Report questions assumptions behind Detroit bankruptcy

Nov 21, 2013

 A new report says declining revenues and bad Wall Street deals—not out-of-control spending or generous pension benefits--contributed the most to Detroit’s bankruptcy.

The report from the left-leaning think tank Demos also accuses Emergency Manager Kevyn Orr of attacking the problem in “inappropriate” ways that are “not rooted in fact.”

The report’s author is Demos Senior Fellow and former Goldman Sachs investment banker Wallace Turbeville.

Turbeville accuses Orr of inflating the city’s debt load, pegged at around $18 billion. He particularly questions the $3.5 billion Orr projects for Detroit’s unfunded pension liabilities.

Turbeville concludes pension benefits and retiree health care “played little role” in Detroit’s financial collapse. And he suggests Orr is tackling the bankruptcy in entirely the wrong way, by focusing largely on the city’s debt.

“At the end of the day, the report points out, the $18 billion number figure is a red herring,” says Saquib Bhatti, a municipal finance expert with the Nathan Cummings Foundation. “Because when it comes to municipal bankruptcies--unlike a corporate bankruptcy, where you’re trying to figure out the liquidation value by balancing liabilities against assets--you don’t do that with cities.”

The report acknowledges that Detroit is bankrupt—but says that’s because of the city’s cash flow problems, not its debt.

People who oppose Orr’s bankruptcy plans—especially pensioners who fear cuts Orr has said are necessary—seized on the report as proof that he’s taking the wrong path.

“The report shows that the city pensions and health care costs did not--and I repeat, did not--put us into bankruptcy,” says Yolanda Langston, a 17-year Detroit city employee.

An Orr spokesman says the report “totally ignores the financial peril the city is in,” and points out it had union backing.

Demos acknowledges that, but defends Turbeville’s “independent” analysis.

The Detroit Free Press did a thorough analysis of Detroit’s long slide into bankruptcy last month—it can be found here.