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Detroit financial crisis was long in coming

By Monica Davey and Mary Williams Walsh


DETROIT » This city was already sinking under hundreds of millions of dollars in bills that it could not pay when a municipal auditor brought in a veteran financial consultant to dig through the books. A seasoned turnaround man and former actuary with Ford Motor Co., he was stunned by what he found: an additional $7.2 billion in retiree health costs that had never been reported, or even tallied up.

"The city must take some drastic steps," the consultant, John Boyle, warned the City Council in delivering his report at a public meeting in 2005. Among the options he suggested was filing for bankruptcy.

"I thought all hell would break loose — I thought the flag would finally be raised," Boyle recalled in an interview last week. But his warning drew little notice.

"It was utterly astounding," he said.

The financial crisis that has made Detroit one of the largest cities ever to face mandatory state oversight was decades in the making, a trail of missteps, of trimming too little, too late, of hoping that deep-rooted structural problems would turn out to be cyclical downturns that might melt away as the economy picked up.

Some factors were out of the city's control. As auto industry jobs moved elsewhere over the decades, for example, Detroit lost much of its affluent tax base.

Lower than expected state revenue sharing did not help, nor did corruption allegations in the administration of Kwame Kilpatrick, a mayor who resigned in 2008 and was convicted on Monday of racketeering and other federal charges.

But recent findings from a state-appointed review team and interviews with past and present city officials also suggest a city that over the years was remarkably badly run.

The state review team found in recent months that the city's main courthouse had $280 million worth of uncollected fines and fees. No one could tell the team how many police officers were patrolling the streets, despite the fact that public safety accounted for a little more than half the budget.

The city was borrowing from restricted funds and keeping unclaimed property that it was required to turn over to the state. In some city departments, records were "basically stuff written on index cards," as one City Council member put it.

"This was bad decisions piled on top of each other," Gary Brown, the Detroit City Council president pro tem, said the other day. "It has all been a strategy of hope. You keep borrowing where every piece of collateral is already leveraged. You have no bonding capacity — you're at junk status. You're overestimating revenues and not managing the resources. Now the chickens have come home to roost."

Once the nation's fourth-largest city, Detroit had grown up around the auto industry, booming right along with it in the 1950s. City workers gained ground with pay increases intended to keep pace with those the United Auto Workers won for its members, analysts said.

"It was easy to do so back in the 1950s," said Joseph L. Harris, Detroit's former auditor-general. "The city had 1.8 million residents then."

But as auto jobs moved elsewhere and the region aged, Detroit's labor costs — retiree health care costs, especially — ballooned.

At the same time, officials papered over growing deficits with more borrowing. Finally Detroit's legal debt limit, which is linked to the total value of real estate in the city, fell when the mortgage bubble burst and property values plunged. Today the city says its debt limit is $1 billion, and it has effectively lost its ability to issue debt in the name of its taxpayers.

When a city cannot borrow, it cannot function; New York City showed that in 1975, Cleveland in 1978. But even as Detroit has approached the critical limit, some city leaders have seemed unaware, quarreling over smaller, symbolic issues like whether to lease a city-owned park to the state.

"It is peeling an onion," Mayor Dave Bing said of his growing understanding after he took office in 2009 of the depths of the city's financial woes. "You dig and you dig and you dig, and you really start to find out how bad the problem was. "

Bing knew plenty about the city's struggles before taking office and ran on a platform of reversing the spiraling finances. Still, within his first six months in office, the city came close to not making payroll.

"That's a scary moment," he recalled in an interview. "You've got people living from paycheck to paycheck, week to week, and you're about to run out of cash. You can only imagine what kind of impact that that's going to have just on the life of the average person."

The big, structural imbalance was hard to see building up, because until 2008, when a new accounting rule took effect, cities like Detroit were not required to keep track of the lifelong health care bills their workers were ringing up. That is why Boyle found a $7.2 billion promise that no one knew about.

Detroit's general-obligation debt to its bondholders, by contrast, was a little less than $1 billion that year, safely within the city's legal debt limit, then $1.4 billion.

But while the numbers are particularly grim here, the basic story line is hardly unique. The same path, long and slow, can be found from Providence, R.I. to Stockton, Calif.

To preserve cash, the city resorted to increasing its workers' future pensions at contract time, instead of raising their pay. That helped balance the immediate budgets, but set up a time bomb sure to explode as more workers retired.

