Detroit Budget Crisis May Lead to Outside Manager

Then came the revelation that Detroit is poised to run out of money by April and fall deep into debt by June. Now a place that had seemed to be finding its balance is reeling once more.

A formal state review of Detroit’s books — a step that could lead to the appointment of an outside emergency manager to take over the city’s finances — was announced this week. City leaders are conducting urgent meetings with labor union leaders and financial consultants in a race to cut costs and head off further intervention.

The possibility that an outside manager could come in — one who would have broader than ever powers under a rewritten state law — has stirred new concerns among financial ratings agencies and business leaders who have fresh investments in the city. City government, meanwhile, is finding itself forced to re-examine services it provides — including buses, health care and street lighting — and shed what it can no longer afford.

The crisis could not have come at a worse time.

“This state is starting to come back, the economy is starting to come back, and as long as you are out there promoting all this negativity, it’s no good for any of us,” Mayor Dave Bing said in an interview. “You don’t need Detroit against the state.”

Still, Mr. Bing, a former basketball star who built an auto-parts manufacturing company, says he also knows the risks — symbolically, financially and politically — if a city of this size reaches a point where it cannot pay debts.

“If Detroit would ever go into default, it would kill the state,” he said, quickly adding that he did not think the situation would come to that.

Already, though, Detroit is the only major American city with credit that sits beneath investment grade, experts say. With 11,000 city employees and 139 square miles of increasingly vacant land to tend to, it has struggled, year by year, deficit by deficit, to pay its bills. Once the nation’s fourth-largest city, it has seen its population drop since a high of 1.8 million in 1950 to a low last year of 714,000.

In the eyes of some leaders, this financial crisis, despite the recent positive signs from the private sector, was decades in the making: the city never shrank its operations enough to match a shrinking tax base, and it delayed its woes with borrowing, exaggerated revenue estimates and accounting shifts.

This fall, Mr. Bing warned that Detroit would run out of cash without major cuts, particularly layoffs and deep salary reductions.

Within days of Mr. Bing’s announcement, state officials said they were starting a preliminary review of the city’s finances, which concluded this week with the announcement of a deeper state look at the books and an alarming snapshot of Detroit: more than $12 billion in long-term debt, an estimated general fund deficit of $196 million and no sufficient plan for dealing with the shortfall.

The state’s moves have set off an uproar. Under Michigan law, a formal review must precede a state finding that a city’s financial circumstances are so dire as to require an outside manager to take over — and many here view that as the state’s ultimate intent. Mr. Bing, a Democrat, and even groups he has sparred with — the City Council and leaders of the city’s 48 unions, whose contracts are the target of much of the cuts — have pushed back, as have residents. The refrain: Detroiters can take care of Detroit just fine, thanks.

For Gov. Rick Snyder, a Republican and businessman elected in the wave of Republican statehouse victories in 2010, Detroit’s crisis comes at a complicated moment. Earlier this year, Mr. Snyder and the Republican-dominated Legislature passed a law adding vast powers to the emergency managers sent to troubled Michigan cities, including the ability to throw out union contracts.

Critics said the law was an attack on democratic principles and an assault on labor unions. A lawsuit is pending. A campaign to repeal the law is under way, raising the possibility that the current emergency manager law could be suspended until the vote — even as the state’s most significant city may be on the verge of being assigned one.

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