Detroit is in a situation like the weakest nations in the eurozone. It does not, however, have access to the kind of capital from the European Central Bank or IMF that Spain, for example, may have. Detroit will lose its ability to govern itself because of deficits and an inability to tap revenue from its tax base or capital markets.
Andy Dillon, the Michigan State Treasurer, will start a preliminary review of Detroit’s financial situation on December 6. It is the kind of review that has led, in the past, to the installation an emergency manager in Flint, a city not far north of Detroit, and Pontiac as well. These emergency managers have dictatorial powers. They can eliminate contracts, reduce staff and override most plans or budgets set by the mayor and city council.
Detroit has trouble that is well below its operating budget. Bloomberg reports that “The 18th-largest U.S. city may face $400 million in penalties if an emergency manager is put in charge, because of swap agreements made with two banks that helped Detroit borrow money in 2009, according to Ted Damutz, senior credit officer for Moody’s Investors Service in Chicago.” Detroit was once the sixth largest city in the U.S. but has lost half its budget in the past 50 years. It also has lost most of the industry that made it great — automotive manufacturing.
The roadblock to a solution in Detroit is the same as in Italy or Spain. The head of the government, in this case the mayor, cannot agree with the city council about deficit reduction packages. Strong public unions have pressured elected officials not to cut their members who are on the Detroit payroll. The political wrangling is what will be the final trigger of Detroit’s demise.
There are rumors that Detroit’s Mayor David Bing would welcome an emergency manager form of government, as long as he is the emergency manager. The governor could make that appointment. Bing can claim he knows the city’s problems, which might make him a viable solution. He is in public, however, against the appointment of a manager. “We believe we have the right plan to address the city’s fiscal crisis,” the mayor said. “We will continue to work with the City Council, our unions and other stakeholders to achieve the necessary cuts and concessions, including pension, health-care and work-rule reform.” There is no reason to believe that what the city’s politicians have not done in the past they will do in the future.
The largest challenge an emergency manager for Detroit would have is the city’s long-term debt and pension obligations. In most cases, managers do not have the power to eliminate or significantly alter these. Those issues may only be resolved by bankruptcy, but a decision about that is not as immediate as one about the city’s deficit.
No matter what Bing and the city council say, Detroit cannot cut costs fast enough or bring in enough revenue to close the deficit gap. Bing may be the mayor a few months from now, but he will hold the office in title only.