Skip to main content

What bled Detroit dry? (It's not pensions)

By Ross Eisenbrey
December 18, 2013 -- Updated 0140 GMT (0940 HKT)
Detroit has become the largest American city to declare bankruptcy. People who spend any time there grow accustomed to hearing the words "used to be," says Heidi Ewing, co-director of "Detropia," a documentary about the Michigan city and its uncertain future. An aerial view, circa 1950, of the old Tiger Stadium and the downtown skyline shows the Motor City in all its former glory. Detroit has become the largest American city to declare bankruptcy. People who spend any time there grow accustomed to hearing the words "used to be," says Heidi Ewing, co-director of "Detropia," a documentary about the Michigan city and its uncertain future. An aerial view, circa 1950, of the old Tiger Stadium and the downtown skyline shows the Motor City in all its former glory.
HIDE CAPTION
Detroit, the glory days
Detroit, the glory days
Detroit, the glory days
Detroit, the glory days
Detroit, the glory days
Detroit, the glory days
Detroit, the glory days
<<
<
1
2
3
4
5
6
7
>
>>
STORY HIGHLIGHTS
  • Ross Eisenbrey: Stripping Detroit's workers of their modest pensions will kill middle class
  • Eisenbrey: Most pensions are $19,000 year; $30,000 a year for police and firefighters
  • He says culprits are sky-high financial costs, corporate subsidies, tax loopholes
  • He says Detroit bankruptcy caused by same dynamics creating inequality in the nation

Editor's note: Ross Eisenbrey is vice president of the Economic Policy Institute.

(CNN) -- A judge's ruling that the city of Detroit can move forward with bankruptcy and strip the city's public workers of their modest pension benefits will have a devastating impact on Detroit's middle class — many of whom are African-American — and the city's ability to rebuild a strong and sustainable economy.

The largest municipal bankruptcy in our nation's history, the Detroit decision charts a course where Wall Street banks and bondholders are at the front of the payment line while city residents, police officers, firefighters and other public employees are left at the rear, with only pennies.

Ross Eisenbrey
Ross Eisenbrey

Kevyn Orr, Detroit's unelected emergency manager, misled the public and succeeded in setting a dangerous precedent that will have ripple effects for other cities and states still struggling to get back on their feet in the post-recession economy.

Michigan Gov. Rick Snyder and Orr, a former corporate bankruptcy lawyer, frequently cited the figure of Detroit's $18 billion in long-term debt as the reason the city must declare bankruptcy. According to a recent report, "The Detroit Bankruptcy," written by former Goldman Sachs investment banker Wallace Turbeville, not only is $18 billion an inflated and inaccurate estimation of Detroit's long-term debt, it is irrelevant. Unlike corporations, cities cannot be liquidated, therefore cash flow, as opposed to long-term debt, is what must be addressed.

Opinion: Detroit, the 'used to be' city

Detroit has a cash-flow shortfall of $198 million. Despite the blame placed on public pensions, the truth is that Detroit's path to insolvency had little or nothing to do with pensions, which average just $19,000 per year for most employees and $30,000 per year for police and firefighters, who are not eligible to receive Social Security. There were several drivers of Detroit's downward spiral:

Retired city workers protest in front of the U.S. Courthouse where a judge ruled that Detroit is eligible to file for bankruptcy.\n
Retired city workers protest in front of the U.S. Courthouse where a judge ruled that Detroit is eligible to file for bankruptcy.

A depleted tax base: The city's wealthier white population has declined by 1.4 million since the 1950s, leaving behind an almost entirely African-American and much poorer population. The remaining tax base continues to decline as unemployment stays stubbornly high: In 2008 alone, the number of working Detroit residents dropped by roughly one-quarter, further diminishing the city's income tax receipts. Property tax revenue also dropped precipitously as home values went through the floor.

Skyrocketing financial costs: Wall Street banks saddled Detroit with $1.6 billion in loan deals that were highly profitable for Wall Street, but exposed the city to risk it could not afford to take. The banks have already extracted $300 million from Detroit to terminate these interest rate swaps, and are posed to collect another $300 million in additional windfalls.

Corporate subsidies and tax loopholes: While public workers were laid off and had salaries cut, Detroit gave away millions of public revenue in tax loopholes and subsidies to big corporations. A wealth of research finds that tax breaks like these are ineffective and it is apparent they have done little to create good jobs for Detroit residents. These tax breaks should be on the table, just like other obligations of the city in resolving the cash-flow crisis.

The dynamics at play in Detroit are the same dynamics creating the growing wealth gap and keeping our economy from making a lasting and sustainable economic recovery. While Wall Street and corporations profit handsomely from a city's decline, public workers—the city's middle class—have sacrificed time and again.

The Motor City sputters to a stop
Detroit's road ahead to better times

In recent years, thousands of public workers were laid off, and the remaining public employees accepted a 10% pay cut, health benefit reductions and a 40% cut in future pension benefits, saving Detroit $160 million. Not only is it immoral to force the working people to give up even more in the name of fiscal responsibility, but these cuts will only burden the effort to solve the city's long-term challenges by depressing economic activity, pushing more residents into poverty, and making it difficult to retain and attract needed workers.

Instead, Detroit's cash flow shortfall must be addressed by fixing the problems that caused it in the first place. Banks must be told that they have profited enough from interest rate swaps that helped create this mess and will receive no more. The state needs to collaborate by increasing available revenues. Corporate tax loopholes must be closed and ineffective subsidies ended.

