March 27 (Bloomberg) -- After firing 20 percent of its workers, doubling water rates and outsourcing trash collection, Flint, Michigan, has a balanced budget. It’s also approaching the point at which it can’t function as a city.
That’s the assessment of Edward Kurtz, its emergency manager. Without reliable revenue to replace dwindling property and income taxes and state funding, the birthplace of General Motors Co. won’t be able to support its citizens, even if its books are square, Kurtz said.
As state-appointed overseer Kevyn Orr takes control of near-bankrupt Detroit, the experience of Flint shows spending can be made to match revenue. Yet merely making the numbers work may not be enough in cities where population and revenue shriveled with the closing of auto plants.
“How many more employees can we lay off and still provide the basic services?” Kurtz asked in an interview in his office at Flint City Hall. “We can’t just keep putting it on the backs of the people who live in the city. Pretty soon, we won’t have anybody left to tax.”
Kurtz said he doesn’t think Flint, whose population has dropped by almost half to 101,558 since 1960, has reached that point. During the 16 months the city has been under an emergency manager -- its second stint -- work has been done to stabilize finances and restructure operations, even as residents complain about the loss of democratic rights and the city is completing its first master plan since the 1960s.
Still, Kurtz wrote in a Feb. 8 report to state Treasurer Andy Dillon that Flint “is approaching the point of diminishing returns” and that “stable revenue is necessary in order for this city, and most other cities in Michigan, to continue to avoid a bankruptcy situation.”
Flint is 68 miles (109 kilometers) northwest of Detroit. Buick Motor Co. moved there in 1903, GM was founded there in 1908 and it prospered until the auto industry started to decline in the 1970s. Today, hundreds of acres of bare concrete remain where plants once stood, and neighborhoods are scarred by vacant and boarded-up homes. Almost a quarter of the housing units are vacant, according to the U.S. Census.
For those who remain, life is dangerous. Flint had the highest rate of violent crime in 2011 among U.S. cities with 100,000 or more residents, and Detroit was second, according to the FBI.
Flint officers are doing their best with staffing that has declined by more than 50 percent since 2008 as pay and benefit cuts destroyed morale, said Officer Kevin Smith, 37, president of the Flint Police Officers Association.
Some residents say otherwise. Police are “about as useless as a rubber crutch,” said Ben Cain, who leads a Neighborhood Restoration Coalition of block watch groups. He said he’s so used to going to bed with gunfire that he doesn’t pay much attention to it anymore.
Emergency managers can’t fix such deep-rooted dysfunction without changing state and federal policies for funding cities, said U.S. Representative Dan Kildee, a Flint native who co-founded the Center for Community Progress, a Washington-based advocate for land reuse and urban revitalization.
“If we don’t have the will to do those things, then all the strong managers in the world will not pull America’s weakest cities out of their decline,” said Kildee, 54, a first-term Democrat.
Flint is among six Michigan cities that have emergency managers, including Detroit, where Republican Governor Rick Snyder named Orr on March 14. While elected mayors and councils remain, the fiscal overseers have ultimate authority to operate and restructure, sell assets and alter union contracts.
This is Flint’s second time around.
Kurtz, a 70-year-old former president of the Baker College system, which is based there, was appointed in 2002 when the city had a $35 million deficit. It had a balanced budget when he left in 2004, yet started running deficits again three years later. Snyder named a new manager in November 2011, and when he couldn’t continue, Kurtz came out of retirement in August.
Kurtz has waived his salary and is being paid only $1,000 a month for expenses, according to the city. The salary would be $170,000 a year, funded by the state under a law taking effect March 28.
Almost 47 percent of Flint’s $94.3 million in revenue in fiscal 2012 came from state and federal sources. While the city still has deficits of $19 million in its general fund and $8.8 million in its water fund, its 2013 budget balanced without deficit spending, and revenue and expenses are generally on target, Kurtz said.
Besides eliminating almost 150 positions, Flint’s managers cut workers’ wages by 20 percent, eliminated retiree health coverage and restructured benefits and pensions. They added a $143 annual fee for trash collection, a $62 special assessment for street lights and increased water and sewer rates.
It’s not enough. Michigan State Police provide patrol officers and detectives, and the Charles Stewart Mott Foundation has given $3.84 million since 2010 for 11 community police officers and neighborhood safety volunteer programs.
It’s a “bridge strategy,” said Neal Hegarty, vice president of programs for the Flint grant-making foundation, which is Michigan’s third-largest and works to better civil society and the environment, and to eradicate poverty.
“The situation was simply untenable, and it needed some relief,” Hegarty said by phone. “There’s just simply not enough money in the system.”
Property taxes declined 44.6 percent between fiscal 2006 and 2012, state funding is down by 32.9 percent and income taxes by 24.5 percent, according to city reports. Property taxes could fall another 18 percent in fiscal 2014, Kurtz said.
“We used to say we need to do more for less,” he said. “Pretty soon we’re going to be doing less for less.”
Cain, who leads the neighborhood group, said residents are being driven out.
“If you keep on cutting the legs off this table, eventually you’re going to be on the floor,” the 65-year-old retired GM worker said in an interview at a police mini-station encircled by barbed-wire fence. “When you kick the dog around long enough, he’s going to leave.”
While more than 80,000 area residents were employed by GM in 1978, according to a 2011 report by Michigan State University, that number is about 7,500 today, the company said. GM is the city’s largest employer, followed by the Flint City School District and McLaren Regional Medical Center, according to the Genesee Regional Chamber of Commerce.
Flint’s median household income is $26,621, compared with $48,669 for the state, according to U.S. Census data. The unemployment rate was 17.2 percent in January not adjusted for seasonal changes, compared with an unadjusted 9.7 percent statewide.
The distress is reflected in municipal finances. There are no current bond ratings for Flint, according to its 2012 Comprehensive Annual Financial Report. Moody’s Investors Service last rated its general-obligation unlimited bonds at noninvestment-grade Ba1 in February 2006, the report said. The long-term debt on June 30 was $62.8 million, it said.
Old promises weigh on the city and others like it. Michigan municipalities had unfunded liabilities for pension and other post-retirement benefits of $12.7 billion in fiscal 2011, Eric Scorsone, a Michigan State University economist, said in a March 14 report. That limits resources for services and can put cities into a “death spiral,” he said.
Bob Emerson, a former state budget director who served on the review team that recommended an emergency manager for Flint in 2011, said that while the city avoided bankruptcy, it faces a difficult future.
“Does anybody want to live there with service levels that are adjusted to the revenue levels?” Emerson said in a telephone interview. “Without sufficient revenue, it doesn’t matter who’s in charge.”
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