Interesting thoughts from David Rosenberg on the Detroit bankruptcy and munis in general. He seems to be reiterating some of the Meredith Whitney fears about state finances. I haven’t had time to digest this one, but I hope to have some thoughts shortly. Here’s Rosie:
“As they say in the business, there is usually more than one cockroach in the motel.
That, or the proverbial canary in the coal mine.
Detroit certainly had special problems of its own. Lousy demographics. Terrible politics. Tax induced capital flight. Years of it. And a public pension fund that was 50% unfunded.
It is that last point that matters most because that is why Chapter 9 has been invoked.
But here is here is the reality. Only 73% of such pensions in the local government sphere are fully funded on an actuarial basis. And that number is assuming long term interest rates of 7-8%. Use a rate that is more realistic and, as the Economist aptly puts it, “the true ratio is a terrifying 48%”. Illinois, Connecticut, Kentucky and New Jersey all have pension liabilities that are a minimum of 137% of annual tax revenues. “
Source: Gluskin Sheff