CHICAGO — Michigan Gov. Rick Snyder on Thursday hailed the consent decree approved a day earlier by the Detroit City Council, saying it would put the city on the path to fiscal stability after decades of struggle.
“I believe it is historic,” Snyder said at a news conference Thursday with state Treasurer Andy Dillon.
The consent decree staves off an outright state takeover of the city while handing oversight of most fiscal matters to an advisory board. The agreement — approved by the council late Wednesday in a 5-to-4 vote — brings to a close the state review process launched last November, though most agreed the toughest work for the city lies ahead.
Detroit’s liquidity and budget crisis prompted Snyder last November to order a preliminary review of city finances under a law that can lead to state intervention, including appointment of an emergency manager.
A month later, a preliminary analysis by Dillon’s office found that a full-blown report was warranted and a state team was named to conduct the review. With the city grappling with $12 billion in long-term debt and pension obligations, the review team recently declared Detroit to be under severe financial stress.
The council faced a Thursday deadline to act on the latest version of a consent decree, based in part on Detroit’s own plan to deal with $270 million of red ink, or risk a declaration from Snyder that could have led to appointment of an emergency manager with sweeping powers over the city.
“The mayor and his administration worked with the City Council and the state to develop a consent agreement that we believe puts us on track to restructure our city financially and re-establish an infrastructure to make sure Detroit never faces these financial conditions again,” deputy mayor Kirk Lewis said in a written statement. “This agreement also ensures that the future of Detroit is determined by Detroiters and its elected officials.”
Snyder said the focus now shifts to filling the nine positions on the advisory board and the positions of city chief financial officer and program manager under terms of the agreement.
“We are already starting to look at potential candidates,” Snyder said, adding that members would chosen based on their financial background and credentials and knowledge of municipal finance and fiscal stress.
The Republican governor sought to ease concerns that the new advisory board would usurp Detroit elected officials, saying its role is “primarily financial” and “not to serve as another City Council.”
Snyder chooses three appointments to the board, Dillon picks one, Mayor Dave Bing chooses two, and the council gets two. A ninth member is to be chosen by the mayor and governor with the council’s approval.
The new CFO would report to Bing, and a new program-management director who would oversee fiscal reforms laid out in the agreement also would report to the mayor.
Detroit must set three-year spending plans as opposed to one-year budgets. The mayor would still propose the budget but the state treasurer would have final say.
The agreement calls for the city to form a revenue-estimate conference, much like the state, to set spending limits, and to adjust spending midyear if revenue forecasts are off. The agreement also calls for the city to eliminate its deficit within five years.
Should the city default on terms of the plan as determined by the advisory board, the state is permitted to withhold revenue-sharing payments and other aid. A court order could be sought to enforce compliance or the city could be placed into receivership and an emergency manager appointed.
The first version of an agreement went to the city in early March, but Bing rejected it.
A revised version was also rejected. One of the more politically charged terms of the pact is the requirement that the city nullify recently negotiated union contracts and negotiate new ones by July 16 with even steeper concessions.
Another term of the plan calls for the state treasury to assist the city with refinancing $137 million of debt. Of that, $33 million would refinance existing debt, and $104 million would be placed in escrow and used to pay for the reform program and city operating expenses.
Shut out of the public market by its junk-bond ratings and nearly out of cash, Detroit recently closed an $80 million private placement that pushes off an upcoming debt-service payment. The Michigan Finance Authority acted as conduit. The $137 million issue in the works would go in part to pay off the private placement.
City employee unions were among the staunchest critics of the consent decree terms and have mounted a legal battle to halt its advancement.
On Wednesday, a federal judge in Detroit denied their request to block implementation of the agreement. The unions had, however, won victories in several rulings by the state courts that affected the Michigan review panel’s actions.
Both Fitch Ratings and Moody’s Investors Service recently pushed the city’s ratings deeper into junk territory. The action triggered a termination event on interest rate swaps that hedge $800 million of debt, raising the possibility that Detroit would have to pay $350 million to the swap counterparties.
The city is in negotiations with firms in the swap contracts in an attempt to stave off a demand for payment. Dillon said at the news conference Thursday that his office “has been assisting” in those discussions.
The state review was launched under the Local Government and School District Financial Accountability Act signed into law by Snyder last year.
