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Motown is singing the fiscal blues.
Detroit Mayor Dave Bing announced at a press conference Friday afternoon that the city would lay off 400-500 workers over the next few months. The city is struggling to fix its troubled finances and stave off a possible Chapter 9 bankruptcy, even as the mayor and city council clash over how to solve the problem.
If Detroit can't get its financial house in order, it could become the largest U.S. city -- at a population of 700,000 -- to file for bankruptcy protection. Earlier this year, two mid-sized California cities -- Stockton and San Bernardino -- filed for bankruptcy.
“I do understand the frustration with the treasurer and the governor because we are equally frustrated," Bing said, according to MLive.com.
State Treasurer Andy Dillon met with the city’s mayor and council this week. He is expected to order a preliminary review of the city’s finances next week, a step that could lead to having a state-appointed manager take over the city’s finances.
“If they want to move forward with an emergency financial manager — I don't agree with it — but that's not my decision. I don't think it's the appropriate decision,” Bing said.
“The treasurer has indicated it’s likely [a preliminary review] would start next week,” spokesman Terry Stanton said, saying there were “growing concerns” about Detroit’s economic situation. “Clearly, there’s a cash burn problem in the city.”
“At this point, it doesn't appear to me that a Chapter 9 filing will occur anytime in the near future,” said George B. South III, a partner at law firm DLA Piper. (South is representing a creditor of the city.) “Municipalities, in general, will file as a last resort. My sense is it wouldn't be an overnight decision.”
The likely forthcoming preliminary review would take up to 30 days. Depending on what it finds, this could be followed up by a more extensive, 60-day review, although the governor’s office has the ability to expedite or extend that time frame. If the city’s finances are in dire straits, an emergency financial manager could be appointed, who would have the ability to take the city through Chapter 9 if other turnaround measures fail.
Local media reports about the city’s financial troubles address the prospect of bankruptcy with an air of inevitability. At the beginning of the year, Dillon told WXYZ Action News that his department’s report showed the city had more than $12.3 billion in bond debt, but that a top state judge estimated the amount would be closer to $17 billion once interest was added. Watchdog group Citizens Research Council said the city had more than $14 billion in liabilities as of mid-2010, not including interest.
Local officials have been working with the state on a restructuring intended to stave off the need to declare bankruptcy. “The mayor’s position is that it’s not going to happen,” said Anthony Neely, the mayor’s press secretary.
Last month, though, Bing said the city might need to furlough workers and engage in “other cost-saving actions” starting in January.
“Due to the failure to meet the first milestone in our agreement with the State — and with the second milestone now at risk — I have directed my Administration to begin planning to offset an anticipated $30 million cash shortfall,” he said in a statement. This money is being held in escrow by the state and was to be released to Detroit provided the city meets certain conditions in its restructuring.
Last week, ratings agency Moody’s cut the city’s rating on several of its bonds and revised its outlook to negative. “These downgrades reflect the city's ongoing precariously narrow cash position and a weakened state oversight framework,” it said in a statement. “The negative outlook... is based on the rising possibility that the city could file for bankruptcy or default on an obligation over the next 12 to 24 months.”
The ratings agency also cited “the city's ongoing inability to implement reforms necessary to regain financial stability.” Last month, voters rejected legislation that would have given the state wider latitude to intervene in financial crises faced by municipalities or school districts and keep them out of bankruptcy.
“The chances of being able to write the ship there are significantly less, which means bankruptcy has to be more likely now,” said Patrick White, a partner in the law firm of Varnum LLP in Grand Rapids.
But it still isn’t inevitable. State lawmakers are using their lame-duck session to craft legislation that might give the state additional ability to intervene prior to a bankruptcy filing, and local media reported this week that a petition calling for the recall of Mayor Bing is being circulated.
“It’s a very fluid situation,” White said.