Departing From General Practice in Detroit

A report came out this week arguing that Detroit should not renege on public pensions but instead renege on:

  • bank counterparties in swap transactions;
  • bondholders of the 2005-6 Certificates of Participation; and
  • those who got tax subsidies for moving into downtown Detroit

on the premise that these people can afford to take the hit* and, besides, it’s Detroit…didn’t they know what they were getting into?

However, the interesting (in the sense of being completely bogus) aspects of the Demos report are the two arguments proffered pooh-poohing the severity of Detroit’s pension crisis:

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 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.

Even though an honest valuation of liabilities would have necessitated massive contribution increases, since politicians get to pick their contribution amounts they decided to low-ball them.  So what’s the problem?

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.

General Practice for Public Pensions: Obligate future generations for promises made to avoid current expense and pre-fund costs only when absolutely necessary by understating liabilities, overstating earnings expectations, and getting professionals skilled in obfuscation to validate this fraud.

A fiscally advanced civilization would find an extreme departure from this general practice welcome.




* As if no backroom workers at these banks and corporations would get fired and all those stock- and bond-holders are filthy rich anyway….aren’t they?

2 responses to this post.

  1. Posted by Tough Love on November 21, 2013 at 1:42 pm

    If you look at their website (, while they put forth an image of research, independence and non-partisanship, just by looking at their headline articles,they appear to be little more than a support arm for the goals of both the Public and Private Sector Unions.

    While I generally have only marginal objections to Private Sector Unions (they generally being reasonable, because being too greedy kills the host AND their jobs),such controls do not exist in the Public arena,and PUBLIC Sector unions are nothing but a CANCER inflicted upon society.

    At the VERY least,Collective Bargaining and dues collection should end,and the Unions ignored.


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