Detroit Council Accepts State Plan to Avoid Bankruptcy

Detroit’s race to avoid bankruptcy reached a turning point yesterday as officials of Michigan’s largest municipality agreed to a plan to avert a state takeover and fix its finances while retaining some control.

The City Council voted 5-4 to accept an accord designed to erase a projected deficit of almost $270 million by empowering an oversight board to review spending cuts and efforts to force concessions from municipal unions. The plan, supported by Mayor Dave Bing, has been challenged in court by labor groups.

“This agreement paves the way for a good-faith partnership that will restore the fiscal integrity taxpayers expect and ensure the delivery of services that families deserve,” Republican Governor Rick Snyder said in a statement. “The magnitude of the city’s financial challenges means that many difficult decisions lie ahead.”

Implementation of the plan will determine the path for an iconic city of cars and music that’s in a downward spiral of deficits and population loss. Majority-black Detroit, whose relations with the rest of the state are marked by racial tension, faces the possibility of running out of money in May. The crisis has pitted Snyder, who is white, against a community whose population has fallen 25 percent since 2000.

Averting Takeover

The council voted ahead of a deadline facing Snyder today on whether to appoint an emergency manager with the authority to strip elected city officials of their power, cut spending and nullify union contracts in the home of General Motors Co., the world’s biggest carmaker. Bing, 68, who had abdominal surgery last month and was readmitted to a hospital yesterday, has negotiated with the council and governor through his top aides.

“It is time now to begin the monumental task of stabilizing Detroit’s financial operations, which is and has always been the mission of Mayor Bing and his administration,” Deputy Mayor Kirk Lewis said in a statement following the vote.

The consent agreement “ensures that the future of Detroit is determined by Detroiters and its elected officials,” Lewis said. The plan “puts us on track to restructure our City financially and reestablish an infrastructure to make sure Detroit never faces these financial conditions again.”

Among opponents, Councilwoman JoAnn Watson called the agreement “patently illegal” and a “pact with sources of evil.” She has described state intervention as a means to wrest political power from the city of 714,000 and municipal unions, calling Snyder’s rescue plan an attempt at “colonization” in an April 3 public meeting.

Earlier Plan Rejected

The mayor and council had rejected an earlier proposal from the governor, first elected in 2010.

While Snyder has said the state won’t pay the city’s bills, he has indicated that Michigan will help it get $137 million in loans to avoid running out of money. Detroit has more than $12 billion in long-term liabilities and was projected to exhaust its cash supply next month by state Treasurer Andy Dillon.

Michigan is rebounding from recession with a revived U.S. auto industry. State unemployment in February fell to 8.8 percent, dropping below 9 percent for the first time since September 2008.

Property values have plummeted in Detroit, where about 34 percent of residents live in poverty, more than double the statewide rate, according to the U.S. Census Bureau. The longest recession since the Depression drove Michigan’s jobless rate as high as 14.2 percent in August 2009, while automakers GM and Chrysler Group LLC turned to Washington for billions of dollars in bailouts to stay in business.

New Officers

Under the revised plan accepted by the council, a nine-member advisory board, appointed by the city and state, will be charged with supervising efforts to eliminate deficits within five years. It creates two positions: a chief financial officer and a municipal program manager to overhaul business practices.

The mayor and council retain their roles under the consent agreement. The advisory board would have the final word in some financial matters.

The accord effectively nullifies wage and benefit givebacks that Bing negotiated with municipal unions as part of his plan to eliminate the deficit, according to a Feb. 8 council report. Snyder said the concessions weren’t enough. Bing has asked the council not to approve the labor deal until the consent agreement takes effect.

The financial recovery plan requires Detroit to negotiate new union contracts by July 16, with changes to save money.

Court Losses

Union leaders sought to block the accord in court, losing in two venues yesterday as a federal judge ruled they couldn’t prevent the governor and city from entering the agreement and a state appeals court dropped an order that held up action on the plan. A third challenge to the process awaits consideration by the Michigan Supreme Court.

The court decisions removed legal obstacles to Detroit’s financial rescue, Geralyn Lasher, a Snyder spokeswoman, said yesterday in an interview. “We’re able to move forward.”

The accord gives the oversight board the authority to force city unions to accept 12 provisions in new contracts, including putting new hires on 401(k)-like plans, the elimination of so-called bumping rights, merit-based changes in work rules to lower costs and letting the city hire contractors to provide more services.

The consent agreement will interfere with union contracts with the city, forcing the frustration of collective bargaining, labor lawyers argued before the federal court.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE