The Consequences of America's Shrinking Cities and States

Americans are on the move. They're leaving various cities and states to avoid high taxes, crime, high costs of living, and to seek better jobs; or, to simply retire.  The downside to this is potential bankruptcies as the tax bases shrink; leaving cities and states with expensive pensions and other commitments that are left over from a time when populations were much higher.

This was certainly the case in the now-bankrupt Detroit.  In 1950, that city's population was 1.8 million. By 2013, it had only 700,000 residents.  But, Detroit's problems -- as the largest city in Michigan -- are taking that state along with it.  Right now, Michigan is on the verge of losing one of it's  Congressional seats due to it's slowing growth.  As a state with nearly 10 million residents, the population increased by only 6,270 from 2014 to 2015; according to the Census Bureau. 

Illinois is in a similar "state" of affairs.  It, too, is close to losing a Congressional seat to some other faster growing states like Texas.  Key to the loss there, is the fact that its largest city, Chicago, is shrinking in size.  New York state is also losing people, but in its case, many of those leaving are high end earners.  Even the weather-desirable California is seeing its population growth slowing.  The fact is that 8 states have growth rates of less than 1/2 of a percent and well below the inflation rates for running the state's expenses.

We are getting very close to an actual bankruptcy of the entire State of Michigan, and not just a single city like Detroit.  Not far behind are Cleveland, Pittsburgh, St. Louis, and Youngstown, Ohio who have all seen losses greater than 50% from their peak populations.  The list of all the cities (see references) that have lost populations is substantial.  As a result, people located in those areas are bound to see higher taxes as the legislatures try to cope with increased costs and a lower tax base.  Raising taxes would only cause even more people to leave.  This is a serious spiral that America cannot afford.  The city/states that are effected need to rethink ways to restore population without raising taxes or we will all wind up paying higher taxes to bail them out.

References:

The Incredible Shrinking Illinois: http://www.chicagomag.com/city-life/February-2016/Where-Is-Illinois-Losing-Population/

Chicago area sees greatest population loss of any major U.S. city, region in 2015: http://www.chicagotribune.com/news/local/breaking/ct-chicago-population-record-loss-met-20160324-story.html

Taxpayers are fleeing New York in droves: http://nypost.com/2016/09/15/taxpayers-are-fleeing-new-york-in-droves/

The Decline of Detroit: https://en.wikipedia.org/wiki/Decline_of_Detroit

Mich. population rebound is slowing, census shows: http://www.detroitnews.com/story/news/local/michigan/2015/12/22/mich-population-rebound-slowing-census-shows/77746798/

Once a boom state, California sees a historic period of slow population growth: http://www.sacbee.com/site-services/databases/article69054977.html

Warning: New Jersey in Midst of Millennial Outmigration: http://www.njspotlight.com/stories/16/02/15/new-report-warns-that-new-jersey-is-in-midst-of-millennial-outmigration/

New Jersey Herald: Time to address population loss: http://www.njherald.com/article/20160327/ARTICLE/303279973#

List of U.S. states by population growth rate: https://en.wikipedia.org/wiki/List_of_U.S._states_by_population_growth_rate

Shrinking cities in the United States: https://en.wikipedia.org/wiki/Shrinking_cities_in_the_United_States

America's Cities In Decline

On Monday, May 1st, Atlantic City avoided a default on its debt payment by the hair of its
mayor's chinny, chin, chin.  They may not be so lucky the next time around.

With a third of its casinos now shuttered, the city is struggling to survive, as shown by this graphic from the Wall Street Journal:

With per-person debt at double that of Detroit and Chicago, Atlantic City looks as if it will  soon be joining Detroit in bankruptcy.  Raising taxes isn't going to do the trick unless you tax everyone an average of 26% against their $26,936 incomes.

Then, there was a story from CNBC that said that 34% of the San Francisco Bay residents surveyed wanted to leave that area due to the cost of living, traffic, poverty, crime, and homelessness.

Add to that the story in Bloomberg News which showed that 20 cities in 2014 -- one-fifth of the top 100 cities -- saw their populations decline.

The point about all this is that declines in populations lead to struggling economies for all too many American cities because the people who do manage to move away are those who can afford to do so.   The ones left behind are generally the poorer and can't afford to move.  As a result, city revenues fall, debt increases; and bankruptcy isn't far behind.

The bottom line is that we have too many population centers in this country that are dying due to high taxes, crime, no jobs, low pay, decaying infrastructure, traffic, record poverty, and homelessness.  The lackluster economic growth of the last 7-1/2 years of the Obama administration have done nothing to correct this urban decay.

