CHICAGO – Detroit is on track to exit state oversight next year with its balance sheet on the mend and private investment booming, a Michigan Treasury official said of the city’s post-bankruptcy recovery.

Pension ills still loom large on the city’s balance sheet but the city is building up a cushion to help cover a big jump in payments scheduled in 2024.

“By early next year Detroit will be out of state oversight,” said Eric Scorsone, a deputy state treasurer who is on leave from his position as director of the Center for Local Government Finance and Policy at Michigan State University. “It will be financially stable by all indications and have a significant surplus.”

Scorsone, speaking during a panel discussion on the lessons Chicago and its school district and the state can learn from prior bankruptcies and alternatives to avoid Chapter 9. called the city’s post-bankruptcy transformation “extraordinary.”

The conference, “Chicago Fiscal Future: Growth or Insolvency” was hosted Wednesday by the Chicago Civic Federation and the Federal Reserve Bank of Chicago.

Detroit, Scorsone said, is on course to meet the criteria – including three years of balanced operations – that would allow the Detroit Financial Review Commission to enter what’s called a dormant stage.

“The city could basically operate on its own,” but if red ink returns the commission would be reactivated, he said.

Panelists discuss municipal bankruptcy, state oversight and other solutions for fiscal distress during a conference on Chicago's Fiscal Future. The Chicago Civic Federation

While under state emergency management, Detroit filed for bankruptcy with Gov. Rick Snyder’s support. The city had a battered tax base and could not deliver adequate services. In bankruptcy, it shed about $7 billion of its $18 billion in debt obligations and has turned a $133 million deficit into a $70 million surplus.

Scorsone said the city’s experience offers a series of lessons for Chicago and struggling municipalities across the country. The city’s process was helped by assistance that came from the state and philanthropists in the form of the “Grand Bargain.”

The financial help was spurred by worries that the city-owned art museum would be compelled to sell its assets as part of the bankruptcy. The financial support helped offset cuts to pensioners’ benefits averting a challenge from labor. “That was another big positive,” Scorsone said.

A strong management team led by Chief Financial Officer John Hill has helped and the city maintains an open line of communication with the commission, and local cooperation improved. Scorsone also praised Mayor Mike Duggan’s leadership for improving basic services like emergency response times and its infrastructure such as its streetlight system.

Financial oversight coming out of bankruptcy served the city well and provides a model, Scorsone said. The commission must sign off on contracts, budgets, capital and facilities planning, and formal revenue estimates are offered biannually.

“This allows the city to stay on a strong economic path,” he said. “These are all critical tools” for the city and others nationally that help ensure “long term stability.”

Scorsone did not defend the state’s controversial emergency management law, which has come under fire following decisions made by Flint managers that led to the city’s water contamination crisis, instead stressing that some version of state oversight or intervention is an important tool.

“State oversight works,” if accompanied with a comprehensive, long-term operating plan, he said.

New York City barely averted bankruptcy in 1975 with support from the state through a special authority that helped the city issue bonds and oversee its finances and labor support through the backing of loans by union retirement funds.

While New York City is in many ways unique the causes and wide ranging remedies serve as a template for comparably situated local governments, said panelist Harrison “Jay” Goldin, founder of Goldin Associates and New York City's comptroller from 1974 to 1989.

Goldin said wide spread changes were enacted as the city recovered beginning with a massive overhaul of its accounting system. “The upshot is that in the aftermath of its near bankruptcy New York City’s finances are transparent, professionally managed and disciplined,” he said.

That laid the groundwork for private investment and allowed its population and tax base to flourish. But there was a cost as the city began to charge tuition at its public university system, closed some public hospitals, and revised pensions for new employees.

As an outside observer, Goldin said Chicago, Chicago Public Schools and the state appear to be on “wrong side of the mountain.” He said it’s unclear whether the political will is sufficient and the necessary coalition of political, civic and labor leaders can join together to take the steps toward financial recovery and stability.

The question is whether it happens by the “compulsion” of a bankruptcy court or local leaders, Goldin said.

States “vary tremendously in how they think about monitoring local governments and responding to distress or crisis when it occurs,” said panelist Mary Murphy, manager of state and local fiscal health at the Pew Charitable Trusts.

Twenty-two states have a monitoring system that identifies fiscal distress. Virginia lawmakers recently approved legislation creating a monitoring system. It awaits the governor’s signature. Eight have early warning systems “really trying to spot the early stage issues,” she said.

Twenty have in place a legal intervention mechanisms that allow the state to take over a local government while 15 have monitoring and intervention policies. Illinois does not have a monitoring system in place but does have some mechanisms for limited intervention.

Murphy said it’s difficult to say what the best system is given disparities across state or what would be most appropriate in Illinois but the goal is to avoid bankruptcy. “It’s a difficult and painful process,” Murphy said.

Restructuring specialist James Spiotto stressed his belief that Chapter 9 serves as a tool only of last resort for a government struggling with a decimated tax base or service insolvency and only after exhausting all other options.

He highlighted just how rarely local governments turn to the courts for a solution to their distress. Since Detroit, only one local government has filed a Chapter 9 case and the case did not proceed to an adjustment plan. Since 1937, 672 have filed. “It really is a rare event….it’s not a road you want to take,” Spiotto said.

Illinois lacks a general Chapter 9 provision on the books although Republican Gov. Bruce Rauner wants to add one. Democrats who view it as an attack on labor are opposed. The Civic Federation is pressing for lawmakers to establish a distressed cities authority that would help local governments emerge from distress without Chapter 9, but legislation remains in a holding pattern.

Chicago is grappling with massive bond and pension debts but its tax base remains healthy, Spiotto said. The junk-rated school systemis deeply distressed, dependent on short term borrowing to stay afloat. The state has gone nearly two years without a budget and its bill backlog is up to $13 billion with its investment grade rating at risk.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.