Report Casts Doubt on Detroit’s Estimated Debt: ‘Simply Inaccurate’

November 21, 2013 | | MSNBC |

The official story about Detroit goes something like this: Decades of mismanagement and out-of-control spending have left the city with a crushing $18 billion in debt. Things are so bad that the city government is simply not equipped to deal with the problem on its own, and so the governor had no choice but to temporarily suspend the powers of the mayor and city council, appointing an emergency manager (EM) in their place.

The EM, after making a good faith effort to patch together the city’s finances, realized that the only way out was through a full reset, and so he filed for bankruptcy. Alas, current and former public employees are going to have to make sacrifices in bankruptcy if Detroit is ever going to get back on its feet: One of the biggest sources of bloat is a $3.5 billion unfunded pension liability – meaning that pensions will have to receive a significant cut.

But that official story is deeply flawed, according to a new report from the progressive think tank Demos. Having combed through publicly available data on the city’s finances, Demos senior fellow Wallace Turbeville—a former vice president at Goldman Sachs—concluded that Emergency Manager Kevyn Orr is selling a municipal bankruptcy on the basis of some deeply questionable assumptions.

The biggest of those assumptions is the claim that Detroit is facing an insurmountable long-term debt burden of $18 billion. In fact, Turbeville writes, that figure is both “irrelevant” and “simply inaccurate.”

“That number is not particularly important in terms of cash flow analysis, and that number is wrong,” he said during a Wednesday conference call with reporters. The bigger issue for the city is whether it has enough cash on hand to make it through the next fiscal year.

“The real issue is about the cash, and in fiscal year 2014 it is about an $198 million cash shortfall,” said Turbeville. He blames the shortfall on a number of factors, including the Great Recession, a dwindling tax base, and declining state aid. But pension obligations, which have stayed mostly flat over the past five years, are not a significant factor in Turbeville’s analysis.

A much larger factor appears to be city’s debt to Wall Street. As of 2011, Detroit owed $3.8 billion to major financial institutions because of financial instruments called interest rate swaps. Those swaps allow cities to trade variable interest rates on their municipal bonds to the banks in exchange for fixed-interest payments.


Read the full report: The Detroit Bankruptcy