Snyder Says Detroit Needs State Manager to End Fiscal Crisis

Michigan Governor Rick Snyder announces he will appoint an Emergency Financial Manager for the city of Detroit during a town hall meeting at Wayne State University on Feb. 29, 2013 in Detroit. Bill Pugliano/Getty Images


Story by Bloomberg
Written by Chris Christoff

Michigan Governor Rick Snyder plans to name an emergency manager to handle Detroit’s fiscal crisis, stripping power from officials in a withered city that in 1940 was the fourth biggest in the U.S. and a capital of industry.

Snyder, 54, said today at a public meeting in Detroit that he plans to take a step he avoided a year ago, empowering his appointee to take over the government with sweeping powers: selling municipal assets, canceling union contracts, restructuring services and reordering finances.

The move, which the City Council can appeal, punctuates decades of decline in the home town of General Motors Co. (GM) His decision may inflame opponents, as the administration of a white Republican seizes control of a place that is predominantly Democratic and more than 80 percent black.

“It’s a sad day, a day I wish never happened, but it’s a day of promise,” said Snyder, who is in his first term.

Detroit, with a deficit of about $327 million and more than $14 billion in long-term obligations, would be the sixth Michigan city put under state control as Snyder tries to prevent what could be the largest U.S. municipal bankruptcy. Starting later this month, a manager would have the power to cancel labor contracts, cut spending and sell assets.

Jefferson County, Alabama, became the largest U.S. municipal bankruptcy in November 2011, involving $3.14 billion of bonds. California’s Stockton, with almost 300,000 residents, and San Bernardino, with about 213,000, sought court protection last year.
No Overseers

No Michigan localities have entered bankruptcy. A review panel’s determination Feb. 19 that a financial emergency grips Detroit cleared the way for Snyder to act to avoid one.

Opponents say state takeovers disenfranchise voters by stripping elected officials of their power over municipalities or school districts, and may protect bondholders at the expense of employees, services and taxpayers.

“We urge the state to be our partner,” the Reverend Wendell Anthony, president of the local branch of the National Association for the Advancement of Colored People, said this week in a statement. “We do not call upon the state to be our overseer.”

Mayor Dave Bing, a Democrat, has said lawsuits, union contracts and a lack of cash has stymied his turnaround plan.

Some have said a takeover is racist because, along with Detroit, cities where almost half of Michigan’s black residents live would be under state control. Managers are already in charge in Allen Park, Benton Harbor, Ecorse, Flint and Pontiac.
Pitching In

Snyder said today he had hoped the consent agreement would yield better results.

“Detroit can’t wait,” he said. “We need to solve real issues here today, because citizens aren’t getting the services they need.”

He called for cooperation and constructive input. He said those who “yell and say it doesn’t work and don’t come forward with solutions, I don’t expect they’re going to have a lot of influence on decisions.”

The 10th-most-populous U.S. city in 2000, Detroit has lost a quarter of its residents, falling to about 707,000 last year, according to U.S. Census Bureau figures. Those remaining must cope with inadequate police and fire protection, broken street lights and unreliable buses.
Industry Reborn

City leaders, all Democrats, can resist a takeover by requesting a hearing within 10 days on Snyder’s decision before a Treasury Department panel. If Snyder wins that round, Detroit can ask a judge to intervene.

In contrast to the morass in Detroit itself, sales for automakers in the region synonymous with the U.S. auto industry continued to roar ahead after stumbling in the 2009 recession.

Ford Motor Co., based in adjacent Dearborn, said February results were the best in six years. GM, based in Detroit, and Chrysler Group LLC, with a headquarters in Auburn Hills about 30 miles (48 kilometers) north, said the month’s results were the best in five years. Indeed, Chrysler has reported 35 months of sales gains in a row, matching a streak that ended in December 1994.

Yet the city that bore them is moribund.

Detroit isn’t alone coping with deficits, pension and debt costs and falling property values. Cities from California to Rhode Island have struggled as the lingering effects of recession constrained revenue.
Local Control

About a year ago, Snyder let Detroit try to stabilize its finances with state assistance, stopping short of a takeover. State Treasurer Andy Dillon, a member of the review panel, said last week the city is “fixable” without bankruptcy, even though it hadn’t managed to reverse its slide.

A state takeover is preferable to bankruptcy because it would keep control in the state and city and out of federal court, Dillon said. An emergency manager could recommend a Chapter 9 bankruptcy filing to Snyder and Dillon, and would have the authority to seek such protection.

Candidates in Detroit’s mayoral race this year have said the city can solve its own problems. One, Lisa Howze, said the state review exaggerated the city’s debt.

Howze, 39, a former state representative, said in a telephone interview that much of the more than $14 billion in obligations is in the form of bonds for the water and sewer system, which produce a reliable revenue stream. Another portion reflects retiree benefits that can be amortized over 25 years. She said general-obligation debt accounts for about 15 percent of the city’s budget and is manageable.

“The people of Detroit still need leadership -- you don’t take this sitting down,” Howze said when asked why she wants to be a mayor under a state manager.
Decades of Decay

The City Council may vote to remove an emergency manager after a year, Howze said. The council also may propose alternative budget cuts.

Last week, the NAACP’s Anthony invoked the civil rights movement, the U.S. invasion of Iraq and Martin Luther King Jr. in denouncing a takeover of a city he said is an international symbol.

“There is no way that an emergency manager is going to come into the city of Detroit and within a period of 18 months resolve what has taken 50, 100 years to develop,” Anthony said in his statement.
Taxman Cometh

Detroit’s deficit grew to $326.6 million as of June 30. The city has imposed wage cuts and reduced its workforce by 18 percent, including an 11 percent police cut, according to a Michigan State University report.

As Detroit’s bond prices have fallen, the yield premium on Detroit limited-general obligation bonds maturing in 2015 has risen to an average of 9.9 percent this year, up from 7.5 percent in the last four months of 2012, according to data compiled by Bloomberg.

Among the city’s challenges are uncollected taxes. Almost half of property owners didn’t pay levies totaling about $131 million last year, according to the Detroit News. That’s about 12 percent of the general-fund municipal budget, the newspaper said Feb. 21.

A state offer to take control of Detroit’s Belle Isle park and save the city $6 million a year was snubbed by the council. As a result, Bing, who supported the plan, said he’ll close 51 smaller parks.

The state review last month painted a picture of plummeting tax revenue as the long-term projected cost of health care for city retirees ballooned to around $7 billion. Detroit’s accumulated deficit would’ve reached almost $937 million in 2012 had it not borrowed to meet costs, according to the report.
Controlling Authority

An emergency manager could remake the city’s finances, said Brad Coulter, a corporate turnaround specialist with O’Keefe & Associates in Bloomfield Hills, Michigan.

“There needs to be a point person who’s in charge, and right now there doesn’t seem to be,” Coulter said in a telephone interview. “It is feasible, there are a number of liabilities that could be restructured for pensions, bond debt.”

“You also have to look at the efficiency in the way the city delivers services,” Coulter said. “My biggest concern is you can’t be short sighted and cut police and fire more when reducing crime is the key to turning the city around.”