Detroit

A state takeover of Detroit, once Americas third-largest city, looks likely

Feb 23rd 2013 | CHICAGO |

Hobbled by the past THE city of Detroit has been in financial difficulty for so long that it has become almost an article of faith on the streets that, somehow, it will manage. But on February 19th it became highly unlikely that it will be allowed to muddle on for much longer. A state review team concluded that there was a localgovernment financial emergency in Detroit and no way of resolving the situation. The governor of Michigan, Rick Snyder, has 30 days to respond, but most people think he will take far less time than this to appoint an emergency manager. A looser power-sharing agreement between the city and the state has already been tried over the past year and has, clearly, failed. The authority of elected officials, including the mayor and the city council, will be suspended and the manager will assume control of public contracts, city assets, staff, pay and benefits. Reports suggest that Mr Snyder already has a shortlist of candidates for the job.

The figures are spectacularly bad. The citys general fund has not been in the black at year-end
since fiscal 2004, and has instead been relying on debt to pay for day-to-day operations. Had this not happened, the deficit would have been $937m in 2012. Long-term liabilities, including unfunded pension obligations and other post-employment benefits, notably health care, are around $14 billion. The citys annual revenues have been between only $2.3 billion and $2.6 billion over the past three years. Detroit will also face a cash-flow deficit of more than $100m by June unless it makes big spending cuts. Imposing an emergency manager is a big step. The legislation allowing such power has been likened to a dictator law, as it gives one unelected official almost total authority. Even tougher legislation, that allows state-imposed managers to fire a citys elected officials and break union contracts to save money, is due to come into force in Michigan next month. Detroits financial problems have been building up for decades. The citys revenues were hit by the collapse of manufacturing, declining property values and the flight of rich people to the suburbs. At the same time, the cost of servicing a still-sprawling city has not shrunk in proportion. Like many of Americas struggling municipalities, Detroit is paying pensions, entitlements and salaries far above what it can afford. Yet amid all this, in parts of the city the story in recent times is of rebirth and investment. Whole Foods, a posh food shop, is even building a supermarket. Sandy Baruah, head of the Detroit Regional Chamber, a business group, says an emergency manager is both expected and welcomed and that the final barrier to Detroits renaissance is fiscal stability. He adds that the manager will be able to make the quick and difficult decisions that have eluded city government. Nonetheless, an appointment could clearly increase political and racial tensions between the city and the state. Detroit is mostly black, with Democratic leadership, while the state is largely white with Republican leadership, including Mr Snyder. Other jurisdictions in Michigan with high proportions of blacks, such as Benton Harbour, Ecorse, Flint and Pontiac, have also been forced to bring in emergency managers. The appointment might also bring the city a step closer to going bust (though the review team said this week that this could still be avoided). Few relish such a prospect; it would be the largest municipal bankruptcy in American history.