In Federal bankruptcy court the following was reported, “On Friday, city financial consultant Kenneth Buckfire said … it was clear that the city did not have the funds to pay the unsecured pension payouts without cutting them. … Buckfire, a Detroit native and investment banker with restructuring experience, later told the court the city plans to pay unsecured creditors, including the city’s pensioners, 16 cents on the dollar. There are about 23,500 city retirees.”
So Detroit pensioners will have to look elsewhere in Michigan or in DC. Obama could propose to bailout those Detroit pension funds, but that would open the floodgates in every other depressed or just-wanting-fairness municipality. Obama would have to first get Congress to go along for Detroit. Undisclosed was how Detroit would stiff secured bondholders. Also unfunded is Detroit’s retiree health benefits.
If secured bondholders take a haircut, that will impact the rate required for any new Detroit bonds which might be issued. Of course, the Federal Reserve and Jane Yellin(?) could buy new Detroit bonds at a rate below market, or buy existing devalued bonds at par to prevent rising rates in the muni bond market.
A cold chill will spread up the backs of all municipal retirees, who believed their pensions were sacred. Detroit will set the precedent for future bankruptcies. Right now most all municipal pension plans make the unrealistic assumption of a 7% to 8 % return on investment and the funds have been buoyed by continuously rising stock market. But all good things must end, including a rising stock market. (4 Out Of 5 Valuation Methodologies Agree: The “Market” Is Overvalued) Very low rates for new municipal bonds is supported by the Fed’s ZIRP (Zero Interest Rate Policy) which is intended to drive down bond rates.
Thatcher paraphrased, “Detroit’s Pensioners ran out of other people’s money.” Detroit is where municipal pensions and Cadillac pension health plans are headed. Detroit will become the precedent. Will the pensioners be happy, if the amount is raised to $0.25 on the dollar? What happens if the Federal Reserve raises rates, ends QE, and/or the stock market tanks and the value held in the pension plans falls below even the $0.16 on the dollar proposed in Detroit.
The party’s over and the permanent hangover is next.