Wednesday, February 20, 2013

Detroit – Running out of Money – The Corruption, the Waste and the Rocky Road Forward.

The City of Detroit, not unlike cities across the country, taking on increasing debt, has reached its limit. According to the New York Times , the City of Detroit has been found to be fiscally unsustainable, and yet, somehow suggests that the City, with a majority African American Population and run by Democrats for Decades, is somehow a race issue, as the State as a whole has a “ population is nearly 80 percent white and Republicans, including Mr. Snyder, control the capital.”. (NY Times). That said, The City’s finances, reviewed by a State panel, and found to be dismal, to the point where the Govenor may appoint a City Manager – appears to have a rather long history of financial struggles – mostly based on corruption, incompetence and the cost of running a City, all under the supervision of those same Democrats that the NYTimes suggests are somehow victims.

Put aside the race baiting and the partisanship and one finds this City’s problems are a fiscal issue, one where , regardless of what has taken place in the past, attempting to fix the problem is the only way out, even if that means a State Manager is necessary (See City of Springfield, MA under the guidance of the Commonwealth). When Cities spend too much on City employee pensions and salaries, (those that are above the medium for private and public sector works in a given state), that is a starting point, but not the entire problem, there is the unchecked and rampant fraud committed by the City employees and elected officials, there is the exodus of city residents, where fewer tax-paying residents are able to support the aforementioned and eventfully, something has to give.

A timeline of Detroit’s decent into ruin by Reuters: suggests the problems began in 1973 under a long-term Coleman Young, who ran the city until 1993 (some late highlights from Reuters follow: read the entire article here at

In September 2008, Kilpatrick left office after pleading guilty to obstruction of justice charges, and City Council President Kenneth Cockrel became interim mayor.

The U.S. Census reported in March 2011 that Detroit's population fell in 2010 to 713,777 - a 100-year low and a 25 percent decline from 2000. The drop threatened key tax revenue sources that were tied to a population of at least 750,000.

Michigan Governor Rick Snyder in June 2011 signed legislation allowing Detroit to continue collecting income and utility taxes. Bing warned in November 2011 that Detroit faced a projected cash shortfall of about $150 million by the end of March 2012.

In March 2012, about half of Detroit's unions accepted pay cuts and other concessions to save the city $68 million annually. The Michigan Court of Appeals allowed the review team to continue working on a potential consent agreement with the city. An interim bond issue to raise $80 million for Detroit's near-empty coffers was sold.

In June 2012, Detroit's top lawyer asked a state court to void the consent agreement on the basis that the state owed the city money. The lawsuit postponed plans for a bond sale to replace the March interim borrowing and raise a total of $137 million for Detroit. Bing, meanwhile, warned the city could soon run out of cash, putting a debt service payment on $1.5 billion of pension debt in peril. As a result, Detroit's credit ratings were cut further into junk.

In July, Bing imposed 10 percent pay cuts on workers.

Michigan voters on Nov. 6 repealed the state's emergency manager law.

The governor on Dec. 27 signed a new emergency manager law to take the place of the law repealed by voters in November. The new law, which takes effect in late March, gives fiscally struggling cities and school district options for dealing with their problems.

An audit released on Jan. 3 showed Detroit's cumulative deficit jumped to $326.6 million at the end of fiscal 2012 on June 30, from $196.6 million in fiscal 2011.

Bing announced on Jan. 25 that the approval of more goals by the city council would allow Michigan to send $20 million of the bond proceeds to the city.

As the formal review of Detroit continued, Snyder revealed on Feb. 11 he had a "short list" of candidates to fill the job of Detroit's emergency financial manager if he decides the city needs one.(Reuters)

Therefore what took place in Detroit began with one city administration followed by others, who kept pushing the increasing public employee debt “can” down the road, The City lost 25 percent of its population over a 10 year period, which eroded the already stressed tax base, and by not dealing with the problem at any time between the 1980’s to 2012 – the current Mayor, Bing, is trying to stop the bleeding with band-aids – but, that began in 2012 with a City Union agreement. The state’s voters passed a bill that took the States ability to help failing cities away, the State’s Govenor signed a new law reversing that bill, in order to step in and save Detroit, but it’s Detroit’s call.

Looking at Detroit’s Demographics is an eye opener: Based on 2009 census data the population of Detroit was 711,700, noting a loss of 25% over the prior census, medium income in Detroit was $18,614, with a medium rent of $749., (City Data),

Compared to a similar metropolitan area in terms of population in the Midwest, with a population of 807,584, the Medium Household income was at$40,278 and the medium rent at $715. (City Data).

That suggests a majority of those living in Detroit were in poverty, with a high rental costs, and those that could, left the City and possibly the State.

Now what?

