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Disrupting Denial by Shea Howell

Thinking for ourselves
By Shea Howell
 
Disrupting Denial
December 12, 2015
 
This week the corporate elite celebration of the Detroit bankruptcy was brought to an abrupt halt. Gathered on the campus of Wayne State University, the Governor, Mayor, bankruptcy judge, and members of the mainstream media left the stage in the face of protests. Governor Snyder, who was greeted by boos from the audience, left in a huff. Judge Rhodes was drowned out. Mayor Duggan never appeared. Host Stephen Henderson admonished the audience saying, “This is not Detroit behavior.”
 
The Detroit Journalism Cooperative, a media collaborative that provided coverage of the bankruptcy and its aftermath, sponsored the event.  The gathering was billed as a public meeting to assess the city in the wake of bankruptcy.  
 
“Detroit Bankruptcy: One Year Later,” however, was put together without any consideration of those who objected to the process or who are being harmed by it. Only one viewpoint was allowed from the stage. If you weren’t willing to say the bankruptcy was a success and everything in the city is better than ever, you were not invited to speak.
 
That is not a true assessment of the state of our city, which is becoming increasingly divided by race and class, and increasingly impoverished in most neighborhoods.
 
This event was little more than a public relations stunt, marked by soft questioning from interviewers, canned responses by politicians, and efforts to reduce citizen perspectives to twitter feeds. No one should be surprised that the audience decided to challenge these constraints.
The organizers did not invite anyone who has challenged the bankruptcy, emergency management, the decisions to pursue aggressive water shut offs, the give away of revenue streams and assets, and the decision to use federal money to tear down houses rather than fix up homes.
Henderson defended this decision by resorting to name-calling. In a twitter exchange he said, “Protesters were not on program cuz it’s not the Springer show. They don’t want to discuss; they want to shout down.”
Of course, when people are not on the program, when the destruction of lives are rendered invisible, there is little left to do but to shout. In fact, our humanity requires it.
 
This defensive response by Henderson and the corporate elite to the disruption of their little show reflects how out of touch they are with the most of the people in the city.
 
The reality is that the direction set by this bankruptcy has resulted in a boom for a few neighborhoods. It has increased the number of young whites in midtown at the expense of elder African Americans and opened a kind of land rush in neighborhoods as foreclosures force out long-term residents. These contradictions of race and class are increasing tensions all over the city. The Mayor, Governor, and the Judge refuse to talk about them. But they are real.
 
According to U.S. Census Bureau between 2009 and 2014, median household income in Detroit fell by 20 percent from $32,493 to $26,095. The poverty rate increased from 33.2 percent to 39.8 percent. On any given day almost half the city is behind on water bills that are not affordable. Nearly 3,000 customers were threatened with water shutoffs last month alone.
 
We should applaud all those who raised their voices to disrupt the denial and evasion of the real questions facing our city. Pretending that our future is measured by bond ratings and buildings, rather than the quality of life of all our people and the care we show for one another, will lead to disruptions far beyond those of a simple meeting.
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Former EM compares Detroit Bankruptcy to Civil Rights #ReclaimMLK

Former EM compares Detroit Bankruptcy to Civil Rights #ReclaimMLK

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Former Emergency Manager Kevyn Orr compares Michigan’s Governor Rick Snyder and Detroit’s bankruptcy to Rev. Martin Luther King and the civil rights movement. #ReclaimMLK

 

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Excerpts from the MLive.com article on Kevyn Orr’s speech at the Grand Rapids Economic Clubs gathering on January 26th:

“While his plan to restructure the city’s pension obligations and its debts was greeted with almost universal hostility, Orr said it was a call from his mother that was among the most difficult. She called after hearing from an elderly friend whose pension was threatened by the bankruptcy petition.

“When your momma calls you crying about the job you’re doing, it’s a little disconcerting,” said Orr.

Orr compared Snyder’s decision to “bet the farm” and seek bankruptcy in his first term in office as a great act of political courage on par with Gen. Dwight D. Eisenhower’s D-Day Invasion and the Rev. Martin Luther King’s civil rights crusade.”