References:

Atlantic City, America’s Worst-Rated Town, Stares at Default: https://www.google.com/search?q=Atlantic+City%2C+America%E2%80%99s+Worst-Rated+Town%2C+Stares+at+Default+&ie=utf-8&oe=utf-8

Atlantic City makes debt payment as mayor averts a default: http://www.chicagotribune.com/news/sns-wp-blm-atlantic-city-683c0ab6-1084-11e6-a9b5-bf703a5a7191-20160502-story.html

Survey says: 34 percent of Bay Area residents are ready to leave: http://www.cnbc.com/2016/05/02/survey-says-34-percent-of-bay-area-residents-are-ready-to-leave.html

These Are the Top 20 Cities Americans Are Ditching: http://www.bloomberg.com/news/articles/2015-07-22/these-are-the-top-20-cities-americans-are-ditching

Obama Whines About Lack of “Credit” for Economy as it Tanks: http://www.whitehousedossier.com/2016/04/28/obama-complains-lack-credit-economy-growth-sinks/

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Chicago's 'Netflix' and Other Taxes Will Only Drive More People Out Of The City

Last year, Chicago grew by 82 residents. An amazingly low number when you consider that a city of 2.723 million residents should have produced at least 35,000 babies. That's assuming that Chicago matches the average birth rate in America which stands at  1.3% of the population.  By only growing by 82 residents, the city actually lost more than 35,000 people in one year's time.

Steeped in pension debt, Chicago is trying to bail itself out through higher taxes and not through real pension reforms.  The more the city taxes its residents, the more they will leave, and those leaving are generally those who can afford to move somewhere else; resulting in a city with an increasing percentage of poor and low income residents.  Thus, tax hikes tend to fall short of their projections; leaving the City to find even more things to tax.

This is a death spiral.  Chicago, just like now-bankrupt Detroit, saw its peak population in the 1950's.  After years of Democratic control, Chicago, like Detroit, gave away generous pension benefits and early retirement to too many of its city workers.  Now, there are not enough revenues to cover the mistakes of the past.

Last year, the City slapped a 9% tax on all business and residential telephone services and, all indications are, the projected revenues will fall short.  Really?  Chicago just lost 35,000+ residents who took their phones and spending elsewhere.

So, now, they have come up with a new tax revenue scheme:  the so-called 'Netflix' tax.  In actuality, its part of a 9% tax on all amusements which has now been amended to include streaming Internet entertainment video services like Netflix and Vudu, and a higher tax on cable television (which had previously been 3%).  In addition, the City's parking tax has been upped from 20% to 22% during the week, and on the weekend, the tax is raised from 18% to 20%.  The tax on leased vehicles has also been raised from 8% to 9%. Also, skyboxes at the City's stadiums will  be hit with the 9% tax.  Some might not find all these new amusement taxes very amusing and just decide to call someplace else home.

It's just a matter of time before Chicago has nothing left to tax and not enough people to collect those taxes from.  The pension problem just get bigger as more workers retire and live longer; while the City's tax base gets increasingly smaller.  Surely, this is exactly Einstein's definition of insanity: Doing the same thing over and over again and expecting  a different result.  I smell bankruptcy.  Don't you?

References:

Finance Committee approves Emanuel's $62.4 million tax package: http://chicago.suntimes.com/politics/7/71/154153/finance-committee-approves-emanuels-62-4-million-tax-package

Chicago finds new tax stream: Netflix, Spotify, online gambling: http://money.cnn.com/2015/07/02/media/chicago-streaming-tax/

Chicago's Population Grew by Only 82 Residents in One Year: Census: http://www.nbcchicago.com/news/local/Chicagos-Population-Growth-Slows-Dramatically-304555131.html

Chicago and Detroit's Declining Populations: Chart: https://karlheubaum.files.wordpress.com/2013/02/chicago-and-detroit-populations.png?w=625  Source article: http://karlheubaum.com/2013/02/10/chicagos-declining-population/

Five Reasons Chicago Is in Worse Shape Than Detroit: http://www.bloomberg.com/news/articles/2015-05-13/how-chicago-city-of-junk-just-moved-a-little-closer-to-detroit

Illinois' Blue State Blues on Unfunded Union Pension Liabilities

For decades, the mostly Democrat-controlled (blue) state governments have caved to their state union worker's demands for earlier retirement ages and increased pension amounts and benefits.  All to curry votes. Never once paying any real attention to the fact that Americans are living longer and that many rust-belt states are seeing declines in their taxable populations and increases in their poverty rates.  This is the problem facing the State of Illinois today.

