Michigan review team report details roots of Detroit's crisis

Reuters News
Posted: Mar 28, 2012 2:18 PM
Michigan review team report details roots of Detroit's crisis

DETROIT (Reuters) - The Michigan advisory team sent to examine Detroit's finances blames elected officials for the city's fiscal crisis, saying they failed to curb spending even as residents fled the city, piling up debt that now threatens basic services.

The 10-member Financial Review Team concluded its 90-day audit of Detroit on Monday, declaring the city in a state of "severe financial stress" but stopping short of recommending the appointment of an emergency manager to take over the city of 714,000.

In its final report, which was made public late on Tuesday, the team provided its official account of how Detroit, the state's largest city and a once-thriving industrial metropolis of 1.9 million people, arrived at the current point, where it will run out of cash within weeks without state intervention.

Although the city's decline has taken place over decades in tandem with the struggles of the domestic auto industry, the team said many of the present financial difficulties are rooted in mismanagement in more recent years.

Between 2005 and 2011, the city consistently spent between $100 million and $300 million more each year than it took in, the team said, and financed the growing deficits by issuing more debt.

But even as those deficits ballooned, the city's population plunged, eroding the tax base. Between 2000 and 2010, Detroit's population contracted by 25 percent, according to U.S. Census data.

With more money going out than coming in, the outlook for fiscal crisis was clear, the team said. But the city's mayors and city council proved either "incapable or unwilling to manage the finances of the city," according to the report, and "deficit elimination plans and proposed budgets proved to be unrealistic."

The report does not mention mayors by name but Democrats have held the office since 1962. Kwame Kilpatrick, who resigned in 2008 after pleading guilty to two counts of obstruction of justice, was mayor for most of the past decade.

As debt piled up, and the need for more borrowing grew, the city attempted to obtain lower interest rates and reduce debt-related costs by entering into complex agreements involving interest rate swaps and swap options, the report said.

But the benefit of those agreements only accrued to the city if interest rates rose. When the Great Recession sent those rates tumbling instead, the city was hit with "increased annual payments," according to the review.

Detroit's problems began to cascade in recent months as its deteriorating finances prompted Moody's and other agencies to cut its credit rating, a move that could force the city to make at least $350 million in swaps-related payments over an accelerated, seven-year period.

The appointment of an emergency manager could force the city to make that payment immediately, one of the reasons both Michigan Governor Rick Snyder, a Republican, and Detroit Mayor Dave Bing, a Democrat, have said they do not want to see one appointed.

Two weeks ago, Snyder unveiled a proposed solution that would allow Bing and the city council to continue to wield some power but gave a nine-member state-appointed financial advisory board broad powers to restructure operations and overhaul spending.

The city rejected the proposal but offered a proposal of its own last week; the two sides have been negotiating ever since.

During a town hall meeting in Detroit on Wednesday, Snyder said negotiators were "close" to reaching a final deal that would "have the city run the city in large part."

Those negotiators have only eight days now to ink a pact before state law will force Snyder to act. If an agreement is not reached by April 5, he can cut off revenue-sharing funds to Detroit or appoint the outside emergency manager to run the city.

Detroit has an annual budget of about $3.1 billion but long-term debt in excess of $12 billion. In 2010, it had a total long-term debt-to-net-asset ratio of 32.64 to 1, according to the review team.

(Reporting by James B. Kelleher; Editing by Peter Bohan and Cynthia Osterman)