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Detroit’s Destiny at Risk Without Union Cuts, Mayor Says

April 12 (Bloomberg) -- Detroit risks a state takeover and “control of our destiny” unless it restructures operations and employees agree to wage and benefit concessions, Mayor Dave Bing said.

Bing called today for the city’s 12,000 employees to pay more for health care and share in pension and other benefit costs as part of his 2012 budget proposal, saying, “Everyone must accept that times have changed.”

In the past decade, Detroit recorded a 25 percent decline in population, about 65 people per day, reducing the city to 713,777 from a peak of 1.85 million in 1950, according to the Census Bureau.

“We face challenges unlike any the city has ever seen, challenges that demand bold action,” Bing said in his budget presentation to Detroit City Council.

“We do not have the luxury of waiting for someone else to solve our problems,” he said in a prepared text.

Detroit, which according to Fitch Ratings is the most populous city whose debt is rated below investment grade, warned investors in bond documents in March 2010 that it might have to consider reorganizing under Chapter 9 bankruptcy protection. Bing later said insolvency was no longer an option.

Yields Rise

Detroit is rated Ba3 by Moody’s Investors Service, the third-highest non-investment grade rating; BB by Standard & Poor’s, the second-highest; and BB+ by Fitch, the highest non-investment grade rating.

A Detroit bond carrying an Aa3 rating from Moody’s and AA-from S&P that sold in March 2010 and matures in November 2021 yielded 4.16 percent today, compared with 3.91 percent on Jan. 5, according to data compiled by Bloomberg.

During that same period, yields on top-rated tax-exempts due in 10 years have climbed 3 basis points, according to a Bloomberg Valuation index. A basis point is 0.01 of a percentage point.

The city provided backing for last year’s issue with payments of state aid from sales taxes, enabling the bonds to be rated at investment grade.

A November report from S&P said that police, fire, debt and pension and benefit obligations account for about 63 percent of the city’s spending and that “a severe loss of revenues without spending adjustments could pressure Detroit’s ability to make debt service payments,” the report said.

The mayor said today that the city’s $155 million current-year deficit could balloon to $1.2 billion by 2015 without spending discipline.

Stopping the Exodus

“The state has made it clear that any city that fails to address its financial issues on its own will have an emergency financial manager appointed,” Bing said.

Bing said that benefit costs are “on pace to consume half of our entire general fund revenue” by 2015.

“If we are unable or unwilling to make these changes, an emergency financial manager will be appointed by the state to make them for us. It’s that simple,” Bing said.

Under the $3.1 billion budget plan from Bing, 67, city unions would have to agree to renegotiate contracts. The budget proposal is part of a five-year plan intended to eliminate the deficit and reduce the risks of a state financial takeover.

Bing also proposed a one-year, $20 million increase in the city’s casino tax, noting that gambling houses in Detroit pay lower taxes than those in neighboring Indiana and Ohio.

Detroit’s population is the smallest since 1910, according to the census. Michigan’s population fell 0.6 percent in the past decade to 9,883,640, census data show. Michigan is the only U.S. state to lose population in the past decade.

“The decline in services had a direct effect on the exodus of people in the last decade,” Bing said. “Some argue the answer is to make unprecedented cuts to city services and lay off hundreds of employees. Fundamentally, that is just the wrong approach.”

To contact the reporter on this story: Timothy Jones in Chicago at tjones58@bloomberg.net

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net

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