Virginia Borrows $1.26 billion To Pay Unemployment Benefits; Detroit Loses $400 Million on $800 Million of Bonds; Detroit's Easy Solution

Virginia is robbing Peter to pay Paul because it is plain flat out broke. Bankrupt is probably a better word. To pay unemployment benefits, Virginia will borrow $1.26 billion and pay it back plus interest by jacking up unemployment taxes.

Please consider Va. to borrow $1.26 billion for depleted unemployment funds.

As Virginia wrestles with ways to replenish its depleted fund for unemployment benefits, Hampton Roads employers expressed concern about the impact that higher unemployment taxes could have on the health of their businesses.

The sorts of tax increases described by the Virginia Employment Commission earlier this fall may be difficult for some small businesses to absorb without job cuts, said Jim Shirley, owner of Bennett's Creek Farm Market in Suffolk.

The state's average unemployment tax per employee will jump from $95 this year to $171 in 2010 and to $263 by 2012, the VEC said in a Sept. 29 presentation to the Commission on Unemployment Compensation.

For small retailers, the financial pressure from weak sales and higher unemployment taxes could be intense, Miller said. "You've got to have someone in the store, and if you're down to one person in the store, you can't cut any more."

In addition to boosting unemployment taxes on employers, Virginia will have to borrow more than $1.26 billion from the federal government in coming years to continue paying jobless benefits, the VEC said in its forecast.

That's because the deficit in its unemployment-benefits fund will hit $194 million by the end of this year and balloon to $561 million by the end of 2010, the VEC said.

Two dozen states, including North Carolina, South Carolina, New York and Texas, have already borrowed about $21 billion from the federal government to pay jobless benefits, according to the Labor Department.

One problem with borrowing to pay jobless benefits, the VEC noted, is that interest payments on this debt cannot come from the unemployment trust fund or from federal money. The interest payments on its $1.26 billion of projected borrowing are likely to total $36.7 million and come from general state funds, the VEC said in its September report.

Yet Another Reason To Not Hire

Borrowing money while jacking up taxes does nothing but give small businesses yet another reason not to hire anyone.

Local governments fork over billions in fees on investments gone bad

Inquiring minds are reading Cities find the fine print is costing millions

Detroit Mayor Dave Bing is struggling to save his city from fiscal calamity. Unemployment is at a record 28 percent and rising, while home prices have plunged 39 percent since 2007.

Against that bleak backdrop, Wall Street is squeezing one of America's weakest cities for every penny it can. A few years ago, Detroit struck a derivatives deal with UBS and other banks that allowed it to save more than $2 million a year in interest on $800 million worth of bonds. But the fine print carried a potentially devastating condition. If the city's credit rating dropped, the banks could opt out of the deal and demand a sizable breakup fee. That's precisely what happened in January: After years of fiscal trouble, Detroit saw its credit rating slashed to junk. Suddenly the sputtering Motor City was on the hook for a $400 million tab.

During late-night strategy sessions, Joseph L. Harris, Detroit's then-chief financial officer, scoured the budget for spare dollars, going so far as to cut expenditures on water and electricity. "I figured the [utility] wouldn't turn out our lights," says Harris. But there wasn't enough cash, and in June the city set up a payment plan with the banks.

Detroit Mayor Dave Bing is struggling to save his city from fiscal calamity. Unemployment is at a record 28 percent and rising, while home prices have plunged 39 percent since 2007. The 66-year-old Bing, a former NBA all-star with the Detroit Pistons who took office 10 months ago, faces a $300 million budget deficit — and few ways to make up the difference.

Against that bleak backdrop, Wall Street is squeezing one of America's weakest cities for every penny it can. A few years ago, Detroit struck a derivatives deal with UBS and other banks that allowed it to save more than $2 million a year in interest on $800 million worth of bonds. But the fine print carried a potentially devastating condition. If the city's credit rating dropped, the banks could opt out of the deal and demand a sizable breakup fee. That's precisely what happened in January: After years of fiscal trouble, Detroit saw its credit rating slashed to junk. Suddenly the sputtering Motor City was on the hook for a $400 million tab.

During late-night strategy sessions, Joseph L. Harris, Detroit's then-chief financial officer, scoured the budget for spare dollars, going so far as to cut expenditures on water and electricity. "I figured the [utility] wouldn't turn out our lights," says Harris. But there wasn't enough cash, and in June the city set up a payment plan with the banks.

Now Detroit must use the revenues from its three casinos — MGM Grand Detroit, Greektown Casino, and MotorCity Casino — to cover a $4.2 million monthly payment to the banks before a single cent can go to schools, transportation, and other critical services. "The economic crisis has forced us to move quickly and redefine what services a city can and should provide," says Bing. "While we face a tough road ahead, I believe we're on the right path." UBS declined to comment.

Detroit isn't suffering alone. Across the nation, local governments and related public entities, already reeling from the recession, face another fiscal crisis: billions of dollars in fees owed to UBS, Goldman Sachs and other financial giants on investment deals gone wrong.

Now, as many of those deals sour, Wall Street is ramping up its efforts to collect from Main Street.

"The banks stuffed customers with [questionable investments] and then extorted money from the customers to get rid of them," says Christopher Whalen, managing director at research firm Institutional Risk Analytics.

The New Jersey Transportation Trust Fund Authority, for instance, must pay nearly $1 million a month at least until December 2011 to Goldman Sachs on derivatives deals tied to municipal debt—even though the state retired the debt last year.

The Chicago Transit Authority, having entered into complex arrangements to lease its equipment to outside investors and then lease it back, could face termination fees of $30 million. The investors could collect penalties because American International Group, which backed the arrangement, has seen its credit rating tumble.

Detroit's Easy Solution

If Detroit Mayor Dave Bing pays UBS one dime over this, he is a complete fool.

The solution is easy. Detroit should declare bankruptcy. In fact, I recommend Houston and any other city in trouble to declare bankruptcy. If they do, they may not be able to go back to the bond markets for a while to raise funds, but so what?

Cities living within their means would be a good thing. Moreover, declaring bankruptcy will allow cities to rework pension benefits and union contracts.

I really do not understand this aversion to bankruptcy by cities.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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