Read the full article: http://www.mlive.com/business/west-michigan/index.ssf/2015/01/kevyn_orr_thanks_outstate_legi.html

 

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Comparing Snyder’s actions to those of MLK’s during the Civil Rights Movement is an offensive attempt to recast the horrendous impact of Gov. Snyder’s legislation and policy on the state’s black population. It is a mockery of Rev. Martin Luther King’s legacy.

During Snyder’s tenure as Governor residents have experienced:

 

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People’s Platform NEWS Five – Democracy by Authority

The latest edition of the Detroit People’s Platform News hit the streets on January 26th. Proudly printed in a union shop, 5,000 copies will be distributed through Platform members in their neighborhoods and through community hubs city-wide.

This edition features:

  • Update: CBA Ordinance
  • Announcing WNUC 96.7 FM
  • Right to the City
  • Special Report: The Restructuring of Detroit, Democracy by Authority
    • Join the People’s Platform Authority Watch
    • Changes in City Governance
    • The Anatomy of an Authority
  • People’s Platform Report-Out 2014

Download the pdf!

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Update: Hockey Arena/Catalyst Project: City council approves land transfer

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City council approves land transfer for new arena without enforceable community benefits or oversight.


Detroit, February 5, 2014. People’s Platform Hockey Arena / Catalyst Project Update.
Many Detroiters are disgusted but not surprised that the transfer of city land to Olympia Development of Michigan (ODM) was approved yesterday by the city council. The land transfer will make way for construction on the new $650 million dollar project that uses $450 million in public funds. Yesterday, the city council voted to give away the land for this project, 39 city lots, for one dollar.

The council members voting ‘yes’ on the land transfer were Jenkins, Sheffield, Benson, Cushingberry, Leland, and Spivey while ‘no’ votes came from Jones, Castaneda-Lopez and Tate.

Some of the votes from the newly seated council were surprising, especially in the face of intense community dissent. Dissenters questioned the wisdom of giving away so many public dollars to build a second [or new] hockey arena for the Detroit Red Wings as the city reels from bankruptcy, the foreclosure crisis, and deep cuts to social services that effect all Detroiters, and residents of the region.

Tate’s ‘no’ vote was unexpected but inconsequential. In his explanation, the council member went out of his way to define his dissent as being due to the lack of commitment to create post-construction jobs and not due to the call from community for oversight.

Council new-comer and Detroit’s first Latina council member, Raquel Castaneda-Lopez, was very engaged, hosting multiple meetings, gathering community input and negotiating with OMD, the Downtown Development Authority (DDA) and the Detroit Economic Growth Corporation.

The ongoing struggle over enforceable community benefits with oversight will carry beyond this decision on the arena. Last year, the Community Benefits Agreement Policy Group presented city council with a draft community benefits agreement ordinance that will benefit Detroiters city-wide and set a precedent for equitable development.

Platform Member Follow-up
People’s Platform members and allies are encouraged to call and thank council members Jones, Castaneda-Lopez and Tate who voted ‘no’ for standing with their community. Members and allies are also encouraged to contact council members who voted to approve the deal yesterday, ask them to explain their vote and reiterate the need for community benefits that are enforceable and include community oversight.

2014 DETROIT CITY COUNCIL CONTACT INFO
(updated Feb 5, 2014)

Brenda Jones, Council President, At Large
313.224.1245 – bjones_mb@detroitmi.gov

Saunteel Jenkins, At Large
313.224.4248 – councilmemberjenkins@detroitmi.gov

James Tate, District 1
313.224.1027 – councilmembertate@detroitmi.gov

George Cushingberry, Jr., District 2
313.224.4535 – cushingberryg@detroitmi.gov

Scott Benson, District 3
313.224.1198 – bensons@detroitmi.gov

Andre Spivey, District 4
313.224.4841 – CouncilmanSpivey@detroitmi.gov

Mary Sheffield, District 5
313.224.4505 – sheffieldm@detroitmi.gov

Raquel Castaneda-Lopez, District 6
313.224.2450 – castaneda-lopezr@detroitmi.gov

Gabe Leland, District 7
313.224.2151 – lelandg@detroitmi.gov

LEARN MORE, DOWNLOAD, PRINT & SHARE RESOURCES from http://unitingdetroiters.org

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Update: City council approves land transfer for new arena

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City council approves land transfer for new arena without enforceable community benefits or oversight.


