Sunday, December 15, 2013

China's Newest City: Detroit?

A federal judge has ruled that Detroit's bankruptcy proceedings can move forward, in spite of the attempts at sabotage by the city's all black, all Democrat city council:

A federal judge ruled on Tuesday that Detroit could proceed into bankruptcy and cut pensions to address its fiscal woes.

U.S. Bankruptcy Judge Steven Rhodes affirmed that the Motor City was indeed insolvent and certified that it could move forward with plans to eliminate nearly $20 billion in debt. Half of that shortfall comes from the city’s defined benefit pension system, which was designed to guarantee workers a portion of their salary for life.

Rhodes said Detroit must provide a pension haircut in order to address the budget deficit.

“It has long been understood that bankruptcy law entails the impairment of contracts,” Rhodes said, while pledging that he “will not lightly or casually exercise power […] to impair pensions.”

Ordinarily, I would have a great deal of sympathy for retirees here. A pension is a contract, and should be honored. In this particular case, I do not, because of the way Detroit's politicians, in collusion with the public employee unions collaborated to create a fiscal disaster.

Detroit's politicians, starting when  five term Mayor Coleman 'I don't know nothin' about no Krugerands' Young took over in the 1970's set out to pillage what was at one time the most prosperous city in America with sweetheart deals  to various cronies, raising the tax base and rewarding the public employee unions with ever more opulent contracts and pension plans ..which in turn fattened their own coffers, either as campaign contributions or outright bribes.

Now that the bankruptcy has been approved,state appointed  Emergency Manager Kevyn Orr can restructure the ridiculous pension plans, and the ruling also allows Orr to restructure the union contracts.

Exactly how Detroit's pension plans got into this state is another reason I have little or no sympathy about their being restructured.

The theory behind pension plans is pretty simple. An employer and its employees contribute funds every month that are invested in certain vehicles like stocks and bonds, with the idea that retiree benefits with be eventually paid out of the profits. It's similar to an old, time tested strategy known as dollar cost averaging - you commit a certain percentage of your earnings to investment, and with even normally competent management, good years average out with not so good years to give you a decent profit on your investment over time.

Once Mayor Young took over as Detroit's first black mayor, Detroit started doing things differently. When the investments did well, instead of leaving them in the fund and re-investing them for further profit, Detroit paid its retirees a 'thirteenth check'. When the investments didn't do so well, that 13th check continued anyway, so there was a constant looting of the pension funds that was largely covered by simply raising taxes or diverting other revenues into it. And the ruling powers in Detroit, including the union bosses had a personal incentive to keep the status quo going, as many of them were dipping directly into the pension funds. That is one of the reasons former Mayor Kwame Kilpatrick is now a guest of the federal government.

Most of the current retirees voted en masse for politicians like Young and Kilpatrick, quite possibly on racial grounds. And as long as the money kept rolling in, no matter whom it was stolen from, they were content. Now, there's going to be a reckoning because there has to be.

So what does this have to do with China?

As I pointed out before, Detroit's problems are systemic, and are a result of the city's current population and a certain way of thinking. Orr won't be there forever, and the next election will see the current city council or others like them re-elected.

However, there may be change in the air. Forbes reports that Detroit is the fourth most popular destination for Chinese real estate investors:

“While the bankruptcy is viewed as a bad thing elsewhere, it raised the exposure level of Detroit’s real estate market in China,” says Evonne Xu, a Michigan attorney catering to Chinese purchasers. {...}

Chinese shoppers can’t resist a bargain. Where else can you buy a two-story home in the U.S. for $39? China Central Television, the state broadcaster, in March reported that two houses in Detroit cost the same as a pair of leather shoes. No wonder a poster on Sina Weibo, the Twitter-like service, asked, “Seven-hundred thousand people, quiet, clean air, no pollution, democracy—what are you waiting for?”

Who says the Chinese are waiting? Dongdu International Group of Shanghai bought, sight unseen, two downtown icons, the David Stott building for $4.2 million and the Detroit Free Press building for $9.4 million, both at auction this September.

Moreover, Chinese purchasers are making bulk purchases of “inexpensive properties”—those selling for $25,000 or less—in the rings surrounding the city center. “They’re banking on the downtown resurgence spiraling out into those rings,” explains Kelly Sweeney of Coldwell Banker Weir Manuel. Mainland parties often buy at tax and foreclosure sales, hold their property, and patiently wait for appreciation.

The Chinese certainly have made an impact on the locals in Detroit. “I have people calling and saying, ‘I’m serious—I wanna buy 100, 200 properties,’ ” said Caroline Chen, a real estate broker in nearby Troy, Michigan, to “They say ‘We don’t need to see them. Just pick the good ones.’ ” Chen reports that one of her colleagues sold 30 properties to a Chinese investor.

Now this is an interesting development.

Here in my local area, I saw a community that was essentially a largely blue collar and middle class bedroom suburb go through a similar transition, as Chinese immigrants and investors bought up the modestly priced properties, refurbished them and began moving in. A local realtor told me that Chinese firms were actually sending brochures and video tours of properties to potential Chinese buyers overseas.

Here's what happened in the space of less than a decade, as the Chinese became the majority in the city:

The real estate and commercial markets soared because of the new demand, with hundreds of new Chinese-owned businesses opening their doors, totally rejuvenating the moribund downtown sections and providing a vast increase in the tax base, which allowed the city to spend more on development, community programs and services.

The city had never had a huge crime rate, but what crime there was plummeted to almost nothing, and after a few years, the local public schools showed a huge increase in test scores.

Local government had its occasional bits of corruption, but they were very small time, detected promptly and stopped. The city's government mostly remained fiscally prudent and responsible.

With the exception of increased street traffic and occasional language difficulties, the small city simply became a much nicer place to live and work.

Now the city I'm talking about had nothing like Detroit's inherent problems, but the effect that the change in demographics made was pretty noticeable. If the Chinese begin moving into Detroit, I think that MoTown actually has a chance of rejuvenating itself.

Culture matters.

1 comment:

louielouie said...

i am aware that ff posted a publication providing most of this information, however, something tells me, that development group from shanghai DID NOT buy those buildings sight unseen.
it may have been third or fourth party, but there WAS some investigation beforehand.