Detroit is bankrupt and headed for an Emergency Financial Manager. What is next?

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An accumulated deficit of $327 million. Unfunded obligations of nearly $15 billion with almost $2 billion due in the next five years. A District Court that is owed almost $280 million and which collects only 7.7% of what they are owed each year. A nearly $1 billion 2012 deficit masked by long-term borrowing with no foreseeable ability to pay it back. The city’s bond, pension and retiree health care liabilities account for 35 to 42 cents of every dollar the city takes in.

These items and more led to yesterday’s formal declaration by a state financial review team that, yes, Detroit is in a state of financial emergency without a plan to solve it. Not a big surprise to anyone paying attention but one that puts the situation into clear focus.

So, what’s next? The likely scenario is that Governor Snyder will scrap the existing consent agreement and install an Emergency Financial Manager (EFM). The timing on this is crucial. If he does it before March 28th, the EFM will remain in place when the newly-passed Emergency Financial Manager Law goes into effect and won’t need to be signed off on by city officials.

Some Detroit City officials still seem to think they can handle this on their own, a proposition that has become increasingly dubious as they reject even reasonable efforts like creating a state park out of Belle Isle, releasing the city from millions of dollars of obligations.

On the other side, we have the Snyder administration that has approached failing cities in a manner than nearly guarantees mistrust and has created an adversarial relationship that all but dooms the cooperation that is essential if the city is going to work in partnership with the state. Except for tiny Three Oaks, none of the cities with EFMs have ever emerged financially secure.

Here’s where I come down on this: Detroit needs a reset; a reboot. The time for recriminations and finger-pointing and outright denial on all sides to end. With or without an EFM, Detroit is going to go through a bankruptcy of some kind. There’s no way they can come out from under billions of dollars of debt and a monthly operational deficit of $15 million without it. State Treasurer Andy Dillon thinks this can be done without a bankruptcy but he is in as much denial with that idea as Detroit city officials are in thinking they can do this without partnering with the state. As I have pointed out in the past, the Snyder administration’s fear of bankruptcy is unfounded.

[F] or all the fear-mongering about Chapter 9 bankruptcies, what we really have is something that looks and sounds an awful lot like an emergency manager without the politics and propensity toward union-busting and outsourcing. And it also comes without unilateral selling off of public assets or, more importantly, the disenfranchisement of residents who lose the representation of their elected officials.

It’s clear that our CEO Governor wants to avoid our cities going bankrupt. That makes sense since it can impact the state as a whole. Maybe the threat of a bankruptcy is what is needed. Not just to force cities to solve their problems but to incentivize the state for getting involved in solving the core issues that lead to the emergency in the first place.

I’m not the only one who thinks this. The Detroit Free Press‘s Rochelle Riley believes this, too, and her argument is one everyone should read and ponder.

The Snyder Administration needs to put their frustration and anger and impatience away and start a fresh relationship with Detroit city officials. They have gotten off on the wrong foot with them so many times that they have a lot of damage to repair. Yeah, it’s hard. We get that. There are politics and attitudes and factions and fear and anger to get past and it’s going to take a concerted effort on their part to move into a new relationship. Many Michiganders, especially Detroiters, have a reasonable fear based on past actions by EFMs that they will see their city assets sold off to profiteering privatization specialists for pennies on the dollar and then exploited for profit — profit for others, not for Detroit. It may be hard but that’s why we elected you: to do the hard stuff.

Detroit’s governmental leaders need to quit the denial game and come to the harsh realization that they simply cannot fix this soon or on their own. It’s going to be painful, it’s going to take a long time, and it’s going to mean that they lose some control. But they didn’t get here overnight so they, too, need to put away their frustration and anger and impatience and start a fresh relationship with state officials.

Here’s what is clear to me as someone who has watched cities go under the control of EFMs all over the state without any true resolution of the problems that caused the financial emergencies in the first place: these problems cannot be solved by cutting only. You cannot rebuild when your only tools are sledgehammers, chainsaws and other implements of destruction. Unfortunately, in their rush to replace a law that Michiganders rejected in November of 2012, Republicans once again failed to give EFMs any tools of construction. EFMs have no ability to raise revenues, enact significant urban renewal, or to invest in the cities they control. They can only cut. Doling out privatization contracts to your corporate friends to profit from is no way to build a relationship with a city that is afraid and in crisis.

Lisa Howze, a CPA who is running to be the mayor of Detroit, put it this way in a statement yesterday:

Michigan’s Emergency Financial Management policy is flawed. Two years of this process have yielded no solutions. It’s unfortunate the review team’s findings still do not address how the city generates revenue or how to resolve Detroit’s financial woes. Detroit needs financially competent leadership right now.

I don’t know if her plan is one that will work but at least she is starting from a realistic understanding of the problem.

The time for blame and fear is over. It is time for true leadership and real, sustainable solutions. The only way for that to happen is for all parties involved, all of the stakeholders who have an interest in seeing Detroit rise from the ashes, to reset their relationship and move forward. All of these groups and our state as a whole have a vested interest in seeing this through until Detroit is on its feet again.

As residents of this fine state, we truly are all in this together. Let’s make the adjustment to the new normal and start acting like it.

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  • Toka313

    Bankruptcy will allow the best parts of the city to be sold off, and will also raid anything that is available in pension funds. While I see it as a possible option, it’s simply not the FAIR option.

    Banks got bailed out, we’re getting sold out. Detroit 100% needs a bailout right now, not a bankruptcy. And as much as people don’t like to hear about bailouts, it’s better than letting private interests cut up the city. Bailing out Detroit is a bailout of the people and the workers. Pension funds are obligations. Not entitlements. They are bargained for and won through struggle, labor, and negotiation.

    Dillon had enough hubris to suggest that Detroit ought to do what NY did in 78. Ummm, worst times ever if you were a poor person of color in NY. We can do better. We have to do better. We don’t have the financial industry that NY has. This cycle of screwing over people of Detroit has to stop. We voted against EFM’s. We’re getting sold out again.

    • http://eclectablog.com Eclectablog

      I disagree with your assessment of bankruptcy. Read my piece at that here: http://www.annarbor.com/business-review/the-case-against-emergency-managers-how-bankruptcy-preserves-democracy/

      • Toka313

        You don’t think a bankruptcy judge would push for regionalization of revenue makers in the city? (i.e. DWSD?) Better than an EM? Maybe, that really depends on which judge you get. I find it doubtful that any possible judges live in the city at all. Ya, they would certainly not hurt unions as much, however, with Detroit workers there isn’t much left you can do to screw them over (other than take away retiree health and pension). So yes, better than an EM. But a bailout is certainly more just. What ever happened to justice?

  • http://twitter.com/helzapoppn Herb Helzer

    I’m seeing a privatization of DWSD as the PRIMARY longterm goal of whoever Snyder appoints as EM Czar.
    Also, immediate reconsideration of the state’s Belle Isle deal, retroactive approval of the Hantz woodland proposal, and selling off DPL (or, more likely, GIVING Public Lighting away since no sane utility wants it for any price).
    Depending on how big of a Republican tool we get, shredding union contracts would come after the “quick hits.”
    As for who: I keep coming back to…Freman Hendrix. Finally getting the big chair after twice going the election route and failing…or is that too savvy a move for this Governor and his consigliere Andy Dillon?

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