Michigan sets formal review of Detroit's finances

Reuters News
Posted: Dec 21, 2011 2:53 PM
Michigan sets formal review of Detroit's finances

By Karen Pierog

(Reuters) - Michigan will launch a formal review of Detroit to determine if a state takeover is warranted, officials said on Wednesday, after a preliminary review found "probable financial stress" for the state's largest city.

Michigan Treasurer Andy Dillon said the in-depth review, which follows the preliminary review launched on December 6, does not necessarily mean Detroit will be declared to be in a financial emergency or that Governor Rick Snyder would ultimately appoint someone to run it.

"The governor and I met this morning with the mayor and we continue to hope this process is cut short because the city has been able to develop a plan that puts the city on a solid financial footing," Dillon told reporters in a conference call.

Detroit, with a population of 714,000, predominantly African Americans, has faced hard times with auto industry contraction and falling revenue. The city was once one of the most populated in the United States, but lost 25 percent of its residents between 2000 and 2010.

The review could have various results. If a financial emergency exists, the governor would have to decide on an emergency manager. If the stress levels are considered mild, the city could carry on as it is now.

Other large U.S. cities have had to submit to state oversight in the past, including Philadelphia, Cleveland, and notably in the 1970s, New York, the largest U.S. city.


Under a new Michigan law that made it easier for the state to intervene in fiscally troubled local governments and increased the power of emergency managers, the next step in the process is the governor's appointment of a review team that includes state officials and others.

Dillon said he will forward recommendations to the governor on Wednesday or Thursday on who should serve on the review team, which will have 60 days to complete its work unless the governor asks for an accelerated schedule. He also said a projection that Detroit will run out of cash by April continues to drive the review process.

Detroit Mayor Dave Bing said his administration will continue to "fully cooperate with the review process."

"However, I firmly believe that the remedy to the city's financial crisis is my plan that seeks savings of $102 million for this fiscal year and $258 million in fiscal year 2012-13," Bing said in a statement.

The mayor said the city is continuing negotiations with union leadership for "structural reforms in health care and pensions, work rule changes and wage reductions."

Detroit City Council President Charles Pugh said he believed the process under way between the council, the mayor and unions will ultimately let the city avoid a consent agreement or emergency manager.

If an emergency manager is tapped for Detroit, it would trigger the termination of interest-rate swap agreements the city has with investment banks UBS and Siebert Brandford Shank & Co. forcing the city to pay them an estimated $400 million unless the agreements can be restructured.

That led to recent warnings by Moody's Investors Service and Fitch Ratings that the city's credit ratings could be cut further into junk territory.

The state's preliminary review found the city has a mounting debt problem with long-term liabilities estimated to top $12 billion. The city's annual budget is around $3.1 billion.

(Reporting by Karen Pierog, Editing by Chizu Nomiyama and Jan Paschal)