How Wall Street — not pensioners — wrecked Detroit
http://www.salon.com/2013/11/20/how_wall_street_not_pensioners_wrecked_detroit/
How Wall Street — not pensioners — wrecked Detroit
While clueless elites continue to blame "reckless public pensions," a new report tells a very different story
In its house editorial yesterday, USA Today retold the now-accepted story of Detroit’s bankruptcy. Railing on “reckless public pensions,” the newspaper told its readers that the Motor City is “Exhibit A for municipal irresponsibility” because it allegedly “negotiated generous pensions” that were too lavish. In this fable, the average Detroit pensioner’s $19,000 a year stipend – which many get in lieu of Social Security – is somehow defined not only as excessive, but also as the primary cause of the city’s financial problems. Detroit, thus, becomes a weapon in the larger Plot Against Pensions, as the right holds it up as a cautionary tale supposedly showing that A) police officers, firefighters and sanitation workers are greedy and B) America cannot afford to fulfill negotiated agreements to pay public-sector workers a subsistence retirement benefit.
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Commissioned by the think tank Demos, the new report out today from former investment banker Wallace Turbeville shows that contrary to the myths about a bloated municipal government overspending on lavish social services, Detroit’s “overall expenses have declined over the last five years” by $419 million thanks to the city “laying off more than 2,350 workers, cutting worker pay, and reducing future healthcare and future benefit accruals for workers.” Today, Turbeville notes that “Detroit has a significantly smaller workforce per capita than comparable cities.” Yet, those draconian cuts still left the city with an annual $198 million shortfall because of three big problems – none of which has anything to do with supposedly greedy public workers and their allegedly overly “generous” pension benefits.
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But perhaps the least discussed factor is the financing cost associated with a series of Wall Street-engineered debt deals back in 2005 and 2006. These schemes crafted by UBS and Bank of America’s Merrill Lynch were supposed to reduce pension fund obligations by using derivatives to try to “synthetically” convert variable-rate interest instruments into fixed-rate contracts.
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As Turbeville shows, in the five years leading up to today’s crisis, the city’s pension contribution expenses were essentially flat. Yes, its health care contribution expenses increased, but they rose by less than the nationwide annual increase in health care expenses, meaning Detroit experienced nothing out of the ordinary on that score. So if benefits didn’t drive the legacy cost increases what did? As Turbeville documents, it was fees, financing costs and payments incurred by Wall Street’s swap scheme. Those expenses constitute more than 61 percent of the total legacy-cost jump.
So when the details of Rand Paul's plan to save Detroit are divulged, who do you think it will have ponying up more money: Wall Street or the pensions?
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