Debt-laden Detroit makes one last bid to avert fiscal takeover by state

Detroit officials on Tuesday argued against handing over fiscal control of the city to a state-appointed emergency manager, citing an agreement already in place to repair city finances. Governor's final decision on next step is expected this week. 

Officials from the nearly bankrupt city of Detroit made a last-ditch attempt Tuesday to stave off losing control of city finances to a state-appointed emergency manager, arguing that more time is needed for fixes applied as a result of a state-city agreement last summer to show results.

Their appeal, made at a one-hour hearing in Lansing, Mich., the state capital, is the last step before Gov. Rick Snyder (R) gives final word on whether he will name an emergency financial manager to intervene in Detroit's finances in a bid to cope with its huge debt and continuing deficit. Most city officials have resisted such a draconian step ever since it became clear in late 2011, when Detroit almost did not make its payroll, that the Motor City was in dire straits. Governor Snyder is expected to say later this week what he will do.

If Snyder does appoint an outsider to seize control of the city's finances, Detroit will make history as the largest city in the US to be directly controlled by an emergency financial manager. 

On Tuesday, Detroit finance officers said the consent agreement between the city and the state of Michigan, signed last year, establishes benchmarks for progress and a monitoring process, and that the state should stick with it.

“In my neighborhood, we were taught a deal is a deal … we have a deal on the table and it’s not over,” said David Whitaker, Detroit’s director of research and analysis.

Earlier this month, the governor declared that the city is in a state of financial emergency, citing findings from a state review team that Detroit has had annual deficits since 2005 that it unsuccessfully sought to fix through long-term borrowing. Not even counting debt repayment, the city’s deficit for the fiscal year ending in June is set to total $937 million. The review team also said the city has amassed $14.9 billion in long-term debt, primarily from unfunded pension and employee retirement benefits including health care.

Detroit officials do not deny that a crisis is at hand. But they do contest the report’s conclusion that Detroit has not shown it has a plan to return to financial solvency. Mayor Dave Bing and City Councilman Gary Brown are the only city officials who say they agree with the report’s recommendation for an emergency financial manager to intervene.

After Tuesday's hearing, Mayor Bing said in a statement that he sympathizes with the City Council's antipathy toward a state takeover, but "did not agree" with its decision to appeal the review team's finding. "I do not believe it will change the governor's decision to appoint an emergency financial manager," he said.

Tuesday's hearing, before a representative of Michigan's Treasury Department, was set in motion by a 7-to-1 City Council vote earlier this month to appeal Snyder’s decision. Detroit's central claim is that it needs more time to allow the initiatives established in last year’s consent agreement to take effect. Twenty of the 25 initiatives in that agreement, such as monthly financial reporting to the state and restructuring of pension contracts, “are in progress,” Irv Corley, fiscal analyst for the Detroit City Council, said at the hearing.

"The existing plan has not proceeded as quickly as one would like,” Mr. Corley said, because of legal challenges from members of the City Council and others to block the consent agreement, “lack of resources at the leadership management staffing level and challenges with employee morale,” and “the need for the City Council to conduct its due diligence in reviewing the contracts and proposals.”

“To address the city’s financial crisis, it would take a full two years for the plan to be implemented. In just eight to 10 months, the state is taking the city down to a different path,” he said.

Detroit's financial analysts also warned that state appointment of an emergency financial manager would bring lawsuits from local unions that do business with the city, among other stakeholders. Under Michigan law, an emergency financial manager has the power to sever or alter union contracts, sell off city assets, and consolidate departments and services.

Representing the state review team, Fred Headen, a state Treasury Department legal adviser, said Detroit did not act on certain reforms for five months after the consent agreement was signed, and only then under intense state pressure. “Barely had the ink dried upon the consent agreement that city officials challenged it in court,” he said. That action led the review team to conclude that the city had no plan for dealing with $1.9 billion in debt payments it faces over the next five years. 

“There appeared to be a lack of urgency by city officials to deal with the cash crisis. Those activities – most if not all of them – would not have occurred if the review team was not hanging over the head of city officials like the sword of Damocles,” Mr. Headen said.

The review team, he added, has “little confidence that Detroit officials could or would abide by the terms of the second consent agreement [because] they did not abide by the terms of the first consent agreement.”

Detroit's arguments failed to impress many observers on Tuesday. Its argument that the city needs more time was “irrelevant” to the purpose of the hearing, which was to address the review team’s recommendation for an emergency financial manager, says Eric Scorsone, an economics professor at Michigan State University in East Lansing.

Mr. Scorsone, who attended hearing, says one reason the City Council maintains that it needs more time is that it decided to mount a costly legal challenge last summer to fight the consent agreement. A county judge ultimately rejected the effort.

“They made a decent case [at the hearing], but the reality is they didn’t show they were very effective. The fact is, what happened over the last eight months supports the conclusion that there have been a lot of delays,” Scorsone says. “The city doesn’t have a great case.”

Mary MacDowell, the Treasury Department official presiding over the hearing, said she will report her findings to Snyder. If he appoints an emergency financial manager later this week, the city is allowed to appeal his decision to a circuit court.

The Detroit Free Press reported Monday that Kevyn Orr, a partner in a Washington law firm and a University of Michigan graduate, is Snyder’s top pick as Detroit’s emergency financial manager. Snyder told reporters earlier this month he had a candidate in mind for the position but would not reveal a name. Mr. Orr is a restructuring specialist who represented Chrysler during its 2009 bankruptcy.

On the same day the Free Press ran its story, Bing announced that the city is hiring Orr’s law firm as restructuring counsel. In his statement, he did not mention Orr by name, but said “the experience” of his firm “will be a valuable asset as we proceed with our plan for restructuring.”