The cost of the retirees' pensions also grew because of an inflation-protection feature that compounds every year. Detroit cannot renege on paying the benefits, at least outside of bankruptcy, because the state constitution makes it unlawful to reduce pensions after public workers earn them.

By the 2000s, Detroit was borrowing to solve budget shortfalls. Meanwhile, property revenues fell, not just because of departing residents, but also as values fell and some people quit paying. The city has reported collecting 84 percent of property tax levied, but a Detroit News analysis suggests a collection rate closer to half of property owners.

In recent years, city officials have made deep cuts in staff and operations, leaving residents complaining of darkened streetlights, slow police response times and bus delays. But while cutting workers can help reduce the current year's costs, it moves many of those people into the ranks of retirees, putting heavy long-term pressure on Detroit's two public pension funds.

By late 2011, a sense of crisis descended on Detroit. In November, Bing, a Democrat, addressed the city on live television, warning that Detroit would run out of money without concessions from unions, layoffs, and privatization. A month later, Gov. Rick Snyder, a Republican, called for a review of Detroit's finances, a first step in cases where the state is preparing to send an emergency financial manager.

City officials held off further intervention by committing to a legal agreement with the state in 2012 that laid out measures to save money. By fall, a board overseeing the agreement said progress was moving too slowly.

While City Council members are contesting the matter during a hearing in Lansing on Tuesday, Snyder's administration is preparing to name an emergency manager within days.

Bing says his administration has drawn up a plan to spare the city, though he acknowledges that it has yet to be fully put into effect.

Under Michigan law, the emergency manager would ultimately have the authority to remove local elected officials from most financial decision-making, change labor contracts, and close or privatize departments. He could even recommend that Detroit enter bankruptcy proceedings, a possibility that experts say raises the prospect of the largest municipal bankruptcy in the nation's history, at $14 billion worth of long-term obligations.

None of the decisions, experts here say, will be simple, and some wonder whether Detroit can be saved at all.

Some 700,000 residents now live in this vast 139-square-mile city that once was home to nearly 2 million people. That number may fall to close to 600,000 by 2030 before the population begins to rise again, one regional planning group projects.

By pushing costs into the future while its population was shrinking, Detroit has left the people least able to pay with the biggest share of its bills.

"Detroit is a microcosm of what's going on in America, except America can still print money and borrow," Boyle said.

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poidragon wrote:
"Detroit is a microcosm of what's going on in America, except America can still print money and borrow," Boyle said." While that may technically be true, it still does not even come close to fnding viable solutions to these troubles! Lets face it, Congress has been doing the same 'mumbo jumbo' on the Federal level that Detroit has been doing, to dig itself such a deep financial hole; Congress even went so far as to develop the harsh cuts of the Sequester, claiming that they would never let it get that far, before comng up with a consensus and stopping it before it all hit the fan. Guess what? Congress lied and the excrement is about to hit the fan in a very big and messy way!
on March 12,2013 | 02:01AM
tiki886 wrote:
Don't let Obama off the hook. Sequester was his idea and everyone now knows he LIED!
on March 12,2013 | 05:57AM
Grimbold wrote:
This comment has been deleted.
on March 12,2013 | 08:03AM
cojef wrote:
Look at Honolulu composition and the City took on the Rail. Wait 5 years and Honolulu will be singing the same blues.
on March 12,2013 | 11:47AM
manakuke wrote:
The financial ‘handwriting was on the wall’ for a long time.
on March 12,2013 | 06:30AM
AhiPoke wrote:
This story is being played out in many communities throughout of country and also on the federal level. In our state there is an underfunded amount of $30B, for government workers' pensions and healthcare benefits, just like Detroit only larger. At the federal level we have powerful legislators, like Pelosi, saying that "we don't have a spending problem", again just like Detroit. If we can learn one thing from Detroit it's that, taxing the "rich" will only cause them to leave, making matters worse. The rich have more ability to relocate than do "poor" people. At the current pace we're likely to see federal borrowing reach $25T before our president leaves office and people seem more intent on political party bias than correcting our country's problems.
on March 12,2013 | 10:46AM
Anonymous wrote:
The rich will stay where the climate is relatively nice. Look at California as a prime example. Tax hell that rivals Hawaii if not worse, but a growing rich population. Detroit, in contrast, is a hell-hole of a place when it comes to absolutely brutal winter weather.
on March 13,2013 | 05:31PM
Loki wrote:
Sounds like what Obama is doing. Take a close look America.
on March 12,2013 | 06:08PM
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