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Debt-laden Detroit makes one last bid to avert fiscal takeover by state

Detroit officials on Tuesday argued against handing over fiscal control of the city to a state-appointed emergency manager, citing an agreement already in place to repair city finances. Governor's final decision on next step is expected this week. 

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"The existing plan has not proceeded as quickly as one would like,” Mr. Corley said, because of legal challenges from members of the City Council and others to block the consent agreement, “lack of resources at the leadership management staffing level and challenges with employee morale,” and “the need for the City Council to conduct its due diligence in reviewing the contracts and proposals.”

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“To address the city’s financial crisis, it would take a full two years for the plan to be implemented. In just eight to 10 months, the state is taking the city down to a different path,” he said.

Detroit's financial analysts also warned that state appointment of an emergency financial manager would bring lawsuits from local unions that do business with the city, among other stakeholders. Under Michigan law, an emergency financial manager has the power to sever or alter union contracts, sell off city assets, and consolidate departments and services.

Representing the state review team, Fred Headen, a state Treasury Department legal adviser, said Detroit did not act on certain reforms for five months after the consent agreement was signed, and only then under intense state pressure. “Barely had the ink dried upon the consent agreement that city officials challenged it in court,” he said. That action led the review team to conclude that the city had no plan for dealing with $1.9 billion in debt payments it faces over the next five years. 

“There appeared to be a lack of urgency by city officials to deal with the cash crisis. Those activities – most if not all of them – would not have occurred if the review team was not hanging over the head of city officials like the sword of Damocles,” Mr. Headen said.

The review team, he added, has “little confidence that Detroit officials could or would abide by the terms of the second consent agreement [because] they did not abide by the terms of the first consent agreement.”

Detroit's arguments failed to impress many observers on Tuesday. Its argument that the city needs more time was “irrelevant” to the purpose of the hearing, which was to address the review team’s recommendation for an emergency financial manager, says Eric Scorsone, an economics professor at Michigan State University in East Lansing.

Mr. Scorsone, who attended hearing, says one reason the City Council maintains that it needs more time is that it decided to mount a costly legal challenge last summer to fight the consent agreement. A county judge ultimately rejected the effort.

“They made a decent case [at the hearing], but the reality is they didn’t show they were very effective. The fact is, what happened over the last eight months supports the conclusion that there have been a lot of delays,” Scorsone says. “The city doesn’t have a great case.”

Mary MacDowell, the Treasury Department official presiding over the hearing, said she will report her findings to Snyder. If he appoints an emergency financial manager later this week, the city is allowed to appeal his decision to a circuit court.

The Detroit Free Press reported Monday that Kevyn Orr, a partner in a Washington law firm and a University of Michigan graduate, is Snyder’s top pick as Detroit’s emergency financial manager. Snyder told reporters earlier this month he had a candidate in mind for the position but would not reveal a name. Mr. Orr is a restructuring specialist who represented Chrysler during its 2009 bankruptcy.

On the same day the Free Press ran its story, Bing announced that the city is hiring Orr’s law firm as restructuring counsel. In his statement, he did not mention Orr by name, but said “the experience” of his firm “will be a valuable asset as we proceed with our plan for restructuring.” 

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