Illinois has a massive unfunded pension liability problem that they may not get themselves out of until bankruptcy.  A problem so bad that the then-Governor Pat Quinn signed a 67% tax increase into law in 2011.  Then, in December 2013, that same governor signed some modest reforms that should have slowed the growth of the impending pension crisis.  But, the unions fought back; claiming that the State had a contractual obligation to pay pensions and that the amounts can never be changed. On May 8th, the Supreme Court of Illinois unanimously sided with that union argument. So, the pension crisis continues on unabated.

How big is the pension problem anyway?

The numbers are staggering, As of 2014, if you are a taxpayer and potentially on the hook to come up with the cash to pay all those retired state workers.  The unfunded pension amount, in all categories of programs, is $104 billion and growing by the day.  This is a state of nearly 13 million residents of which only half are actively working and able to pay income taxes that could help cover that huge debt.   But, if you do the math, that is a per-worker liability amount of nearly $16 thousand, and growing exponentially every year.  For, example, in 2000, the total pension liability was $15.6 billion or nearly one-seventh of what it is today.

What makes it even worse it that the Illinois' tax base is shrinking as taxpayers flee the state's already high taxes (income, real estate, sales, etc.).  I know I did. My wife and I escaped to Las Vegas for that very reason (along with the weather).  In Illinois, we were paying property taxes that were 2-1/2 times higher for a house that was 32% smaller and on a lot that was 1/3 the size of what we have now.  Also, thanks the Casinos, we pay no state  tax. The simple fact is that, based on a study of tax date in 2010, Illinois lost almost 50,000 taxpayers and their dependents in that year alone, along with almost $2 billion dollars in tax revenues.  This of course, was before the State raised its income tax by 67% in 2011; which probably only exacerbated the exodus.

There is one more problem that is putting Illinois on a path to bankruptcy.  Rising poverty.  Since the recession of 2007, the number of people in poverty has risen an average of 3.1% per year with "officially" only 2 million people or 14.1% in poverty.  But, that official rate assumes that even if you make a dollar more that the designated poverty income level per year, you're rolling in cash.  The Heartland Alliance says that 33% of Illinois residents are "at" or "near" poverty.  This is especially troubling for the pension crisis because people in poverty don't pay any taxes and people near poverty pay very little; and at the same time, sap the State treasury with welfare assistance.

Personally, I can't see how Illinois can avoid bankruptcy.  The unions won't concede on pension benefits.  The tax base is shrinking.  The workforce is shrinking while poverty is rising.  Essentially this is an all encompassing recipe for fiscal failure.  Of course, if the State is taken down by its pension shortfalls, those retired union personnel may just see much of their pension decimated.  They should have accepted the modest reforms and not taken the case to the State's Supreme Court.

References:

Definition: Blue States: https://www.google.com/search?q=blue+states+definition&ie=utf-8&oe=utf-8

Illinois Supreme Court rules landmark pension law unconstitutional: http://www.chicagotribune.com/news/local/politics/ct-illinois-pension-law-court-ruling-20150508-story.html#page=1

Census Bureau Quick Facts: Illinois: http://quickfacts.census.gov/qfd/states/17000.html

Illinois workforce smaller than at any time during the recession: http://www.rebootillinois.com/2014/08/06/editors-picks/kevin-hoffmanrebootillinois-com/illinois-workforce-numbers-since-recession/22205/

Outrageous Public Pensions Could Bankrupt These States: http://www.thefiscaltimes.com/2015/03/30/Outrageous-Public-Pensions-Could-Bankrupt-These-States

Report: Illinois poverty remains stubbornly high: http://www.washingtontimes.com/news/2014/jan/30/report-illinois-poverty-remains-stubbornly-high/?page=all

IRS data show more taxpayers fleeing Illinois: https://www.illinoispolicy.org/irs-data-show-more-taxpayers-fleeing-illinois/

Illinois' 33%: A Report on Poverty: http://www.ilpovertyreport.org/sites/default/files/uploads/Illinois_33percent_PovertyReport_FINAL.pdf


Illinois’ temporary tax hike: $18 billion later: https://www.illinoispolicy.org/policy-points/illinois-temporary-tax-hike-18-billion-later/

The victims of Illinois' failure on pensions - Chicago Tribune: http://www.chicagotribune.com/news/opinion/editorials/ct-pension-ruling-victims-edit-0510-20150508-story.html

Taxpayers Still Paying For The Failings Of Obama's Energy Secretary Chu

Basically, Steven Chu was picked by Barack Obama to be his Energy Secretary because he was a climate change zealot who wanted to eliminate all fossil fuels.  So, like any zealot, he never saw a green business or green technology that he didn't like.  Even if that business or technology made no operational or economic sense.  As a result, the list of failed companies that he recommended while in office continues to grow.  So too, do the billions of taxpayer dollars lost to his bad judgement.

