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Shock in Detroit: Workers Lose in Court

The war on the middle class is easier to wage here because the losers are black
by Lou Dubose

Feb 1, 2014 | Economy, Politics



Exactly one week before Christmas, 18 lawyers huddled in front of a bankruptcy judge in a federal courtroom in downtown Detroit. All were white, one was a woman, most were from the Jones Day law firm. There was one African-American attorney sitting on the side of the bar reserved for counsel, principals, and the judge: Kevyn Orr, a Jones Day partner on leave while he serves as Detroit’s emergency manager. Appointed by Michigan’s Republican Governor Rick Snyder, Orr has vice-regal powers to reorganize the municipal government and distribute the city’s assets to its creditors.

There was one other African-American man standing between Orr, the Jones Day legal team retained to represent the city, and attorneys representing the banks. A bodyguard: the emergency manager’s private personal muscle providing him protection inside a federal courtroom.

Detroit is a black city—83 percent black, according to the U.S. Census—which made this tableau all the more remarkable. A pack of white bankruptcy lawyers picking over the carcass of the nation’s largest majority-black city. The December 18 hearing focused on $230 million the city had agreed to pay Swiss investment bank UBS AG and Bank of America. It was payment due on an interest-rate swap deal that had gone south.

The bar dividing the courtroom also served as a racial partition. In the section of the court open to the public, dozens of black and Hispanic municipal workers and retirees sat in silent witness to the court’s disposition of their pensions.

It was a pack of white bankruptcy lawyers picking over the carcass of the nation’s largest majority-black city.

“We here to see what they doing to us,” a retired city worker who appeared to be in her sixties told me.

The retirees I talked to, including this woman, know what’s being done to them. The court is overseeing a bankruptcy plan that has already converted retirees into creditors who will be paid pennies on the dollar for their pensions. They were in court waiting for Bankruptcy Judge Steven Rhodes to determine how many pennies.

This is “disaster capitalism,” a neologism Naomi Klein coined in The Shock Doctrine: the rapid-fire corporate reengineering of societies reeling from shock. Judge Rhodes is managing the vertical redistribution of wealth from taxpayers and pensioners to bankers and lawyers. Jones Day, an international law firm based in Washington, D.C., is being paid $18 million for its services.


Winners (broke the rules)

Wallace Turbeville was scheduled to testify on December 18, but Judge Rhodes abruptly adjourned the hearing because he objected to a plan that handed over $230 million (borrowed from Barclays in London) to only two investment banks. Turbeville is a former Goldman Sachs investment banker, now working for Demos, a liberal research and policy foundation based in New York. He had done financial transactions with Detroit 20 years earlier, so he knows the territory. In a Demos report published a month before the hearing, Turbeville explained how the city became insolvent.

Municipal bankruptcies are about cash flow. Because unlike corporations, cities have no assets that can be liquidated to pay creditors. Detroit has a cash-flow problem. The city has lost more than 53 percent of its population since 2000, with half that number leaving in 2008 when unemployment spiked to 30 percent. Declining population has resulted in fewer taxpayers, a glut of houses, declining property values, and a diminishing tax base.

The city council made dramatic cuts in its budget and municipal workforce. Last year, 10 percent of the city’s 11,000 workers were either retired or dismissed, and pay was reduced by 10 percent for those fortunate enough to keep their jobs.

What couldn’t be reduced was debt owed to investment banks. In 2005 and 2006, Detroit entered into a complex transaction when it borrowed $1.6 billion at a variable interest rate and then used an interest-rate swap to convert $800 million of the loan to a fixed rate.

In rate swaps, parties exchange the interest due on debts (but not the principal) that each of them owe. Detroit did the $800-million swap to lock in a fixed rate and protect against exposure to long-term interest rate fluctuation.

Swaps are always bets. But bankers rigged this bet to ensure that Detroit would lose. The contract included three triggers: if Detroit missed a payment, had its credit rating downgraded, or was placed under the control of an emergency manager, all the interest due on the 30-year debt would have to be paid immediately.

When Detroit’s credit rating was downgraded, the city faced $250-$350 million in swap-termination payments.

According to Turbeville, ethical guidelines, and laws, prohibit investment bankers from selling complex financial deals that put buyers at risk.

“A strong case can be made,” he writes “that the banks that sold these swaps may have breached their ethical, and possibly legal, obligations to the city in executing these deals.”

Turbeville also makes a strong case that banks, and not the oft-cited pensioners, pushed Detroit toward bankruptcy. The city’s financial expenses increased $38.5 million between 2008-2013. At the same time, pension costs increased by $2 million.

The newly elected Republican Legislature also pushed. While Detroit’s annual revenue shortfall was $198 million, legislators were cutting $67 million in annual revenue sharing, funds that would have covered almost a third of the city’s operating deficit.

Part of that $67 million was an automatic reduction triggered by population loss. But legislators cut an additional $48.2 million to balance the state budget—on the backs of pensioners and taxpayers in Detroit.

This is “disaster capitalism”: the rapid-fire corporate reengineering of societies reeling from shock.

