Panic in Detroit

The City of Detroit is careening towards a state appointed receiver, with Michigan Governor Rick Snyder announcing his intent to make that appointment. Mayor Dave Bing has announced that he will not join the City Council in fighting the process, which should help to pave the way for the Governor to make that appointment. Naturally the fight is full throttle, with the locals claiming the move is “undemocratic”, and the Governor and his supporters claiming that the locals have had an opportunity to straighten things out, but have failed to do so.

Detroit’s problems have been a long time in the making. Detroit has experienced severe population loss, going from 1,850,000 residents in 1950 to 714,000 in 2010. Property values have plunged, wide swarths of the City are vacant, with declining revenues constraining the ability to deliver services. In addition Detroit has been subjected to serious cuts in aid from the State of Michigan, which has had its own serious financial issues. The fiscal issues have been boiling for some time, with the City in the grip of a fiscal death spiral, with cuts to the budget leading to less services, more problems, and then more cuts. But the reality is that the locals have turned in, from my distant vantage point, an abysmal performance. No matter the municipality, no matter how bad the fiscal situation, there is always a very strong political force advocating no change to the status quo. No different here. The locals have turned to budgeting tricks that are transparently bad, and have created the showdown with state government. There is no question that state government is not entirely blameless here, but the locals have not been profiles in courage. The state report that led the Governor to issue his call for an emergency manager shows us some of the ugly truth in Detroit’s budget numbers. Some of the lack of local action was highlighted by the State, in the prior mentioned report:

For example, for the year ending June 30, 2010, the human resources apprentice training program exceeded its budget by over $2.3 million, the insurance premium line item exceeded its budget by over $12 million, and the police operations line item exceeded its budget by $15.8 million. Consequently, the general fund had line items that exceeded budgeted amounts, in the aggregate, by almost $58 million. Unaudited 2011 figures indicated that line items amounting to $97 million exceeded their budget, including an excess of $25 million for fire and $44 million for police.

A couple of quick notes: The City appears to have routinely allowed budgeted allocations to be overrun by Departments. They also have included revenue estimates that are largely fictitious. And as annual deficits pile up the corrective action taken has been to simply borrow the funds to paper over the budgets. Not a good idea. Lets look at some of the annual deficits, and the corresponding borrowing:

Year Deficit Debt Proceeds
2005 ($155,404,035) $248,440,183
2006 ($173,678,707) $34,892,659
2007 ($155,575,800) —
2008 ($219,158,138) $75,210,007
2009 ($331,925,012) —
2010 ($155,692,159 $251,663,225
2011 ($196,577,910) —

I don’t care what Party you represent those are not only some bad numbers, but some terrifically bad financial practices. Using capital borrowing to paper over operating deficits is as bad of a budgeting practice as there is.And those operating deficits are pretty hefty, indicating that fair or not budget adjustments MUST be made. In this case either the locals do it, or the State will do it for them. What did the City propose?

The City’s deficit elimination plans and proposed budgets proved to be unrealistic. City officials either had been incapable or unwilling to manage the finances of the City. For example, the 2008 fiscal year deficit elimination plan reported $58 million in expenditure reductions in the general fund and $69 million (excluding debt proceeds and revenue sharing) in revenue enhancements for 2010. However, the 2010 general fund balance ended in a deficit condition of over $155 million and would have been much greater if not for $250 million in new debt. Again, the 2009 deficit elimination plan certified in November of 2010 projected a 2011 surplus while the actual fund balance for the general fund ended with a deficit estimated at close to $200 million. City officials had promised restructuring and consolidation, including hiring freezes and improved tax collection. Finally in mid-2011, City officials submitted a deficit elimination plan for the 2010 deficit which included revenue initiatives of over $200 million and expenditure reductions of over $300 million, most of which were to take place in future periods and were
questionable, such $10 million from selling Windsor tunnel rights and $50 million in improved income tax collections. One version of the deficit elimination plan estimated that the City would be able to realize an additional $154 million annually from collecting income taxes from residents who work outside the City. Projected expenditure reductions relied heavily upon union concessions which had not historically materialized.

I realize that the City has a different point of view than the State, but those facts are pretty damning. What about the City’s bond rating? Not much good news there either. They have fallen below BBB, which is junk status.

Nov 28 (Reuters) – Moody’s Investors Service lowered Detroit’s debt ratings deeper into junk territory on Wednesday and warned there was a higher risk the cash-strapped city could default on bonds or file for bankruptcy.

The credit rating agency, which placed Detroit on review for possible downgrades in June, assigned a negative outlook to the lowered ratings, citing “the rising possibility that the city could file for bankruptcy or default on an obligation over the next 12 to 24 months.”

Moody’s also pointed out that oversight of the city’s finances by the state of Michigan was weakened when voters earlier this month repealed a 2011 law that beefed up the state’s power to aid financially struggling local governments.

Another factor playing into Detroit’s rating woes is its “ongoing inability to implement reforms necessary to regain financial stability,” Moody’s said.

Detroit’s city council has resisted certain reform measures supported by Mayor Dave Bing, state officials and an oversight board. Last week, the nine-member council rejected a contract with law firm Miller Canfield to work on the city’s financial stability deal with the state, which had set the contract as one of the goals Detroit must meet to obtain a $10 million cash infusion this month.

Bing subsequently said the city, which was on track to run out of money by the end of December, would turn to unpaid temporary leaves for workers and other cuts to stop that from happening.

All of that borrowing to pay day to day expenses has of course left the City with a major debt problem. Debt service payments, in 2010, were $597 million, and long term debt, not including unfunded pension and OPEB obligations, total over $8 billion. I dare say that the data show that the Mayor and the City Council have to take some share in the responsibility for not coming forward with a short term stabilization plan, as well as a longer term recovery plan that would include major economic development and growth. I have given short shrift to the City’s position because even with cuts in state aid and some of the other problems involved they could have, and should have, done a better job.

Detroit presents the Governor with a unique set of governance challenges. Taking away responsibility from elected officials, even where some level of malfeasance has been shown, is a serious matter. It is, by definition, undemocratic. Detroit has a resurgent auto industry, and a few other positives to build on. Success will be difficult, but not impossible. Working for an Emergency Manager in Detroit, to produce positive results for the City and its residents, would be a unique opportunity for anyone that loves municipal management. As the state looks to impose financial controls on the City the ball is in the Governor’s court to produce a plan that just does not slash and burn, but produces economic growth and opportunity for Detroit and its people.

Addendum: Today’s New York Times had a story on the poor financial condition of Detroit that reflects on the poor performance of the locals.

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