Wall Street, Not Workers To Blame For Detroit's Bankruptcy Crisis, Says Demos Report

Wall Street bankers, bad decisions made by elected officials and the Great Recession should be blamed for contributing to Detroit's fiscal crisis -- not the pensions of workers and retirees.

That's according to a report released Wednesday by Wallace Turbeville, a former investment banker with Goldman Sachs, now a senior fellow at the liberal think tank group Demos. He said on a media conference call Wednesday that the city's current cash shortfall for the 2014 fiscal year, estimated to be $198 million, can be traced to declining tax revenues, which dropped 20 percent since the Great Recession began -- not pensions and benefits for retired and active workers. The Demos report also said deep cuts in state revenue sharing to Detroit accounted for nearly a third of the city’s revenue losses since fiscal year 2011.

Since the recession began, Turbeville noted, Detroit reduced its operating expenses by 38 percent; 2300 employees were laid off; the total cost of salaries as an operational budget line item decreased dramatically.

"It's left the city in a situation where there is no more to be cut in terms of operating expenses," he said.

The Demos report also eviscerates Wall Street bankers for entering into a series of highly complex swaps agreements with the city worth $1.4 billion in 2005 and 2006, when Kwame Kilpatrick was mayor. The pensions were underfunded by then and needed an infusion of cash to stay solvent. Instead of issuing general obligation bonds, the city created nonprofit entities and corporations to issue the debt, and bought interest rate swaps as a hedge, betting that interest rates would rise. "The 2005 deal was a dangerous doubling-down that pushed the city beyond its legal debt limit," according to a Detroit Free Press report.

But interest rates dropped dramatically in 2009, and "the city lost the bet, adding to the pensions’ underfunding by as much as $770 million over the next 22 years," the Detroit Free Press report said. Detroit owed the difference between interest rates to the holder of the swaps, secured by $11 million in monthly payments Detroit's three casinos give the city. When Orr decided to default on these payments in June, the $11 million monthly casino revenue went to the insurers of the swaps holders.

The banks are now demanding upwards of $250-350 million in swap termination payments, the Demos report says. Instead of offering the swaps holders 75 cents on the dollar, as Kevyn Orr has said, he thinks they should be dealt with aggressively.

Read the full report: The Detroit Bankruptcy