CHICAGO — Detroit’s stressed fiscal situation warrants a full-blown state review, Michigan’s treasurer said Wednesday in a preliminary analysis of city finances ordered by Gov. Rick Snyder.
The preliminary review was ordered by Snyder earlier this month, launching the process that under Michigan law can lead to state intervention, including the appointment of an emergency manager.
Treasurer Andy Dillon’s office started its review on Dec. 6 and completed it well ahead of the 30-day deadline.
The report lays out in stark terms the fiscal pressures battering Detroit, including a massive debt load and cash-flow crisis.
The fiscal strains and city leaders’ failure to solve them resulted in Dillon’s finding of “probable fiscal stress,” prompting the next step, which is the appointment of a financial review team.
Snyder will appoint the team, which would then have 60 days to complete its report under the Local Government and School District Financial Accountability Act signed into law by Snyder this year. It eases the path to state oversight of fiscally troubled local governments and gives emergency managers greater powers.
The review team can settle on a range of findings. It can conclude that Detroit is not in financial stress, is in a condition of mild financial stress, or is in a condition of severe financial stress but the issues can be resolved with a consent agreement.
It could also find that a condition of severe financial stress exists without a consent agreement reached or find that a financial emergency exists and there is no satisfactory plan to resolve it. The state could then appoint an emergency manager.
Dillon said Detroit still has time to take action and he is hopeful it can avoid a state intervention as the review process proceeds.
Dillon said he met Wednesday with the governor and Mayor Dave Bing. “We continue to implore the mayor and City Council to come together on the development of a workable recovery plan,” Dillon said.
“While it appears some progress is being made by the city, the review process must continue, given the city’s financial condition and the distinct possibility that it may run out of cash in early 2012,” he said. “As we have noted on numerous occasions, the longer it takes to address Detroit’s financial problems, the more painful the potential solutions become.”
Bing issued a statement saying that the city would cooperate with the review but that he is confident it can solve its problems.
“I firmly believe that the remedy to the city’s financial crisis is my plan that seeks savings of $102 million for this fiscal year and $258 million in fiscal year 2012-13,” the mayor said. Bing is seeking union concessions to lower expenses.
Factors behind the treasurer’s probable stress finding included the city’s violation of state budgeting and accounting rules by failing to adjust its budget on a timely basis; its inability to avoid fund deficits; an improper reliance on inter-fund and other borrowing to deal with cash-flow strains; and a failure to file adequate or approved deficit elimination plan for the fiscal year ending June 30, 2010.
Detroit also has relied on unrealistic plans to balance its budgets, including restructurings, consolidations and union concessions that failed to materialize, the report said.
The city faces a rising debt load, with total long-term liabilities estimated at more than $12 billion. It has failed to address its unfunded non-pension other post-employment benefits liabilities and has struggled to make required payments to its pension plans.
“The city has a mounting debt problem,” the report said. In 2010, annual debt service requirements exceeded $597 million and as of June long-term debt stood at more than $8 billion.
When Detroit’s pension-related liabilities are added, the total rises to more than $12 billion.
The city’s unfunded actuarial pension obligations are $615 million, but that figure is offset by assets of $1.4 billion, and unfunded other post-employment benefit liabilities are $4.9 billion.
The city also is experiencing significant cash-flow problems, with a projection that it could run short starting in April. Officials anticipate ending the fiscal year next June with a shortage of $44 million.
Other highlights of the report underscoring Detroit’s stress include new data estimates that the general fund’s deficit has increased to $196 million for 2011.
“City officials are either incapable or unwilling to manage” city finances, the report read. Detroit operates on a roughly $3 billion annual budget.
The report also cites the threat swap termination payments would pose should a termination event occur, such as appointment of an emergency manager. The city could be forced to pay between $280 million to $400 million. The report cited city auditors as saying Detroit would be hard-pressed to come up with the cash.
Detroit recently came to market with nearly $500 million of senior-lien water revenue bonds, with about half the proceeds going to unwind a portion of its swaps. The treasurer’s report notes that the notional amount on the city’s swaps was more than $3.8 billion, with a market value of $560 million.
The report also noted Detroit’s low general obligation ratings. All three major rating agencies put the GOs at junk levels.
Detroit has $453 million of unlimited-tax GO debt and $486 million of limited-tax GO bonds.