One of the central features of the current US economy is the
trillions of dollars of debt being accumulated by corporations,
consumers and all levels of the government. While it is barely
mentioned in the mass media, major US cities have accrued an enormous
debt burden to finance their day-to-day operations.
With the cutback in federal aid, the loss of state revenue-sharing
and the massive tax breaks provided by city officials to attract
corporate investment, municipal governments have turned towards
Wall Street for a short-term solution to their budget woes. The
municipal bond marketnow valued at $1.9 trillionhas
become one of the most lucrative businesses for investment banks,
brokerage firms and their army of lobbyists and consultants.
This process has resulted in a windfall of profits for wealthy
investors, who have gained unprecedented access to the public
treasury. In order to pay off their debt obligations, financially-strapped
cities have been forced to cut funding for infrastructure repairs,
education and other vitally-needed public services, and sell off
municipally-owned utilities and other assets to raise cash.
The latest example is the city of Detroit. Long beset by problems
associated with the decline of the US auto industry that have
turned the Motor City into the poorest big city in the US, the
city has faced almost perennial budget deficits. Earlier this
year, Democratic Mayor Kwame Kilpatrick announced a budget-cutting
plan to reduce the citys $350 million deficit that included
the elimination of nearly 1,000 city workers jobs, cutting
wages and benefits and ending 24-hour-a-day bus service. On April
12, Kilpatrick announced further cuts, including the virtual elimination
of all subsidies for the arts, zoos and other non-essential
programs, as well as cutbacks in firefighting and EMT services.
Kilpatrick also proposed to float $1.2 billion in municipal
bonds to finance the citys under-funded pension plan and
other budget shortfalls. The city council, which first opposed
the deal, unanimously voted to approve it after the mayor announced
he would lay off 2,000 city workers if the bond deal didnt
pass. So far, 3,000 city workers have been dismissed in the last
In essence the city is using the hard-earned pensions of current
and future retirees, as well as other public assets, like the
city-owned water treatment plant, as collateral to guarantee Wall
Street repayment of its loan, plus millions in interest payments.
At the end of 2004, the Detroit retirement system had assets totaling
$2.5 billion, according to the pension board. At the same time
the Kilpatrick administration is continuing to cede unprecedented
authority to wealthy investors to dictate the citys fiscal
policy, including reducing retiree benefits.
During a four-hour City Council meeting, a fiscal analyst from
the Wall Street rating company Standard & Poor told council
members that pension boards would have to resist demands
for better retiree benefits and distribution of excess profits
in order for the bond deal to succeed.
When a city council member expressed concern over what would
happen if the city defaulted on its loan, while still remaining
obligated to pay retirees their money, the mayor arrogantly responded,
So what, according to a report in the Michigan
Citizen. The mayor insisted, Weve already told
Wall Street we would use the pension obligation certificates to
close the gap in our budget.
For almost a year, the Kilpatrick administration worked with
UBS Financial Services to sell the bond proposal. The middleman
who laid the groundwork between the city government and the investment
bank was none other than Dennis Archer, the former mayor of Detroit.
During his eight years in office, the Democratic mayor handed
over hundreds of millions of dollars in tax breaks to corporations
and contributed to the financial crisis that working people in
Detroit are now paying for.
At the end of 2004, the city of Detroit was scheduled to pay
almost a billion dollars on bonds, notes and debts. Of that nearly
$366 million was for interest payments alone. Kilpatrick claims
the new bonds will save about $13 million a year because of lower
interest rates during the 15-year life of the bond certificates.
Detroit is following the pattern set by municipal governments
in New Orleans, Pittsburgh and other major cities throughout the
US. Cities and states have to pay a fixed rate of interest on
the bonds, and are essentially betting they can earn a higher
rate of return by investing their pension funds in the stock market.
The losses on pension investments over recent years have put
municipal governments in the red, not only to cover the cost of
their pension obligations but also the interest payments on the
newly-purchased bonds. According to an October 2003 analysis from
the advocacy group Global Action on Aging, many cash-strapped
cities have been lured into stocks and commercial money markets
with promises of high returns on their pension investments, which
have never panned out.
In New Orleans, for example, a bond deal finalized in late
2000 ended up costing the city $270 million. We were thinking
that we were going to make money on it, said, Suzy Mague,
fiscal officer for the New Orleans city council. Mague said PaineWebber
claimed New Orleans would probably have to pay about 8.2 percent
on the bonds and could expect to earn 10.7 percent a year, on
average, by investing the proceeds, mostly in stocks.
This rosy scenario was based on the returns from 1983 to 1999,
a period that saw the greatest bull market in history. When the
market fell sharply, instead of earning 10.7 percent on their
pension investments, New Orleans suffered losses of about 3 percent
a year. For its role in the bond sale PaineWebber, which later
merged with UBS, collected a $3 million fee.
Pittsburgh, which like Detroit has suffered the erosion of
its industrial base, owes $1.68 billion in total debt. Between
now and 2011 the city has to pay at least $82.8 million annuallyor
nearly 20 percent of its yearly budgettoward the debt, assuming
it doesnt borrow more. In the late 1990s the city sold $404
million in bonds to cover its pension obligations and other debts.
Placed under financial receivership, Pittsburgh sold off its water
and sewer operations to a private water company in 2001 to help
pay off its debt to Wall Street.
In January, Wall Street upgraded Detroits credit rating
from a negative to stable outlook. The message to big business
is: now is a good time to invest in Detroit at the expense of
its low-income and working class citizens!
The Kilpatrick administration is currently considering selling
off Detroits water system and lighting utility to private
corporations. The city took a step in this direction, when it
hired Victor Mercado from the British-based water conglomerate
Thames Water North America to run the Detroit water department
and began the shut-off of water supplies to tens of thousands
of poor people who failed to pay their bills.
The mayor recently closed the century-old aquarium on Belle
Isle Park, the 983-acre island park designed by the creators of
New Yorks Central Park. Further mass layoffs in the future
are almost certain, given the relentless demands placed upon the
city government by Wall Street bond investors.
Demands for austerity measures and the wholesale selloff of
public assets are familiar for Third World countries facing the
dictates of the International Monetary Fund and World Bank. Now
almost every large US city is being subjugated to the same predatory
lending practices and austerity measures as the less developed
The historical precedent for the restructuring plans being
imposed on US cities by Wall Street was set in 1975 when New York,
the countrys largest city, was on the verge of financial
collapse. At the insistence of Wall Street, the Municipal Assistance
Corporationformed by the state government and representatives
of big businessthe city government laid off thousands of
city employees, implemented wage freezes, increased subway fares,
and abolished free college tuition for students at the City University
of New York.
Today Democratic-controlled city governments, like the Kilpatrick
administration in Detroit, are gambling with the pension funds
of workers and selling off public assets, much in the same way
as the Bush administration proposes to privatize Social Security.
In both cases the fate of retirees and the welfare of the general
public are being put in the hands of billionaire financial speculators.