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Treasurer Optimistic Despite Detroit Emergency

FEB 19, 2013 5:29pm ET
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CHICAGO — Hours after a state review team found a financial emergency in Detroit, state Treasurer Andy Dillon said he believes the city can be restructured successfully without bankruptcy.

Dillon said the city's long-term liabilities, estimated at around nearly $15 billion, pose the biggest threats to the city's future. The problem rests largely with the unfunded retiree health care liability — nearly $6 billion — and pension debt, rather than with revenue and general obligation bonds, Dillon said. "The city's funded debt, at $2.5 billion is manageable," Dillon said Tuesday afternoon at a press conference announcing the review team's report. "It comes down to the unfunded liability for health care and how unfunded the pension funds are — those are significant strains on the city," he said. "But I think we can navigate our way through this and avoid a [Chapter] 9."

Under the state's new emergency manager law, which takes effect in March, an EM can unilaterally amend or terminate labor contracts.

The review team's report on the Motor City's chronic cash shortfalls and general fund deficits was not new, though it featured a new emphasis on the current city charter as a significant obstacle to progress.

"We put a lot of time into a 200-page charter document, and whether it would not in fact be an impediment to a restructuring," Dillon said. "It would be very difficult to restructure the city and adhere to all the requirements of the charter."

The report found an ongoing cash flow shortfall that is on track to reach $100 million by the end of the fiscal year and that the city has had a general fund deficit every year since 2005.

Dillon said the city masked many of its deficits with long-term borrowings, and that without the bond issues, the general fund deficit would now be at $937 million instead of $327 million.

Gov. Rick Snyder, who appointed the six-member team in mid-December, asked it to take a close look at the city's long-term liabilities, estimated at around $14.9 billion. The report breaks down the debt, which includes $6.1 billion of non-general obligation bonds — much of which is revenue bonds payable by water and sewer fees — and $5.7 billion of other post-employment benefits liability. Pension certificates of participation account for $1.4 billion of debt. General obligation bonds total $963 million. The general retirement system unfunded liability is $640 million, according to the review team report.

Detroit has operated under a consent agreement with the state since April 2012, the last time the state found a financial emergency in the city. Dillon said the consent agreement has not been able to solve enough problems, though the city has made progress during the past year.

"This may be an appropriate evolution. We did try a consent agreement, and now we know where the weaknesses are," Dillon said.

Like other members of the review team, Dillon said he hoped for a partnership with the city.

"It doesn't have to be adversarial," he said. "A lot of the ingredients for the turnaround in the city are in place. I believe strongly Detroit is fixable and will see brighter days ahead."

Snyder now has 30 days to review the report and decide whether to appoint an emergency manager or take an alternative route, such as crafting a new consent agreement. If he opts to appoint an emergency manager, the city has 10 days to appeal the decision.

Dillon said the six-member team's finding of a financial emergency was unanimous.

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