What workers need to know about Detroit’s budget crisis

On Jan. 6 Standard and Poor’s triggered a financial emergency in Detroit by lowering the city’s rating to “junk bond” status.

The Detroit City Charter mandates that the city government must protect the needs of the residents, but interim Mayor Ken Cockrel Jr. is concocting a deficit reduction plan based on massive layoffs of city workers and the sale or lease of city infrastructure assets to profit financial institutions.

Cockrel continues to ignore the demand for a moratorium on foreclosures and evictions—a measure that costs the city nothing but can provide an important step toward economic recovery by stabilizing population and keeping homes on the city tax rolls.

A city where more than 85 percent of the residents are African Americans, Detroit is already struggling to overcome unemployment and poverty—the result of decades of racist disinvestment and auto industry “restructuring” job losses that hit Black workers hardest. It is this corporate disinvestment that is at the root of the city’s annual structural budget shortfalls.

The current global capitalist collapse has brought Detroit an epidemic of layoffs and home foreclosures. They have been intensified by racist subprime and deceptive lending practices that targeted Black communities and single women homebuyers.

The city workforce is so depleted by layoffs that there aren’t enough accountants to file financial reports. Yet the mayor has mandated a 10 percent cut in each department—on top of recurring cuts many times over the past eight years.

To date, three financial institutions have been implicated in the new strong-arming of Detroit’s finances. They include Merrill Lynch, now owned by Bank of America, UBS and AIG. (Detroit News, Jan. 7 and 8)

BOA and AIG received $110 billion in taxpayers’ money in the federal bank bailout.

UBS sells hedge funds, often a way of betting against the success of an investment, and credit default swaps—a form of insurance that promises payment to investors in mortgage securities and other bonds if the borrower defaults.

Even before Standard and Poor’s lowered the bond rating, Detroit officials had announced that the city owed $300 million more than its income. The rating change not only increased the interest rate for future borrowing—meaning less funds available for city services—but also triggered a retroactive jump in bond interest from $90 million to $400 million.

How did this happen?

In 2005 the city formed a nonprofit corporation called the Detroit Retirement Funding Trust to sell approximately $1.2 billion in taxable pension obligation certificates. The proceeds from this sale made up a projected shortfall in the defined-benefit pension funds for Detroit workers and Detroit police and fire employees.

This plan was viewed as a plus because the debt did not show on Detroit’s books and the excess income of $80 million offset part of the annual budget deficit.

(America’s Intelligence Wire, Feb. 8, 2005)

But it all fell apart. “Because of the financial meltdown crippling the economy, interest rates fell and the amount the city would owe investors in the case of a rating downgrade went from $90 million to more than $400 million. Financial firm AIG lost its ability to insure Detroit’s payment to creditors because of its bankruptcy and bailout by the federal government.” (Detroit News, Jan. 7)

In December, New York transit riders had protested a similar problem. The city threatened fare increases after AIG, which had guaranteed the city’s financial transactions, failed and was bailed out but lost its credit rating.

In Detroit, Mayor Cockrel and Chief Financial Officer Joe Harris insist they will do what is necessary to bring the bond rating back up.

But what about standing up to Standard and Poor’s, Moody’s and Fitch—the rating companies that with a thumbs-up or thumbs-down can throw a city administration into a panic? They are private, for-profit, unregulated entities that create nothing of value. Didn’t these same rating firms give high ratings to those inventive and now worthless repackaged mortgage investment schemes? Didn’t they downgrade AIG, destroying its ability to insure?

The mayor, as the executive officer, has the power and the responsibility to ask for federal emergency assistance in the case of a disaster. Whether that’s a hurricane or a hatchet job by bank and corporate interests trying to squeeze more profit from Detroit workers, the devastation is the same.