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Pension Debt Did Not Cause Detroit Bankruptcy, Report Says

Benefits Pro

Declining revenue, a drop in employment and large, risky Wall Street deals are the real causes of Detroit’s bankruptcy, according to a report by Demos, a liberal public policy organization.

Pension debt gets a bad rap in Detroit, but it isn’t the true cause of Detroit’s financial problems, said Wallace Turbeville, author of the Demos report.

Turbeville, who is an attorney and a former vice president at Goldman Sachs, said he has “been around insolvencies in cities ... as long as they have been filing for bankruptcy. It’s about the cash. Municipal insolvencies are always about a cash shortfall and political will.”

In a teleconference on Wednesday morning, he pointed out that Detroit’s structural issues have been decades in the making and will have to be addressed in the future, but the reason the city filed for bankruptcy is that it didn’t have enough cash to make it through the year, not because it had an increase in obligations to fund its pensions.

Turbeville isn’t alone in his assertions. Well-known New York Times columnist Paul Krugman has blamed Detroit’s downfall on job sprawl and market forces. Others have said that years of government excess are to blame.

Kevyn Orr, the emergency manager called in to solve Detroit’s financial problems, has bandied around an $18 billion debt figure since the city filed for bankruptcy in July. Turbeville said that number “isn’t important in terms of cash flow analyses. That number is wrong materially and wrong for a number of reasons.”

In his report, Turbeville also said that the emergency manager’s assertion that the city’s pension funds have a $3.5 billion shortfall is an estimate, very different from the certain liability of a financial debt, based on calculations that use extreme assumptions that depart from most cities’ and states’ general practice.

Read the full report The Detroit Bankruptcy