Recently we learned of the biggest of the Chu losers: The Ivanpath Thermal Solar Power Plant.  Built at a cost of $2.2 billion, Obama and Chu -- actually the taxpayers -- footed $1.6 billion dollars of that cost as a loan, but the plant is only producing a quarter of the energy output promised and that means that it is losing money big time.  As result, that loan is looking a lot like another $1.6 billion taxpayer loss.

On top of the loss of money, thermal solar technology is literally incinerating any birds that gets near it.

That fact that this plant is 75% short of its power output just proves that Chu, and the people who reported to him, didn't do an adequate scientific or engineering review of the project.  It is simply more proof that ideology is being put ahead of all else in Obama's failed presidency.  What the new Congress needs to do in 2015 is to cut off funding to the President's Energy Department so this kind of abuse of funds is put to an end.

References:

At Ivanpah Solar Power Plant, Energy Production Falling Well Short of Expectations: http://breakingenergy.com/2014/10/29/at-ivanpah-solar-power-plant-energy-production-falling-well-short-of-expectations/

Ivanpah Solar Power Facility: http://en.wikipedia.org/wiki/Ivanpah_Solar_Power_Facility

Steven Chu: http://en.wikipedia.org/wiki/Steven_Chu

List of Failed Obama Green Energy & Solar Companies in the Billions: http://www.freerepublic.com/focus/f-bloggers/2930442/posts

Green Energy Failures: https://www.gop.com/topic/government-accountability-green-energy-failures/canonical/

Are We Really Better Off Since Obama Took Office?

In front of adoring crowds at one of his all-too-many campaign style events, President Obama has claimed that "By almost any measure, we are better off since I took office" or that America is stronger under his watch.

The problem with such statements is that they are factually untrue when looking at the broader state of our union.

Sure, the President can claim that overall unemployment is down from where it was when he took over the reins of government in January 2009.  But, to get there, overall unemployment rose to a rate of 10% in the first year-and-a-half of his presidency.  Something that the so-called "stimulus" was supposed to avoid by promising that the unemployment rate wouldn't go above 8%. Even now, 5 years passed the end of the official end of the recession, this country still has an unemployment rate that is a full point above pre-recession levels.

Our major cities have extraordinarily high unemployment rates.  Chicago, Obama's home town, is still at 8.0%; and, that's just recently down from a January 2014 rate of 9.6%.  Detroit, now in bankruptcy, had an unemployment rate of  17.7% in July.  A city like Atlantic City, that depends heavily on Americans spending leisure-time money, is suffering from cash-strapped tourists unable to indulge in what they have to offer. The casinos are closing and the unemployment rate sits at 13.7%. More worrisome is the fact that our three largest cities -- Los Angeles, New York, and Chicago -- are dangerously close to following Detroit into bankruptcy.

The Gross Domestic Product (GDP) is stuck at a 5-year growth rate of about 2%. This is, at least, the worst recovery since World War II and, some say in the history of the United States when using alternate methods of calculating GDP.
Then there's the overall economic health of America.  For 5 straight years the median incomes of this country have fallen and income inequality has risen to a record high.  Half the jobs created under this President's watch were low income/low paying.  When he took office, only 30 million Americans were on food stamps.  Today, that number is 47 million; a 56% increase.  Similarly, only 38 million Americans were living in poverty.  Today, that number is a record 47 million and has stood at 15 percent of the population for the last 2 years. Thus, as the population grows, so does the amount of people left in poverty.

Of course, the real elephant in the room is the amount of debt that Obama has left us with; a number that only gets worse by the day.  At the beginning of his first term, the federal debt was $10.6 trillion.  Today, it is closing in on $18 trillion; just $250 billion from the current number (as of this writing) of $17.756 trillion. A number that, for the first time in this nation's history, is greater than the total annual economic output of the country.  Of those advanced economies in the world, only Portugal, Italy, Ireland, Greece and Spain can claim debt levels above their economic output. All of which are near bankruptcy and on the brink of bringing the European Union to its knees.

When we see people standing behind President Obama and nodding in agreement that things are better, you have to wonder what planet they're from.  Most other Americans (74% in one poll) still think that we never recovered from the recession.  And, in so many ways, they're right.