Detroit, February 5, 2014. People’s Platform Hockey Arena / Catalyst Project Update.
Many Detroiters are disgusted but not surprised that the transfer of city land to Olympia Development of Michigan (ODM) was approved yesterday by the city council. The land transfer will make way for construction on the new $650 million dollar project that uses $450 million in public funds. Yesterday, the city council voted to give away the land for this project, 39 city lots, for one dollar.

The council members voting ‘yes’ on the land transfer were Jenkins, Sheffield, Benson, Cushingberry, Leland, and Spivey while ‘no’ votes came from Jones, Castaneda-Lopez and Tate.

Some of the votes from the newly seated council were surprising, especially in the face of intense community dissent. Dissenters questioned the wisdom of giving away so many public dollars to build a second [or new] hockey arena for the Detroit Red Wings as the city reels from bankruptcy, the foreclosure crisis, and deep cuts to social services that effect all Detroiters, and residents of the region.

Tate’s ‘no’ vote was unexpected but inconsequential. In his explanation, the council member went out of his way to define his dissent as being due to the lack of commitment to create post-construction jobs and not due to the call from community for oversight.

Council new-comer and Detroit’s first Latina council member, Raquel Castaneda-Lopez, was very engaged, hosting multiple meetings, gathering community input and negotiating with OMD, the Downtown Development Authority (DDA) and the Detroit Economic Growth Corporation.

The ongoing struggle over enforceable community benefits with oversight will carry beyond this decision on the arena. Last year, the Community Benefits Agreement Policy Group presented city council with a draft community benefits agreement ordinance that will benefit Detroiters city-wide and set a precedent for equitable development.

Platform Member Follow-up
People’s Platform members and allies are encouraged to call and thank council members Jones, Castaneda-Lopez and Tate who voted ‘no’ for standing with their community. Members and allies are also encouraged to contact council members who voted to approve the deal yesterday, ask them to explain their vote and reiterate the need for community benefits that are enforceable and include community oversight.

2014 DETROIT CITY COUNCIL CONTACT INFO
(updated Feb 5, 2014)

Brenda Jones, Council President, At Large
313.224.1245 – bjones_mb@detroitmi.gov

Saunteel Jenkins, At Large
313.224.4248 – councilmemberjenkins@detroitmi.gov

James Tate, District 1
313.224.1027 – councilmembertate@detroitmi.gov

George Cushingberry, Jr., District 2
313.224.4535 – cushingberryg@detroitmi.gov

Scott Benson, District 3
313.224.1198 – bensons@detroitmi.gov

Andre Spivey, District 4
313.224.4841 – CouncilmanSpivey@detroitmi.gov

Mary Sheffield, District 5
313.224.4505 – sheffieldm@detroitmi.gov

Raquel Castaneda-Lopez, District 6
313.224.2450 – castaneda-lopezr@detroitmi.gov

Gabe Leland, District 7
313.224.2151 – lelandg@detroitmi.gov

LEARN MORE, DOWNLOAD, PRINT & SHARE RESOURCES from http://unitingdetroiters.org

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People’s Platform Action Alert: Council Hearing on a NEW ARENA and Detroit Development Authority expansion

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People’s Platform Call to Action

Thursday, December 19th 2013

 

Tomorrow, Friday December 20th at 9am Detroit City Council will meet to hear public comments and vote on the expansion of the Downtown Development Authority.

The expansion of the DDA, across I-75 and into the long contested land between Downtown and “Midtown”, will facilitate, authorize and make way for the construction of a new hockey arena and, according to recent reports, the state supported demolition of Joe Louis Arena.

City Council has delayed their vote until the last business day of the calendar year waiting for the DDA and the developer, Olympia Development, to present the Concession Agreement (executive summary attached) which they agreed upon and presented to Council last Friday, December 13th.

