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EM Orr’s focus on long term debt “irrelevant”

“The Detroit Bankruptcy”

Analysis

By Allison Jones
Special to the Michigan Citizen

Detroit’s financial crisis is attracting not just local but national attention. The world wants to know how one of America’s greatest cities — which many believe created the middle class — has found itself facing the largest municipal bankruptcy in history.

A new analysis of the city’s finances is lifting the debate out of local circles often mired by lack of information, prejudice and bias. Superficial reports of Detroit’s bankruptcy would blame years of excessive spending, mismanagement and overall incompetence — something that is said to have happened after the rebellion in 1967 — as the cause.

Growing research and analyses of the problems facing Detroit are revealing new perspectives on the crisis where, locally, Black leaders have often been maligned for fiscal mismanagement or judged for outspoken views on race.

Instead, a new report points to more serious causes such as a severe decline in revenue — “plummeting” tax income and cuts in the state’s revenue sharing — and Wall Street.

Demos think tank analyst, Wallace Tuberville, a former Goldman Sachs investment banker, released last week “The Detroit Bankruptcy,” which offers a check on Emergency Manager Kevyn Orr’s articulation of the problem.

“Depopulation and long-term unemployment caused Detroit’s property and income tax revenues to plummet. The state of Michigan exacerbated the problems by slashing revenue it shared with the city. The city’s overall expenses have declined over the last five years, although its financial expenses have increased. In addition, Wall Street sold risky financial instruments to the city, which now threaten the resolution of this crisis. 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 budget even further,” writes Tuberville.

Tuberville also points out that Detroit has lost 20 percent of its revenue in the last five years alone and “contrary to widely held belief, Detroit does not have a spending problem” but has decreased operating expenses by cutting workers, reducing pay and benefits. Detroit’s officials are managing well enough. The problem, according to Tuberville, is the cost of the Wall Street financial instruments — more money to banks and not people.

Financial products with variable interest rates, balloon payments and other predatory characteristics introduced in the last 10 years, have taken a disastrous toll on the city’s cash flow.

The report directly contradicts the analysis of Emergency Manager Kevyn Orr who believes $18 billion in long-term debt has spiraled Detroit into financial chaos.

Tuberville says a municipal bankruptcy is ultimately a cash flow problem and Detroit needs to focus on its $198 million annual budget shortfall. Not, as EM Orr intends, on long-term debt. Tuberville calls Orr’s focus on long-term debt “irrelevant.”

He writes, “Detroit’s bankruptcy is, at its core, a cash flow problem caused by its inability to bring in enough revenue to pay its bills. While Orr has focused on cutting retiree benefits and reducing the city’s long-term liabilities to address the crisis, an analysis of the city’s finances reveals his efforts are inappropriate and, in important ways, not rooted in fact.”

The report, however, does not acknowledge the fact that 38 percent of every dollar collected by the city goes to pension, healthcare and other long-term obligations.

This is at the crux of the argument between liberal and conservative forces about Detroit’s financial crisis. Conservatives believe the cause is rooted in pension obligations and other worker based benefits. Liberals say depopulation, long-term unemployment and Wall Street contributed to the problem.

Yet, the growing research and analyses mitigates the polarity and offers new understanding.

In September, the Detroit Free Press even credited Mayor Coleman Young with being one of the most “austere” and financially prudent mayors in the last 50 years. Under Young, the city’s revenue exceeded its debt for ten years. Until now, Young was known more for his criticism of the region’s racial politics than executive prowess.

Tuberville’s report also serves as a policy whodunit for elected officials — a guide to avoid the mistakes of history. According to the report corporate subsidies, expensive Wall Street financial instruments, state revenue sharing cuts — not necessarily pension obligations — are key components to Detroit’s financial missteps.

Find full Demos report at http://www.demos.org/publication/detroit-bankruptcy

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