Detroit and Michigan come to terms on bailout, averting bankruptcy

Nearly bankrupt Detroit has taken the first step down what is likely to be a long road to solvency, agreeing to strict state oversight but averting a full-blown takeover of its finances. But Michigan has promised no bailout money, and Detroit will be subjected to more stringent review than is customary for floundering cities, as it grapples with how to meet $12 billion in pension and benefit obligations and how to close a $200 million budget deficit.

In a vote late Wednesday, the Detroit city council approved, 5 to 4, a consent agreement with the state that permits tough, outside fiscal oversight from an advisory board. If the council had failed to act, Michigan Gov. Rick Snyder (R) could have appointed an emergency manager, which would have stripped both the mayor and the city council of control of all financial matters.

Compared with similar agreements between state authorities and cities that faced bankruptcy, such as Philadelphia, New York City, and Washington, the deal worked out between Michigan and Detroit gives greater authority to the state should city officials fail to execute changes or fail to meet budgetary deadlines. For example, should Detroit violate certain parts of the agreement, powers of both its executive and legislative branches could shift to the newly appointed chief financial officer and chief operating officer, and the state could withhold state aid or appoint an emergency manager.

Detroit’s agreement is more stringent than those in other financially strapped cities “given the history of corruption and mismanagement that has been very well documented at this point” in Detroit, says Eric Scorsone, a professor of economics at Michigan State University in East Lansing.

However, Mr. Scorsone says the consent agreement fails to specify how to ease the city’s long-term cost burdens, such as its retirement obligations. Also problematic: The agreement does not define the criteria for success in renegotiating union contracts of public employees.

“There are a lot of pitfalls here," he adds. "The state was trying to be creative and compromise, but in a way, it made life a little more difficult potentially."

Michigan State Treasurer Andy Dillon said late Wednesday that it is likely to be five years or more until the city sees a turnaround. “The city didn’t get here overnight, so it’s going to take awhile to get it back on its feet,” he said.

In earlier drafts of the agreement, Detroit's city council had requested state funds to help ease its crushing pension obligations, as well as its $200 million budget deficit.The current agreement does not include a cash infusion, although Mr. Dillon said the governor is willing to direct money to Detroit “if he sees progress.”

“At some point we’ll want to invest in the city,” he added.

Detroit Deputy Mayor Kirk Lewis praised the vote, calling it “a pivotal moment in Detroit’s history” for beginning “the monumental task of stabilizing Detroit’s financial operations.”

“This agreement also ensures the future of Detroit is determined by Detroiters and its elected officials,” he said in a statement.

The new agreement calls for the formation of a nine-member advisory board, which will impose state oversight over the city’s financial restructuring. The new chief operating officer and chief financial officer report to the mayor and carry out the board directives. Governor Snyder will appoint three members, Detroit Mayor Dave Bing and the city council will appoint two each. The city and state will jointly approve one board member; the state treasurer will appoint one.

The prospect that the state would assess the city's financial health prompted heated public meetings and protest against a state takeover. In public hearings and during outside street demonstrations, many residents accused the state of a power grab. Because Detroit is a majority black population, many of the criticisms invoked racial overtones, with many accusing city council members of being traitorous if they voted for any state oversight.

Isaiah Thomas, a member of the state review board tasked with negotiating with the city, said the protests hurled at the board were expected and even warranted.

“That’s America. That’s what we do. We have that right to do so, so those people who yelled and screamed at us, that’s America,” he told reporters late Wednesday.

As negotiations moved forward in late March, Mayor Bing has been in and out of the hospital following surgery. On Wednesday he returned to the Henry Ford Hospital, where doctors say he is expected to make a full recovery.