We encourage citizen participation in this decision and request that Detroiters contact City Council members, attend the public hearing if possible, and

1.) demand that Council oppose the expansion of the DDA, and

2.) that if it is approved, they amend the Concession Management Agreement between the DDA and Olympia Development to include a Community Steering Committee that truly reflects community. NOT the committee structure recommended by the Corridor Alliance group.

Members and supporters of the People’s Platform will be meeting at 8:30 AM in the hallway outside of Council chambers on the 13th Floor of the Coleman A. Young Municipal Center to organize before the hearing starts at 9:00 AM. If you are unable to join us in person we encourage you to contact council by email or phone to express your opinion. Council Member contact info is below.

Suggested Talking Points:

  • In the same month that a federal judge has determined that Detroit is eligible for bankruptcy, the proposal for this development, which uses $300 million in public funding encourages separate and unequal development that benefits only the developer and not the community and flies in the face of pensioners and others impacted by the bankruptcy.
  • This project will negatively impact current residents and businesses by making the downtown and midtown areas more difficult to navigate for the vast majority of Detroiters, cutting off access needed services, like the DMC for example.
  • The Ilitches already own acres of blighted property WITHIN the existing DDA that could be utilized and put to use for this project.
If Council Members vote in support of the DDA expansion:
If council elects to approve the expansion of the DDA, we ask that they amend the Concession Management Agreement to include and empower a Community Steering Committee with an alternate structure to the one proposed by the Corridor Alliance. While the work of the Corridor Alliance strives to address the concerns of the community and brings many resources through its partnerships it does not represent the voice of many Detroiters who refuse to accept this project as a “done deal”. The Corridor Alliance’s letter to Council President Jenkins is attached. CA_Council_December 12
The proposed Corridor Alliance Community Steering Committee does not truly reflect the residents and businesses in and around the catalyst area, only serves to authorize and condone this project, only benefits a few well organized and well intentioned individuals and continues to set a precedent for community benefit that does not benefit those directly impacted by development.
If the proposal for a Community Steering Committee is included in the Concession Management Agreement by City Council we encourage an alternate structure for the committee, This alternate proposal will more adequately reflect a greater diversity of input and will include community members from District 6 and District 5, both areas that will be impacted by this development.Proposed Alternate Community Steering Committee Membership
The Community Steering Committee shall consist of ten members to be selected as follows:
2 members designated by City Council Member Raquel Castaneda-Lopez for District 6
2 members designated by City Council Member Mary Sheffield for District 5
2 members designated by existing and active community groups, WRD6 and the Detroit People’s Platform Leadership Caucus
2 members designated by the Corridors Alliance
1 member designated by Doing Development Differently in Detroit
1 member designated by the Developer

The Corridor Alliance proposed membership:
(from their letter to Council President Jenkins)

The Community Steering Committee shall consist of ten (10) individual members to be selected as follows: the Council Member for District 6 shall have the right to designate three (3) members, the Corridors Alliance shall have the right to designate four (4) members, the board of Directors of Doing Development Differently in Metro Detroit (D4) shall have the right to designate two (2) members, and the Developer shall have the right to designate one (1) member.  ref: CA_Council_December 12

 

Call/email City Council
Council President Saunteel Jenkins, (313) 224-4248 (office), E-mail: councilmemberjenkins@detroitmi.gov
Council President Pro Tem André L. Spivey, (313) 224-4841 (office), E-mail: CouncilmanSpivey@detroitmi.gov
Council Member Kenneth V. Cockrel, Jr, (313) 224-4505 (office), E-mail: Kenneth.Cockrel@detroitmi.gov
Council Member Brenda Jones, (313) 224-1245 (office), E-mail: bjones_mb@detroitmi.gov
Council Member James Tate, (313) 224-1027 (office), E-mail: councilmembertate@detroitmi.gov
Council Member JoAnn Watson, (313) 224-4535 (office), E-mail: WatsonJ@detroitmi.gov

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DEMOS Report on Bankruptcy – Media Roundup

DETROIT — In their push for bankruptcy, Emergency Manager Kevyn Orr and other public figures are incorrectly looking at Detroit’s long-term debt—figures generated using aggressive and in some cases inaccurate assumptions—to the detriment of solving the City’s immediate cash-flow crisis and its long-term structural challenges, according to a report released Wednesday by Demos.

