Detroit bankruptcy: State takeover begins as Gov. Rick Snyder taps city manager

Michigan Gov. Rick Snyder announces he will appoint Michigan Gov. Rick Snyder announces he will appoint an Emergency Financial Manager for the city of Detroit during a town hall meeting at Wayne State University in Detroit, Michigan. Detroit has more than $14 billion in debts and liabilities and has 10-days to appeal Snyder's decision. (Feb. 29, 2013) Photo Credit: Getty Images

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Michigan Gov. Rick Snyder plans to put a state manager in charge of ending Detroit's fiscal crisis, stripping power from officials of a withered city that in 1940 was the nation’s fourth biggest and a seat of industry.

Snyder, 54, took a step he avoided a year ago, empowering an emergency financial manager who can sweep aside union contracts, sell municipal assets, restructure services and reorder finances. He announced the move Friday at a public meeting in Detroit.

The decision, which can be appealed by the City Council or Mayor Dave Bing, punctuates decades of decline in the home town of General Motors Co. It may inflame opponents, as an appointee of a white Republican seizes control of a community 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 enhanced power to cancel labor contracts, cut spending and dispose of city assets.

In November 2011, Jefferson County, Alabama, became the largest U.S. municipal bankruptcy, with $3.14 billion of bonds. California’s Stockton, with almost 300,000 residents, and San Bernardino, with about 213,000, sought court protection in 2012.

HELP NEEDED

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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.

Bing, a Democrat, said Friday that he’ll consider Snyder’s decision and the options open to him in response.

“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,” Bing said in a statement. “We have always said that we need help from Lansing to implement our initiatives such as public safety, transportation, lighting and others.”

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.

'A NIGHTMARE'

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“This is going to be a nightmare,” said state Senator Coleman Young II, a Detroit Democrat and the son of a longtime mayor of the city. “This is going to be tragic. I just think they’re going to go in there and sell off all our assets. We’re not going to have anything left. And if you sell off the assets, we’re still going to be in debt.”

Ronald Griffin, 68, a Detroit pastor, said an emergency manager is crucial. Griffin, who was among those invited to the televised meeting where Snyder announced his decision, said it’s most important to shore up the police and fire departments.

“New businesses, new families are not going to come back into a city that’s ravaged with crime,” Griffin said.

Bing has said lawsuits, union contracts and a lack of cash have 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.

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NO WAITING

Snyder said 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, abandoned buildings and unreliable buses.

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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.

MOTOR CITY

In contrast to the morass in Detroit, known to many as the Motor City, sales for the region’s automakers continued to roar ahead after stumbling in the last recession.

Ford Motor Co., based in adjacent Dearborn, said Friday that February sales were the best in six years. GM, based in Detroit, and Chrysler Group LLC, based in Auburn Hills about 30 miles north, said they had the best February in five years. Chrysler has reported 35 straight months of sales gains, matching a streak that ended in 1994.

“There is more hard work and tough decisions to come, but we all need to move forward with the single purpose to once again make Detroit a healthy, vibrant city,” Greg Martin, a GM spokesman, said in a statement.

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 the recession that ended in June 2009 constrained revenue.

BANKRUPTCY OPTION

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 city’s financial review panel, said last week the crisis is “fixable” without bankruptcy, even though the slide hadn’t been reversed.

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.

LEADERSHIP NEEDED

“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.

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

Reverend Wendell Anthony, president of the Detroit Branch NAACP, invoked the civil rights movement, the U.S. invasion of Iraq and Martin Luther King Jr. in denouncing a takeover of a city which 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 this week in a statement.

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.

RISING YIELDS

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 more than 9 percent this year, up from about 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.

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 by telephone. “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.”

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