Today, the largest U.S. City to file for Bankruptcy, Detroit, Michigan–and in the largest bankruptcy filing ever–did so, with Debt of more than $18 Billion Payable, and only $1 Billion in Assets. Bondholders are somewhat concerned; because these were General Obligation Bonds. GO’s are payable from the ad valorem real estate taxes, as well as any other revenue that may be accessible to the City. They were regarded as the safest.
But, the handwriting has been on the wall for decades: the City’s population declined from 2 million in 1950, to the current 700,000. More than one-third of the population lives below the Poverty Level, and the Unemployment Rate is more than twice the national average.
The linked article, from The Wall Street Journal, provides a good overview, http://online.wsj.com/article SB10001424127887323993804578614144173709204.html#printMode. As businesses and jobs move out–and are not replaced–spending in the local economy declines, and also State and City tax revenues. Demands for City Services, however, increase too. And, that had led to Detroit getting a head-start on the decline in real estate values as: store fronts were boarded-up; homes were vacated; and crime and vandalism increased. Also, due to the Great Recession, help from the State of Michigan declined, as well.
Part of the problem, as I see it, is that too much of the Auto Industry was based in-and-around Detroit–and the City and State had done nothing to diversify beyond that. Several decades ago, as industries and jobs moved from the ”Rust Belt” to the South, to take advantage of lower pay-scales, some Detroiters moved as well. That included companies and workers that supply the Auto Industry, and their Families and many others.
Now, this should concern bond investors; because, much of the bond market moves somewhat in unison–not just with regard to Detroit or Michigan Bonds. Additionally, Detroit’s Pension Funds have been grossly underfunded; so, Retirees and those working toward Retirement should be concerned, as well. The Bankruptcy will surely result in more lay-offs and a further decline in residents–and tax revenues.
Some might wonder if the Federal Government might provide a Bail-out for Detroit, like it did for the Auto Industry. That Bail-Out saved 1.1 Million jobs, and kept many other businesses operating–not just GM and Chrysler. Plowing money into Detroit, at this time, would merely be throwing good money after bad. It would all be for nought! And also, what would President Barack Obama say to Allentown, Pa., Jefferson County, Ala. (Birmingham), Stockton, Calif., or other bankrupt local governments?
Now, I’m not suggesting that you Run for the Exit–or sell all your bonds. Review your portfolio, consider whether you have the proper mix in securities for your current situation–Stocks vs. Bonds, Domestic to Overseas, some Cash, etc. Do you have the right type of bonds or bond funds? Discuss it with your Financial Advisor, or whoever you get investment second opinions from.