Detroit Local Coverage

http://www.deadlinedetroit.com/articles/7298/report_challenges_kevyn_orr_s_version_of_why_detroit_went_belly-up

http://www.detroitnews.com/article/20131120/METRO01/311200082/Report-Detroit-s-collapse-caused-more-by-declining-revenue-than-legacy-costs

http://www.freep.com/article/20131120/NEWS01/311200115/detroit-bankruptcy-debt-revenue-sharing-cuts

http://www.crainsdetroit.com/article/20131120/NEWS/131129981/report-detroits-pension-fund-liabilities-not-to-blame-for-bankruptcy#

http://www.huffingtonpost.com/2013/11/20/detroit-bankruptcy-wall-street-demos-_n_4310023.html?utm_hp_ref=business

National – Global Coverage

http://www.theguardian.com/world/2013/nov/20/detroit-accused-exaggerating-18bn-debts

http://www.salon.com/2013/11/20/how_wall_street_not_pensioners_wrecked_detroit/

http://www.usatoday.com/story/news/nation/2013/11/20/detroit-bankruptcy-debt-state-revenue-sharing-cuts/3652057/

http://www.benefitspro.com/2013/11/20/pension-debt-did-not-cause-detroit-bankruptcy-repo

http://www.msnbc.com/all/detroits-estimated-debt-inaccurate

http://rhrealitycheck.org/article/2013/11/20/detroit-workers-deserve-better-than-bankruptcy/

The Detroit Bankruptcy

November 20, 2013

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The City of Detroit’s bankruptcy was driven by a severe decline in revenues (and, importantly, not an increase in obligations to fund pensions). 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.

The Shortfall

Detroit’s emergency manager, Kevyn Orr, asserts that the city is bankrupt because it has $18 billion in long-term debt. However, that figure is irrelevant to analysis of Detroit’s insolvency and bankruptcy filing, highly inflated and, in large part, simply inaccurate. In reality, the city needs to address its cash flow shortfall, which the emergency manager pegs at only $198 million, although that number too may be inflated because it is based on extraordinarily aggressive assumptions of the contributions the city needs to make to its pension funds.

Cash flow crisis.

In a corporate bankruptcy, the judge takes stock of a company’s total assets and liabilities because the company can be liquidated and all its assets sold to pay down its debts. However, municipal bankruptcies are inherently different because they do not contemplate the liquidation of a city. Municipal bankruptcies are about cash flow—a city’s ability to match revenue against expenses so that it can pay its bills. Under Chapter 9 of the United States Bankruptcy Code, a municipality is eligible to file bankruptcy when it is unable to pay its debts as they come due.

This means that Detroit is bankrupt not because of its outstanding debt, but because it is no longer bringing in enough revenue to cover its immediate expenses. According to the city’s bankruptcy filing, the emergency manager projects a $198 million annual cash flow shortfall for fiscal year (FY) 2014 (though, as explained below, the portion of this amount that is related to pension fund contributions is an estimate that requires deeper analysis). To get out of bankruptcy, the city needs to address this annual shortfall—whether it is $198 million or a smaller number—not its total outstanding long-term debt.

Total outstanding debt. 

Not only is the $18 billion outstanding debt figure irrelevant to Detroit’s bankruptcy, it is also misleading and inflated. There are several reasons, including the following examples:

  • The emergency manager includes $5.8 billion of the Water and Sewerage Department’s debt as a liability of the city, even though the Water and Sewerage Department serves more than 3 million people all across southeastern Michigan, an area far larger than just the city of Detroit, which has just 714,000 residents. This debt is not a liability of the city’s general fund; and, even if it were, only a fraction of it would allocable to the city.
  • 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.

To pinpoint the causes of Detroit’s bankruptcy, it is necessary to identify the reasons for the city’s cash flow shortfall, which are best understood through an analysis of the city’s revenue and expenses.

