INTRO: Detroit could emerge from chapter 9 bankruptcy this year. The city is $18 billion in debt. Both Wall Street and local pensioners have to accept it. That’s been the news narrative for almost a year now. Michigan Now’s Chris McCarus is hearing something different. Debt and unfunded liabilities are not the same thing. So $18 billion is wrong.
In July of last year Emergency Manager Kevin Orr filed for bankruptcy. He told reporters he was presenting the facts.
“What we tried to do in the first 90 days was put all that information out there so we wouldn’t be debating the extent of the debt and what we have to address. We seem to have some success with that because nobody is saying the city is not insolvent or it’s not $18 billion. Everybody agrees with that.”
No. Not everybody agrees with that.
“The one thing I say every chance I get is the $18 billion is nonsense.”
25 years ago, the investment banking firm Goldman Sachs sent vice-president Wallace Turbeville to Detroit. He helped the city make money rather than lose money from assets. He spoke recently at Wayne State University’s conference called Beyond Bankruptcy.
“One of the things that bothered the dickens out of me was I see this table that adds up to $18 billion. And having been around municipal finance for a while I start to thinking that’s not right.”
The city has $1.13 billion of general obligation debt. No debate there. Then $1.4 of certificate of participation debt. Kevin Orr is challenging that in court. So a total of $2.5 billion instead of $18 billion. The rest is unfunded liability for health care, pensions and water. But let’s stay with pensions.
Orr’s number is $3.5 billion. The pension trustee fund called it $800 million. Turbeville says “they are just different… neither necessarily true.” He says “Orr used extreme projections to get to his high number. That’s almost never done.”
Turbeville says state government made Detroit worse by not sharing revenue. Debt was not the problem.
For example, the assumed earning rates were extremely low. “His (Orr’s) # is unusual,” says Turbeville. “Orr says the pension fund will grow by 6.5% and the pension fund people say it will be 8%.”
Turbeville says that Orr “was trying to get that 18 billion to be as high as possible. So how can you trust any of it?”
(See page 47 of Wallace Turbeville’s report especially the chart on the public fund survey.) Here is the abbreviated version.
“So not only have the costs been cut and salaries been cut, the number of employees been cut, it, the city, couldn’t keep up with the revenue loss. So there’s no question in my mind that the cause of the bankruptcy is a catastrophic decline in revenue.”
Since the 2008 crash, 28 American cities have gone into insolvency, formal receivership programs or bankruptcy. Others in just as bad a shape got bailed out by their state governments.
Turbeville doesn’t focus on corruption either. Detroit doesn’t have that many workers.
“The number of employees per person in Detroit… there is roughly 1 city employee for every 60 people. If you compare that with St. Louis or Cleveland it’s one employee for every 50 people.”
The Michigan Municipal League reports that Lansing has shortchanged Detroit $700 million in the last few years. They say the state’s economy suffers when state government reduces money for cities.
The bankruptcy conference at Wayne State also brought in Rob Johnson. He grew up in Grosse Pointe loving the Detroit Institute of Arts. He became an economist and a hedge-fund manager for billionaire investor George Soros in New York. He says he has “plenty of money” in retirement. But he still feels connected to the average guy.
“What made me hurt the most is I imagined being a pensioner sitting at home being told when they’re cutting me down that I’m supposed to feel guilty because I’m causing the artwork to leave town by not accepting a bad deal. Now what the hell is that about? What kind of foundation executive can look in the mirror when they’re doing that? So we gotta come back with some positive art to propel us. And I found some this afternoon.”
Rob Johnson wrote a poem while waiting his turn to address the audience.
“I call it ‘the First Straw.’ Seeing my city before and beyond, the conflict engulfs us, demands we respond. Fighting the forces of finance and greed the inhuman process compels us to stand up and envision our need. We taste the injustice that leaves us each raw. Together commit now to weave with new straw.” (Applause)
You can hear the next segment on Detroit’s unfunded liability…. how that’s affecting the water and sewer department.