Report: Detroit's Collapse Caused More by Declining Revenue than Legacy Costs

November 21, 2013 | The Detroit News |

A former Wall Street investment banker is taking Detroit Emergency Manager Kevyn Orr to task for blaming the city’s financial collapse, in part, on escalating pension and retiree health insurance costs.

Wallace Turbeville, senior fellow at Demos, a liberal think tank in New York, released a new report Wednesday that asserts the city’s financial collapse had more to do with declining revenue than its legacy costs.

Turbevilles report blames Detroit’s population loss in the last census for triggering a $24 million reduction in constitutional state revenue sharing. The Legislature cut Detroit’s annual statutory revenue sharing by an additional $42.8 million. The cuts account for a third of the city’s revenue losses between the 2011 and 2013 fiscal years, Turbeville said.

“By cutting revenue sharing with the city, the state effectively reduced its own budget challenges on the backs of the taxpayers of Detroit (and other cities),” Turbeville wrote in the report. “Furthermore, the Legislature placed strict limits on the city’s ability to raise revenue itself to offset these losses.”

Orr’s spokesman, Bill Nowling, said the city’s consultants project legacy costs will consume 65 cents of every tax dollar by 2020 if pensions and retiree health insurance costs are not dramatically reduced.

“I’ve got to think the unions paid for this,” Nowling said of the report. “It’s kind of part of the status quo crowd that says there’s no problem in Detroit, except for the problem in Detroit that nobody could seem to get their hands around.”

Elektra Gray, a spokeswoman for Demos, said less than 5 percent of the think tank’s budget comes from organized labor sources.

“Nothing (of) substance was influenced by anyone outside of Demos, and there are multiple areas where the report departs from positions held by unions,” Gray said.

Turbeville also questions why Orr wants to pay UBS AG and Bank of America a $230 million fee to terminate a complicated interest rate swap deal tied to $1.44 billion the city borrowed in 2005-2006. At the time, city leaders effectively bet interest rates would remain high, giving them lower borrowing costs. Instead, interest rates plummeted during the recession, causing the city’s interest payments to skyrocket.

Echoing the sentiments of some creditors in Detroit’s bankruptcy case, Turbeville said the city should fight the banks’ claim as a secured creditor. Orr has said the city has no choice but to give the banks priority over pensioners and bondholders because they hold a 2009 lien over the city’s $15 million in monthly casino tax revenues.

Read the full report: The Detroit Bankruptcy