March 11 (Bloomberg) -- Sandwiched between bankrupt Detroit and two foundering cities that fell under state control, Lincoln Park is trying to avoid the same fate.
The bungalow suburb of 37,000 residents asked Michigan for a review of its finances, which are so shaky that it diverted $2.5 million to pensions from a water and sewer account. The audit, due by April 11, could prompt Governor Rick Snyder to appoint an emergency manager -- a fate the town wants to avoid.
Officials in Lincoln Park and other cities are cutting police and firefighters, skimping on services and warily engaging the state as conditions that sent Detroit into insolvency ripple outward. Lincoln Park’s property values fell 46.6 percent since 2007, compared with a 35.2 percent drop across all of Wayne County, which includes Detroit, according to the Southeast Council of State Governments.
“We’re ahead of the pack,” said Lincoln Park City Manager Joseph Merucci from city hall, which is closed Fridays to cut costs. “A lot of communities may be a year behind us.”
Detroit’s fall from industrial supremacy has seeped into aging, residential suburbs that once prided themselves on better services and stability than their giant neighbor. They see their own populations and economic advantages flowing away to more distant communities. Meanwhile, the region’s core struggles on.
Detroit’s bankruptcy filing in July capped decades of population loss, revenue decline and rising retirement costs, worsened by the 18-month recession that ended in 2009. The accompanying housing bust hit nearby communities as well. Almost half of Lincoln Park’s general revenue went toward debt and retirement costs in 2012, according to a November preliminary state review.
Snyder, a 55-year-old Republican, warned in 2010 that hundreds of Michigan communities faced such financial crises. In 2011, the state held training sessions for hundreds of would-be emergency managers who could operate under a new law that granted the officials more sweeping powers over cities and school districts. They supersede elected officials and can change union contracts and reorganize operations. Critics say they usurp democracy.
Today, only four cities are under emergency managers, including Allen Park, which borders Lincoln Park. Pension shortfalls may put another city, Highland Park, under Michigan’s oversight. Yesterday, Benton Harbor was removed by Snyder from state control after four years under an emergency manager. An appointed board will oversee the city’s transition to self-governance, Snyder said in a release.
The fortunes of such places have diverged from those of the state.
The rejuvenation of the U.S. auto industry since the 2009 bankruptcies of General Motors Corp. and Chrysler fueled the state’s economic recovery. Michigan’s unemployment was 7.8 percent in January after peaking at 14.2 percent in August 2009, when it led the U.S.
Michigan’s economic health has recovered better than all except North Dakota since March 2009, according to the Bloomberg Economic Evaluation of States. Yet the prospect of state supervision remains a potent threat for city officials.
“Nobody is immune,” said Steve Duchane, manager of Detroit neighbor Eastpointe in Macomb County, where full-time employees fell to 99 from 180 in the past four years as property tax revenue declined 42 percent to $8.9 million.
To compensate, the general budget was cut 18 percent to $18.5 million, and the city imposed a $31 annual fee on each parcel for public lighting and a $10.85 monthly fee for trash pickup, Duchane said.
Michigan property-tax revenue fell faster than the rest of the U.S. from 2006 to 2009, according to a September report by Moody’s Investors Service. Among Michigan’s 237 cities, those in Wayne County struggled most after the recession, said Eric Scorsone, an economist at Michigan State University in East Lansing who specializes in municipal finance.
“Property values are back up faster than expected, but the pressure is still there,” Scorsone said. “It’s hard to be a city in Michigan because state policy is very negative toward cities in general.”
Twelve years of state aid cuts have cost communities $6.2 billion, said Summer Minnick, director of policy initiatives and federal affairs for the Ann Arbor-based Michigan Municipal League. The result is 2,315 fewer police officers and 1,800 fewer firefighters on the street since 2001, the league reports.
A projected $971 million state surplus through fiscal year 2015 is partly due to those reductions, Minnick said.
“Local governments don’t see any of that,” she said.
Snyder has proposed increasing aid to cities by 15.3 percent in the fiscal year that begins Oct. 1. For some in the Detroit area, any aid would be too late.
Allen Park fell under state control in 2012 because it took on unsustainable debt from an ill-fated plan to create a movie studio. Another Lincoln Park neighbor, Ecorse, emerged from state control in April after almost four years.
Two other communities -- Highland Park and Royal Oak Township -- may be placed under managers. Highland Park’s pension-fund assets of $9 million would pay retirees for only three years, according to a Moody’s Investors Service report.
The city, which is surrounded by Detroit on all sides and is home to what was once a Ford Model T plant, was declared a financial emergency by Snyder in January.
Mayor DeAndre Windom said in an interview that the state’s review exaggerated a deficit. The city will negotiate settlements for debts with pensioners and creditors rather than accept an emergency manager, Windom said.
Highland Park imposed a 10 percent pay cut on employees and relies largely on part-time police and firefighters who receive no benefits, Windom said.
Eastpointe’s Duchane, who has managed Michigan cities since 1980, predicted more will fall under state control because they can’t raise revenue fast enough.
“We’re at the tip of the iceberg,” Duchane said.
Lincoln Park abuts Detroit’s southern tip.
“Lincoln Park is nicknamed the buffer zone,” said councilman Tom Murphy. “We’re the wall between the so-called good communities and Detroit.”
The proximity makes it hard to attract businesses and raise property values, he said. Murphy said the city will seek an agreement with the state to eliminate deficits, adding, “We know we’re in trouble.”
He said a state audit may make it easier to wrest concessions from employee unions.
Lincoln Park’s deteriorating finances were reflected in a December downgrade of its debt rating. Standard & Poor’s cut it seven steps, to two levels below investment grade.
On Dec. 31, the town’s general-obligation bonds traded at 86.8 cents on the dollar even though they’re backed by insurance, according to data compiled by Bloomberg.
Lincoln Park is typical among Detroit’s nearest suburbs hit with falling revenue, said Merucci, the city manager. Its pension funds are only 28 percent and 34.6 percent funded, and retirement health care is underfunded by $110 million, the state report said.
It has reduced police and firefighter ranks and cut recreation and street maintenance programs, Merucci said. Yet its deficit will rise to about $1 million by June 30, he said.
Bob Steele, a retired Lincoln Park police officer, fears state intervention may jeopardize his $3,500 monthly pension. Yet the 58-year-old acknowledges the city’s financial squeeze and said he worries about eroding services.
“I still own property in the city,” said Steele, who operates a cement company. “I have a stake in how it turns out.”
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