March 6 (Bloomberg) -- A law that would let Michigan take over cash-poor Detroit may be repealed by a referendum even as the home of General Motors Co. hurtles toward payless paydays.
Michigan’s largest city will run out of money in two months and its deficit will balloon to $270 million by June 30 without changes, according to a City Council report. By March 28, a review team may recommend that Republican Governor Rick Snyder appoint an emergency manager who could cut the mostly Democratic city’s costs and void union contracts to avoid that fate.
The 2011 law that empowers the governor is “a Frankenstein monster that deprives people of their rights for self-governance on a local level,” said Greg Bowens, spokesman for the Stand Up For Democracy coalition. “The Republicans have achieved what terrorists crashing a plane into a building couldn’t, and that is dismantling our democracy.”
The group last week submitted to the state what leaders said are 226,637 signatures. If 161,305 are validated in 60 days, the measure would be suspended until voters decide in November whether to reinstate it. If the question makes the ballot, it would be the eighth state referendum before U.S. voters in November -- the most since at least 1980, said Jennie Bowser, senior fellow at the Denver-based National Conference of State Legislatures.
Across the Midwest, voters have taken state policy into their own hands. Last year, Ohio Governor John Kasich was stung when voters repealed a law he backed that restricted collective bargaining for public employees. Wisconsin Governor Scott Walker may face a recall election -- 1 million petition signatures support his ouster -- over a similar law.
The drive to repeal Michigan’s law began in June, spurred by unionists who objected to its broad authority over local governments.
Four cities are under emergency managers: Flint, Pontiac, Benton Harbor and Ecorse. All but Flint’s manager were appointed originally by Snyder’s Democratic predecessor, Jennifer Granholm, under an earlier version of the law. Public schools in Detroit and Highland Park also are under managers.
On Jan. 16, a crowd estimated at almost 1,000 demonstrated against the 2011 measure at Snyder’s home in a gated subdivision near Ann Arbor. Last week, about 200 people marched to Michigan’s secretary of state offices in Lansing to deliver petitions to repeal the law, some singing the civil-rights anthem “We Shall Overcome.”
Detroit is 83 percent black; Snyder is white.
Talking It Out
Snyder has said he wants to avoid an emergency manager in Detroit, and would prefer an agreement giving Mayor Dave Bing broader authority.
Bing in February negotiated wage and benefit concessions with unions that represent most of Detroit’s 11,000 employees. He also began firing 1,000 workers as part of a plan to save $360 million through June 30, 2013.
The agreements cut pay 10 percent for all employees except police and firefighters. None have been ratified by union members. Even if they are, that may not save enough money, according to the council report.
“I don’t see anywhere near the savings needed in the short term or the long term,” City Council member Gary Brown said of the concessions. “We’re spending $360,000 a day more than we take in.”
Bowens of Stand Up for Democracy said Detroit’s financial collapse was caused by debtholders and scanty state funding -- not workers. Debt should be refinanced or forgiven, he said.
“The people should get paid before the bank,” he said. “And with an emergency manager, the banks get paid before the people.”
Bowens said a federal bankruptcy court would more fairly spread losses to include debtholders.
Detroit has at least $12 billion in long-term debt with no plan to reduce it, state Treasurer Andy Dillon said in a Dec. 21 memo to Snyder. Dillon cited Detroit’s below-investment-grade bond ratings -- Ba3 by Moody’s Investors Service, BB by Standard& Poor’s and BB- by Fitch Ratings -- as more reason for the full-scale financial review now under way.
“City officials are either incapable or unwilling to manage” finances, Dillon wrote.
Ratification of the union concessions, along with Bing’s plan, will resolve the crisis, said Naomi Patton, a spokeswoman for the mayor.
The potential repeal puts pressure on the city to devise solutions, said Brad Coulter, 51, a municipal-finance consultant with O’Keefe & Associates in Bloomfield Hills, which provides financial analysis and advice. The threat of an emergency manager gives a mayor leverage, he said.
“If the law is repealed, you lose a powerful tool to avoid bankruptcy,” he said.
Economists such as former state Treasurer Robert Kleine have said Detroit’s travails are caused by falling population and tax revenue, including cuts in state aid. Its population fell by one-quarter to about 714,000 in the past decade, according to the 2010 U.S. Census. Almost 2 million inhabited the city in the 1950s.
State Representative Al Pscholka said that bankruptcy might leave the state liable for Detroit’s debts. The west Michigan Republican, who sponsored the emergency manager law, said in a statement last week that it gives local communities more say in resolving financial crises.
The law protects taxpayers from government mismanagement, he said: “There is no fine print, no other motive.”
After The Fall
It’s unclear what would happen if the emergency manager law were repealed. State treasury officials have said the previous weaker law would take effect while opponents say a repeal would nullify all emergency managers.
Gutting the law would harm distressed cities, said Louis Schimmel, 74, emergency manager for Pontiac. Schimmel and his predecessor disbanded the police and fire departments, though the city still faces an estimated $6 million shortfall this year, Schimmel said.
He said that without the clout of the law known as Public Act 4 he could not repair it.
“I have not seen the people who are against Act 4 tell me what they would do in place of it,” Schimmel said.
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