CHICAGO — Detroit officials told Michigan officials Tuesday that Gov. Rick Snyder is acting too quickly to take over the city and that city officials already have a plan in place to address its financial crisis.
City officials also warned that the appointment of an emergency manager would trigger termination events on interest-rate swap and an avalanche of litigation that would stall the city's progress toward stability.
"We have a deal on the table, and we say keep the current deal in place," David Whitaker, director of the city council's research and analysis division, said, referring to the consent agreement with the state that the city is currently operating under. "In my neighborhood, where we grew up, we were taught a deal's a deal."
Whitaker and other Detroit City Council representatives made the comments during a hearing in Lansing appealing Snyder's recent decision that the city is in a financial emergency. The decision paves the way for Snyder to appoint an emergency financial manager to take over the city.
Tuesday's hearing was part of the formal appeal process. The Detroit city council voted last week to pursue the appeal. Mayor Dave Bing said last week he would not fight the state.
The city was represented by its corporation counsel and fiscal analysts in its arguments before chief deputy treasurer Mary Macdowell, who acted as the hearing officer.
Frederick Headen, the treasurer's legal advisor and a member of the state team that investigated Detroit's finances and found a financial emergency, represented the state's position.
Each side had a half an hour to present its argument about whether the state review team's report's findings were "supported by competent material and substantial evidence."
Irvin Corley, the head of the council's fiscal analysis division, said the state was abandoning the 10-month-old consent agreement too quickly, and that it would take at least two years for the plan to stabilize the city.
"The existing satisfactory plan has not proceeded as quickly as one would like, but there are reasons for that," Corley said, citing the voter overturn of the former emergency management law last November, several lawsuits that slowed progress, lack of staffing resources, low morale, and the time it takes for due diligence.
"It will take up to a full two years for such a plan to be implemented, but after only eight to 10 months the state is taking the city down a different path to appointment of an emergency financial manager."
In addition to the consent agreement, the city's plan to address its fiscal crisis includes a so-called milestone agreement with the state that outlines a series of short-term goals as well as a cash plan crafted by the council and the mayor. Corley said the cash plan would eliminate a projected $114 million deficit by the end of the fiscal year and lead to a $6.5 million surplus.
Corley also argued that the review team's finding that the city's long-term liability totals $14.9 billion "exaggerates" the debt.
About half of the debt is due to water and sewer bonds, which are backed by specific revenue streams "with no impact on the general fund," Corley said.
He said the city has roughly $1 billion of general obligation bonds, half of which are supported by a debt-service millage. "It's important to note that the city of Detroit is not anticipating a default on its GO bonds," Corley said.
"The city's long-term liability picture is not as bleak as depicted by the state review team," he added.
Corley also cited a recent Moody's Investors Service report that said the appointment of an EFM would trigger a termination event on the city's eight interest-rate swaps hedging $800 million of pension obligations. The counterparties could demand termination payments as high as $400 million.
Detroit's interim corporation counsel, Edward Keelean, also warned that an EFM appointment would unleash a wave of litigation.
"We all recognize that the legal framework for this hearing and the legal framework for what happens next is going to be challenged," Keelean said. "I would predict that if this action leads to the appointment of an emergency manager, there will be another wave of ... lawsuits."
Headen rebutted the city on several points. He said the "ink had not dried" on the consent agreement before the council challenged it in court, and that it did not make progress on any of its goals until after a second review team was appointed.
"Those activities referred to [by Corley] most if not all would not have occurred if the review team had not been hanging above city council like the sword of Damocles," he said.
Headen noted that the swaps have already had termination events triggered and that the city and state are already in negotiations with the counterparties to avoid the termination payments. "There's no reason why parties can't negotiate if an EFM is appointed," he said.
On the topic of the city's $14.9 billion of long-term debt, Headen said the state is aware of the revenue streams that back some of the obligations but it doesn't change the size of the obligations. "The city has a staggering amount of long-term debt whatever the category," he said.
Macdowell will review the information and provide a determination to the governor. If the state's findings are upheld, Snyder could appoint an emergency financial manager within the next few days.