Detroit is in financial emergency, state-appointed review finds

(MyFoxDetroit.com)

DETROIT – The fiscal crisis plaguing Detroit is now in the hands of Michigan's governor after a state-appointed review team determined the city was in a financial emergency with "no satisfactory plan" to resolve it.

Republican Gov. Rick Snyder has 30 days to decide if Detroit needs an emergency manager to take charge of its finances and spending, and come up with a new plan to get the city out of its financial mess.

After spending weeks looking at the city's books, the independent review team released a report Tuesday saying Detroit's deficit could have reached $900 million last fiscal year had it not borrowed enormous amounts of money. The city's long-term liabilities, including underfunded pensions, are more than $14 billion.

The report also said the city's bureaucratic structure makes it difficult to solve the financial problems.

Some fiscal experts believe the city's only way out may be municipal bankruptcy, but state Treasurer Andy Dillon said answers could be found if the city and state work together.

"It's our hope at the state level that this is a partnership. It doesn't have to be adversarial," said Dillon, a member of the review team. "A lot of the ingredients for the turnaround of the city are in place. Now we just need to execute. I do believe strongly that Detroit is fixable."

But over the last nine months, that relationship has been strained. Detroit Mayor Dave Bing and the nine-member City Council entered into a consent agreement with Snyder in April that allowed some state oversight and help with Detroit's finances -- short of cash infusions -- in return for certain fiscal reforms. However, the city often missed deadlines and benchmarks.

The ongoing cash crisis has threatened to leave the city, which has a current budget deficit of $327 million, without money to pay its workers or other bills. Dillon said the city has been running deficits since 2005, and masking over them with long-term borrowing.

"I stand with Detroiters and other stakeholders that the pace of change has been frustratingly slow," said Gary Brown, City Council president pro-tem. "The political will has often not been there to make the necessary and bold fiscal reforms. ... Without a doubt we need the support and accountability that a State of Michigan partnership offers. We cannot address our legacy obligations alone."

Under state law, Snyder has 30 days following the review team's finding to decide for himself whether there's a financial emergency. Bing would have 10 days to request a hearing. The first-term governor could then revoke his decision or appoint an emergency manager.

The emergency manager would be responsible for overseeing all of the city's spending. Bing and the City Council would keep their jobs, but the manager would decide all financial matters. And only the manager would have the power to authorize the city to take the bankruptcy route.

James McTevia, president of a Michigan-based firm that specializes in turnaround management, said an emergency manager could halt the city's borrowing, freeze debt and restructure finances, including voiding contracts.

"The checkbook needs to be taken from the politicians," he said.

However, others said that even with an emergency manager, municipal bankruptcy may be the city's only option.

"Is it imminent? Well, not tomorrow," said Doug Bernstein, managing partner of the Banking, Bankruptcy and Creditors' Rights Practice Group for Michigan-based Plunkett Cooney law firm. "You need to give a financial manager the opportunity to formulate a plan and let the plan have a chance to succeed or fail. It may not avoid a bankruptcy, but you don't need to do a bankruptcy today."

Bing said Tuesday's report shouldn't have surprised anyone.

"My administration has been saying for the past four years that the city is under financial stress," Bing said in an emailed statement. "If the governor decides to appoint an emergency financial manager, he or she, like my administration, is going to need resources -- particularly in the form of cash and additional staff."

Snyder spokeswoman Sara Wurfel said the governor will carefully review the team's report.

"He won't make a determination immediately, but sooner rather than later," she said. "The governor believes that a strong and successful Detroit is key to Michigan's continued comeback."

If Snyder appoints an emergency manager, Detroit would be the sixth and largest city in Michigan to have one. The cities of Benton Harbor, Ecorse, Pontiac, Flint and Allen Park are currently under state oversight. School districts in Detroit, Highland Park and Muskegon Heights also have managers.

A new state law taking effect in late March gives local governments the chance to choose their own remedy when a review team finds a financial emergency exists. However, Detroit loses those options if an emergency manager is put in place before the new law goes into effect, said Department of Treasury spokesman Terry Stanton.

The six-member review team began looking closely at Detroit's books in mid-December. Another team had done the same about 12 months earlier, but stopped short of declaring a financial emergency. That team's findings eventually led to the consent agreement in April.