References:

By almost any measure, we are better off since I took office: http://www.realclearpolitics.com/video/2014/07/10/obama_by_almost_every_measure_we_are_better_off_than_when_i_took_office.html

Obama claims US is 'stronger' than 'when I first came into office' as economy weakens, debt soars, America loses global influence and border crisis deepens: http://www.dailymail.co.uk/news/article-2722926/Obama-claims-US-stronger-I-came-office-economy-weakens-debt-soars-America-loses-global-influence-illegal-immigrants-flood-border.html

Half Of The Jobs Created During The Recovery Were Low-Paying: http://thinkprogress.org/economy/2013/05/14/2008591/jobs-recovery-low-paying-minimum-wage/

Chicago Unemployment Rate Falls to 8.0%: http://www.worldbusinesschicago.com/news/chicago-unemployment-rate-jul2014

Detroit Unemployment Rates:  https://ycharts.com/indicators/detroit_mi_unemployment_rate

Unemployment rises in most US states in July: http://www.detroitnews.com/article/20140818/BIZ/308180072

 Another Atlantic City Bust: Trump Plaza Closes: http://abcnews.go.com/US/wireStory/trump-plaza-4th-atlantic-city-casino-shutdown-25528499

3 huge cities flirting with bankruptcy: http://money.msn.com/investing/post--3-huge-cities-flirting-with-bankruptcy

Obama’s economic recovery: officially the worst in US history: http://poorrichardsnews.com/post/41366829334/obamas-economic-recovery-officially-the-worst-in-us

Median Income Falls For 5th Year, Inequality At Record High: http://www.huffingtonpost.com/2013/09/17/median-income-falls-inequality_n_3941514.html

47 million Americans on food stamps: http://img.washingtonpost.com/blogs/wonkblog/files/2013/09/SNAP-participants.jpg

That’s rich: Poverty level under Obama breaks 50-year record: http://www.washingtontimes.com/news/2014/jan/7/obamas-rhetoric-on-fighting-poverty-doesnt-match-h/?page=all

America's Poverty Rate Stuck At 15 Percent For Second Straight Year: http://www.huffingtonpost.com/2013/09/17/poverty-america-census_n_3940812.html

 74% said we are still in a recession: http://patch.com/new-hampshire/concord-nh/is-the-recession-over-yet#.VBR1qmNAVLU

U.S. Federal Debt Exceeds GDP: http://jamesviser.com/?p=995

Los Angeles Is On Shakey Ground; Literally and Economically

All three of our largest cities -- Chicago, New York, and Los Angeles -- are currently walking a fine line between solvency and bankruptcy.  While all three cities must better manage their finances in order to avoid looking like the Godzilla of all bankruptcies in comparison to, say, Detroit, Los Angeles has an added difficulty to contend with: A Possible Mega-Sized Earthquake. 

Right now, the series of earthquakes near Los Angeles have mostly resulted in minor damage; although, some homes have actually been structurally condemned.  But, what if a 6.7 quake or higher hit the city?  The damage could be massive.  Just as it was when a 6.7 hit the Northridge area in 1994.  That quake caused $25 billion in damages in a somewhat smaller and must less densely populated area of  Los Angeles.  But, the current activity is on a little known Puenta Hills Fault which extends through downtown L.A. and into Hollywood. Between a tangle of overpasses, high rises, and older buildings, the toll in lives and damage could be many times greater than what Northridge and other surrounding communities experienced.

If such an event did hit the heart of L.A., police, fire, and most city workers would all be called into action.  There could be serious damage to many civilian and municipal buildings, city roads and bridges.  The cost could literally tip the city into bankruptcy almost instantaneously; and, certainly a lot earlier than the estimated 2 to 3 years that lawmakers had "thought" they had left to fix their financial woes.  If it is hastened by an earthquake, the city managers have only themselves to blame. For years, they've dallied while, all along, bankruptcy was staring them right in the face.

References:

Three Huge Cities Flirting With Bankruptcy: http://money.msn.com/investing/post--3-huge-cities-flirting-with-bankruptcy

1994 Northridge Earthquake: http://en.wikipedia.org/wiki/1994_Northridge_earthquake

Major quake on Puente Hills thrust fault could be worse than San Andreas: http://www.upi.com/Top_News/US/2014/03/30/Major-quake-on-Puente-Hills-thrust-fault-could-be-worse-than-San-Andreas/7831396195031/

Obama, The Minimum Wage, The GAP Stores, and Circuit City

Recently, Obama went to a GAP store to make another pitch for raising the minimum wage to $10.10. The reason he chose the GAP as his prop is because they recently announced that they are voluntarily raising their entry level wage to $9 this year and $10 in 2015. Citing that there were no politics behind the wage increase, it must be that the GAP feels that this increase will ultimately benefit their company by attracting a better class of worker and will result in less employee turnover.  A fact that has been borne out by hundreds of companies that have paid their employees more than the minimum wage.