On December 23, Governor Snyder told the Detroit Free Press Editorial Board that he will not introduce a proposal to restore the revenue that Detroit lost.

“That’s a legislative prerogative,” Snyder said.

Yet there is nothing to suggest that the Legislature will restore the funding.

“This city has been sold out by the Legislature and the governor,” Detroit School Board Trustee Elena Herrada told me. “Look at this courtroom. We live under apartheid rules. Every city in Michigan that has a black majority is run by an emergency manager the governor appointed.”


Losers (played by the rules)

More than five inches of snow fell on Detroit in late December. Streets were plowed, but there are not enough municipal workers to remove the accumulated piles of snow.

The American Federation of State County and Municipal Employees building sits on the south side of Lafayette Boulevard, a half mile west of the federal courthouse and at the ragged border where downtown Detroit gives itself over to abandoned office buildings, gutted warehouses, and empty lots.

On the north side of the boulevard is the Romanesque Detroit News building. It was designed by Albert Kahn in 1916 and is now occupied by the News and its competitor, the Detroit Free Press. Both struggling papers are moving to cheaper accommodations in June.

Two dying institutions on the edge of downtown in a dying city. The slush bank on the north curb was lower, so I parked in front of the Detroit News building.

The AFSCME Local 207 office, where I had arranged to meet with several union members, is at the end of a warren of rooms in the dreary basement of the union’s building on Lafayette. The local represents workers at the city’s Water and Sewerage Department, which Orr has indicated might be sold off.

Mike Mulholland retired from the city in 2012 after working 29-and-a-half years as a sewer plant operator. He is serving out his term as vice president of the local.

Mulholland is a slight, wiry man with brown hair, a close-cropped graying beard, and a militant streak lacking in organized labor these days. Local 207 was the only union to go on strike last year, when the city stopped negotiating and began dictating the terms of the union’s contract.

The strike, intended to compel the city to negotiate “before Kevyn Orr showed up,” ended as quickly as it began, when the leaders of the AFSCME Labor Council housed in the same building as Local 207 lost their nerve and refused to support it.

Like every other city employee or retiree I spoke with in Detroit, Mulholland referred to a clause in the state Constitution that defines public pensions as a contractual obligation that cannot be impaired.

Lawyers representing pension funds and city retirees were in state court on July 17, the day before Orr was scheduled to file bankruptcy. They were requesting a ruling that would block the governor from authorizing a bankruptcy they feared would put pensions at risk. As the hearing began at 4:11 p.m., the attorney general’s office called to inform the court clerk that Orr had filed for bankruptcy at 4:06 p.m. Below Orr’s signature on the bankruptcy filing, the numeral “8” in “July 18, 2013,” is written over in pen and replaced with a “7.” The emergency manager’s race to bankruptcy court didn’t allow him time to print out a clean document.

She estimates she has lost thousands of dollars to pay cuts, furloughs, and “dwops”—days without pay.

The state district judge presiding over the hearing told the attorneys representing the retirees that she had intended to grant their request, according to CNN and other sources. Orr’s filing rendered their request moot. He had said he needed to shed $9.5 billion of $11.5 billion in unsecured debt. And he knew that much of that debt was tied up in pensions and health care benefits for retirees.

“They say it’s legal,” a retiree from the Public Works Department told me. “But we don’t see it as such. We look at it as not only lawfully wrong, we look at it as definitely morally wrong.”


Unbinding contracts

Mike Mulholland was earning $41,000 a year before he retired after 30 years.

“I get $1,650 a month now,” he told me. “That comes to about $20,000 a year.” He could have drawn $2,400 a month. But because his wife is 12 years younger, Mulholland opted for a lower payout that would allow her to continue receiving benefits after his death. Like an interest rate swap, it was a bet. A bet Mulholland appears to have lost.

And like many residents of the city where 70 percent of home loans are in foreclosure, Mulholland also lost on his house: a 1930s brick bungalow with cove ceilings, a carved fireplace, and hardwood floors. He sold it for “$5,000 paid in $20 bills,” he told me.

“Everybody had left the neighborhood and scrappers were working in empty houses in the middle of daylight,” Mulholland said.

City workers, as well as retirees, are losing ground. With unions boxed in by a bankruptcy judge and an emergency manager, the workplace is changing. Aurelia Morgan, an African-American mother of five with an pleasant voice and a serene demeanor, has worked in water and sewers for 13 years. She described life under the Orr administration and under a private consulting firm that has taken over operation of the sewer plant.

“What comes to mind first,” she said, “is that they are going to change our titles and basically we are going to have to reapply for our jobs. They are also increasing our workload, because we have to work with fewer people.”

Morgan started at $12.75 an hour 13 years ago and had reached $19.66 an hour until her most recent 10-percent pay cut. “That put me back down to around $17,” she said.

She estimates she has lost thousands of dollars to pay cuts, furloughs, and “dwops”—days without pay.

She said that Orr has discussed reclaiming matching funds the city has paid into employees annuities.

“He has said it three times,” Mulholland interjected. “He’s said there was too much interest paid.”

