Sunday, December 08, 2013

Motown Woes

At one point in time Detroit was the American dream.  It was the fifth biggest metropolitan area in the country and its economy was booming as a result of the success of the big three automakers: Ford, General Motors, and Chrysler. The car industry's unionized workforce took home good salaries. The Motor City's manufacturing workforce stood at 200,000 in 1950. Today, it's 20,000. Its workforce has been decimated by union-busting schemes.

With its jobs gone and poverty rampant, Detroit, like so many other deindustrialised cities across America suffered massive defaults at the heels of the sub-prime lending crisis which ensured the financial crisis hit the Motor City especially hard. A federal judge has ruled that Detroit can go bankrupt, putting its workers' pensions in jeopardy. The city is claiming poverty, and therefore that's just tough luck for its workers.

Subordinating the needs of the working class and needy to the profits of corporate and wealthy interests is a time-honored practice.  The group "Good Jobs First" that tracked "mega-deals" (deals over $75 million) brokered by states nationally in the past 35 years. Michigan had the most, with 29 such deals. Michigan forfeited a whopping $7.1 billion mostly large Fortune 500 type companies in return for little if anything at all.

A corporate flat tax was introduced by Michigan in 2012. Had the Michigan Business Tax remained intact, state revenues for 2013 would have amounted to at least $1.320 billion. Now, in 2013, projected revenues for the state coffers are between $310 million to $410 million instead, roughly a fourth of the previous rate. This has profound implications for cities such as Detroit that rely in part on state revenue sharing for their funding.

Tom Barrow, a mayoral candidate,  president of Citizens for Detroit's Future and former head of the Michigan Licensing Board of Accountancy, explained “...they've convinced the public that pensions and health care are driving a short-term cash crisis when they're not. I had to conclude the whole thing is a fabrication."

Bond market expert Kate Long, who, after running the numbers is quoted in Reuters, June 2013, indicates that the pension fund is actually "reasonably well-funded according to national standards." It is unclear how a $614 million gap in funding reported in 2011 has now swelled to $3.5 billion.

In 2005 and 2006, the city, like many cities and states around the country, felt compelled to issue debt to put money into its pension fund. The idea is you borrow the money, you put it in the pension fund, and, let’s say, you can hold it for 30 years and invest it in the stock market; the interest on the debt that you take out is less than the earnings you’re going to get on shares of stock. So, they issued $1.6 billion of debt. For half of that, they did it in combination with a derivative. Derivatives was the large reason for the financial crisis in 2008.  So what happened was they talked the city of Detroit into doing this derivative. And the way it worked is, for half, or $800 million, of this financing, it’s as if you took out a mortgage, borrowed money, and you paid your principal to one bank and the interest to the other bank. On this interest part of the deal, they had a term in it that if Detroit was nicked just one credit rating down, the bank could ask for all of the interest for 25 years that was to become due—they could ask for it now. Detroit has been on the edge of investment grade, non-investment grade for decades. So, to do that transaction in 2005 and 2006 and include a term which says all of your interest for 20 years is due now if you get downgraded was imprudent beyond imagination. One of the major issues under discussion is that the banks have come and said, "I want my interest now." And the question is whether that’s going to be adjusted by the bankruptcy court, whether it’s negotiated some other way.

Demos, a non-partisan think-tank, released  a report titled "The Detroit Bankruptcy." which said:
 “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.”

 Ross Eisenbrey of the Economic Policy Institute wrote:
 “Detroit's current citizens and the public employees who serve them are not the cause of Detroit's fiscal problems. They are the victims of forces beyond their control, including globalization, capital flight and racism. No one can, with any seriousness, blame Detroit's librarians, social workers, garbage collection workers or street cleaners for the city's catastrophic loss of population and tax base...It's unrealistic to expect Detroit's remaining 700,000 residents, more than one-third of whom have incomes below the poverty level and whose per capita income is only $14,000, to support a city and an infrastructure built for 1.8 million...”

Detroit's pensioners did not cause the city's financial problems and should not be made the scapegoats for the ill-conceived financial schemes and greed of the wealthy and powerful. Pensions are not gifts bestowed  on workers; they are part of workers' pay, deferred. When the city like Detroit cut workers' pensions, they are in effect saying that they are not going to pay workers for the work they did. Public sector pensions were voluntarily negotiated and  agreed by employer and employee but now these contracts are apparently worthless. The rich can just rewrite the law as they go along.  U.S. Bankruptcy Judge Steven Rhodes ruled that "Pension benefits are a contractual obligation of a municipality and not entitled to any heightened protection in bankruptcy. " The Michigan state constitution protects public pensions as a "contractual obligation" that cannot be "diminished or impaired." But the U.S. government allows contract cuts in bankruptcy, and Rhodes ruled that federal law preempts the state Constitution.

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