For Detroit, a Crisis of Bad Decisions and Crossed Fingers
By MONICA DAVEY and MARY WILLIAMS WALSH
Published: March 11, 2013
DETROIT — This city was already sinking under hundreds of millions of
dollars in bills that it could not pay when a municipal auditor brought
in a veteran financial consultant to dig through the books. A seasoned
turnaround man and former actuary with Ford Motor Co., he was stunned by
what he found: an additional $7.2 billion in retiree health costs that
had never been reported, or even tallied up.
Stephen McGee for The New York Times
Cindy Darrah, a Detroit resident since 1967, protesting the emergency manager decision last week.
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“The city must take some drastic steps,” the consultant, John Boyle,
warned the City Council in delivering his report at a public meeting in
2005. Among the options he suggested was filing for bankruptcy.
“I thought all hell would break loose — I thought the flag would finally
be raised,” Mr. Boyle recalled in an interview last week. But his
warning drew little notice. “It was utterly astounding,” he said.
The financial crisis that has made Detroit one of the largest cities ever to face mandatory state oversight
was decades in the making, a trail of missteps, of trimming too little,
too late, of hoping that deep-rooted structural problems would turn out
to be cyclical downturns that might melt away as the economy picked up.
Some factors were out of the city’s control. As auto industry jobs moved
elsewhere over the decades, for example, Detroit lost much of its
affluent tax base. Lower than expected state revenue sharing did not
help, nor did corruption allegations in the administration of Kwame M.
Kilpatrick, a mayor who resigned in 2008 and was convicted on Monday of racketeering and other federal charges.
But recent findings from a state-appointed review team and interviews
with past and present city officials also suggest a city that over the
years was remarkably badly run.
The state review team found in recent months that the city’s main
courthouse had $280 million worth of uncollected fines and fees. No one
could tell the team how many police officers were patrolling the
streets, even though public safety accounted for a little more than half
the budget. The city was borrowing from restricted funds and keeping
unclaimed property that it was required to turn over to the state. In
some city departments, records were “basically stuff written on index
cards,” as one City Council member put it.
“This was bad decisions piled on top of each other,” Gary Brown, the
Detroit City Council president pro tem, said the other day. “It has all
been a strategy of hope. You keep borrowing where every piece of
collateral is already leveraged. You have no bonding capacity — you’re
at junk status. You’re overestimating revenues and not managing the
resources. Now the chickens have come home to roost.”
Once the nation’s fourth-largest city, Detroit had grown up around the
auto industry, booming right along with it in the 1950s. City workers
gained ground with pay increases intended to keep pace with those the
United Auto Workers won for its members, analysts said.
“It was easy to do so back in the 1950s,” said Joseph L. Harris,
Detroit’s former auditor general. “The city had 1.8 million residents
then.”
But as auto jobs moved elsewhere and the region aged, Detroit’s labor
costs — retiree health care costs, especially — ballooned.
At the same time, officials papered over growing deficits with more
borrowing. Finally Detroit’s legal debt limit, which is linked to the
total value of real estate in the city, fell when the mortgage bubble
burst and property values plunged. Today the city says its debt limit is
$1 billion, and it has effectively lost its ability to issue debt in
the name of its taxpayers.
When a city cannot borrow, it cannot function; New York City showed that
in 1975, Cleveland in 1978. But even as Detroit has approached the
critical limit, some city leaders have seemed unaware, quarreling over
smaller, symbolic issues like whether to lease a city-owned park to the
state.
“It is peeling an onion,” Mayor Dave Bing said of his growing
understanding after he took office in 2009 of the depths of the city’s
financial woes. “You dig and you dig and you dig, and you really start
to find out how bad the problem was. “
Mr. Bing knew plenty about the city’s struggles before taking office and
ran on a platform of reversing the spiraling finances. Still, within
his first six months in office, the city came close to not making
payroll.
“That’s a scary moment,” he recalled in an interview. “You’ve got people
living from paycheck to paycheck, week to week, and you’re about to run
out of cash. You can only imagine what kind of impact that that’s going
to have just on the life of the average person.”
The big structural imbalance was hard to see building up, because until
2008, when a new accounting rule took effect, cities like Detroit were
not required to keep track of their workers’ lifelong health care bills.
That is why Mr. Boyle found a $7.2 billion promise that no one knew
about. Detroit’s general-obligation debt to its bondholders, by
contrast, was a little less than $1 billion that year, safely within the
city’s legal debt limit, then $1.4 billion.
But while the numbers are particularly grim here, the basic story line
is hardly unique. The same path, long and slow, can be found from
Providence, R.I., to Stockton, Calif.
To preserve cash, the city resorted to increasing its workers’ future
pensions at contract time, instead of raising their pay. That helped
balance the immediate budgets, but set up a time bomb sure to explode as
more workers retired.
The cost of the retirees’ pensions also grew because of an
inflation-protection feature that compounds every year. Detroit cannot
renege on paying the benefits, at least outside of bankruptcy, because
the State Constitution makes it unlawful to reduce pensions after public
workers earn them.
By the 2000s, Detroit was borrowing to solve budget shortfalls.
Meanwhile, property tax revenues fell, not just because of departing
residents, but also as values fell and some people quit paying. The city
has reported collecting 84 percent of property tax levied, but a Detroit News analysis suggests a collection rate closer to half of property owners.
In recent years, city officials have made deep cuts in staff and
operations, leaving residents complaining of darkened streetlights, slow
police response times and bus delays. But while cutting workers can
help reduce the current year’s costs, it moves many of those people into
the ranks of retirees, putting heavy long-term pressure on Detroit’s
two public pension funds.
By late 2011, a sense of crisis descended on Detroit. In November, Mayor
Bing, a Democrat, addressed the city on live television, warning that
Detroit would run out of money without concessions from unions, layoffs
and privatization. A month later, Gov. Rick Snyder, a Republican, called for a review of Detroit’s finances, a first step in cases where the state is preparing to send an emergency financial manager.
City officials held off further intervention by committing to a legal
agreement with the state in 2012 that laid out measures to save money.
By fall, a board overseeing the agreement said progress was moving too
slowly. While City Council members are contesting the matter during a
hearing in Lansing on Tuesday, Mr. Snyder’s administration is preparing
to name an emergency manager within days. Mr. Bing says his
administration has drawn up a plan to spare the city, though he acknowledges that it has yet to be fully put into effect.
Under Michigan law, the emergency manager would ultimately have the
authority to remove local elected officials from most financial decision
making, change labor contracts, close or privatize departments, and
even recommend that Detroit enter bankruptcy proceedings, a possibility
that experts say raises the prospect of the largest municipal bankruptcy
in the nation’s history, at $14 billion worth of long-term obligations.
None of the decisions, experts here say, will be simple, and some wonder
whether Detroit can be saved at all. Some 700,000 residents now live in
this vast 139-square-mile city that once was home to nearly two million
people. That number may fall to close to 600,000 by 2030 before the
population begins to rise again, one regional planning group
projects. By pushing costs into the future while its population is
shrinking, Detroit has left the people least able to pay with the
biggest share of its bills.
“Detroit is a microcosm of what’s going on in America, except America can still print money and borrow,” Mr. Boyle said.
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