I’ve been talking for some time about U.S. municipalities and their budget deficit problems. Just recently, I cited a Moody’s Investor Services study that highlighted how the number of bankruptcies has doubled in the last two years after remaining steady over the previous 30 years!
Unfortunately, the cracks are starting to widen with budget deficits.
Pensacola, Florida, is situated at the westernmost point in the Florida Panhandle. With it being the envy of many outside of the city because of its location, the roughly 55,000 residents would probably argue otherwise when discussing the municipality’s budget deficit and the payments on their municipal bonds.
The pension liabilities of Pensacola are mounting to the point where, this year, the property taxes that the city takes in are not enough to cover the payout of pensions. This is before all of the other expenses and services the city has to deal with in the budget deficit.
The budget deficit facing the city is enormous. The solutions being tabled are going to be painful if instituted, but necessary when one considers that the pension fund is deeply underfunded due to the market crash of 2008 and low interest rates, worsening the budget deficit.
The options the city is tabling include raising taxes, cutting pension benefits, and raising the retirement age to be eligible for benefits (the norm with most municipalities these days). Naturally, none of these are sitting well with the unions and Pensacola’s citizens—budget deficits and municipal bonds be damned.
As has been customary since this crisis began in 2007, many municipalities have cut defined benefit retirement plans (traditional retirement plans most people have been accustomed to) for new municipal employees, to cut costs. However, those who were on those plans still have to be paid.
Since the crisis, municipalities (as budget deficits grew) and corporations couldn’t afford traditional retirement plans and are now opting for new employees to handle their own retirements. One study revealed that defined benefit retirement plans declined from 62% in 1983 to just 17% in 2007 (source: Boston College Center for Retirement Research). I have a feeling that 17% will be dropping rapidly right into 2012.
Detroit automakers are back on their feet and showing signs of life, but the government bailouts haven’t made their way to the city’s coffers. The city of Detroit says it won’t have enough money to pay its bills by April and could be in a position to declare bankruptcy by the end of June—its budget deficit proving overwhelming.
The city admits that income and sales tax from automakers has increased lately, but not fast enough or nearly large enough to make up the shortfall in its budget deficit. Due to its massive cuts since the crisis hit in 2008, Detroit is losing more people and so its tax revenue base is shrinking, actually exacerbating its budget deficit. This has led to the city currently having twice as many retirees as active employees.
Should Detroit declare bankruptcy, it would be the largest U.S.city ever to do so. The other alternative being considered is that the state take over Detroit’s finances and municipal bond payments, but then the state would have to appeal to the Federal government for more money to meet the budget deficit, and the Federal government would have to print. And the beat goes on…
Reverse mortgages were created for the purpose of helping retirees enhance their quality of life. To qualify for the highest loan amounts, retirees need to be in their 70s.
Using a reverse mortgage frees up money to take that dream vacation or whatever it is those people wanted to do right now and not tomorrow—consumer confidence.
Unfortunately, that trend has changed since the credit crisis…dramatically.
Reverse mortgages are designed for those aged 62 and over who own a home, and that particular home must be their principal residence to qualify. The homeowner gets a lump sum for the equity of the house. The interest-bearing loan does not have to be repaid until the last surviving homeowner moves out of the property or passes away.
Reverse mortgages are not taxable, so in general, they don’t affect the amount of social security or Medicare that a senior receives.
A new, just-released study by the MetLife Market Institute reveals that more and more homeowners are using reverse mortgages because they need the money to survive—so much for consumer confidence.
Those applying for a reverse mortgage between the ages of 62 and 64 jumped 15% since 1999. The disturbing part is that, in that age group, the loan limits available through a reverse mortgage are much lower than when one is in their 70s, which exhibits desperation, not consumer confidence.
Unfortunately, the severity of the problem is revealed when the study shows that 46% of all new applicants are under the age of 70. So much for consumer confidence!
One survey within this study that was conducted in 2010 disclosed that 67% of respondents who applied for reverse mortgages were doing so to lower their debt levels—not for consumer confidence reasons like a vacation. Some of these respondents saw obtaining a reverse mortgage as the only way to keep their house. The effects of the credit crisis live on.
One of the study’s major conclusions and immediate recommendations is that advisers who help plan for people’s retirement must become more educated about reverse mortgages, because, unfortunately, since the credit crisis, they are now being used as part of the retirement vehicles seniors are looking at and not as a vehicle of consumer confidence to pay for luxuries. Education is critical, because those loans eventually have to be repaid.
This sobering study proves that the credit crisis still has left very real effects on people’s lives and consumer confidence. The problem is that retirees are faced with higher inflation than what the Consumer Price Index (CPI) indicates, but since their pension benefits are adjusted by CPI, they are not being compensated, stifling consumer confidence.
Compound this with the fact that retirees can only earn very low returns on the money they saved for and this squeezes the average retiree and their consumer confidence. That is why more and more are opting for part-time jobs to help ends meet since the credit crisis.
These are supposed to be the “Golden Years” for retirees; keeping in mind that if indeed retirement was “golden,” people would spend more—consumer confidence—which helps the economy. This study shows otherwise and indicates more stress in a system that is looking for consumer confidence and spending since the credit crisis. If retirees are not earning interest on their capital and are not being compensated for inflation, how can they exhibit consumer confidence? How can the economy really improve?
Where the Market Stands; Where it’s Headed:
I’ve been out for the past few days talking to business owners, analysts, and would-be economists. They are all telling me the same thing: the U.S. economy is improving. Why it’s improving, they don’t know.
If I had to pick a classic bear market as an example for my readers, we are living it now. Every recession in modern history has been followed by rising interest rates—except for this post-recession period. Interest rates can’t rise, because the economy is too fragile and government debt too onerous, which means the economy is on very shaky ground.
Stock prices continue to rise and the bear continues to lure investors back to stocks—a classic bear market at work.
What He Said:
“Overbuilt, over-speculated, over-financed and overdone. This is the Florida real estate market right now. For those looking to buy for personal use or investment, hold off! The best deals are yet to come. I continue with my prediction that the hard landing in the U.S.housing market, which is now affecting lenders, will have significant negative effects on the U.S.economy.” Michael Lombardi in PROFIT CONFIDENTIAL, April 3, 2007. Michael started talking about and predicting the financial catastrophe we began experiencing in 2008 long before anyone else.