Manager to End Fiscal Crisis
Michigan Governor Rick Snyder plans
to name an emergency manager to handle Detroit’s fiscal crisis,
stripping power from local officials in a withered city that in
1940 was the fourth biggest in the U.S. and a thriving capital
of industry.
Snyder, 54, said today at a public meeting in Detroit that he plans to take a step he avoided a year ago. The move punctuates decades of decline in the home town of General Motors Co. (GM) His decision may inflame opponents, as the administration of a white Republican seizes control of a place that is predominantly black and Democratic.
“It’s a sad day, a day I wish never happened, but it’s a day of promise,” Snyder, who is in his first term.
Detroit, with a budget deficit of about $327 million and more than $14 billion in long-term obligations, would be the sixth Michigan city put under state control as Snyder tries to prevent what could be the largest U.S. municipal bankruptcy. Starting later this month, a manager would have the power to cancel labor contracts, cut spending and sell assets.
Jefferson County, Alabama, became the largest U.S. municipal bankruptcy in November 2011, involving $3.14 billion of bonds. California’s Stockton, with almost 300,000 residents, and San Bernardino, with about 213,000, sought court protection last year.
Opponents say state takeovers disenfranchise voters by stripping elected officials of their power over municipalities or school districts, and may protect bondholders at the expense of employees, services and taxpayers.
“We urge the state to be our partner,” the Reverend Wendell Anthony, president of the local branch of the National Association for the Advancement of Colored People, said this week in a statement. “We do not call upon the state to be our overseer.”
Mayor Dave Bing, a Democrat, has said lawsuits, union contracts and a lack of cash has stymied his turnaround plan.
Some have said a takeover is racist because, along with Detroit, cities where almost half of Michigan’s black residents live would be under state control. Managers are already in charge in Allen Park, Benton Harbor, Ecorse, Flint and Pontiac.
City leaders, all Democrats, can resist a takeover by requesting a hearing on Snyder’s decision before a Treasury Department panel. If Snyder wins that round, Detroit can ask a judge to intervene.
Detroit isn’t alone coping with deficits, pension and debt costs and falling property values. Cities from California to Rhode Island have struggled as the lingering effects of recession constrained revenue.
About a year ago, Snyder let Detroit try to stabilize its finances, with state assistance, stopping short of a takeover. Treasurer Andy Dillon, a member of the review panel, said last week the city is “fixable” without bankruptcy, even though it hadn’t managed to reverse its slide toward insolvency under the 2012 accord.
Candidates in Detroit’s mayoral race this year have said the city can solve its own problems. One, Lisa Howze, said the state review exaggerated the city’s debt.
Howze, 39, a former state representative, said in a telephone interview that much of the more than $14 billion in obligations is in the form of bonds for the city’s water and sewer system, which produce a reliable revenue stream. Another portion reflects retiree benefits that can be amortized over 25 years. She said general-obligation debt accounts for about 15 percent of the city’s budget and is manageable.
“The people of Detroit still need leadership -- you don’t take this sitting down,” Howze said when asked why she wants to be a mayor under a state manager.
Last week, Anthony invoked the civil rights movement, the U.S. invasion of Iraq and Martin Luther King Jr. in denouncing a takeover of a city he said is an international symbol.
“There is no way that an emergency manager is going to come into the city of Detroit and within a period of 18 months resolve what has taken 50, 100 years to develop,” Anthony said in his statement.
Detroit’s deficit grew to $326.6 million as of June 30. The city has imposed wage cuts and reduced its workforce by 18 percent, including an 11 percent police force cut, according to a Michigan State University report.
As Detroit’s bond prices have fallen, the yield premium on a Detroit limited general obligation bond maturing in 2015 has risen to an average of 9.9 percent so far this year, up from 7.5 percent in the last four months of 2012, according to data compiled by Bloomberg.
A state offer to take control of Detroit’s Belle Isle park and save the city $6 million a year was snubbed by the council. As a result, Bing, who supported the plan, said he’ll close 51 smaller parks.
The state review last month painted a picture of plummeting tax revenue as the long-term projected cost of health care for city retirees ballooned to around $7 billion. Detroit’s accumulated deficit would’ve reached almost $937 million in 2012 had it not borrowed to meet costs, according to the report.
An emergency manager could remake the city’s finances, said Brad Coulter, a corporate turnaround specialist with O’Keefe & Associates in Bloomfield Hills, Michigan.
“There needs to be a point person who’s in charge, and right now there doesn’t seem to be,” Coulter said in a telephone interview. “It is feasible, there are a number of liabilities that could be restructured for pensions, bond debt.”
“You also have to look at the efficiency in the way the city delivers services,” Coulter said. “My biggest concern is you can’t be short sighted and cut police and fire more when reducing crime is the key to turning the city around.”
To contact the reporter on this story: Chris Christoff in Detroit at cchristoff@bloomberg.net
To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net
Snyder, 54, said today at a public meeting in Detroit that he plans to take a step he avoided a year ago. The move punctuates decades of decline in the home town of General Motors Co. (GM) His decision may inflame opponents, as the administration of a white Republican seizes control of a place that is predominantly black and Democratic.
“It’s a sad day, a day I wish never happened, but it’s a day of promise,” Snyder, who is in his first term.
