning to auction off the housing for $1 each.
• The homes would each need $15,000-$30,000 in repairs.
• Buyers would have to agree to renovate their purchases as quickly as possible.
• If buildings are beyond repair, NBC reports that a 'deconstruction' program could be initiated - to take apart buildings and recycle materials.

This approach fails to recognize the title defects that result from prior tax sales.  The City is unable to convey good title to these buyers.  The buyers will have to file quiet title actions (against prior owners) in order to clear the title and obtain financing for the repairs. 

 

Despite the flaws in this proposal, urban consolidation is an approach that will become almost mandatory as municipalities struggle with declining revenues and increasing service costs.

 

Compare this approach with the approach taken by Detroit in recent years. 

  

Update - August 25, 2013
Tara Steele provides more information on the "catches" in this program.

Homeownership at its lowest rate since 1995

From Bloomberg news comes the story of home ownership at its lowest rate in 18 years:

The share of Americans who own their homes was 65 percent in the first quarter, down from 65.4 percent a year earlier and the lowest level since the third quarter of 1995, the Census Bureau reported today. The vacancy rate for rented homes dropped to 8.6 percent from 8.8 percent a year earlier, while vacancies for owner-occupied houses fell to 2.1 percent from 2.2 percent.

This reduction corresponds with increasing investment by landlords:

“Credit conditions are still tight and investors are taking advantage, in the interim, of favorable yields,” Paul Diggle, property economist for Capital Economics in London, said in a telephone interview. “They’re making hay while the sun shines.”
Diggle said the homeownership rate will continue to fall throughout the year. It peaked at 69.2 percent in June 2004, spurred by easy credit.