This report documents the role of interest swaps in the undermining mass transit in Detroit and across the U.S.
From page 1:
THROWING RIDERS UNDER THE BUS
We have identified a dozen places around the country where banks have entered into toxic swap deals directly with transit agencies or with the governments that provide substantial funding to them: Baton Rouge, Boston, Charlotte, Chicago, Detroit, Los Angeles, New Jersey, New York, Philadelphia, the San Francisco Bay Area, San Jose, and Washington, DC. In these 12 places alone, banks are overcharging taxpayers and riders $529 million a year.
From page 9:
CITY OF DETROIT PUBLIC TRANSIT RIDER PROFILE
Median annual earnings for transit riders in the city: $11,956
Percentage of riders making below $25,000 annually: 76%
Percentage of riders who are African-American: 90%
Percentage of riders without a car: 55%
The City of Detroit was brought to the brink of bankruptcy in 2009 when its swap deals blew up. When the city’s credit rating was downgraded, UBS and other banks threatened to terminate the city’s swap deals and demanded $400 million in penalties, which the city did not have.54 Detroit was able to renegotiate its deals with the banks to save some money, but as a result, it has to make a “$4.2 million monthly payment to the banks before a single cent can go to schools, transportation, and other critical services,” according to BusinessWeek. As a result of the city’s budget pinch, it was forced to make drastic cuts to public transit, eliminating bus routes, delaying equipment repairs, and laying off workers. Wait times at buses increased as much as 33% in some areas as a result of service cuts.
Since 2008, Detroit has been able to take out offsetting swaps on six of its original deals, under which banks return part of the fixed rate paid by the city. Even after all of these renegotiations, the city is still losing $54.0 million a year on its swap deals, exacerbating its budget crisis.58 Detroit’s swaps are with Citigroup, JPMorgan Chase, Loop Capital, Morgan Stanley, SBS Financial, and UBS. This has taken a big toll on the city’s public transit system, which is run by the Detroit Department of Transportation (DDOT). The mayor announced plans to put the DDOT under private management in November 2011, and then in February 2012, DDOT announced plans to eliminate overnight bus service altogether. The median annual earnings for Detroit transit riders are just $11,956. 76% of DDOT public transit riders make less than $25,000 a year and 55% of do not have a car and so are dependent on public transit to get to work. By cutting public transit, the city has shifted the costs of these toxic swap deals to those who can least afford it. (my emphasis)