Report by thinktank Demos says Detroit has made 'extreme assumptions' to make city's problems seem worse than they are

Detroit's debts are a fraction of the $18bn lawyers pushing for bankruptcy say they are, and their costs are "irrelevant, misleading and inflated," according to a report released Wednesday.

A Demos thinktank report, issued as a city judge decides whether to allow Detroit to file for the largest municipal bankruptcy in US history, lays the blame for the city's woes at the feet of falling revenues, Wall Street banks and "extreme assumptions" calculated to make its problems worse than they are.

"There is no doubt that the city has suffered from structural decline and that state and city policies have not successfully addressed that decline. But that is not the immediate issue in a municipal insolvency. The issue is that the cash currently available does not cover the current expenses of the city," said Walter Turbeville, the report's author, a former Goldman Sachs investment banker and a leading expert in infrastructure finance and public private partnerships.

Kevyn Orr, the state appointed emergency manager, has argued that the city's pension and healthcare liabilities are a leading cause of the city's woes. City workers and retirees face draconian cuts on the $3.5bn in pension payments, and another $6bn in healthcare benefits they are owed. The average Detroit pensioner gets $19,000 a year. Under a deal now being discussed they would be given 16 cents to the dollar, cutting the average pension to $3,040.

The report claims Orr's focus on cutting benefits and other debts are "inappropriate and, in important ways, not rooted in fact."

Turberville questions the necessity of those cuts and the assumptions that underpin Orr's foundation for the $18bn total. According to the report:

• The emergency manager includes $5.8bn of debt from the water and sewerage department as a liability of the city, even though the department serves more than 3 million people across southeastern Michigan. Detroit has just 714,000 residents. "This debt is not a liability of the city's general fund; and, even if it were, only a fraction of it would allocable to the city," he writes.

• Orr's assertion that the city's pension funds have a $3.5bn shortfall is an "estimate, very different from the certain liability of a financial debt, based on calculations that use extreme assumptions that depart from most cities' and states' general practice," he writes.

According to Turberville, the real issue for Detroit is not its debts but declining revenues as a result of its rapidly falling population. The city's had close to 2 million residents in 1950 and 714,000 in 2010. During the recession, unemployment and the property crash exacerbated Detroit's revenue woes. Since 2008 the city's revenues have fallen by over 20%. This year it will have a budget shortfall of $198m.

The report also blames Wall Street for Detroit's troubles. "The biggest contributing factor to the increase in Detroit's legacy expenses is a series of complex deals it entered into in 2005 and 2006 to assume $1.6bn in debt," he writes. Instead of issuing "plain vanilla general obligation bonds," the city financed its debt using certificates of participation (COPs), complex financial instruments municipalities often use to get around debt restrictions.

These products were "ill-suited for a city like Detroit, which had been hovering on the edge of a credit rating downgrade for years." They allowed the banks to collect termination payments under certain conditions and the likelihood of Detroit defaulting was "imprudently high," the report claims. The city failed to meet its obligations, and the banks are now demanding $250m-$350m in payments.

"The banks and insurance companies were in a far better position to understand the magnitude of these risks and they had at least an ethical duty to forbear from providing the swaps under such precarious circumstances," he writes.

The city has also handed too much money to private interests – giving as much as $20m in some years to companies building businesses in Detroit. "To the extent that the development would have occurred without these tax subsidies, or with less subsidies, the program was a burden on city revenues at a time when it was particularly damaging," he writes.

The state of Michigan has played its part, too, according to Turberville, slashing $67m in state revenue sharing with the city. About $24m of those cuts were triggered by Detroit's declinig population but the majority, $42.8m, were cut at the discretion of the state legislature.

Tuberville says Orr should stop his plans to cut benefits, which run "counter to the long-term goal of structurally improving city services." Instead, Orr should reclaim tax benefits to corporations, renegotiate with the banks and reinstate Michigan's discretionary revenue sharing.

"Once Detroit gets through this immediate crisis, the city's elected officials, hopefully working collaboratively with the state legislature and the governor, can turn their attention to post-crisis, structural programs that would grow the city's tax base and allow it to return to prosperity over time," he writes.