Report: Yeah, Detroit Might Be Forced To Declare Bankruptcy

Posted: Feb 19, 2013 10:21 PM

What happens when a city government tries to tax, spend, and borrow its way to prosperity? Hint: it goes broke:

A state-appointed review team has determined Detroit is in a financial emergency, paving the way for Republican Gov. Rick Snyder to appoint an emergency manager who would need to come up with a new plan to get the city out of its fiscal crisis.

The team released its findings Tuesday, saying in a report to Snyder that "no satisfactory plan exists to resolve a serious financial problem."

The review team pointed to the city's ongoing cash crisis, which have threatened to leave the city without money to pay its workers or other bills. It noted that the city's deficit could have reached more than $900 million in fiscal year 2012 if the city had not borrowed enormous amounts of money; that Detroit has long-term liabilities, including underfunded pensions, of more than $14 billion; and that the city's bureaucratic structure makes it difficult to solve the financial problems.

"The cash condition has been a strain on the city," said state Treasurer Andy Dillon, a member of the review team. "The city has been running deficits since 2005 ... (and) masking over those with long-term borrowing."

Under Michigan law, Snyder has 30 days to decide for himself whether there's a financial emergency. Mayor Dave Bing would have 10 days to request a hearing. Snyder could then revoke his decision or appoint an emergency manager.

Sure, Governor Snyder has exactly one month to appoint an emergency manager to handle the city’s finances. But declaring bankruptcy might be Detroit’s only option at this point:

However, others said that even with an emergency manager, municipal bankruptcy may be the city's only way out of the financial mess.

"Is it imminent? Well not tomorrow," said Doug Bernstein, managing partner of the Banking, Bankruptcy and Creditors' Rights Practice Group for Michigan-based Plunkett Cooney law firm "You need to give a financial manager the opportunity to formulate a plan and let the plan have a chance to succeed or fail. It may not avoid a bankruptcy, but you don't need to do a bankruptcy today."

Snyder spokeswoman Sara Wurfel said he will review the team's report carefully.

"He won't make a determination immediately, but sooner rather than later," she said. "The governor believes that a strong and successful Detroit is key to Michigan's continued comeback."

Detroit’s systemic budgetary and spending problems should be a wake up call to members of both political parties. But at least Republicans seem to understand that a government that spends more money than it takes in every single year is destined to go bankrupt. Remember: Congressional Republicans actually pass budgets and want to cut federal spending; the same can’t be said about Congressional Democrats.

Syndicated columnist Mark Steyn calls America the Brokest Nation in History and perhaps he’s correct. But I can assure you that if Detroit’s political leaders continue down the reckless fiscal path they’re on, the once thriving metropolis will one day be known for something else: being the Brokest City in America.

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