“Right now, we can sign a contract with the city, and Kevyn Orr can override it tomorrow,” Mulholland said. “We are negotiating with Jones Day. The city labor relations people are there, but they’re scared shitless of Jones Day. They are looking over their shoulder and saying, ‘Can I do this?’”

A former AFSCME member, who asked to remain anonymous because she has moved into a management position, said this is all carefully thought out. Jones Day and EMA—the Minnesota-based consulting firm brought in to manage the sewer plant—are part of a long-term plan to bust the union.

“That way if they privatize the sewer plant, it will be non-union,” she said.

And if the city succeeds in “impairing” pensions, she believes the same model will be used by other cities that want to shed pension liabilities.

images_Detroit 2“We are their laboratory,” she said.

“You hear about the war on the middle class,” Mulholland said. “This is it.” Mulholland, who is white, said there is another story line and it involves race.

“Thirty years ago this all took on a particular racist tinge once we elected our first black mayor,” he said. “We provide water and sewage service for much of Southeast Michigan. (The department serves 3 million people; Detroit’s population is 714,000.) The suburbs have been saying black politicians are corrupt and incompetent and we have to take over the Water Department.”

“Detroit has been under attack. As an urban center with a legacy of black power, the right wing hates that. They have this sense that black people have some level of entitlement and empowerment and that unions are backed up by those folks,” Mulholland said.

Lakita Thomas is Local 207’s secretary-treasurer. Dressed in a blue security guard’s uniform, she comes across as too amiable to work as the cop on the beat at the sewer plant. She said that a memory of black power is all that will remain after Detroit’s new owners take charge. She pointed to the Whole Foods that recently opened in Midtown. Investors, she said, are buying property at huge discounts. Pockets of gentrification are expanding.


Not asking for handouts

The whole city, it seems, is for sale. The business press routinely reports on Japanese investors scooping up houses at fire-sale prices. The Free Press moved in with The Detroit News after a Chinese firm bought the Detroit Free Press building. Sight unseen and sold at an online auction, the building—another Albert Kahn monument—went for a deeply discounted $4.2 million. It will be converted into retail space and 150 rental apartments. At the same auction, the same Shanghai firm bought a 38-story downtown building for $9.4 million. The Detroit News building goes on the auction block in June, after the newspapers clear out.

“You can see the dynamic of the city changing,” Thomas said.

“It will still be Detroit, but it will be a new Detroit.

“But it’s not going to be a Detroit for blacks. It’s going to be a new city for everybody else. We’re not going to have a stake in it.”

The following morning, I returned to the AFSCME building to meet with a retirees’ committee. Fifteen retired city workers, ranging in age from 65 to 77, sat around a square table. They were mostly women, mostly black. Only one man, a retired mechanic, was white. Two women who ended their careers in management had pensions that paid them $30,000 and $32,000 a year. Everyone else in the room received the $19,000 average. Or less. One man said his pension was “about $15,000.”

It is always difficult to interview a group and this angry and bewildered gathering was more difficult than most.

Finally, Rose Roots, the 77-year-old president of the committee, said if everyone would calm down, she had something to say.

“We don’t understand,” Roots said.

“Our state constitution says that our pensions cannot be diminished. We put money into those pension funds while we were working. And now we’re told that the city needs money. Well, a lot of years we did away with pay raises to help the city. And if we hadn’t done away with pay raises, we would have higher pensions. So we helped the city. We are at the point where we need the city to help us. We’re not asking for a handout. This is something we worked for.”

Sitting in a windowless room in the basement of the AFSCME building, I concluded that Mike Mulholland is right. The Detroit bankruptcy is part of the war on the middle class, and here it’s easier to wage because the losers are black. It’s a zero sum game. Retirees lose; bankers and other secured creditors win.


‘Welcome to Walmart’

Yet Mulholland had been sanguine the previous day, when I asked him what he intended to do.

“To be frank, next month I’m going to go to Florida for the first time in my life,” he said. “I don’t know what they are going to do to me, but for now, I’m going to retire like a regular guy retires. I’m going down there for a week. We got cheap tickets and we’re staying in a little efficiency.”

“If they hit me for 50 percent, or if they hit me for 80 percent, then I’m whacked.”

“Maybe I’ll find another job,” he said.

“You know, ‘Hello, welcome to Walmart.’”

I didn’t ask Mulholland what he was paying for the efficiency in Florida. But Orr’s downtown condo at the Westin Book Cadillac Detroit goes for $4,200 a month, according to e-mails that local labor activist Robert Davis obtained and turned over to the Free Press.

The condo, Orr’s security detail, and other expenses are covered by a nonprofit foundation set up by Governor Snyder.

Two distinct versions of the American Dream in the age of disaster capitalism.

The guy who showers before he goes to work in the morning gets the $4,200-a-month condo.

The guy who kept the shit out of Lake Erie for 30 years and showers at the end of his workday gets a week in Florida.

And a roll of the dice on a pension he assumed would be waiting for him when he returned.

Lou Dubose is the editor of The Washington Spectator.

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