Detroit emergency declared. Can intervention turn around the city’s finances?

The city of Detroit is less than two weeks away from the likelihood of being assigned an emergency manager. In announcing that the city is in a state of financial emergency Friday, Michigan Gov. Rick Snyder (R) said he agrees with a state report that concluded intervention is necessary because city officials have not yet provided a satisfactory alternative.

The city’s comeback is vital to strengthening the overall state economy, Governor Snyder said in an address Friday. Detroit’s financial collapse has been decades in the making, he said.

“[Citizens] deserve public safety, they deserve better lighting, they deserve better transportation, and the list goes on. We need to solve these issues. Detroit can’t wait any longer,” he said.

Detroit is saddled with a $100 million cash-flow deficit by June 30, in addition to an accumulated deficit of $327 million, a financial review team reported last week. Even more serious is its $14.9 billion in unfunded pension and retirement liabilities. The city needs $1.9 billion to fund liabilities within the next five years, but to date has no plan.

“If those [pension and retirement liabilities] don’t get fixed, it’s hard to see Detroit getting financially solvent. There are very few other long-term fixes,” says Eric Scorsone, an economics professor at Michigan State University in East Lansing.

Snyder’s declaration of a financial emergency sets off a 10-day appeals process, which allows the mayor or the nine-member city council to ask for a hearing to offer an alternative to an emergency manager. The deadline to make the appeal is March 11. The hearing date would be March 12. After that, Snyder will make his final decision. 

Detroit Mayor Dave Bing said he does not support an emergency manager but has long complained that the city council has put up obstacles hindering the city from working with the state on other solutions. A financial consent agreement between the state and city council last April did not significantly improve the financial situation.

“If, in fact, the appointment of an emergency financial manager both stabilizes the city fiscally and supports our restructuring initiatives which improve the quality of life for our citizens, then I think there is a way for us to work together,” Mr. Bing said in a statement.

Soon after Synder’s announcement, many city council members agreed they should be directing their efforts toward mounting a legal challenge to prevent an emergency manager from being assigned. They also discussed pressing for a modified consent agreement, which would create benchmarks for accountability.

“It would be irresponsible for us to not provide some response.... We have to do everything we can to try to stop [emergency management] from happening,” Councilwoman Saunteel Jenkins told The Detroit News.

However, not all city council members projected such defiance. In a statement, Gary Brown, council president pro tem, said he doesn’t support the appointment of an emergency manager on democratic principles, but if the council and mayor don’t address certain roadblocks, “the only alternative is for the governor to appoint an [emergency financial manager] who has the will to implement the necessary reforms.”

Snyder said he has an emergency manager in mind but did not reveal the name. He said his appointee would need just 18 months to help transition the city out of its current crisis and create structural changes that would lead it to solvency. If Detroit is assigned an emergency manager, it would become the only major US city to operate under state control.

While an emergency manager would have the power to cut spending by consolidating city services, privatizing services and assets, and canceling contracts, he or she could also declare the city bankrupt – although Professor Scorsone notes that would require the approval of a federal judge. He says the state could face legal challenges if it tries to enact changes through actions that “look like bankruptcy,” such as selling assets or cutting benefits unilaterally.

“There will be a lot of constitutional issues,” he says. “Some will claim Michigan is developing a quasi-bankruptcy process outside Congress’s purview, so there are a lot of constitutional issues to see if this is doable or not.”