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What’s next for Detroit’s finances? History may have the clues

Detroit Turned Out To Be Heaven

Today on the 14th floor of Cadillac Place in New Center, Detroiters, Michiganders and the world were able to have some of the questions answered around Detroit’s financial crisis but many remain.

The Treasury Department, led by State Treasurer Andrew Dillon presented to the media some of the findings of the financial review team appointed in December.

The six-member independent group unanimously decided that Detroit is in fact experiencing a financial crisis. It may seem redundant or nakedly obvious, but government works in mysterious and bureaucratic ways. It takes time, it takes manpower and it takes the findings of a state-sanctioned review team to push decisions forward.

Andy Dillon, Michigan State Treasurer

Andy Dillon, Michigan State Treasurer, at press conference announcing the fiscal findings

For example, the projections estimate that by June of this year the city will have a cumulative cash deficit of $100 million. But the real challenge ahead is the city’s responsibilities for future health care, pension and other liabilities. These fall somewhere in the neighborhood of $13.6 billion. The numbers and all the projections are staggering, but one thing remains clear, the finances of the city of Detroit need fixing.

“Each member of the review team came into this process with an open mind and no preconceptions. However, it became clear as we moved forward that the city continues to struggle mightily beneath the weight of chronic deficits and its long-term liabilities,” said Ronald Goldsberry, an independent consultant and one of Governor Rick Snyder’s appointees to the review team.

“Add to the mix a city governance structure that resists meaningful, structural change and you have what we have deemed to be a financial emergency.”

As it stands the Governor has 30 days to review the findings of the board and make a decision on whether or not a fiscal crisis exists in Detroit. It doesn’t take a hair-brained fortune teller to predict what is probably going to happen. Although no officials would say it outright, the reality is we’re likely on the precipice of an emergency manager being appointed for the city of Detroit.

When it comes to municipal fiscal crisis in modern history, Detroit is not so alone. Cleveland declared bankruptcy in 1978, Philadelphia in 1991 and the Big Apple was on the razor’s edge of insolvency in the late 70’s. By the mid 1980’s New York had began to pull itself back from the brink of financial ruin by virtue of implementing a similar approach to what’s in motion here.

Dillon outlined today that there are short and long term strategies. The Emergency Manager, if appointed, is a more short term solution. However, the Financial Advisory Board would continue to work in conjunction with the Emergency Manager for as long as the state decides it takes to get the job done.

New York City faced a severe fiscal crisis

Manhattan Image by Alfred Hutter

New York in the 1970’s faced looming financial insolvency. They looked to the MAC (or Municipal Assistance Corporation) to assist them along their road to recovery. Within eight years from the original austerity measures, New York recovered and enjoyed unprecedented prosperity. The MAC remained in place up until 2008.

The implementation of a Financial Manager does not mean the instant eradication of public service. It simply means that instruments will be put in place to better allocate existing resources.

“So we know there is a inefficiency there, and I think ideally if you can reallocate the resources, you can provide better services to the residents at less cost. Detroit employees are not overpaid and I think you wouldn’t look at fixing the city by further cutting wages – that’s not the solution that I see as necessary,” said State Treasurer Andrew Dillon in response to questions about the future of Detroit’s city services.

One thing is clear, the information shared today is not the end, but a beginning of a potentially long and drawn out process.

 

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