Detroit nears deal to avert bankruptcy, but is it a state takeover?

Both city and state officials say they are close to an agreement that could force extensive restructuring of city finances, as Detroit faces a $200 million deficit and bankruptcy by May.

With Detroit now formally in a state of "severe financial emergency," city and state officials are grappling with the terms of an agreement to resolve the crisis, which both sides say they expect to be signed by week's end.

So far, Michigan state officials are avoiding talk of a takeover – a toxic term in a majority black city whose elected officials are opposing the appointment of an emergency manager. Detroit officials are calling for more financial support from the state.

While Michigan Gov. Rick Snyder (R) says he wants to avoid assigning an emergency manager to control the city's finances, the agreement being worked out between the city council and the state treasurer's office is expected to force the most extensive financial restructuring ever experienced by Detroit, or any other US city its size.

An agreement to solve Detroit’s economic crisis is “two or three additional paragraphs” away from being signed this week, he said at a press briefing on Monday.

The prospect of an emergency manager assigned to Detroit has loomed over the city since late December, when the governor appointed a commission to assess the city’s financial situation and recommend next steps. On Monday the commission declared Detroit to be in a “severe financial emergency,” compounded by reports that the city’s budget deficit had reached $200 million and a forecast it will run out of cash by late May. Both factors led Moody’s Investors Service to issue two separate downgrades of the city’s bond rating last week.

Governor Snyder now has 10 days to deliver a "consent agreement," according to a new law that allows the state to take financial control of any municipality facing bankruptcy. Since the law passed in March 2011, Michigan has placed four cities and two school districts under emergency management.

The law allows the state to break collective bargaining agreements, privatize city assets, fire local officials, and force a restructuring to keep basic city services flowing.

“It’s a big experiment,” says Vincent Hutchings, a political scientist at the University of Michigan in Ann Arbor. “Detroit is a high-profile city with a lot of issues.”

In a press conference Monday, Snyder described discussions with Detroit officials to date as “encouraging” and added that the city had been saddled in the past by plans that were not enforceable or accountable.

“How many plans have there been for the city? The challenge isn’t any more plans. It’s getting stuff done,” he said.

Meanwhile, in a statement released late Monday, Deputy Mayor Kirk Lewis and Detroit City Council President Charles Pugh described the eventual document as “a financial stability agreement” meant “to restore Detroit fiscally and preserve the democratic process.” They said it is likely to be signed by week’s end.

Still, city officials oppose referring to the final deal as a "consent agreement," which can lead to an emergency manager. The city wants to retain power to approve budgets but will hire a chief financial officer who will report to the mayor, said Deputy Mayor Lewis on Tuesday. The city also wants the state to lend Detroit money – a move that Snyder has refused in the past. 

“I’m not going to say we don’t have a deal unless there’s money, but we all have to come to an understanding that there needs to be money to make this plan work … turnarounds don’t happen without resources,” Lewis said. A state takeover would be "toxic," he added.

It's a concern that the governor says he shares. “My role is not to run the city of Detroit … my goal is not to have an emergency manager of Detroit. My goal is to have the state provide a supporting resource to be a partner with the city in helping it achieve success,” he said on Monday. 

Both sides appear to agree that a financial advisory board will be established to approve budgets and enforce deadlines. Any agreement signed between the city and state will carry the threat of an emergency manager, if certain guidelines are not met. Snyder said he expects to add “probably two or three additional paragraphs” so that whatever document the city provides “will also qualify as a consent agreement,” although it may not be officially declared as such. 

Avoiding specifics on who ultimately will control the city’s finances is likely to prevent inflaming racial passions in the city, which, unlike the rest of Michigan, is dominated by a majority black population, says Mr. Hutchings. Party divisions are another flashpoint: The Democratic Party is entrenched in city politics, while the Republicans control the state.

“No local city likes to cede control,” he adds. “The situation is fraught with multiple difficulties, which is probably why the governor is reluctant to impose control."

Meanwhile, many Detroit residents are protesting the possibility of the state playing a larger role in management of their city. An open meeting of the state commission was nearly shut down Monday by protesters who shouted, sang, and angrily denounced the state officials for what they see as trying to intervene with the democratic process. One activist filed a request with the Michigan Supreme Court for an emergency injunction to stop Snyder’s team from moving forward.

Adding to the drama is the weekend hospitalization of Detroit Mayor Dave Bing, who remains bedridden.