Transcript Slide 1

Richard Larkin, HJ SIMS
Director of Credit Analysis
September 13, 2013
MUNICIPAL ANALYSTS GROUP OF NEW YORK
The material presented here is for information purposes
only and is not to be considered an offer to buy or sell any
security. This report was prepared from sources believed to
be reliable but it is not guaranteed as to accuracy and it is
not a complete summary of statement of all available data.
Information and opinions are current up to the date of
publication and are subject to change without notice. The
purchase and sale of securities should be conducted on an
individual basis considering the risk tolerance and
investment objective of each investor and with the advice
and counsel of a professional advisor.
•Joined
SIMS in 2008
•26 Years at 2 Rating
Agencies, 38 Years Total
Experience
•Former Chief Municipal
Rating Officer at S&P
•Chaired or Co-Chaired
Rating Criteria Committees at
Both S&P and Fitch
•Opinions
are mine & mine alone, not
necessarily shared by my employer, HJ SIMS,
who has allowed me to speak on this subject
•Not
a recommendation to buy, sell or hold
Detroit municipal bonds
•Detroit
has worst economic problems of any
major city that I have seen in 38 years
•Detroit's
long term liabilities are only $15.7 billion, not the oftrepeated $18 billion; may actually be less with the swap settlement
•Contrary
to what some pundits would have you believe, Detroit
does not have the worst funded pension system in the U.S.. And the
existing actuarial assumptions are not unrealistic—in fact they are
similar to most other public pension funds
•Detroit
does not have the highest taxes of any major city in the U.S..
In fact, ‘A’ rated Philadelphia not only has a higher local tax
burden, but its pension funding levels are lower than Detroit’s.
1.
THE MYTH OF FULLY FUNDED PENSION PLANS FOR GOV’TS
2.
MORTGAGE IS PAID IN 15 YEARS…JUST CAN’T BUY GROCERIES
3.
“BROTHER, CAN YOU SPARE A PENNY?”
4.
YOU’RE WELCOME FOR OUR HELP..CAN YOU RETURN THE FAVOR?
5.
OUR CUP CAN RUNNETH OVER; LET’S HOIST ONE TOGETHER
6.
“JUST PAY ME WHAT YOU OWE..PAY THE GHOST”: Transvision Vamp
7.
“THE MORE I SPEND, THE MORE I SAVE” : Dawn Larkin
8.
I CAN BUY A HOUSE WITH JUST THIS YEAR’S SALARY (yeah, right)
9.
TIME TO REFI…BUT THIS TIME I PROMISE TO PAY YOU BACK
10.
“ERROR… A RESTART IS REQUIRED”
•Public Pension Fund experts have stated that
it is adequate for
public pension plans to be 80% actuarially funded
•A fully 100% funded pension plan might have to lower contributions
or increase benefits in years when investment returns are strong
•8% investment returns may appear aggressive, but pension plans
have plenty of liquidity and strong monthly cash flow, so they can
invest for the long term
•25 year average of annualized returns on the S&P 500 has not been
below 8% since 1954
•Annual returns on the S&P 500 have exceeded 15% for the last 4
years
•Current actuarial assumptions assume pay raises (which
affect final pay for pension benefits) are overly
conservative at a projected 4-9% annually…this RAISES the
calculated UAAL
•Requiring Detroit to amortize UAAL in 15-18 years adopts
a standard that fits for companies that can go out of
business—unrealistic for state and local governments
•Setting this amortization as a standard would qualify just
about any city or state for bankruptcy
•Giving the City of Philadelphia the ability to collect a 1 cent sales tax
within city limits was an important piece of that city’s fiscal recovery
in 1992
•Allows the city to help itself
•Did not increase costs to the Commonwealth of Pennsylvania’s
budget
•Would generate about $30 million annually
•Costs an estimated $43 per capita to city residents; realistically,
would even be less than that because out of town visitors and
business travelers would help foot the bill
•
•
•
It is ironic that within the year that Detroit lost its
investment grade ratings, the State of Michigan saw its
rating upgraded, mainly because of budget austerity
including cuts in aid to municipalities
Restoring aid to cities at prior levels would not be new
“bailout” funds, but restoration to prior levels
Was the State upgraded on the backs of its municipalities?
Isn’t it normally the other way around?
•
•
•
•
•
•
•
Many cities across the country use surplus utility revenues to help fund general
fund expenses
Detroit’s water and sewer systems are creditworthy; as the owner and builder,
Detroit will always deserve a return on its investment in the system
State agency can refinance debt to pay off existing bondholders (who are secured
creditors anyway and will receive 100% on their bonds)
Change the flow of funds on the new State-issued bonds to guarantee a payment
to Detroit after expenses but before debt service. Insure this with a strong rate
covenant
Cost to the State? The costs of creating a new debt issuing conduit
Share surplus with suburban customers; in return, enact a regional tax to help
Detroit pay for truly regional assets like parks, museums, etc.
Regional tax used successfully by Pittsburgh, PA
One of two pieces of the
Emergency Manager’s Plan
for Detroit that I agree with—
Improving tax and fee
collections. It just makes
sense.
