Motown Breakdown: Detroit Teeters at Edge of Bankruptcy

Motown Breakdown: Detroit Teeters at Edge of Bankruptcy
April 3, 2012

Cheryl K. Chumley

Cheryl K. Chumley (ckchumley@gmail.com) writes from Northern Virginia. (read full bio)

Detroit spends millions of dollars more each month than it receives in revenues and faces a challenge to continue providing the most basic of government services—police, fire, trash collection, even street lighting.

The city narrowly averted a state takeover because of the city's financial woes. The City Council voted 5-4 April 4 to accept a consent agreement with state officials. The agreement puts the city's finances under stricter state control without the appointment of an emergency manager to oversee day-to-day operations.

The state will appoint a financial officer and a nine-member advisory board to work with city officials to implement better financial controls and budget policies, including more accurate revenue forecasts and a three-year budget projection. A full state takeover is still possible if city officials break terms of the agreement.

Detroit had been expected to run out of money by the end of April or early May. Under the agreement, some debt will be restructured to reduce payments and improve cash flow.

State and city officials had spent months trying to find agreement on a financial stability plan, but on April 2 an Ingham County judge ordered the state's financial review team not to meet or vote on any issues until an April 11 hearing. The order was lifted and they were able to consider the agreement, which included amendments agreed upon by Mayor Dave Bing (D), Detroit City Council members, and the state Treasurer’s office.

$200 Million Debt Load

By the end of this fiscal year the city is projected to be approximately $50 million in deficit. Additionally, the city carries a debt load of $200 million from failures to balance prior budgets.

Both Moody’s Investors Service and Fitch Ratings have downgraded Detroit’s credit scores. The state government has stepped in to assist if necessary, but the ensuing pushback among state and city officials has left Detroit residents wondering when or if services will terminate.

 “The state has been more than patient with the city to get its own financial act together,” said Michael LaFaive, director of the Morey Fiscal Policy Initiative for the Mackinac Center for Public Policy in Midland, Michigan. “Now it’s time for ‘bold strokes.’”

Running Out of Money

In March 2011 Gov. Rick Snyder (R) signed into law the Local Government and School District Financial Accountability Act, authorizing state officials to intervene when local governments face extreme financial distress. By November 2011, press reports had surfaced indicating Detroit was due to run out of money in April 2012. State officials discussed installing an emergency manager with authority to lay off city workers, reorganize departments, amend ordinances and budget allocations, sell city properties, and halt or delay labor deals. Detroit’s union employees condemned the plan, as did Mayor Bing.

Approximately half of all city tax dollars go toward employee benefits in this heavily unionized city.

“Let me make one thing perfectly clear,” Bing told reporters. “I don’t want an emergency manager making decisions for my city.”

Last December the Michigan Department of Treasury launched a preliminary investigation into whether further review of the city’s financial issues was warranted. A few weeks later the decision came back: more review.

Hanging on to Power

State Treasury officials recommended the appointment of a task force. While the review progressed, and with the emergency manager idea still in the air, the state provided the city with a proposal to curb costs.

This plan, released in March 2012, recommended a nine-person board to oversee and restructure the city government, with authority to approve all financial decisions. The City Council members and mayor would still hold office, but their powers would be confined to setting policy.

City officials balked. The mayor’s March 20 counterproposal called for establishment of a seven-person board to assist city officials with operations and services and recommend changes to the city’s budget. The mayor and council members would maintain all their executive powers as granted by the city charter.

‘No Plan to Address Finances’

Meanwhile, the Treasury Department panel finished its audit of the city’s finances.

“On March 26, we sent a notice to the mayor that a severe financial emergency exists in Detroit and that we found no plan is in place to address it,” said Terry Stanton, spokesman for Michigan’s Department of Treasury.

Some of the findings in the 15-page report: “For the year ending June 30, 2010, the human resources apprentice training program exceeded its budget by over $2.3 million, the insurance premium line item exceeded its budget by over $12 million, and the police operations line item exceeded its budget by $15.8 million.” Yet the city did not amend the general budget, and “consequently, the general fund had line items that exceeded budgeted amounts, in the aggregate, by almost $58 million,” according to the report.

On March 29 the state offered a counterproposal to the city’s, calling for a nine-member board to advise and review on all fiscal matters while allowing the mayor and council member to retain their executive roles. That essentially is the agreement that averted a full state takeover of the city.

To LaFaive, however, the course of action is clear. The city, he said, needs to make “dramatic reductions in the size and scope and expense of government,” decrease debt, reduce or eliminate taxes, and improve core city services.

Cheryl K. Chumley

Cheryl K. Chumley (ckchumley@gmail.com) writes from Northern Virginia. (read full bio)