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Detroit Faces State Takeover If Unable To Cut Spending By $200M

Detroit Spending

First Posted: 04/12/11 04:43 PM ET Updated: 06/12/11 06:12 AM ET

Detroit must cut $200 million in spending or face a takeover by the state of Michigan, Mayor Dave Bing said on Tuesday.

With the city's population dropping to a 100-year low, while its budget deficit is projected to climb to $1.2 billion by fiscal 2015, Bing outlined a plan to the city council to balance Detroit's finances over five years.

That plan includes cuts in personnel costs, a one-year suspension of a payment to employee pensions, and a temporary gambling tax increase.

"If we are unable or unwilling to make these changes, an emergency financial manager will be appointed by the state to make them for us. It's that simple," Bing said in his budget address.

In March, Governor Rick Snyder signed into law a bill that bulks up the state's ability to intervene in fiscally troubled local governments and appoint someone to oversee them. The new law also gives state-appointed financial managers the power to modify or end collective bargaining agreements with public sector workers -- a move that sparked pro-union demonstrations in the state capitol earlier this year.

Bing, who pegged the current deficit at $155 million, said the city council, unions and the pension boards had to work together to turn around Detroit's finances. Otherwise, he said, the state will step in and "existing contracts will be voided, legislative powers will be stripped and decisions will be made without the input of elected officials or residents."

That reality was not lost on members of the city council.

"I want to make sure we're not the group that's the answer to the trivia question -- Who was in charge of the city of Detroit when the emergency financial manager came in and took over?" said Council Member James Tate.

Detroit's shaky finances are a major concern in the $2.9 trillion municipal bond market, where the city's bonds are rated in the junk category. Detroit was also cited in a recent Reuters poll as a potential candidate for rarely used municipal bankruptcy.

The mayor's proposed fiscal 2012 $3.11 billion all-funds budget includes nearly $1.22 billion of general fund spending, according to budget documents.

Some of Bing's budget-balancing proposals depend on getting bills passed through the Republican-controlled Michigan Legislature. They include the higher tax on Detroit casinos, pension reforms, the suspension of state driver licenses for three unpaid Detroit parking tickets and the continuation of the city's ability to collect income and utility taxes.

Detroit's population under current state law must be at least 750,000 to collect the taxes, which generated $265 million last year, Bing said.

U.S. Census figures released last month showed Detroit's population fell to 713,777 in 2010 from 951,270 in 2000, as the region suffered from a struggling automotive industry, plant closures and job losses.

Bing said while he believes the final census count will be revised upward, the city must deal with the reality of a shrinking population base and the loss of state and federal funding.

State revenue sharing has already been dropping and Detroit expects to receive less than half of the $332 million it got in 2002, according to Bing, who added that talks with the legislature and governor were ongoing.

But Council Member Saunteel Jenkins said she will be pushing for revenue alternatives in case Michigan lawmakers don't pass needed legislation.

Detroit, which sold nearly $250 million of deficit financing bonds last year, begins fiscal 2012 on July 1.

(Reporting by Bernie Woodall, writing by Karen Pierog, Editing by Chizu Nomiyama)

Copyright 2011 Thomson Reuters. Click for Restrictions.

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Filed by Maxwell Strachan  |