Revenue

Detroit has been in a state of decline for several decades. The city’s population has fallen from a high mark of nearly 2 million residents in 1950 to just 714,000 in 2010. This long-term decline has also taken a toll on the city’s revenue base, causing both property and income tax revenues to shrink as homeowners and jobs have left the city. Altogether, Detroit’s revenues have decreased by more than 20 percent since FY 2008, declining by $257.7 million.

Tax revenue.

Because of the Great Recession, this gradual decline in revenue became a massive leak. Detroit was hit particularly hard by both the foreclosure and unemployment crises. The number of employed Detroit residents fell by 53 percent from 2000 through 2012, but half of that decline occurred in a single year, 2008, as the recession took hold.

During the recession, property values declined substantially, eating into the city’s property tax base. The recession has cut deeply into key property and income tax revenue and fee revenue from utilities owned and operated by the city.

State revenue sharing.

The state of Michigan has exacerbated Detroit’s revenue crisis by slashing $67 million in state revenue sharing with the city. About $24 million dollars of these cuts were due to revenues shared  pursuant to the Michigan State Constitution, allocated among cities and towns based on population. Detroit’s allocation was reduced because of population loss in the 2010 census. However, the remaining $42.8 million (64 percent of the total state cuts) were due to statutory revenue sharing and were at the discretion of the state Legislature. By cutting revenue sharing with the city, the state effectively reduced its own budget challenges on the backs of the taxpayers of Detroit (and other cities). These cuts account for nearly a third of the city’s revenue losses between FY 2011 and FY 2013, coming on the heels of the revenue losses from the Great Recession and tipping the city into the cash flow crisis that it is now experiencing. Furthermore, the Legislature placed strict limits on the city’s ability to raise revenue itself to offset these losses.

Corporate subsidies.

The city has provided significant tax subsidies to a large number of enterprises as incentives to engage in development projects in downtown Detroit. In some years, the city handed out as much as $20 million to private interests. To the extent that the development would have occurred without these tax subsidies, or with less subsidies, the program was a burden on city revenues at a time when it was particularly damaging. In any event, the subsidies that have not yet been received should be treated as obligations of the city, in the same category as debt service and funding of future employee benefits, subject to readjustment to help resolve the cash flow crisis to the extent revenue is not increased to cover the demands on cash.

Expenses

Contrary to widely held belief, Detroit does not have a spending problem. Since the onset of the Great Recession, the city’s total expenses have actually decreased by $356.3 million, driven by a 38 percent reduction ($419.1 million in absolute terms) in operating expenses, although its financial expenses have gone up.

Operating expenses. 

Between FY 2008 and FY 2013, the city drastically cut operating expenses by $419.1 million. This was accomplished in large part by laying off more than 2,350 workers, cutting worker pay, and reducing future healthcare and future benefit accruals for workers. The city reduced salary expenses by 30 percent between FY 2008 and FY 2013. Total operating expenses have been reduced by nearly 38 percent during that same time.

Legacy expenses.

The city’s “legacy expenses” increased by $62.8 million between FY 2008 and FY 2013. These legacy expenses include the city’s debt service and financial expenses as well estimates of its future liability for healthcare and pension benefits it pays to retirees. A close look at the city’s legacy expenses reveals that this $62.8 million increase was driven heavily by the city’s complex financial deals, not retiree benefits.

  • The city’s financial expenses increased by $38.5 million between FY 2008 and FY 2013, accounting for more than 60 percent of the total increase in legacy expenses.
  • The city’s pension contribution expenses remained relatively flat, rising only $2 million during this time. The city’s contribution might have been larger if it had had more money, but increases in the actual contributions it did make did not contribute materially to the cash flow crisis.
  • The city’s healthcare contribution expenses increased by $24.3 million. This constitutes an increase of 3.25 percent, per year, which is less than the nationwide annual increase in healthcare costs of 4 percent.

The city’s pension contributions in particular did not play a role in pushing it into bankruptcy because they did not contribute materially to the increase in the city’s legacy expenses that added to the cash flow shortfall. While the city’s healthcare contributions did increase, this was largely because of rising healthcare costs nationally, not because the city’s benefits were too generous. In fact, a comparative analysis of Detroit’s retiree benefits shows that its pension and healthcare benefits are in line with those of other comparable cities.

