Finance

State Panel Declares Financial Emergency in Detroit

The decision brings Michigan's largest city one step closer to a state takeover.
by | February 19, 2013
Detroit ended the 2012 fiscal year with a $327 million deficit. (Photo: David Kidd)

A Michigan panel has officially declared Detroit in a state of "financial emergency," bringing the financially strapped city one step closer to a state takeover.

The declaration was made Tuesday by the state's six-member Financial Review Team, which in December was tasked with examining the city's finances.

State Treasurer Andy Dillon, a member of the panel and whose office oversees state supervision of struggling cities, said Detroit hasn't enacted significant reforms it needs in order to rectify its finances.

"The team collectively believes the city needs assistance in making the difficult decisions necessary to achieve the significant reforms that are so crucial to the city's long-term viability," Dillon said in a statement.

Under state law, Gov. Rick Snyder now has 30 days to review the panel's report and decide whether the city is, indeed, in a state of financial emergency.

The review team noted that the city's general fund hasn't ended the year with a positive fund balance since the 2004 fiscal year, and at the close of the 2012 fiscal year, it had a deficit of $327 million.

As of June 30, 2013, the city's long-term liabilities -- including pension obligations and other post-employment benefits -- exceeded $14 billion, according to the team. It argues that the city faces a major challenge in addressing those costs, since the city charter makes changing future retirement benefits a cumbersome process.

The state -- which has a complicated history with emergency manager powers -- is operating under Public Act 72, an old version of its emergency manager law, which gives the state broad powers to intervene in struggling cities.

A new version of law approved by the legislature last year takes effect March 28.

Under PA 72, if Snyder does concur with the panel and determined that a financial emergency exists, the city will then have one last chance at changing his mind. If it doesn't, Snyder would be able to appoint an emergency financial manager who would have far-reaching powers in Detroit, including the ability to adjust its budget, revise its debt payments and renegotiate labor contracts.

Detroit leaders -- and indeed, many leaders in Michigan's financially distressed cities -- say the state government has exacerbated the financial challenges of localities by reducing their portion of state revenue sharing.

Detroit entered its consent agreement with Michigan last spring, in which the state had broad review powers over the city's finances. That move was an effort by the city to fend off the the threat of an emergency manager at the time.

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