Detroit, with a budget deficit of about $327 million and more than $14 billion in long-term obligations, would be the sixth Michigan city put under state control as Snyder tries to prevent what could be the largest U.S. municipal bankruptcy. Starting later this month, a manager would have the power to cancel labor contracts, cut spending and sell assets.
Jefferson County, Alabama, became the largest U.S. municipal bankruptcy in November 2011, involving $3.14 billion of bonds. California’s Stockton, with almost 300,000 residents, and San Bernardino, with about 213,000, sought court protection last year.
No Overseers
No Michigan localities have entered bankruptcy. A review panel’s determination Feb. 19 that a financial emergency grips Detroit cleared the way for Snyder to act to avoid one.Opponents say state takeovers disenfranchise voters by stripping elected officials of their power over municipalities or school districts, and may protect bondholders at the expense of employees, services and taxpayers.
“We urge the state to be our partner,” the Reverend Wendell Anthony, president of the local branch of the National Association for the Advancement of Colored People, said this week in a statement. “We do not call upon the state to be our overseer.”
Mayor Dave Bing, a Democrat, has said lawsuits, union contracts and a lack of cash has stymied his turnaround plan.
Some have said a takeover is racist because, along with Detroit, cities where almost half of Michigan’s black residents live would be under state control. Managers are already in charge in Allen Park, Benton Harbor, Ecorse, Flint and Pontiac.
Dwindling Population
The 10th-most-populous U.S. city in 2000, Detroit has lost a quarter of its residents, falling to about 707,000 last year, according to U.S. Census Bureau figures. Those remaining must cope with inadequate police and fire protection, broken street lights and unreliable buses.City leaders, all Democrats, can resist a takeover by requesting a hearing on Snyder’s decision before a Treasury Department panel. If Snyder wins that round, Detroit can ask a judge to intervene.
Detroit isn’t alone coping with deficits, pension and debt costs and falling property values. Cities from California to Rhode Island have struggled as the lingering effects of recession constrained revenue.
About a year ago, Snyder let Detroit try to stabilize its finances, with state assistance, stopping short of a takeover. Treasurer Andy Dillon, a member of the review panel, said last week the city is “fixable” without bankruptcy, even though it hadn’t managed to reverse its slide toward insolvency under the 2012 accord.
Home Control
A state takeover is preferable to bankruptcy because it would keep control of the process in the state and city and out of federal court, Dillon said. If an emergency manager determines the city’s deficits can’t be resolved, he or she could recommend a Chapter 9 bankruptcy filing to Snyder and Dillon, and would have the authority to seek such protection.Candidates in Detroit’s mayoral race this year have said the city can solve its own problems. One, Lisa Howze, said the state review exaggerated the city’s debt.
Howze, 39, a former state representative, said in a telephone interview that much of the more than $14 billion in obligations is in the form of bonds for the city’s water and sewer system, which produce a reliable revenue stream. Another portion reflects retiree benefits that can be amortized over 25 years. She said general-obligation debt accounts for about 15 percent of the city’s budget and is manageable.
“The people of Detroit still need leadership -- you don’t take this sitting down,” Howze said when asked why she wants to be a mayor under a state manager.
Decades of Decay
The City Council may vote to remove an emergency manager after a year, Howze said. The council also may propose alternative budget cuts.Last week, Anthony invoked the civil rights movement, the U.S. invasion of Iraq and Martin Luther King Jr. in denouncing a takeover of a city he said is an international symbol.
“There is no way that an emergency manager is going to come into the city of Detroit and within a period of 18 months resolve what has taken 50, 100 years to develop,” Anthony said in his statement.
Detroit’s deficit grew to $326.6 million as of June 30. The city has imposed wage cuts and reduced its workforce by 18 percent, including an 11 percent police force cut, according to a Michigan State University report.
As Detroit’s bond prices have fallen, the yield premium on a Detroit limited general obligation bond maturing in 2015 has risen to an average of 9.9 percent so far this year, up from 7.5 percent in the last four months of 2012, according to data compiled by Bloomberg.
Taxman Cometh
Among the city’s challenges are uncollected taxes. Almost half of property owners didn’t pay levies totaling about $131 million last year, according to the Detroit News. That’s about 12 percent of the general-fund municipal budget, the newspaper said Feb. 21.A state offer to take control of Detroit’s Belle Isle park and save the city $6 million a year was snubbed by the council. As a result, Bing, who supported the plan, said he’ll close 51 smaller parks.
The state review last month painted a picture of plummeting tax revenue as the long-term projected cost of health care for city retirees ballooned to around $7 billion. Detroit’s accumulated deficit would’ve reached almost $937 million in 2012 had it not borrowed to meet costs, according to the report.
An emergency manager could remake the city’s finances, said Brad Coulter, a corporate turnaround specialist with O’Keefe & Associates in Bloomfield Hills, Michigan.
“There needs to be a point person who’s in charge, and right now there doesn’t seem to be,” Coulter said in a telephone interview. “It is feasible, there are a number of liabilities that could be restructured for pensions, bond debt.”
“You also have to look at the efficiency in the way the city delivers services,” Coulter said. “My biggest concern is you can’t be short sighted and cut police and fire more when reducing crime is the key to turning the city around.”
To contact the reporter on this story: Chris Christoff in Detroit at cchristoff@bloomberg.net
To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net
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