Financial deals.

Detroit’s financial expenses have increased significantly, and that is a direct result of the complex financial deals Wall Street banks urged on the city over the last several years, even though its precarious cash flow position meant these deals posed a great threat to the city. The biggest contributing factor to the increase in Detroit’s legacy expenses is a series of complex deals it entered into in 2005 and 2006 to assume $1.6 billion in debt. Instead of issuing plain vanilla general obligation bonds, the city financed the debt using certificates of participation (COPs), which is a financial structure that municipalities often use to get around debt restrictions. Eight hundred million dollars of these COPs carried a variable interest rate, which the city synthetically converted to a fixed rate using interest rate swaps.

These swaps carried hidden risks, and these risks increased after the Federal Reserve drove down interest rates to near zero in response to the financial crisis. The deals included provisions that would allow the banks to terminate the swaps under specified conditions and collect termination payments, which would entitle the banks to immediate payment of all projected future value of the swaps to the bank counterparties. Such conditions included a credit rating downgrade of the city to a level below “investment grade,” appointment of an emergency manager to run the city and failure of the city to make timely payments. Projected future value balloons in low, short-term rate conditions. This is because the difference between the fixed swap payments made by the city and the floating swap payments projected to be paid by the banks increases. Because all of these events have occurred, the banks are now demanding upwards of $250-350 million in swap termination payments.

These swap deals were particularly ill-suited for a city like Detroit, which had been hovering on the edge of a credit rating downgrade for years. Because the risk of a credit downgrade below “investment grade” was so great, the likelihood of a termination was imprudently high. The banks and insurance companies were in a far better position to understand the magnitude of these risks and they had at least an ethical duty to forbear from providing the swaps under such precarious circumstances. The law recognizes special duties that sophisticated financial institutions owe to special entities like cities in providing complex financial products.  A strong case can be made that the banks that sold these swaps may have breached their ethical, and possibly legal, obligations to the city in executing these deals.

Conclusion

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 emergency manager Kevyn 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 that his efforts are inappropriate and, in important ways, not rooted in fact. Detroit’s bankruptcy was primarily caused by a severe decline in revenue and exacerbated by complicated Wall Street deals that put its ability to pay its expenses at greater risk. To address the city’s cash flow shortfall and get it out of bankruptcy, the emergency manager should focus on increasing revenue and extricating the city from these toxic financial deals. Here are some recommendations for doing that:

  • The emergency manager, ideally in collaboration with the state, needs to increase revenue by $198 million annually to bridge Detroit’s budget gap until structural programs can be put in place and the city can benefit from increased general economic improvement. This includes enlisting state involvement on an emergency basis and restoring discretionary state revenue sharing to pre-crisis levels. The shortfall amount can be reduced as FY 2014 proceeds by factors such as improved collection of unpaid taxes (which has yielded modest results to date).
  • The emergency manager should drop his proposal to move city workers to a defined contribution pension plan and abrogate vested pension benefits. The city’s pension fund contributions did not cause the crisis.  Reducing benefits runs counter to the long-term goal of structurally improving city services. Moreover, converting to a defined contribution plan at just the moment when new active employees will be added as services are improved (a goal of the emergency manager) would adversely affect the financial dynamics of the pension fund for existing retirees and other beneficiaries who have already vested under the defined benefit system. Over time, the new active employees will rebalance a fund that is currently top-heavy with retirees and will improve the long-term investment horizon of the plan, to the benefit of city cash flow.
  • The emergency manager should drop any plans to privatize or otherwise monetize the Water and Sewerage Department, since the asserted benefits of such a plan are not likely to be realized and, even if they were, would have no net effect on the current cash flow crisis. The sale price of the system or components represents an investment by a buyer that must be repaid by system revenues, the same as bonds issued against those revenues. If the sale price is applied to retire existing bonds, the effects balance out. If they are not used to retire bonds, it is just like issuing new debt, which presumably the system could do without selling off parts of itself. The plan calls for an annual payment to the city, but this payment is from user fee revenues net of operational expenses and debt service (and return on equity investment if true privatization is used), a financial structure that is parallel to the current system.
  • The emergency manager’s plan to pay the swap termination fees outside of the bankruptcy process should be abandoned. The bank counterparties should be made to bear the consequences of the original swap transaction, and they should be pushed to forego their projected profit (the measure of the termination payment), given the large profits they have already earned as a result of the unusually low interest rates that resulted from the financial crash. The emergency manager should also press for prorated rebates on the premiums for insurance on the swaps. And, if necessary, the state should be enlisted to guarantee the city’s swaps to avoid payment of termination fees. The termination fees will become smaller as interest rates rise over time, which they are likely to do.
  • The emergency manager should negotiate directly with the holders of the pension financing certificates of participation, apart from other unsecured creditors. The circumstances of the COPs issue are unique. Unless these circumstances are shown to have benign explanations that are not currently available generally to the public, the leverage that the emergency manager has over this negotiation is high.
  • The emergency manager should reclaim tax subsidies and other expenditures to incentivize investment in the downtown area. These tax subsidies should be treated similarly to the city’s other financial obligations. The residents of Detroit have already suffered as a result of the crisis, as have the public employees. The recipients of tax expenditures should share in the sacrifice as well.

