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Detroit’s Bing Targets Deficit With Budget

APR 13, 2010 6:39pm ET
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CHICAGO — Detroit Mayor Dave Bing yesterday unveiled a much-anticipated 2011 budget proposal that relies on a series of relatively modest spending cuts to whittle down the deficit while putting on hold bold initiatives to securitize assets to raise new money.

The $2.9 billion all-funds budget represents a decrease of nearly $850 million from the current $3.67 billion budget. It is the city’s smallest budget since 2006.

The proposed spending plan does not include any general obligation or revenue bond sales. The only recommended borrowing is $46.6 million from the state of Michigan for the sewage system.

The Detroit City Council will now begin to hold hearings on a final budget, which must be approved by the end of the fiscal year on June 30.

Bing’s spending plan cuts to $85 million a deficit that officials had warned was on pace to possibly reach $440 million by the end of fiscal 2011. The administration wiped out a big chunk of what was estimated at the time as a $330 million accumulated deficit with the early March sale of $250 million of fiscal stabilization bonds.

The borrowing allowed Bing to balance the 2011 budget without having to raise millions in new money.

The proposed budget trims general fund spending by $101 million to match declining revenue sources that are expected to total $1.2 billion in 2011, down from $1.3 billion in the current year.

Bing unveiled the budget a week after an independent research group released a major fiscal analysis of the city that warned bankruptcy is a possibility without major structural changes. In his presentation to the City Council yesterday, the mayor said it was “now or never” for the city to regain fiscal stability.

“The recent report by the Citizens Research Council of Michigan paints a very grim picture,” Bing said to council members yesterday. “However, the first option mentioned as a potential solution — that the elected mayor and City Council can implement required changes — is exactly what we must do. It’s the only way out without state intervention or ­bankruptcy.”

Bing told the council that the recent bond sale was a sign the city was changing for the better.

“The successful sale of bonds was one of the first signs that we were beginning to repair our image,” he said. “The response by investors was overwhelming. They placed $500 million in orders for $250 million in bonds, helping us lower the interest rate to save the city $1.1 million on its annual debt service. That vote of confidence from Wall Street was a significant one.”

With negotiations with Detroit’s powerful unions ongoing, the administration said it would trim city jobs to 11,900 from 13,000. No public safety positions will be cut. The budget proposes the city turn over management of the Coleman A. Young Airport to save $500,000 and close the Mistersky Power Plant to save $5 million. Another $45 million will be saved by consolidations in departments and office space and other spending cuts.

The budget eliminates the use of city vehicles for employees and renegotiates a number of city contracts to save $5 million. Bing also said the city would move to a multi-year strategic planning process.

“The financial crisis inherited by this administration is by now familiar to all of us — a $330 million deficit with no plan to reduce it,” he said. “When I say this is a budget that will finally keep us from spending more than we take in, I have the strategy and the data to back it up.”

Bing’s budget abandons proposals that balanced the current-year $3.6 billion budget to lease a trio of city assets to raise roughly $270 million. Former interim mayor Ken Cockrel Jr. and former Mayor Kwame Kilpatrick both endorsed the proposals, which would have securitized revenue streams from the Detroit-Windsor Tunnel, municipal parking, and the Public Lighting Department.

The Bing administration said the initiatives are unlikely to happen in the upcoming fiscal year.

“What we’ve said early on is that we want to be straightforward and honest about where our revenues will be,” the mayor told the council. “The only thing in the short term is to make cuts and do a better job of managing cuts.”

The securitization proposals are highly unrealistic based on the assets’ revenue streams, according to Bettie Buss, senior research associate at the Michigan CRC who wrote “The Fiscal Condition of the City of Detroit.”

“The city of Detroit’s current-year budget was balanced with revenues that were highly unlikely to materialize,” Buss said. “If the check-and-balance system had worked in the city of Detroit, that budget never would have been adopted.”

The only city asset that is likely to generate enough revenue to make it attractive to investors would be the water and sewer system, she said. “If you were looking for one asset that could generate revenue, that’s the big asset.”

The 74-page report warns that, if unchecked, the city’s general fund deficit could reach nearly 25% of general fund revenue, a situation “that is clearly not sustainable.”

The report notes that one of the triggers enabling Michigan to take over a city’s finances is when a general fund deficit totals more than 10% of general fund revenue. That has been the case in Detroit since 2006, Buss said.

“If the state wanted to come in, the deficit percentage in the general fund would allow them to do that,” she said. “It’s pretty clear that the state is not eager to come in.”

That could be due in part to the fact that the city’s chief underlying problem is an economy that has been ravaged by job losses.

“If you can come with a solution to the underlying economy, then the budget issue takes care of itself,” Buss said. “I don’t know that anybody has an answer to that. It’s Detroit, it’s Flint, it’s older industrial cities in which a number of forces have conspired to challenge the economic purpose of that urban area.”

The pressures facing Detroit and other municipalities across the state have prompted the 94-year-old Citizens Research Council of Michigan to prepare its first report on municipal bankruptcy, its fallout, and alternatives. Buss said the report, which will be released within the next week, is an effort to show state policymakers alternatives to bankruptcy.

“Nobody is advocating municipal bankruptcy as a solution to these problems,” she said. “This next report will hopefully draw the attention of state policymakers to the fact that there are other options.”

No Michigan city has ever filed under federal bankruptcy laws. To file, a municipality would need to go through a number of threshold events, and it cannot be placed in bankruptcy involuntarily.

“One of the things that we’ve seen here in Michigan — not just in Detroit but in a number of local units of government that traditionally have been very well run and that now are experiencing fiscal stress — is local officials using words like bankruptcy and insolvency, which expresses their concern and level of anxiety,” Buss said.

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A recent phenomenon is the emergence of bonds with shorter call protection as funding alternatives for municipalities. However, the shorter call protection also dampens the potential upside for investors, which in turn reduces the price they are willing to pay.

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