Experts split on Detroit's fiscal recovery options

February 20, 2013 - 7:31 PM
Detroit Finances

FILE - In this Oct. 24, 2012 file photo, a pedestrian walks in Greektown in downtown Detroit. A state-appointed review team Tuesday, Feb. 19, 2013 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. (AP Photo/Carlos Osorio, File)

DETROIT (AP) — In less than a month, Michigan Gov. Rick Snyder will decide whether the state will take over Detroit's broken finances and send in someone to oversee the city's fiscal recovery.

Regardless of Snyder's decision, the question may not be who can save Detroit, but how can Detroit be saved.

The city's options are limited, with experts split on what may be best: long-term, methodical restructuring with help from the state or cutting the city's losses now through municipal bankruptcy.

Detroit, with a population of about 700,000 residents, would be the largest city to file for Chapter 9 bankruptcy if that path is taken, according to James Spiotto, a municipal bankruptcy expert at the Chicago-based Chapman and Cutler law firm.

"Chapter 9 is meant to be the absolute last resort ... when all else fails and you are no longer capable of working with the state or anyone else to bring about a resolution," Spiotto said. "It would have an adverse effect on the credit market, not only for that municipality, but also for the state."

About 640 Chapter 9 bankruptcies have been filed since Congress enacted a revised Municipal Bankruptcy Act in 1937.

Recent cities that have filed for bankruptcy include San Bernardino, Calif., which took that route in August after learning it had a $46 million deficit. The largest municipal bankruptcy filing in U.S. history involved Jefferson County, Ala., which had more than $4 billion in debt when it filed in 2011. The most populous city in the U.S. to do so was the 290,000-resident Northern California community of Stockton, in June.

Detroit faces more than $14 billion in long-term liabilities, has a near-zero cash flow and a skyrocketing budget deficit that now is listed conservatively at $327 million, according to a state-appointed review team that looked at Detroit's books.

"Rome fell because it went broke, and France faced a national revolution when it went broke," said James McTevia, president of a Michigan-based firm that specializes in turnaround management. "If an emergency financial manager is not appointed immediately, the city should file for bankruptcy at once. The city's debt needs to be restructured."

The review team found that Detroit was in a "financial emergency" and forwarded its report to the governor. Snyder said he would carefully review the team's findings before deciding whether to appoint an emergency manager. If he does, Detroit Mayor Dave Bing would have 10 days to request a hearing.

Bing, who opposes a state takeover, has said that without an influx of money from the state, any emergency manager would face the same frustrations he's endured. Bing also opposes taking the bankruptcy route, but he says his restructuring plan approved last year by the state has been hindered by legal and other roadblocks.

"We have the plan, but we face significant challenges executing it in a timely manner," the mayor said Wednesday. "We are hindered by several factors, including the city charter, labor agreements, litigation, governmental structure, and a scarcity of financial and human resources."

Snyder called a news conference Thursday afternoon in Detroit to discuss the process. The governor's staff said he would not announce any decisions.

Bing, who was elected in 2009, has yet to say whether he will seek re-election.

Tom Barrow, an accountant who ran twice for Detroit's top office, said an emergency manager would usurp Detroit's control over city finances, spending and assets. Barrow, who lost to Bing in 2009, is considering another mayoral run this year.

Bankruptcy would keep the elected mayor and City Council in power, Barrow said.

"This is more about control than restructuring," Barrow said about the emergency manager option. "If we go into a Chapter 9 that will minimize the influence of the state. All of a sudden they become a secondary player.

"Under Chapter 9 the city runs itself, enters into agreements with creditors and bond holders."

Those actions would be overseen by a bankruptcy judge.

The city can pass a resolution for bankruptcy protection on its own, but that would have to be approved by the state and filed by an emergency manager, Barrow added.

Tonya Phillips, who grew up in Detroit and lives on the city's east side, said she is resigned to the idea of some form of outside intervention.

A deal between Bing and Snyder nearly a year ago promised some state resources and expertise if the city met certain milestones and deadlines. The City Council gave its OK to the agreement but was slow in approving some outside professional contracts tied to it.

The state, in turn, initially held millions of dollars in bond money in an escrow account that Detroit needed to meet payroll and pay some other bills.

"I hope the city and the state can come to an agreement that doesn't involve an emergency manager so the Democratic process won't be compromised," said Phillips, an attorney. "If the city cannot achieve it on its own and if the state isn't able to assist in any other kind of way — and the jury is still out on that — I think the city will have to explore (bankruptcy)."