Detroit teeters on brink of bankruptcy as state takeover looms

A state-appointed commission on Wednesday declared that the city is in the midst of a “severe financial emergency," as city and state officials scramble to find a way to keep the city from bankruptcy.

Facing a budget deficit of $200 million, Detroit is burning up cash reserves for basic services. The 10-member financial commission, appointed by Gov. Rick Snyder (R), has until Monday to deliver an action plan, which could include a takeover by state government. Governor Snyder will have 10 days to make a decision.

Although the city has long been under financial duress, the crisis escalated Tuesday after Moody’s Investors Service issued two separate downgrades of the city’s bond rating. Moody's noted that key parts of Detroit's rescue plan "are yet to be secured,” including reliance on debt financing to stabilize city operations and ongoing labor-concession negotiations.

“Historically speaking, the situation has not been as serious” as right now, says Eric Scorsone, an economist at Michigan State University in East Lansing. “Detroit has gone through a number of periods where it has had financial trouble and had to borrow money, but this is the most serious partially because revenue declines have been so significant.”

To avoid the takeover of a state-issued emergency financial manager, Detroit Mayor Dave Bing and the City Council are assembling their own plan that would cede some control, but not all, to the state government. The city has yet to deliver the plan to Snyder, who told the Detroit Free Press Wednesday that Mayor Bing “should not expect to give us something and have us sign it. The key is … we need to have a dialogue.”

The relationship between Detroit and Lansing, the state capital, has been contentious in recent weeks. The key difference between opposing proposals is control of city finances and who can hire or fire key personnel.

For example, Bing wants the state’s financial advisory board to make recommendations but the City Council to have final say. Snyder’s plan gives that power to the state-appointed board, plus it gives the state the power to approve budgets, appoint key city officials as well as restricting the city from entering collective-bargaining agreements with public-sector unions.

Mr. Scorsone compares the relationship to that of cash-strapped Greece and the European Union, which agreed to bail out the country in early March.

“That local politicians want to maintain control is common in any of these situations. You want to get the aid and not lose control,” Scorsone says. However, in the case of Detroit, which is facing a $5 billion burden in unfunded pension and health-care liabilities, it will be difficult for the city to prove it can handle key financial decisions – a factor some say was confirmed by this week’s downgrade.

“Like Greece, Detroit doesn’t have much bargaining power at this point,” he says.

Bing’s proposal seeks $104 million in state aid for restructuring plus an additional $33 million to refinance the state debt by late April.

This week Snyder launched a website, Detroitcantwait.com, to make his case for his proposals and to solicit public opinion. “Instead of worrying about who gets blame or credit, we all need to work together to put Detroit back on the path to success,” he said in an online video.

The process hit a roadblock Tuesday after an Ingham County Circuit Judge ruled the state-appointed commission violated the state’s open meeting laws by meeting behind closed doors. The judge ordered a March 29 hearing, but that is three days after the committee planned to sign its plan.  

On Wednesday, the state filed an appeal to the ruling. In a statement released Tuesday, State Treasurer Andy Dillon said the ruling “only services to delay a potential solution to Detroit’s financial crisis.”