What isn't clear is whether or not the GAP will raise their entry level wages again by another 41%, if the Federally mandated $10.10 minimum wage becomes effective.  You know, to keep a better class of worker and all that by paying them more. After all, they said the current 41% increase in wages had nothing to do with politics.  This from a company that is headquartered in the most politically liberal town in America, San Francisco, and, more than likely, are supportive of Barack and his liberal agenda. But, what is even more remarkable is how "employee caring" the company has suddenly become.  I say this because, in the past, they have been criticized and even sued over the sweat shop  conditions they've maintained in manufacturing locations like Bangladesh, Saipan, and India.

While it's true that paying more than the minimum wage has advantages in employee loyalty, that same loyalty can kill a business. That's exactly what happened to Circuit City when, in late 2008, it went bankrupt; with thousands losing their jobs.  Just like the GAP, they too thought it was smart to pay much higher than the minimum wage.  But, when the competition, like Wal-Mart and Best Buy, were able to price products lower because of lower wages, they were stuck with a very loyal but extremely expensive workforce.  In 2007, a year before going belly up, they blamed their financial problems on "wage management" issues.  At they same time, they announced a lower entry level wage and that they would lay off 3400 higher paid employees who would ultimately be replaced with lower paid workers.  But, their fate was already sealed long ago.

I just hope the GAP knows this, because our President will never understand why many companies will die if the minimum wage is raised another 41%.

References:

GAP to Raise Minimum Hourly Pay: http://www.nytimes.com/2014/02/20/business/gap-to-raise-minimum-hourly-pay.html

President Obama makes shopping stop at New York Gap as part of minimum wage campaign: http://www.nydailynews.com/new-york/obama-unscheduled-trip-gap-part-min-wage-campaign-article-1.1718211

GAP Labor Practices: http://en.wikipedia.org/wiki/Gap_Inc.

Circuit City: http://en.wikipedia.org/wiki/Circuit_City

Gap admits to child labour violations in outsource factories: http://www.theguardian.com/business/2004/may/13/7

GM Still Has One Big Financial Problem

Based on the current stock price, anyone could buy GM for a mere $31 billion and change.  However, if you did buy the company, you would also take on $109 billion in "current" pension liabilities.  That's a burden that is 350% greater than the market value of the company. 

In June, GM announced that it was going to try and reduce those liabilities by $26 billion by offering 42,000 non-union employees a chance to opt out of their pensions by accepting a one-time, lump-sum payout at age 65.  The payout, itself, would be equal to whatever the annual pension would have been  over 12 years; starting at age 65.  Now, the cash for this is basically taxpayer money; part of the $33 billion that was left over from the $50 billion that the government gave GM to remain solvent.

But, even with this lump-sum program, GM is still left with $83 billion in liabilities; of which, $71 billion are theoretically non-negotiable union pensions.  That $83 billion is still 260% greater than the company's value, and, because union pension programs remained intact following last year's 4-year labor contract agreement, those pension liabilities will only continue to grow. 

Now, even if GM could fund the pension liabilities with every dollar it made in profits, it would still mean that it would take a decade or more to cover that liability in total; and, of course, realistically, that just won't happen.  Its pension liabilities could be a ticking time bomb that could sink the company once again.

The problem here was the way GM was bailed out.  Obama sided with labor, and all the labor commitments and contracts were left unchanged.  That would not have happened if they went through a normal bankruptcy process.  As a result, you have a company that, in the short term, looks to be successful,  but, in the long term, may be a disaster waiting to happen.  This is a major reason why GM's stock price is so low; below $20/share.  And, the taxpayers?   They're really screwed because its looking like it will never get back to the $53/share that is needed for us to breakeven on Obama's bailout of the company.  Basically, GM is another Obama Solyndra.   This time, a bankruptcy in slow motion.

Biden: Bin Laden Is Dead, GM Is Alive

Ahead of the one-year anniversary of the Bin Laden raid, Vice President Joe Biden proudly declared: "Bin Laden is dead, GM is alive."

Now, I'll buy Obama/Biden taking credit for the Bin Laden killing.  But, as far as GM being alive, the qualifier should be "just barely".   While the company looks profitable on paper, let's not forget that this profitability came at a very high cost to the taxpayer's with a $56 billion bailout.  At the same time, prior stockholders and creditors were literally thrown under the bus with Obama handing ownership over to the unions and the U.S. Treasury. And, with the stock price floundering, it looks like it will be a very long time before the taxpayer will get any of its money back.