Once Detroit gets through this immediate crisis, the city’s elected officials, hopefully working collaboratively with the state Legislature and the governor, can turn their attention to post-crisis, structural programs that would grow the city’s tax base and allow it to return to prosperity over time.

Download the full report

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People’s Platform Advisory Alert #2

LAND JUSTICE: Community Land Trust Gathering, Tues, Nov 19, 6-8pm – 736 Lothrop

The next Community Land Trust Gathering will take place this Tuesday November 19 from 6-8pm at 736 Lothrop. The meeting will include a presentation on the land portion of Detroit Future City by Professor Peter Hammer, Director of Wayne State University’s Law School’s Damon Keith Center for Civil Rights. The presentation will serve and an overview and share how it will affect different neighborhoods.

 

DEMOS Briefing on What Caused the Detroit Bankruptcy, Wed, Nov 20, 8:30am – MSU Detroit Center

Detroit has filed the largest municipal bankruptcy in the United States but there has been a remarkable lack of in depth analysis of Detroit’s financial data by those with expertise in municipal finance.

On Wednesday, November 20, 2013 at 8:30 am, Demos is sponsoring a briefing on their new report about the Detroit Bankruptcy. The report, which is being released on the same day, was researched by Wallace Turbeville, a senior fellow at Demos and an expert in municipal finance. Mr. Turbeville, reviewed several years of Detroit financial data in his effort to determine the contributing causes of the largest municipal bankruptcy in American history.

The briefing will feature Mr. Turbeville and Saqib Bhatti, a fellow at the Nathan Cummings Foundation. They will discuss key findings of the research. There will be an opportunity for questions and answers. A report summary will be made available to attendees.

Community groups, clergy, activists, elected officials, civil rights groups and labor unions are invited to attend. You are free to pass this invite on to others.

CLOSED TO PRESS

Michigan State University, Detroit Center
3408 Woodward Avenue, Detroit MI 48201
8:30-10:00 am.
To RSVP email thedetroitbankruptcy@gmail.com

SAVE THE DATE: State of Emergency – Nov 30th

People’s Forum II: Next Generation
State of Emergency!

*EXPOSING the roots and effects of Emergency Management
*FIGHTING displacement and colonization in our communities

*ILLUMINATING the path to dignity and self-determination of all generations

DID YOU KNOW?
Over half of Michigan’s African-American population is under is under dictator rule by Governor appointed Emergency Management?

Emergency Management does NOT increase revenue, does NOT improve quality of life, does NOT reduce debt?

There is no accountability for decisions made about our communities by Emergency Managers?

Learn more about these pressing injustices and be part of creating community solutions.

Saturday November 30th 10am-2pm
Northwest Activities Center
18100 Meyers Rd #1  Detroit, MI 48235