Tax Law

State Net Capitol Journal – February 2, 2015; Suit Blames Morgan Stanley For Detroit's Fiscal Crisis

Budget & Taxes

SUIT BLAMES MORGAN STANLEY FOR DETROIT'S FISCAL CRISIS: The Wall Street investment firm that has already agreed under settlements with U.S. government regulators to pay over $1.5 billion for its part in the subprime mortgage scandal that helped precipitate the Great Recession may soon be accused of pushing racially-discriminatory loans that led to the fiscal collapse of Detroit. According to a potential class action lawsuit filed by African American homeowners in that city, Morgan Stanley encouraged now-bankrupt lender New Century to push high-risk loans between 2004 and 2007 that "disproportionally impacted" black borrowers there.

The suit cites internal documents that suggest Morgan Stanley officials were aware the loans were problematic as early as October 2005, when a staffer at the firm emailed several superiors to express concerns that the loans were being made to individuals with limited credit histories and no proof of income.

"There is not a lot of common sense being used when approving these types of loans," he wrote.

In an April 14, 2006 memo the head of the firm's trading desk predicted growing problems from the loans.

"We should expect ...a good percentage of the borrowers going into extended delinquency/liquidation," he said.

And in January of the following year, when that same Morgan Stanley official emailed New Century asking, "What is going on with these loans??????????" a New Century executive replied, "You mean besides borrowers who apparently don't have the money to make their mortgage payments? (Sorry to be flip ...)"

Yet the investment firm kept on buying the loans until the subprime mortgage bubble burst.

The suit also cites an unidentified director of Morgan Stanley's mortgage unit saying in a 2008 radio broadcast: "It felt wrong way back when. And I wish we had never done it." (DETROIT FREE PRESS, LEXISNEXIS STATE NET)

CA GOV TACKLING PUBLIC RETIREE HEALTH CARE DEBT: A little over two years after overhauling his state's public employee pension system, California Gov. Jerry Brown (D) has set his sights on reducing the state's public retiree health care debt. That unfunded liability is currently estimated at $72 billion.

Brown said last month he wants to cut the cost of providing retiree health benefits in half by requiring new hires to work longer to qualify for full benefits. He also wants the state to offer high-deductible health plans so it doesn't get hit by the Affordable Care Act's so-called Cadillac tax, a penalty imposed on employers who offer plans that are too generous.

"If we don't rein things in, then down the road, there will be drastic cuts just like there were over the last 10 years," the governor said.

But even if Brown gets the state's public employee unions to agree to the changes, they may not make much of a dent in the state's long-term unfunded liability because even with those changes and investment gains, the state would still be saddled with tens of billions of dollars in liability for decades. (ASSOCIATED PRESS, STATE NET)

SOCIAL IMPACT BONDS COMING TO DENVER: A new way to cover the rising costs of social service programs, which has been gathering momentum in state and local governments across the country, is coming to Denver.

Under the financing method, known as a social impact bond or "pay for success" plan, private investors put up millions of dollars to initiate or expand preventative programs, such as for helping reduce recidivism among ex-criminal offenders or expanding educational opportunities for at-risk kids. The cost savings generated by those programs are then used to pay the investors back with interest.

Denver officials are considering using $8 million to $15 million in private investment to move up to 300 of the city's most chronically homeless into housing where they can also obtain mental-health and substance-abuse treatment.

"We expect to save taxpayers money through the life of this program," said Cary Kennedy, the city's deputy mayor and CFO. "In the short term, those savings will go to repay the investors. And long term, they will go toward investing in permanent supportive housing."

But some question the need for involving investment banks in the programs.

"Often, [the projects are] being developed for programs and activities that are pretty well known to be effective," including supportive housing for the homeless, said Rick Cohen, a consultant and writer for Nonprofit Quarterly. "The issue is, if they're so clearly effective, why not just simply do them rather than pay a private investor 6, 8, 10, 12 percent?"

At-large Denver City Councilwoman Debbie Ortega, former executive director of the city's Homeless Commission, however, applauded the city's effort.

"Every major city has a homeless problem," she said. "I commend the administration for looking at something creative that is helping us try to figure out how to solve this problem." (DENVER POST)

BUDGETS IN BRIEF: The TEXAS Supreme Court has announced it will hear the state's appeal of the long-running lawsuit challenging the way it funds public education (AMERICAN-STATESMAN [AUSTIN]). • MINNESOTA Gov. Mark Dayton (D) has called for a $6 billion transportation funding plan that would include a new 6.5 percent tax on the wholesale price of gas (MESABI DAILY NEWS, LEXISNEXIS STATE NET). • KANSAS' transportation department plans to put off $300 million in maintenance projects to help close the state's budget hole (WICHITA EAGLE). • NEW HAMPSHIRE began selling bacon-scented lottery tickets last month, the state's first foray into scratch-n-sniff tickets. The state sold about 700,000 of the tickets in a single week, making it the bestselling $1 ticket, according to MarketWatch (UNION LEADER [MANCHESTER], TIME)

- Compiled by KOREY CLARK

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