Jeremiah Wright was right!

Rev WrightJust not in the way he intended. As quoted by ABC News:

America’s chickens are coming home to roost…

Yes, I’m taking the Reverend’s comment totally out of context, because in context he’s absolutely wrong. In today’s context however, he couldn’t be more right.

Today’s context is the way we’ve been running our cities. Current case in point is Detroit.

I would argue that Detroit is the face of the affirmative action movement in the US. The people of Detroit have spent the last 40 years electing affirmative action candidates as mayor and city councilmen they’re about to finally pay the price. Let’s hope Detroit serves as an object lesson for the rest of the nation, because the rest of the nation isn’t far behind.

Emergency Manager Kevyn Orr’s plan to suspend payments on $2 billion of Detroit’s debt threatens a basic tenet of the $3.7 trillion municipal market: that states and cities will raise taxes as high as needed to avoid default.

Orr, appointed by Republican Governor Rick Snyder to oversee Michigan’s largest city, proposed a deal last week that included skipping a $39.7 million payment on pension-obligation debt. The city is also set to default on unsecured unlimited-tax and limited-tax general-obligation bonds as it grapples with $17 billion in liabilities to avoid a record bankruptcy.

By calling into question the safety of any security backed by a government’s general obligation to pay what it owes, Orr, 55, imperils similar debt across Michigan …

…across Michigan and the rest of the nation.

Here’s how municipal financing works. Governments borrow money on the municipal bond market at very favorable rates because the interest on the bonds is non-taxable and because no bondholder has ever lost principal on a muni investment.

That dynamic is about to change and the way local governments finance operations is about to forever change.

Paying less than 100 cents on the dollar would “rock the market,” said Tamara Lowin, director of research for Belle Haven Investments in White Plains, New York.

Folks, change is on the way. Real change, not the “HopenChange” kind of thing. Here’s what’s going to happen given the various possibilities:

Scenario I: Detroit defaults on its debt and the bankruptcy court upholds the action.

Bondholders will take a huge principal loss on their investments which will upend the municipal bond market. Bond underwriters will declare open season on all new bond issues and bond guarantors will audit the living daylights out of current issues. It’s likely that any bond requiring either unlimited or limited tax clauses will be priced at near “junk” levels. That will significantly raise the cost of borrowing and reduce the ability of municipalities to borrow money.

The second thing that will happen under this scenario is that every city in the US that is pinched will suddenly go to the Bankruptcy Court for help.

Since the major holders of municipal bonds are retirement funds and retirees, this action will throw seniors in general and most state retirement funds into a real pickle. Retirees who were counting on income from their munis will now be living on Social Security only and the pension funds will instantly be seriously (or more seriously) underfunded. Remember, we’re talking about $3.7 trillion in municipal bonds.

Scenario 2: The Court restructures the pension contracts that the city has with their retirees in order to make the pension fund solvent on an on-going basis.

This is the absolute nightmare scenario for Public Employee Unions. This is a green light for city governments to draw a line in the sand with a backhoe in their union negotiations and could be a death knell for Public Employee Unions. If they can’t keep their members fat at the public trough what’s the point of paying union dues? As we’ve seen in Wisconsin, when given a choice, union members choose not to pay.

You can be sure that some drastic form of both of these things are going to happen when – not if – Detroit files a Chapter 9 bankruptcy. The unions have already said they’re done giving back and they’re ready to go on strike.

I expect, over the next few years, we’re going to see cities begin to privatize every form of service they can. They’ll get a flat price and they will no longer be on the long term hook for retirement and health care. Additionally, you can expect to see Mayors dumping their current retirees into the Obamacare pool for health care which will cause the Obamacare rate structure to implode.

So yes, Jeremiah Wright was indeed right, the chickens are coming home to roost. Except that they’re roosting in the cities that have been run for the past 40 plus years by liberal affirmative action politicians like his former parishioner Barack Obama.

We’re about to see REAL change at the local level, and it’s going to be very ugly.

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