DETROIT — The annual chore of putting together Detroit's city budget for the upcoming fiscal year will begin in earnest in the coming days and will be performed by the mayor and City Council, instead of an emergency manager appointed by the governor.
The agreement allows the state to assist in the city's long-term restructuring, while keeping actual power in the hands of elected leaders.
The deal is designed to fix the city's $200 million budget deficit and $13.2 billion in structural debt.
The task is daunting. Detroit's fiscal situation is among the worst any major city has faced, though not totally unique. Both New York and Philadelphia have had oversight boards help those cities out of financial trouble before.
So what is the answer for Detroit? A group of bankruptcy, business, turnaround and fiscal specialists shared their ideas for saving the city with The Associated Press.
SHRINK THE PAYROLL
Robert Inman, professor of Finance, Economics and Public Policy at the University of Pennsylvania's Wharton School, said of one of Detroit's first actions should be to cut its payroll in half.
He then suggests a get-tough approach with city unions that would begin with very frank discussions.
"Public employees, you and your wages are going to shrink," Inman said. "We're going to feel free to contract out. We're going to contract out trash services. Unions if you want jobs at all, you're going to have to buy into a transition package."
That approach is similar to parts of agreement reached Wednesday with Snyder's office which calls for outsourcing of services to save money, consolidation of departments and negotiated pay hikes.
Inman said he would do away with regulations that prohibit the growth of business. He also would make a commitment to keeping taxes on the middle class and businesses down.
Inman suggests something similar to Philadelphia's Pennsylvania Intergovernmental Cooperation Authority for Detroit. The PICA was created in 1991 to oversee Philadelphia's finances. PICA has the authority to issue refunding bonds and grant or lend the money to the city.
"All PICA does is ask are you balancing your budget and puts really good fiscal managers in there to run the operation," he said. "You have to have the transition loan that balances the books and then you have the oversight."
RAISE TAXES, FREEZE BONDS, CUT SERVICES
Detroit "by any measure of general accounting" is bankrupt," said James McTevia, a turnaround specialist and adviser to companies in transition, about Detroit. "It's bankrupt. It's broken. It needs to be fixed. The city cannot pay its bills."
The city needs to raise money, and that can be done through a special tax on all residents and businesses, he said
"Then I'd see how much money we have available to meet the expenses," McTevia said. "Bonds and obligations? We would freeze them. That debt would then have to be restructured. If Detroit owed $100 million in bonds, and you can't meet it, the people who own the bonds would lose that money. The city would default on the bonds. What are they going to do, repossess the Penobscot Building? Detroit is insolvent anyway. People just aren't recognizing it."
Bing has threatened service cuts, but so far the biggest changes are in city bus service. Some little-used routes have been cancelled, while others have been shut down during non-peak hours.
"You gotta operate the city with services at the level of income that it has," McTevia said. "You don't cut the grass. Anything they can't afford needs to be done away with. Then, you would get into privatizing services."
STATE OVERSIGHT CAN HELP
State officials can play a central role, said James Spiotto, a municipal bankruptcy expert at Chicago-based Chapman and Cutler law firm. He pointed to the Municipal Assistance Corp in New York. State legislators created MAC in 1975 to rescue New York City from imminent bankruptcy. The MAC's board took over the city's finances and was able to borrow billions of dollars on its behalf.
"The MAC provided the financial umbrella, refinanced debt and financed loans in order to bridge the period of time it takes to get back," Spiotto said.
But any fix has to have multiple partners.
"You need buy-in by everybody," Spiotto said. "You want to negotiate it. You want to have significant input from City Council and the mayor, and you want to have the workers and citizens feel the transparency and the effectiveness. It's got to be fair, shared pain."
Bing has warned the City Council, city unions and residents for more than a year that everyone will have to share in the "pain" during Detroit's restructuring. Bing has been hesitant to cut too deeply or risk the disintegration of city services like park upkeep and recreation programs. The council has asked for more layoffs to save money.
Recently negotiated concessions with city unions on pay, health benefits and pensions were expected to save Detroit about $20 million this fiscal year. Snyder has complained that they aren't enough. The concessions were nullified under the agreement reached Wednesday.
"You can only have a manager in for so long. Then, they're gone," Spiotto said. "If you don't have buy-in at the beginning, you are not going to have buy-in in the end."
Could Detroit sell off things it owns? The consent agreement proposed by Snyder would give the appointed 9-member financial advisory board the authority to review proposed sales of material assets in the city, but one-time sales and short-term borrowing are not desirable, said Dean Kaplan, a former Philadelphia budget director and Pennsylvania-appointed overseer for Pittsburgh, Reading and New Castle.
"You end up putting off the solution," he said. "You would only use those kinds of steps if it's part of a larger solution."
Prior to resigning in 2008 as mayor in the wake of criminal charges related to perjury and a text-messaging sex scandal, Kwame Kilpatrick proposed creating an authority that would lead to the $65 million sale of the city's half of an international, underwater commuter tunnel to Windsor, Ontario, Canada. The City Council voted down the plan.
The city often has sold bonds to raise funds. Last month, the council approved the sale of $137 million to help stem a cash flow crisis that could leave Detroit broke by the end of May.
"You would only use those kinds of steps if it's part of a larger solution," Kaplan said. "You want to match long-term structural asset sales with long-term structural problems. Pittsburgh sold its water and sewer utility to an authority and took that money and spent it over a 10-year period. You have to look at if it's a good idea or bad idea."
AND IF ALL ELSE FAILS....A BAILOUT?
It will take money to cure Detroit's most immediate ills, said Vimala Anishetty, president of Environmental Compliance Office.
Anishetty's success depends in part upon a strong and viable business climate in Detroit. Her environmental consulting firm is based in Detroit and serves clients in the U.S and Canada. It was started about four and a half years ago and has two full-time and 14 part-time employees.
Anishetty said she would review municipal union contracts and possibly relieve the 9-member City Council of its responsibilities.
"We need some help from the state and federal government," she said. "Everybody else has got bailouts, why not Detroit?"
So far, Washington D.C. has not written Detroit a check toward the city's deficit. Snyder has said no money is coming from the state.Comment on this story
Finding ways to build on or reuse Detroit's vacant land and aging housing stock would be needed for any long-term solutions, Anishetty said.
By some estimates, Detroit has more than 70,000 vacant houses, empty lots and abandoned buildings. Some blocks have only one or two occupied homes on them, but police still have to patrol them and garbage pickup continues — something Bing has said drains the city's scant resources.
"Mayor Bing has suggested they limit services to those areas that are highly populated," Anishetty said. "I think that's an excellent notion."