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Detroit May Get State Manager as Fiscal Emergency Shown

A fiscal emergency grips Detroit, according to a report that opens a path to a state takeover of General Motors Co.’s home town, citing deficits that have stymied city officials after a $326.6 million gap last year.

“It doesn’t have to be adversarial,” state Treasurer Andy Dillon said yesterday at a news briefing about the report, produced by a six-member review team that included Dillon. “Detroit is fixable and brighter days are ahead.”

Michigan’s most-populous city needs help to take difficult steps and make crucial changes to restore its long-term viability, according to the report, ordered by Governor Rick Snyder. The conclusion lets the first-term Republican name an emergency manager to take control of Detroit’s finances, a move that may spur a political backlash.

The governor won’t make a decision for “a week or two,” according to Sara Wurfel, a spokeswoman. He has 30 days to decide, and can instead seek to modify and enforce an April consent agreement, crafted to avert a takeover. That deal envisioned spending cuts and concessions from city workers.

Detroit would be the sixth and largest Michigan city to get an emergency manager, if Snyder takes that step. Several school districts, including Detroit’s, are already operated by a state overseer.

“I am not surprised by the findings of the state’s financial review team,” Mayor Dave Bing said in a statement. “My administration will stay focused on the initiatives that most directly impact the citizens of Detroit: public safety, public lighting, transportation, recreation and neighborhood blight removal.”

Resources Needed

An emergency manager would “need resources -- particularly in the form of cash and additional staff,” Bing said.

Snyder probably has to call for a state takeover, said Doug Bernstein, a lawyer specializing in bankruptcies at Plunkett Cooney PC in Bloomfield Hills, Michigan. He said the challenge is to find someone for the job willing to take on a temporary role that will be met with hostility in the city.

“The risk is they have to just settle for somebody, or they may have to overpay for somebody,” Bernstein said. “Maybe there’s someone who is capable and doesn’t need the job but wants to do some good for the city.”

Snyder has said he has been interviewing candidates for the Detroit post in anticipation of the report’s conclusions.

State’s Fault

The city’s plight was caused by state aid cuts, said city resident Ralph King, 56. “If this is going to minimize the elected people of the city of Detroit, who we chose to handle the problem, then I have some disagreement with it.”

The city is on track to have a cash shortfall of more than $100 million by June, according to the report. Had it not borrowed to help cover earlier deficits, Detroit would have had an accumulated funding gap of $936.8 million by June of last year, the review team said. They said the city has amassed more than $14 billion in debt and long-term liabilities for pensions and other post-employment benefits for municipal workers.

“No satisfactory plan exists to resolve a serious financial problem,” according to the report.

The reviewers also cited provisions in Detroit’s governing charter that impede meaningful restructuring by city officials. The measures include requirements that make changing future retirement benefits “all but impossible,” they said.

Bankruptcy Option

Detroit still could seek bankruptcy court protection as an alternative to a state-appointed fiscal manager, Dillon said in an interview. He said that is neither inevitable nor desirable.

“I don’t think it’s necessary to navigate the problems in the city,” Dillon said. He said previous municipal bankruptcies in the U.S. haven’t led to the kind of quick restructuring that revived General Motors.

Detroit’s unfunded obligations -- especially $7 billion in retiree health-care promises -- are the biggest challenge, and the city charter prevents potential solutions, Dillon said.

City Council President Charles Pugh told the Detroit News that the report’s conclusions were anticipated.

“The question is, what is the governor going to do,” Pugh said, according to the newspaper’s website.

Pugh didn’t immediately respond to a message left by telephone after normal business hours seeking comment on the report. Council members JoAnn Watson and Kwame Kenyatta, who have both been critical of state efforts to take over city operations, also didn’t respond to e-mails or telephone calls for comment.

‘Bitter Pill’

“It’s a bitter pill to swallow” to have the state come in to fix the city, said Charlotte Patnaude, 70, a lifelong Detroiter. “I’m sad it’s come down to this, but we don’t seem to be able to get enough minds thinking on the same page.”

Tensions heightened last month when the council balked at a proposal to put Detroit’s Belle Isle Park under state management, cutting $6 million in city maintenance costs. Some Detroiters opposed the deal, calling it a seizure of city assets.

Snyder expressed frustration at the rejection. The offer would have led to improvements of the park on the 983-acre Detroit River island, which has fallen into disrepair.

With the consent agreement failing to sufficiently ease the city’s financial strains after more than six months, Snyder in December sought a review, leading to yesterday’s report.

A 1990 law governs emergency managers. Michigan voters in November repealed a 2011 measure, championed by Snyder, that gave managers more sweeping authority, such as the power to cancel union contracts, sell city assets and cut officials’ pay.

In December, Snyder and the Republican-led legislature enacted a new law to replace the one repealed by voters. However, it doesn’t take effect until March 27. It gives emergency managers already in place the power to cancel or change union contracts.

To contact the reporter on this story: Chris Christoff in Lansing at cchristoff@bloomberg.net

To contact the editor responsible for this story: William Glasgall at wglasgall@bloomberg.net

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