Now that the state-appointed Financial Review Team has officially declared that Detroit's finances are in a state of emergency, Governor Rick Snyder can appoint an emergency financial manager to oversee the city's books. In a nutshell, here is what the review team found and what their findings mean going forward.
Short-Term Problems: A $100 Million Cash Deficit
“The City continues to experience a significant depletion of its cash reserves,” according to a statement issued by the Michigan Treasury. “Projections estimate a cumulative cash deficit of more than $100 million by June 30, 2013, without significant spending cuts. The Review Team noted that the Mayor and Council have moved forward with some financial reforms, those changes are too often one-time savings and apply only to a small percentage of the City’s overall wage and benefit burden.”
Long-Term Challenges: Liabilities Of $14 Billion
“As of June 30, 2012, the City’s long-term liabilities, including accrued pension liabilities and other post-employment benefits, exceeded $14 billion,” according to the Treasury’s statement. “City officials have projected that, over the next five years, expenditures needed to fund certain long-term liabilities will total nearly $1.9 billion. However, City officials have not devised a satisfactory plan to address long-term liabilities.”
Papering Over The Crisis Since 2005
“If you look, the city has been running deficits every year since 2005,” said Michigan Treasurer Andy Dillon. “They’ve been masking over those in a way with some long-term borrowing. Under government accounting rules, long-term borrowing is considered revenue. If they weren’t doing long-term borrowing over the last seven years, the actual accumulated deficit would grow from $327 million to $937 million.”
Next Steps
“There’s not an ability or mechanism in place for the city to address [Detroit's financial situation] absent a finding of emergency,” said Dillon. “That is the recommendation sent to the governor today. He has thirty days to react to that report and he can accept or reject that finding of the review team. After he makes his determination, if in fact it is an emergency status, the city can request a hearing for reconsideration within ten days of the governor’s determination.”
That means Snyder has until March 20 to announce the appointment of an emergency financial manager. The city can request an appeal within ten days of Snyder’s decision, meaning this will be essentially settled by March 30 at the latest. Michigan’s newer and stronger emergency manager law, Public Act 436, takes effect on March 28.
The Financial Advisory Board Likely In For Long Haul
“I would hope the financial advisory board would remain,” said Dillon. “If you look at New York City with the [Municipal Assistance Corporation] that existed for 30 years, they played a critical role in New York.”
An Emergency Manager Is Short-Term Solution
“It’s not our intention that, if in fact there is a manager, that he’s here for an extended period of time,” said Dillon. “We want to transition him out and [transition] power back to the mayor and City Council.”
Mayor Dave Bing’s Reaction: Detroit Needs More Money
“Certainly I am not surprised by the findings of the State’s financial review team,” Bing said in a statement released Tuesday afternoon. “My Administration has been saying for the past four years that the City is under financial stress. If the Governor decides to appoint an Emergency Financial Manager, he or she, like my Administration, is going to need resources -- particularly in the form of cash and additional staff.
Update: Wednesday, 2:20 p.m. -- Bing on Wednesday issued a sharper comment about the review team.
In a statement he said:
Yesterday, the Financial Review Team asserted that there was no plan in place to correct the City’s financial emergency. To the contrary, my administration has worked diligently to develop and implement a restructuring plan for the City of Detroit.
In fact, our plan was reviewed and accepted by all stakeholders, including the State and the Financial Advisory Board. We have the plan, but we face significant challenges executing it in a timely manner. We are hindered by several factors, including the City Charter, labor agreements, litigation, governmental structure, and a scarcity of financial and human resources. Further exploration of ways to mitigate these barriers for more timely implementation of my initiatives should be examined."
