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Detroit Officials Offer $2.5 Billion Budget Under Consent Agreement

APR 12, 2012 8:46pm ET
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CHICAGO — Detroit Mayor Dave Bing's office Wednesday presented a $2.5 billion all-funds fiscal 2013 budget that marks the first step in a rigorous new budget process required under the historic consent agreement the struggling city signed with Michigan last week.

With Bing still recovering from recent surgery, deputy mayor Kirk Lewis and chief operating officer Chris Brown Wednesday unveiled the spending plan to the City Council. They announced $96 million of new cuts they said would help achieve a cash balance of $240 million by the end of 2015. They expect revenues to come in $23 million under current-year projections. The council will hold hearings through May.

The consent decree imposes a slew of new budget requirements on the city, including three-year spending plans, monthly cash-flow reports, and regular revenue estimate conferences. The state has the power to veto the budget — which functions as Detroit's deficit-elimination plan — if it's considered out of line with projected revenues.

"The one primary purpose of the consent agreement was to bring the discipline of very realistic budgeting and realistic revenue projections and to cause that discipline to be imposed," said Michael McGee, an attorney with Miller, Canfield, Paddock and Stone PLC. McGee is special counsel to the city, hired by the mayor's office to draft the consent agreement.

"We're already seeing that with this budget," he said. "It's a realistic, spare budget, and that was the goal."

The consent agreement requires Detroit to craft three-year budgets that are structurally balanced. It requires city and state officials to hold twice-annual revenue estimating conferences. If revenues fall below estimates at any point during the year, the mayor's office is required to submit proposed cuts to the council within 30 days.

Bing's office must also appoint a chief financial officer as well as a so-called program manager, who will oversee the implementation of the consent decree along with a new nine-member financial advisory board. The new positions should be announced within the next 30 to 40 days.

The proposed 2013 all-funds budget totals $2.5 billion, with a $1.2 billion general fund. That compares with a current all-funds budget of $3 billion and a $1.6 billion general fund. But the current-year budget was always in doubt, in part because it relied on revenue-raising proposals that never materialized, so it doesn't make sense to compare the two blueprints, according to Eric Scorsone, an economist with Michigan State University who specializes in municipal finance.

"Last year's budget was completely out of whack with any reality," Scorsone said. "They knew this first one was going to be rough because they had so little time. Are they moving in a first real aggressive direction? Until the details are sorted out, we don't know how real this is."

Specific cuts proposed Wednesday include $32 million to the police budget, $20 million to the fire budget and $10 million to the city Department of Transportation.

Not included in Wednesday's budget proposal but included in the consent decree is a refinancing that will help free up general fund dollars. The consent agreement outlines a $137 million deal that will push off near-term debt service and includes new money to pay for self-insurance claims usually paid out of the general fund.

The city completed the first tranche of that refinancing two weeks ago with an $80 million private placement with Bank of America Merrill Lynch.

"They're still facing a cash crisis," Scorsone said. "The consent agreement is nice, but it didn't fix that problem. You've got to move quickly to cut costs that are going to have an immediate impact on cash flow. That's going to be an interesting debate in the next few weeks."

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