Highland Park, Michigan is on the brink of bankruptcy. There is no other realistic way out of the fiscal mess the city is in. As is typically the case, public union pensions are at the heart of the problem.
Michigan Live reports Highland Park pensions in jeopardy if Fifth Third Bank halts loan payments.
The city of Highland Park is operating on financial fumes and the pensions of its retirees could be in jeopardy if Fifth Third, one of the banks providing loans to the municipality, cuts of the money stream.
According to the Associated Press, the bank has threatened to cut off loan payments to the city, which has prompted a legal battle that may have to be settled in court.
At this point, Highland Park is a risky investment. It’s ran nearly $500,000 over budget in 2012, the Associated Press reports, and under Public Act 436 will soon have to decide between accepting a consent order with the state, installing an emergency manager or filing bankruptcy.
In any case, the city’s creditors could face losses if the communities finances don’t recover.
Voters in Highland Park, which currently owes Detroit $18 million in water bills, voted in 2007 to take on $27 million in debt in order to maintain pension payments.
Comment of the Day
The comment of the day award goes to “Group W Bench” who responded to the Michigan Live report with: “When you already owe $18M you can’t pay, for something so vital as water, why would you agree to take on an additional $27M to cover pension payments? Why would a lender agree to loan this much money to a municipality that obviously cannot pay the debt back?“
Without a doubt the voters were stupid. So stupid, that I strongly suspect union and city official coercion to get that vote through.
Regardless, it’s going to backfire in a huge way.
Fifth Third Bank, Highland Park Lawsuit
The Detroit News reports Highland Park, bank battle over loans for pension costs.
Officials from financially strapped Highland Park and a bank providing loans to the city could appear before a federal judge after the bank threatened to halt the funds to cover pension costs.
Fifth Third Bank informed Highland Park last month it would stop providing loans the city uses to help pay worker pensions. Highland Park filed suit in Wayne County Circuit Court, saying that without the money, retirees would lose earned benefits.
According to court documents, Fifth Third Bank wants to cut off the loans over concerns that the city will not be able to pay up.
In a Dec. 12 letter to Mayor DeAndre Windom, the bank outlines its reasons for suspending the loans “based on the city’s incurrence and continuance of debt relating, among other things, to the city’s failure to pay amounts owed to the city of Detroit and the Detroit Water and Sewerage Department.”
The city sought a temporary restraining order in Wayne County Circuit Court to block Fifth Third from halting the line of credit.
The bank responded by requesting the case be moved to federal court.
Gov. Rick Snyder called for a review board to decide by next month whether bankruptcy will be declared or if the city will operate under a consent judgment. The city could also get an emergency manager to oversee the day-to-day finances rather than the community’s elected officials.
Time to Cut Losses
Fifth Third Bank is correct to cut losses.
A state review last year of Highland Park’s finances found violations of the Uniform Budgeting and Accounting Act during fiscal year 2012. The general fund went over budget by $491,161.
Breaching state-approved deficit elimination plans and violating the state budget law for municipalities are grounds for state takeover.
Unable to Pay Electric Bills Highland Park Shuts Off Lights
This is not the first time Highland Park is in trouble.
In 2011 Yahoo!Finance reported Unable to pay bill, Mich. city turns off lights.
Not only did the city turn off the lights, contractors from DTE Energy Co. began rolling through the streets, taking out two-thirds of the light poles.
Councilman Christopher Woodard called shutting off the lights a “winning proposition“.
The city has a $4 million electric bill it cannot pay. DTE considers the electric bill “uncollectable”.
Wikipedia notes:
In June 2001, because of the Highland Park’s mounting fiscal crisis, an emergency financial manager for the city was appointed under the supervision of the State of Michigan. In April 2009, state officials fired Arthur Blackwell as Highland Park’s emergency financial manager for over-payments that Blackwell received, and appointed Robert Mason as the new emergency financial manager.
In August 2011, over two-thirds of the streetlights in Highland Park were removed by the city, due to an inability to pay a $60,000 per month electric bill. The street lights were not only turned off, but decommissioned, or removed from their posts. The city advised residents to keep porch lights on in order to deter crime.
Highland Park IS Bankrupt
There is no question regarding the bankruptcy of Highland Park. The only open issue is when the city files.
Those running the city ought to understand that and do what’s right for taxpayers. The sooner the better. How many more “winning propositions” can residents take?
Since city officials are resisting bankruptcy, one can only suspect they are out to protect their own pensions.
Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com