In its house editorial yesterday, USA Today retold the now-accepted story of Detroit’s bankruptcy. Railing on “reckless public pensions,” the newspaper told its readers that the Motor City is “Exhibit A for municipal irresponsibility” because it allegedly “negotiated generous pensions” that were too lavish. In this fable, the average Detroit pensioner’s$19,000 a year stipend – which many get in lieu of Social Security – is somehow defined not only as excessive, but also as the primary cause of the city’s financial problems. Detroit, thus, becomes a weapon in the larger Plot Against Pensions, as the right holds it up as a cautionary tale supposedly showing that A) police officers, firefighters and sanitation workers are greedy and B) America cannot afford to fulfill negotiated agreements to pay public-sector workers a subsistence retirement benefit.
No doubt, there is a tiny grain of truth in this otherwise inaccurate story. Yes, it is true, Detroit is a cautionary tale for governments about financial management and legacy costs. However, it is not a cautionary tale about allegedly greedy employees living the MTV Cribs life off taxpayers. As an eye-opening new report from a former Goldman Sachs executive documents, it is instead yet another cautionary tale about Wall Street’s too-good-to-be-true schemes that end up being, well, too good to be true.
Commissioned by the think tank Demos, the new report out today from former investment banker Wallace Turbeville shows that contrary to the myths about a bloated municipal government overspending on lavish social services, Detroit’s “overall expenses have declined over the last five years” by $419 million thanks to the city “laying off more than 2,350 workers, cutting worker pay, and reducing future healthcare and future benefit accruals for workers.” Today, Turbeville notes that “Detroit has a significantly smaller workforce per capita than comparable cities.” Yet, those draconian cuts still left the city with an annual $198 million shortfall because of three big problems – none of which has anything to do with supposedly greedy public workers and their allegedly overly “generous” pension benefits. [...]
As Turbeville shows, in the five years leading up to today’s crisis, the city’s pension contribution expenses were essentially flat. Yes, its health care contribution expenses increased, but they rose by less than the nationwide annual increase in health care expenses, meaning Detroit experienced nothing out of the ordinary on that score. So if benefits didn’t drive the legacy cost increases what did? As Turbeville documents, it was fees, financing costs and payments incurred by Wall Street’s swap scheme. Those expenses constitute more than 61 percent of the total legacy-cost jump.
In his report, Turbeville notes that “the banks are now demanding upwards of $250-350 million in swap termination payments” in order to let Detroit out of the apocalyptic swap scheme. In an actual bankruptcy, creditors might have to forego some of those fees – or in the industry lingo, they might have to “take a haircut.” But in the era of bailouts, ordinary Americans have to take haircuts, but Wall Streeters almost never do. Thus, the banks’ demand for termination payments has been turned into yet another opportunity for the financial industry to swindle Detroit taxpayers. Specifically, Detroit’s Republican-appointed emergency manager is pushing the city council to take on an additional $350 million in debt from a new loan with Barclays.