This weekend's competition in Wisconsin is a bit more intense than it was in your grade school gym class.
When Detroit filed for bankruptcy last week, city comptrollers and treasurers around the country held their collective breaths. That’s because cities, it turns out, don’t file for bankruptcy in a vacuum.
Philadelphia is already feeling the effects of Detroit’s bankruptcy.
That city will pay hundreds of thousands of dollars in additional interest costs over the next 20 years because the interest rate on Philly’s new $197 million bond offering is going up a quarter percent.
We talk to WHYY senior reporter Dave Davies about why that’s happening, and what — if anything — cities can do to insulate themselves from future fiscal woes.
ROBIN YOUNG, HOST:
It's HERE AND NOW. When Detroit filed for bankruptcy last week, city comptrollers and treasurers around the country held their collective breath because cities, it turns out, don't file for bankruptcy in a vacuum. Take Philadelphia. Detroit's collapse is going to cost Philadelphia $500,000 a year, so writes Dave Davies. He's senior reporter and often host of FRESH AIR on Philadelphia's WHYY, which is part of the HERE AND NOW Contributors Network. He writes about the effects of bankruptcy in his Off Mic blog. So Dave, explain why would Philadelphia spend more because Detroit filed for bankruptcy?
DAVE DAVIES, BYLINE: Well, because Detroit's collapse threatened the credit status of cities everywhere. I mean Detroit filing for bankruptcy is like a sequoia falling. I mean the tremors are going to be felt by everybody in the forest. You know, cities everywhere borrow money regularly in the financial markets to, you know, finance capital projects and manage cash flow. And historically, city bonds have been considered absolutely safe. People think companies will fold. Cities won't. They pledge their full faith, credit and taxing power to repay those bondholders.
And so bondholders say great, that's a secure investment, I'll accept a lower interest rate. That's good for city taxpayers. If you have a prospect in Detroit of a federal judge issuing an order saying that bondholders will get stiffed on hundreds of millions of dollars of legally owed payments from Detroit bonds, that scares everybody who is thinking about investing in city bonds. And so that means the market is skittish, and any city going to issue bonds is going to have to pay more to borrow.
YOUNG: Well, remind us what's happened in other cities when judges have made those decisions.
DAVIES: A limited number of cities have gone into bankruptcy before, none nearly as big as Detroit. And we have to say that in Detroit there's still a legal fight about whether the city will even be allowed into bankruptcy court. But if you look at, for example, Central Falls, Rhode Island, last year, went bankrupt, went into court. And what happened there was that the city pensioners did take a cut in their benefits, but the state government passed a law saying that bondholders will be made whole. They were protected.
Now, in some other cases, in some California communities, bondholders' payments were impaired. So the law isn't clear. I mean it kind of depends on what state laws say about cities in fiscal distress and what bankruptcy judges decide. And the reality is that when you look at what - how the Wall Street rating agencies are viewing this, they are very uncertain about it, and they're warning bondholders in Detroit you may not get your money back.
YOUNG: Well, and you point out that it's not as clear as it would seem at first that you might think on the face of it, gee, the city should first pay these older workers, their pensioners who are expecting their pension. But then you remind us their investors may also be pensions for other cities.
DAVIES: Yeah. It seems like the humane thing to do is to give people those monthly checks and then, you know, let the investors go hungry. But it isn't so simple. I mean as you say - I mean a lot of the people who hold the bonds are themselves big pension funds and if - they count on those returns to feed their own people. And then there's the fact that cities everywhere rely upon good credit on Wall Street, you know, to do what they need to do. And if you don't pay the bondholders, that means every other city is going to have to pay more tomorrow, and that's going to put more pressure on their budget and taxpayers.
I mean it's just one of those ways in which the, you know, the financial system is so connected to everything in the economy that you end up with these really tough policy choices like we did back in 2008. Do you bailout the banks? Nobody wants to. But it might be the best of bad alternatives.
YOUNG: Well, and during the financial crisis every adviser was saying to us, what you should invest in? Well, invest in cities. So when cities sell a bond and they do that so that they can get money from investors to do things like build things, buy that bond because you're guaranteed to get your money back, but that's, you know, that faith has been shaken, as you say. So how did you come to $500,000?
DAVIES: Well, as it happens, the city of Philadelphia was planning a major bond issue this week, $197 million borrowing to finance capital projects, and so it went to market Thursday of this week as the impact of the Detroit bankruptcy, and another thing, which was a major downgrade in the city of Chicago's credit rating, those things were rattling the markets. And when I spoke to the city treasurer, Nancy Winkler, who's really a pro, she's been doing this for years in the private markets, she said we're going to pay about a quarter percent more on this bond issue of nearly $200 million.
You do the math. That means the annual debt service payments the city will make are up about $500,000. The good news for the city is its credit rating has been rising in recent years, and it will actually do better than it did a couple of years ago when it last went to the market with a big issue. But it's going to cost money. There's just no way around it.
YOUNG: Well, and some cities are seeing this as their job to let people know that they are healthy, you know, how well they're doing, talk to investors, talk to institutions. But then you can get bad press and it can destroy everything. And you point to an article in the Wall Street Journal which listed Philadelphia as a city that could go under in the way Detroit did. And you call them on it.
DAVIES: Well, yeah. I mean it was an editorial and I think it was called "Detroit, Who's Next?" And it mentioned Chicago and Philadelphia. And it actually overstates the perilous state of the city's pension fund, which is in some peril. I mean Philadelphia has some serious financial challenges, but the rating agencies have given them improving marks in recent years. So I think there's little prospect of default on Philadelphia credit.
But the fact is there are big challenges here as there are in a lot of places. In particular the school system here is in a terrible financial crisis. And every city will be making the case privately to rating agencies and big institutional investors, and publicly to the media and everywhere they can, that they're OK.
YOUNG: But then the other element that everyone looks at: pensions, how much cities have promised to their workers. And just stay in Philadelphia - how is it looking there?
DAVIES: Well, it's very troubling. I mean if you look at - what people do in a pension fund is they say, if we dissolve the fund today and we had to pay all of our existing retirees their promises until they die and the existing city employees who retire, you get a number. And then if you compare that to the assets of the fund, you see whether the number matches. And in Philadelphia it's about half of that number.
That doesn't threaten retirees' checks in the short term, but long term the city is going to have to figure out a way to improve performance of its fund, get more money into it or in some way limit the benefits it pays. And this is pretty typical around the country. Pension fund financial problems are pretty standard in a lot of cities, states and counties.
YOUNG: That's WHYY and FRESH AIR's Dave Davies, taking a look at how the crisis in Detroit is reverberating throughout other cities, including his own, Philadelphia. We'll link you to his blog at hereandnow.org. Dave, thanks so much.
DAVIES: Happy to help.
YOUNG: And Jeremy, you have some news on this topic?
JEREMY HOBSON, HOST:
Yeah. For all those pensioners who are worried that they are going to get the short end of the stick here, we learned today from Detroit's emergency manager, Kevyn Orr, that general obligation bondholders in that city will be unsecured creditors, which means they could get less than 10 cents on the dollar back for their bonds after the restructure.
YOUNG: But - in other words, pensioners were worried that they would be the only ones.
HOBSON: That they were gonna get the short end of the stick, but bondholders will get all their money back. It doesn't look like that's going to be the case.
YOUNG: OK. But this doesn't affect the fact that lenders will raise interest rates.
HOBSON: It doesn't.
YOUNG: Back in a minute, HERE AND NOW. Transcript provided by NPR, Copyright NPR.