•
•
•
•
•
The second piece of the current Detroit Plan that I agree
with
There is no debate that some of Detroit’s most
important essential services need to be restored or even
bolstered
In order to maximize revenue collection, the city needs to
invest more operating expense
Improve and install new computerized financial
management systems & programs: a page out of the
1978 New York City Fiscal recovery playbook
Also included in Mayor Rendell’s plan for Philadelphia
•
•
•
•
•
•
•
•
•
Perhaps the single worst feature of the current Detroit Plan
Eliminating blight is the most important thing that Detroit needs to do
Using annual tax revenue to pay for such a large non-recurring expense is like
trying to pay cash to buy a house-CAN ONLY BE DONE IF YOU HAVE THE MONEY
(Detroit does not).
Why do it in six years when it might be able to be done in two?
The nature of the expense lends itself to use of long term bonds
Tax increment bonds would not add to Detroit’s balance sheet liabilities; City
could also consider selling blighted properties after they are cleared
City’s major taxpayers could invest, and in the process improve the value of their
current investment in the city
An avenue for Detroit to revive and lead american manufacturing again?
Best short-term stimulus that Detroit could have to reduce its high unemployment rate until new permanent jobs are created in the “Renaissance”
•
•
•
City’s tax-supported debt is retired much more rapidly than the
average city: 63% in 10 years
If you refinance existing tax-supported debt with a 30-year level
debt service structure, it will add costs to the back end of
Detroit’s finances, but would generate about $257 million to the
10 year plan
If either the current plan or my Plan B is successful, economic
activity should revive, generating more resources beyond the 10
year forecast, which could be used to rebuild pension fund assets
and/or pay back tax-supported debt early (perhaps using
California’s Economic Recovery Bond structure with a “turbo”
feature)
•
•
Stop adding to Detroit’s existing expensive pension plans
Shift to new defined contribution pension plans, similar to
401K plans
•
•
•
Puerto Rico achieved this 13 years ago in a major change to
its pension plans
This is the current “vogue” for both public entities as well
as private corporations
Has the Emergency Manager looked into the possibility of a
“buyout” for current employees’ pension plans?
COMPARATIVE 10 YEAR FINANCIAL FORECASTS FOR DETROIT
ACCUMULATED DEFICIT AFTER
10 YEARS
NET END RESULTS
(-$4.175 BILLION)
$4.175 BILLION OF BILLS GO UNPAID
EMERGENCY MANAGER'S BANKRUPTCY PLAN
$1.679.6 BILLION*
VARIOUS ESTIMATES PROJECT THAT
BONDHOLDERS AND PENSIONERS
GET FROM 3 CENTS TO 20 CENTS ON
THE DOLLAR
PLAN "B"
($ -$591 MILLION)
MORE NEEDS TO BE DONE, BUT THEN
ALL CREDITORS GET PAID IN FULL.
PLAN
"DO NOTHING"
*This "surplus" would be used to pay debt given to pensioners and bondholders to replace their current claims.
•
•
•
HISTORY YOU WANT TO REPEAT ITSELF: “THE PHILADELPHIA STORY”
SET AN AGGRESSIVE SPENDING REDUCTION/SAVINGS PLAN
• RENDELL ONLY NEEDED TO ACHIEVE 40% OF HIS TARGETS FOR HIS PLAN TO
SUCCEED
POSSIBILITIES:
• PRODUCTIVITY BANK: SPEND MORE TO SAVE MORE
• CONSOLIDATING SERVICE DELIVERY
• PRIVATIZATION OR “COMPETITIVE BIDDING” BETWEEN PRIVATE SECTOR AND
CURRENT CITY DEPARTMENTS FOR THE BEST SERVICE AT THE LOWEST COST
• SHARED SERVICE AGREEMENTS WITH COUNTY AND/OR SURROUNDING
SERVICES
• E.G.: CENTRALIZED POLICE/FIRE/EMERGENCY DISPATCH CENTER
• COMPETITIVE BIDDING FOR HEALTH CARE CONTRACTS
• CONSOLIDATION OF MYRIAD FRINGE BENFIT PLANS INTO A SINGLE PROVIDER
TO OBTAIN EFFICIENCIES OF SCALE
•
•
•
•
•
THE MAJOR DISTRESSED CREDITS OF THE PAST 40 YEARS WOULD NOT HAVE
SUCCEEDED WITHOUT STRONG POLITICAL LEADERSHIP:
• N.Y.C. IN 1975 & 1993: ED KOCH & RUDY GIULIANI
• PHILADELPHIA IN 1992: ED RENDELL
• WASHINGTON D.C. IN 1995: CFO ANTHONY WILLIAMS (LATER TO
BECOME MAYOR)
THE NEXT MAYOR OF DETROIT WILL BE IN THE HANDS OF THE VOTERS THIS
NOVEMBER
DETROIT’S WOUNDS WERE HEAVILY “SELF-INFLICTED”, CREATED BY THE PEOPLE
THAT DID (OR DID NOT) LEAD
THE NEXT MAYOR MUST HIRE A “DEMOLITIONS EXPERT” TO ELIMINATE THE
BLIGHT
DETROIT DOES NOT NEED A “DEMOLITIONS EXPERT” TO MANAGE THE CITY’S
FINANCIAL AFFAIRS
• Email Me at [email protected]
• Access all of Dick Larkin’s reports and
commentaries on the HJ SIMS website
under SIMS INSIGHTS:
http://www.hjsims.com/news-andviews/sims-insights/