Once upon a time, Detroit was a mighty industrial giant, manufacturing cars for the entire world. By the 1950s, the Motor City had lured in 1.8 million people with plenty of good paying manufacturing jobs. This once fourth largest U.S. city birthed America’s middle class.
At a recent concert at The Palace of Auburn Hills, Beyonce paid tribute to the now bankrupt Detroit with a rendition of Sam Cook’s “A Change is Gonna’ Come.” The video montage that accompanied the song, ended with the words “Nothing Stops Detroit!”
Umm…I can think of a couple of things.
The 1967 riots accelerated the move of white residents north of Eight Mile Road – the region’s racial divide line. At the same time, auto companies began opening plants in other cities. Japan became a global competitor for automobile exports, and the U.S. auto industry began its decline. As jobs were cut and poverty grew, crime and murder rates rose, causing property taxes to fall. Tax revenues dropped, causing public services to dwindle. And then, middle class African-Americans left for safer suburbs with better schools. With every downturn, more and more businesses left, further eroding the tax base and city.
Today the city is littered with abandoned factories that were built in the post-war boom years, a visual sad reminder of what once was. The city was doomed to fail. It could never sustain itself, or a system, built on promises made during more robust times, especially in the long run, without an increase in tax revenue. To make matters worse, for years, officials in charge of the public pensions did not make the necessary contributions to those funds in order to be able to meet other municipal operating costs. Over time, those back-pays kept getting bigger and bigger until the city was forced to borrow $1.4 trillion in order to plug that hole back in 2005.
There were also irresponsible investments made by the pension boards on behalf of the retirees. Really bad investments. This is the story of how Wall Street lobbied our local politicians in municipalities, counties, and states, nationwide, to invest pensions in mortgage-back securities and other Wall Street gimmicks, in order to make risky gambles and then loose it all. Oh yeah, Congress knew it about it all along. But money talks, and campaigns get more and more expensive each cycle.
It is common practice to take pension funds, which are sitting in the bank, and invest it. When the investment does well, it helps not only keep the funds solvent during hard economic times, but also decreases the amount required to deposit into the account by the employer annually. In Detroit’s case, that would have been the city.
So, fraudulent mortgage-backed securities were being given triple-A ratings by the Wall Street ratings agencies, which were supposed to provide independent analysis of the actual value of investments. But as we now know, the supposedly “independent authority” conspired with the banks. Because the ratings agencies were giving triple-A ratings to the mortgage-backed securities, pension funds and retirement funds were allowed to invest in them. And boy, did they. When the smoke cleared in 2008, all the money was gone. That is the real reason why public pensions for teachers, police, and firefighters have gone broke.
Detroit didn’t bet all their money into Wall Street. They took $30 million dollars ($15 each from the police and fire funds) and invested it into the Alabama-based TradeWinds Airlines, which was operated by an acquaintance of then-City Treasurer and Pension Board Trustee Jeffrey Beasley. Beasley was notoriously known for demanding cash from people who wanted to do business with the city’s two pension funds. The airline went bust seven months after the deal. It agreed to repay Detroit’s pension funds $4.25 million sometime between 2011 and 2017. I’m not a math major, but $4.25 million sure doesn’t come close to replacing the $30 million.
And so, as common practice in these United States, the only person who ever gets screwed in the end is the poor worker who did all the right and just things, got a good job, worked hard, paid their bills, and invested into a retirement fund that was negligently managed. As for the risky gamblers who flushed the retirees’ security down the drain…it’s summer time, they’re probably in the Hamptons, St. Tropez, or Ibiza.
Danielle DeAbreu is a former model and student at William Paterson University studying Broadcast Journalism with a minor in Political Science.
Follow me on Twitter @DaniDeAbreu13