However, lurking just below the surface, GM has a major problem that could, again, put that company into serious financial trouble. That problem is underfunded pension funds.  As of the end of last year, it was estimated that GM's pension funds were short $31 billion dollars; growing from a $22 billion deficit at the end of 2010.  That was a net deficit increase of $9 billion in just one year and far greater than the $7.6 billion in GM's profits for that same year.  What's more disturbing is the fact that, based on stock price, the total value of the company barely exceeds its pension deficit at the end of 2011.

Unless GM can get some concessions on existing pension liabilities, that company will be right back facing bankruptcy in as little as two years.  That's because the pension fund payouts are rising much faster than GM's profits and its contributions to pension funding.   This pension problem is one of the reasons that GM's stock price is floundering.   A problem that will only get worse with time.

Commercial Real Estate: The Next Shoe

As economic activity continues to slow, the next shoe to drop may be a spate of real estate bankruptcies and foreclosures as small retailers and businesses shutdown in our malls, strip malls, store fronts, and in our industrial parks.

This week, one of the nation's largest retail space developers/managers filed for bankruptcy protection. Simply speaking, that company, General Growth Properties or GGP, saw it's revenues for store leases decline to the extent that it could no longer cover all its mortgage and debt obligations (See Full Story).

Just like the home mortgage defaults, these kind of commercial property problems will hit our banks hard because, like those risky home loans, some of these commercial properties were covered by credit default swaps. But, even worse than the housing market, there is only a limited market for empty office and retail space when an economy hits hard times. That means that these commercial spaces could sit idle for a very long time; even years. As a result, the losses of individual commercial property values could be greater than price declines that we saw in the housing market.


Image by bradleygee's photostream on Flickr with Creative Commons Licensing. Some rights retained. (Click to View Other Works).

No News Isn't Good News

Apparently, a Democrat, Senator Ben Cardin, thinks that the newspaper industry of America can be saved by giving the newspaper companies a non-profit tax status (See Full Story). This just shows how out-of-touch our lawmakers are when it comes to taxes and businesses. It also exposes the fact that Democrats, too, think taxes hurt businesses. Something that a Democrat like Cardin wouldn't otherwise admit.

First, for the clueless Ben Cardin, I have a surprise: Those newspapers who are in jeopardy of going bankrupt or who have gone bankrupt are already non-profits because they aren't making any money. Because of this, they aren't paying any taxes. Paying taxes is not the problem.

Simply speaking, the problem with the newspaper industry is their business model. A model that, in essence, hasn't really been changed since the days of Ben Franklin; except for advertising.

The nation's newspapers are losing money because they are still operating with a massive printing and distribution infrastructure that can't compete with the low costs of delivering news vis a vis the Internet. Today, even though the population has grown, circulations have fallen off and have left them holding a big bag full of expensive printing presses, distribution trucks and all the supporting labor that is greater than their current levels of circulation.

First, I think they need to make a move to completely abandon paper for their news. The process of printing the news on paper is just too expensive.

Using the Internet is the first step. In the past, attempts to charge for Internet news distribution have failed. That's why I think they need a two-tiered system of distributing the news. They need to provide a free cursory news service that is expanded upon by a fee-based service. Think of the cursory service as being the sample candies being given out at a candy store to promote sales.

The in-depth, fee-based news could provide expanded news and commentary (the op-ed's), and even expanded want ads, obituaries, and expanded sale ads and coupons. The sale ads actually have a large audience. The monthly price should be reflective of the lowered operational costs. They should also give people an opportunity to read the online, fee-based news at a pay-per-view rate that is equivalent to buying a newspaper at a newsstand.

I also think that the industry can help itself by collectively developing a cheap, effective hand-held electronic reader that is akin to today's eBook devices (See Wikipedia Overview). The price target should be under $30. This is important because many people can't be tied to a PC for their news. They need the freedom to read the news on a train or on a bus or while having their breakfast coffee, or whatever.

The device should have the ability to download the complete news in just a few seconds. It should support public and private WIFI and should have a USB port to download from a PC. The power should come from a standardized and easily replaceable source like AAA batteries that are either rechargeable or replaceable.

Now, the only problem with all this technology is that the poor won't have access to the information. For this, I would suggest that the news companies provide gratis news kiosks at libraries and other public buildings.

Certainly, this plan of action won't save those companies that are currently in bankruptcy and may completely go under. However, I think something like what I have outlined above could be the savior of the industry. That's just my opinion.

The End Of Private Banking In America?

If you don't think banks are making enough loans to consumers and small businesses right now, just wait until the Congress passes its "cram down" legislation (See Full Story).

As I have said before, the basic business model for banking is fairly simple. They take money in from depositors with the promise of paying interest on that money. Then, they use that money to give out loans to borrowers. The interest income derived from those loans is then used to pay interest to their depositors. In essence, the bank is a lending agent or consolidator between a diverse group of depositors and some group of select borrowers. For that, the banks take a commission; which is their profit.