Like other cities, Detroit can work its way back toward a healthy local economy with good jobs, quality public services and a robust tax base. But making that happen depends on honoring the promises made to workers and ensuring that Wall Street and big corporations pay their fair share.

Follow us on Twitter @CNNOpinion.

Join us on Facebook/CNNOpinion.

The opinions expressed in this commentary are solely those of Ross Eisenbrey.

ADVERTISEMENT
Part of complete coverage on
July 10, 2014 -- Updated 1620 GMT (0020 HKT)
Frida Ghitis says a poll of 14 Muslim-majority nations show people are increasingly opposed to extremism.
July 10, 2014 -- Updated 1828 GMT (0228 HKT)
Ruben Navarrette says spending more on immigation enforcement isn't going to stop the flow of people seeking refuge in the U.S.
July 10, 2014 -- Updated 2048 GMT (0448 HKT)
Faisal Gill had top security clearance and worked for the Department of Homeland Security. That's why it was a complete shock to learn the NSA had him under surveillance.
July 10, 2014 -- Updated 1841 GMT (0241 HKT)
Kevin Sabet says the scientific verdict is that marijuana can be dangerous, and Colorado should be a warning to states contemplating legalizing pot.
July 9, 2014 -- Updated 2047 GMT (0447 HKT)
World War I ushered in an era of chemical weapons use that inflicted agonizing injury and death. Its lethal legacy lingers into conflicts today, Paul Schulte says
July 10, 2014 -- Updated 1137 GMT (1937 HKT)
Tom Foley and Ben Zimmer say Detroit's recent bankruptcy draws attention to a festering problem in America -- cities big and small are failing to keep up with change.
July 10, 2014 -- Updated 1201 GMT (2001 HKT)
Mel Robbins says many people think there's "something suspicious" about Leanna Harris. But there are other interpretations of her behavior
July 9, 2014 -- Updated 2006 GMT (0406 HKT)
Newt Gingrich warns that President Obama's border plan spends too much and doesn't do what is needed
July 9, 2014 -- Updated 1753 GMT (0153 HKT)
Amy Bass says Germany's rout of Brazil on its home turf was brutal, but in defeat the Brazilian fans' respect for the victors showed why soccer is called 'the beautiful game'
July 8, 2014 -- Updated 1754 GMT (0154 HKT)
Errol Lewis says if it really wants to woo black voters away from the Democrats, the GOP better get behind its black candidates
July 9, 2014 -- Updated 2107 GMT (0507 HKT)
Aaron Carroll explains how vaccines can prevent illnesses like measles, which are on the rise
July 9, 2014 -- Updated 0008 GMT (0808 HKT)
Aaron Miller says if you think the ongoing escalation between Israel and Hamas over Gaza will force a moment of truth, better think again
July 8, 2014 -- Updated 2241 GMT (0641 HKT)
Martin Luther King Jr. fought and died so blacks would no longer be viewed as inferior but rather enjoy the same inherent rights given to whites in America.
July 9, 2014 -- Updated 1147 GMT (1947 HKT)
Alex Castellanos says recent low approval ratings spell further trouble for the President
July 9, 2014 -- Updated 0349 GMT (1149 HKT)
Paul Begala says Boehner's plan to sue Obama may be a stunt for the tea party, or he may be hoping the Supreme Court's right wing will advance the GOP agenda that he could not
July 6, 2014 -- Updated 1659 GMT (0059 HKT)
The rapture is a bizarre teaching in fundamentalist circles, made up by a 19th-century theologian, says Jay Parini. It may have no biblical validity, but is a really entertaining plot device in new HBO series
July 7, 2014 -- Updated 1749 GMT (0149 HKT)
Ruben Navarrette: President Obama needs to send U.S. marshals to protect relocating immigrant kids.
July 8, 2014 -- Updated 1903 GMT (0303 HKT)
Norman Matloff says a secret wage theft pact between Google, Apple and others highlights ethics problems in Silicon Valley.
July 8, 2014 -- Updated 2237 GMT (0637 HKT)
The mother of murdered Palestinian teenager Mohammed Abu Khder cries as she meets Palestinian president Mahmoud Abbas in Ramallah, West Bank on July 7, 2014.
Naseem Tuffaha says the killing of Israeli teenagers has rightly brought the world's condemnation, but Palestinian victims like his cousin's slain son have been largely reduced to faceless, nameless statistics.
July 9, 2014 -- Updated 2028 GMT (0428 HKT)
Danny Cevallos says charging the dad in the hot car death case with felony murder, predicated on child neglect, was a smart strategic move.
July 8, 2014 -- Updated 1326 GMT (2126 HKT)
Van Jones says our nation is sitting on a goldmine of untapped talent. The tech companies need jobs, young Latinos and blacks need jobs -- so how about a training pipeline?
July 7, 2014 -- Updated 1309 GMT (2109 HKT)
A drug that holds hope in the battle against hepatitis C costs $1,000 per pill. We can't solve a public health crisis when drug makers charge such exorbitant prices, Karen Ignagni says.
July 7, 2014 -- Updated 1133 GMT (1933 HKT)
Julian Zelizer says our political environment is filled with investigations or accusations of another scandal; all have their roots in the scandal that brought down Richard Nixon
July 6, 2014 -- Updated 1814 GMT (0214 HKT)
Sally Kohn says Boehner's lawsuit threat is nonsense that wastes taxpayer money, distracts from GOP's failure to pass laws to help Americans
July 7, 2014 -- Updated 1526 GMT (2326 HKT)
Speaker John Boehner says President Obama has circumvented Congress with his executive actions and plans on filing suit against the President this month
ADVERTISEMENT