A former Chief of Communications from the City of Detroit suggests the only option for the City is a managed bankruptcy. Commenting on the report released Karen Dumas, suggests Detroit’s woes, began a decade ago (contrary to Reuters findings), and follows with a short laundry list of issues that should have been corrected:

The city's long-term liabilities surpassed $14 billion, what it cost American taxpayers to bail out the entire auto industry.

The city charter is structured in a way that shackles the city and keeps it from making changes needed to survive.

And the city broke the law -- a lot -- by not amending its budget to prevent deficit spending. It kept paying for things that it could not afford. For instance, it paid last year for 285 employees at 36th District Court. The court has 350 employees, not counting judges. And the court owes the city $199 million.

The city did not balance its checkbook every month, just once a year.

The city sometimes recorded expenses in the wrong place, wrong account or the wrong year.

Some information about city workers did not match information in the personnel files.

When the city paid some insurance claims, they kept a record of the payments, but not of the claims that forced them to make the payment.

The city had no process for anonymous reporting of ethical or fraud violations.

The city used restricted funds to pay for things those funds could not pay for. That's why they're called restricted funds. As a matter of fact, some funds shared the same bank accounts.

The city sometimes determined weekly paychecks without computers and without having the amounts verified by managers. So some paychecks, perhaps many paychecks, were wrong.

And the city kept breaking the rules and operating like it was the 1950s until it accumulated $13 billion in bond debts and a $326-million deficit.

(Detroit Free Press)

On Pensions and the City Management:

From the Detroit Free Press: 2010: “Risky bets cost Detroit pension funds $480 million”, reviews the mess pension fund managers made out of Detroit’s City Pension fund. Detroit’s Mayor Bing, responded to the Free Press: Asked about the losses, Mayor Dave Bing said in a statement: "The current obligations of the city's two pension systems are unsustainable."

He did not elaborate.

On City Pensions:

From the New York Times: an article entitled “Public Pensions, Once Off Limits, Face Budget Cuts” reviews the City of Detroit as well as other cities nationwide as to Union pensions. On Detroit specifically:

The struggles of Detroit, of course, are extreme. The report by the arbitrator, Thomas W. Brookover, noted that although the city’s unemployment rate was officially 28 percent, there was evidence that less than 37 percent of the city’s residents were actually working. The population had crashed. Property tax revenues were dwindling. Detroit had drained its rainy day fund, reduced overtime, offered property-tax amnesty, sold public assets, borrowed money, allowed casinos to set up shop — and still its deficits kept growing.

The average pension for retired police officers in Detroit is not especially rich: it is $28,501 a year. But with more than twice as many retirees as active workers, Mr. Brookover wrote, the costs of paying for the pensions “threaten both the city’s fiscal viability, as well as its wherewithal to provide public safety for its citizens.”

Detroit’s efforts to cover those costs through aggressive investing have not helped. In a 2010 report, an auditor warned that $103 million of alternative investments were unaccounted for. The city’s bets have included Tradewinds Airlines, which went bankrupt for the third time in 2008, and a luxury hotel in Detroit. The Securities and Exchange Commission is investigating.

The city initially sought to freeze its pension fund immediately, which is almost unheard of in the public sector. The arbitrator rejected that proposal, but agreed that the city could reduce the rate at which lieutenants and sergeants earn pension benefits from 2.5 percent of their salary per year to 2.1 percent. Although rare, the reduction is not particularly large, given the magnitude of Detroit’s problems. The arbitrator did not try to find a solution to the fund’s imbalance. (Read balance of article here
(New York Times)

What happened in Detroit is obvious, a long standing and unchecked, systematic destruction of a once great city, by those in charge for decades at the City level. From corruption to incompetence, to downright criminal activity, the City has found itself on a precipice. As it is obvious why this occurred, fixing the problem is also obvious, not only for Detroit but for any municipality or town across the nation. If elected management is in any way, shape or form, incompetent or corrupt, there should be a mechanism in place to remove said individuals though a City recall, Union contracts should be reviewed and adjusted to the public sector in each individual municipality. Above all, the taxpayer to City obligations should be considered for all budget projections, and those findings should determine city wages, and services. Federal intervention is not an option, as the National debt and budget reads like Detroit’s. (Which makes one wonder, why, the President on budget cuts, is suggesting that firefighters, teachers, etc. will be laid off or fired, when the City hires, and fires, these employees, based on what the City has in its coffers, rather than the Federal Government? What has possibly worsened the situation (most likely), was the stimulus and job bills during the administration that was given to Cities and Municipalities to increase their employees, and create jobs. The problem arose when the funds ran out, and the City, now straddled with unemployment compensation, ran into deeper debt as a result of the Federal Aid.) It is unfair to those teachers, firefighters and police officers and all working for the City of Detroit, who have retired from any City System, to have to live in fear of a City going into bankruptcy, and the result, a loss of all benefits. It is now a human rights issue as well. If now is not the time to bring fiscal sanity to the table, across the country, when?

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