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."
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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.
Turbeville compared what Detroit pays its employees in salary and benefits to similar cities, like Cleveland and St. Louis. What he found is that Detroit's expenses in this arena are quite modest in comparison.
"Stop talking about the pension plan and worker benefits. The heath care benefits and pension plans going forward, that which people are to be paid, is modest. Talk about aggregating those benefits is problematic," he said. "It is really problematic because everyone agrees services have to improve and the city needs to retain and attract workers. Cutting benefits further is not going to work."
He also said that the city's plan to freeze its pension plans to new hires and implement defined contribution plans instead will just serve to "isolate" the DB plans, leaving them stuck with too many retirees and too few workers.
A major contributor to Detroit's downfall was that Wall Street sold risky financial instruments to the city, which now threaten the resolution of this crisis, Turbeville said in his report.
"To return Detroit to long-term fiscal health, the city must increase revenue and extract itself from the financial transactions that threaten to drain its budgets even further," he said.
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