Now, enter the Democrats in Congress. They believe that people struggling with their mortgages (mortgages that they couldn't really afford in the first place) should have mediation conducted by a Federal bankruptcy judge. That judge, armed with this new legislation, will be able to accomplish what the real estate industry calls a "cram down" of any principal loan amount to a new, much lower level, with lower and much more affordable interest rates.

A "cram down" is simply forgiving any loss in market value that a defaulting homeowner has realized against their original mortgage loan agreement. In essence, a person who bought a house for a high price and who has an equally high mortgage value associated with that home (a.k.a. their principal loan amount), will have a new contract written to match today's lower market value and today's low interest rates. The bank, then, has to eat the difference as a loss. For the delinquent homeowner, it is nothing but a win-win situation. They walk away with a new loan amount and a monthly mortgage that is, in many cases, more than halved. For the bank, they will have sustained losses in the 5 to 6 figure range for each home that is being crammed down on them.

The Democrats argue that this will keep people in their homes. And, it will have no cost to the tax payers. Also, the value of all homes will be maintained because there won't be any empty and foreclosed homes in our neighborhoods.

If only these people understood either business, or banking, or the real estate market!

Every time you financially benefit one group of people in some legislative or court action, you disadvantage others. In a "cram down," you are forcing banks into accepting severe losses. At the very least, those losses will result in reduced interest rates to all their depositors. In those formerly hot real estate markets, many banks won't be able to sustain all the losses that are being forced upon them and the FDIC will have to come in and takeover those banks. The savings of some people, those who exceed the current FDIC insurance levels, can and will sustain heavy losses. Federal funds, from the taxpayers, will be used to square the accounts of remaining depositors through FDIC insurance. So much for no cost to the taxpayers!

If a bank remains solvent while still sustaining tremendous losses, they are not going to be inclined to make any more moderate-to-high-risk loans for fear that some other Federal Judge, at some time in the future, will cram some more losses down on them. This will only exacerbate the current tight credit conditions that already exist in this country. It absolutely will insure that there won't be a recovery from this recession. Further, the value of homes in the real estate market will continue to decline because there won't be any loans available to drive the demand that is very much needed to clear all the existing inventory in what is already an oversupplied housing market.

Apparently, our Congress and Mr. Obama don't seem to understand that it is a lack of home buyers and not necessarily the number of foreclosed homes that is driving home prices down.

Additionally, if a bank sustains heavy losses but remains in business, it is likely to lose depositors because they won't be able to pay adequate or competitive interest rates on their checking/savings accounts. People will move their money elsewhere and, ultimately, those banks will fail as a result of runs on their deposits. Once again, Federal (FDIC) insurance money will have to be used in taking over another bank. And, once again, that's taxpayer money; just in case our Congress doesn't know.

This whole mess could result in a complete collapse of our private banking system. The net-net will ultimately be a Federally operated banking system with all the losses, the pitfalls, the inefficiencies, and all the lack of creativity of our current United States Post Office. God help us all!

Will GM Management Be Speaking Chinese Soon?

One of the only remaining hot markets for General Motors products is, surprisingly, China (See Full Story). But, it is floundering elsewhere and absolutely living on the brink of bankruptcy. The stock price has fallen to just a couple bucks per share. I wouldn't put it past the Chinese Government to buy out GM if it goes belly up. I think that China would just love to have a well-known, worldwide auto concern that they could call their own; and the acquisition of GM would definitely do that.

My guess is that China will wait, like a scavenger, for GM to finally fall and die before coming in for the feast. That will happen when the voters and Congress can no longer feed GM anymore money to keep them in business. Then, they'll go into Chapter 11. Bankruptcy would allow GM to shed much of their debt and their labor commitments; both of which are making it very sick and killing it as an ongoing business concern. Bankruptcy would also put GM up on the chopping block for pennies on the dollar.

Right now, China is one of the few countries in this world with the money to buy anything. Increasingly they are buying up America by buying up all our debt. GM would only be another step in that process. With the ownership of General Motors, China would give the appearance of being a real industrialized country because almost all industrialized countries in this world, to some extent, have an auto company they can call their own. It is a measure of success that China might need and want.

Of course, this is all speculation on my part. But, if I didn't think it was plausible, I wouldn't have brought it up. If China doesn't buy GM, Chrysler could also be a target.

Image of Chinese Ad For A Buick Royaum by Hugo90's photostream on Flickr with Creative Commons Licensing. Some rights retained. (Click to View Other Works).