Most people who are drowning would gratefully grab a lifeline tossed their way. But the elected leaders of the (formerly) great city of Detroit might actually prefer to drown.
How else to interpret their response to a proposal—or a “consent agreement”—crafted by Michigan Governor Rick Snyder to help the city avoid bankruptcy when it runs out of operating cash in less than 60 days?
Detroit Mayor Dave Bing, a former guard for the Pistons and a businessman who can barely raise his voice to a whisper when dealing with the city’s public unions, has found his inner lion against the Republican governor’s plan.
Unless Bing, a Democrat, and the city council sign the agreement, it can’t go into effect. But, Bing roared in a recent radio interview, “Why the hell would I sign it?” Likewise, some city council members have described the agreement as a hostile takeover that eviscerates the rights of Detroit’s voters. They have been negotiating for weeks without resolution. Meanwhile, a financial review team has declared that Detroit is facing a severe fiscal emergency. If the city leaders and governor don't iron their differences and accept the agreement today, they will set in motion a process that will lead to the takeover of the city's books by a state-appointed emergency manager.
What exactly in the agreement has gotten Bing and the council members so mad?
Essentially, in exchange for letting the city borrow an additional $137 million in state-backed debt so it can pay its bills until the end of the year, the agreement would put the city’s finances in the hands of a nine-member financial advisory board.
The board, which would be appointed jointly by the governor, mayor and city council, would pick a new chief operating officer and chief financial officer who would run the city’s day-to-day finances. The panel would have sweeping powers to sell assets, outsource city services, and rewrite or void union contracts to put the city’s long-term fiscal health on a sound footing.
A consent agreement is actually the least intrusive deal on the table because it entails less loss of control for Mayor Bing and the city council, who would be responsible for executing the agreement, something that would leave them at least nomially in charge. But an emergency manager would make the governor solely responsible for Detroit's fiscal destiny, something that is politically risky.
But Bing and others reckon that they can play hard ball with Snyder on the consent agreement and get more out of him for even less loss of control.
That’s because the bankruptcy of Michigan’s largest and most visible city would be damaging for the whole state. Coming at the heels of the federal bailout of General Motors and Chrysler, it would cement Michigan’s reputation as an economic basket case, potentially raising statewide borrowing costs while making it harder to attract businesses.
Bing is leveraging this fear to demand that the state hand over $220 million in cash—not debt, mind you—that Detroit is allegedly owed as part of a previous revenue-sharing formula. And he wants more control over the city’s finances.
There is certainly some room to negotiate on the second count given that, as the consent agreement currently stands, the advisory board would remain in charge of Detroit’s budget until the city posts three consecutive years of financial solvency and transforms its junk-bond credit rating to AA. But it might take Detroit 20 years to improve its rating that much, if it ever can, effectively giving the board control into perpetuity.
It would be foolish of Snyder to run Detroit for that long, so he should back down on that provision. But it is hard to see how he can let Bing retain any control over the collective-bargaining aspects of the agreement, especially given Bing’s track record of timidity with public unions.
Detroit’s accumulated debt stands at more than $10 billion, something that puts its debt-to-asset ratio at 33-to-1. By contrast, GM’s debt-to-equity ratio when it went into bankruptcy was 22-to-1. Detroit’s annual debt payments—$600 million a year—exceed its primary tax revenue by $60 million.
This, despite the fact that Detroit has the highest income tax rates for residents (2.5 percent) and nonresidents (1.25 percent) in Michigan and its corporate tax rate is 1 percent. In other words, Detroit has maxed out its credit cards and is taxing its residents to the hilt, and it will still run out of money to pay its employees and creditors by the end of this year. Some vendors have been complaining that they have not been paid for months.