Report: Detroit Bankruptcy Caused by State cuts, Shrinking Tax Base, not Long-term Debt

November 20, 2013 | | The Detroit Free Press |

A New York-based think tank released a report today questioning Detroit Emergency Manager Kevyn Orr’s assertion that the city’s long-term debt is responsible for its fiscal problems, or that pension contributions are at major hurdle for the city’s finances.

Instead, the report by Wallace Turbeville, a senior fellow at Demos, a public policy organization, said Detroit’s decline into bankruptcy was caused by a steep decline in revenues partially due both to a shrinking tax base and deep cuts in state revenue sharing with the city.

“By cutting revenue sharing with the city, the state effectively reduced its own budget challenges on the backs of the taxpayers of Detroit,” Turbeville wrote. “These cuts account for nearly a third of the city’s revenue losses between (fiscal year) 2011 and FY 2013. ... Furthermore, the Legislature placed strict limits on the city’s ability to raise revenue itself to offset these losses.”

Demos describes itself as nonpartisan but has been identified as a liberal think tank in past media stories. Its website says its mission is to “reduce both political and economic inequality” in America.

■ PDF: Detroit bankruptcy report from Demos

Orr has cited Detroit’s $18-billion in long-term debts as a major reason for the bankruptcy filing — the largest by any municipality in the nation’s history — and has said that pensioners may have to see benefits cut. But Turbeville argues that the city’s annual cash flow is the problem — not long-term debts — and that legacy costs for health care and pensions haven’t been out of line with other cities.

Instead, he said, financial institutions that entered into complex deals with the city to help pay pension obligations should be held responsible, believing a “strong case can be made that the banks that sold these swaps may have breached their ethical, and possibly legal, obligations to the city in executing these deals.”