Rod Meloni: Detroit City Council appealing state's declaration of financial emergency

Author: Rod Meloni, Local 4 Business Editor, @RodMeloni
Published On: Mar 12 2013 10:01:39 AM EDT   Updated On: Mar 12 2013 11:02:47 AM EDT
LANSING, Mich. -

9:45AM

The minutes Tuesday morning leading up to the Detroit City Council’s appeal of the state's review team’s findings is orderly and professional.

The hearing room inside the State Treasurer’s office is small, maybe 20 by 20. The state says it is capable of holding 56 people; I would say that’s if you jam them in like sardines!

Already here are Detroit City Council President Charles Pugh and half a dozen of his office staff, Council member Andre Spivey, Detroit Research attorney David Whitaker, Irvin Corley Jr. Detroit’s Fiscal Analyst and the attorney who will plead the City of Detroit’s case Edward V. Keelan, Deputy Corporation Counsel.

So far, the state’s hearing team, led by Frederick Headen, director of the Department of Treasury’s Bureau of Local Government Services, has not yet arrived.              

Charles Pugh was happy to hand out the following statement:

“We do not dispute that a financial emergency exists in the City of Detroit. In fact, we have worked as a Council, to put Detroit on the right fiscal path. We have consistently developed sound budgets which have not only included the tough cuts necessary to address our cash crisis, but we’ve also proposed a list of revenue generating opportunities. To further these efforts, the Council and Mayor’s Administration developed a three-part plan over the 2012 December break, which is comprised of milestones and recommendations from the State of Michigan that addresses Detroit’s financial emergency.

Given the time to achieve its projected results, we believe this plan, along with the recommendations from several financial analysts that have been hired to assist city staff, can accomplish the coal of improved fiscal and operational health of Detroit. As outlined in our resolution appealing the Governor’s determination, we’ve already taken several steps and we’re beginning to see progress.”

The city’s case is made in a three page paper, the highlights I will pass along as soon as I get a chance to read it. In the meantime, having spent time discussing this case with the governor himself and the treasurer’s office, I can tell you that assessment of the city’s “progress” is one the state has often heard and often rebuffed as nothing in the neighborhood of being sufficient to the task of solving Detroit serious short and long term problems.

We were told there would be a protest outside the hearing, so far nothing has materialized.

10AM

There are two new arrivals on the City’s side, Council members James Tate and Ken Cockrel Jr.. Frederick Headen is now seated at his table. The hearing officer, Chief Deputy Treasurer Mary G. MacDowell Just came in. The hearing is starting about one minute late. 

The City’s Case goes as follows:

1.)    By adopting the “milestone agreement” as part of the City’s Consent Agreement signed last April [2011] recommended by the State of Michigan “a satisfactory plan to address the City’s financial emergency”

2.)    That plan has three parts

a.       The Consent Agreement

b.      A Memorandum of Understanding signed last November establishes timelines and benchmarks for completion of restructuring tasks.

c.       A Joint Cash Plan developed over December 2012 had the City hiring Ernst & Young and Miller Canfield consultants to assess the city’s financial difficulties.

3.)    Council is seeking continued implementation of the plan with enhancements to be provided by consultants

4.)    “The city has made measurable progress” toward the goals outlined in the document.

10:26AM

The state is making its case, reiterating the Review Team’s assessment the city has mountains of debt and no “acceptable” or “satisfactory plan to address that.

Frederick Headen the director of the Department of Treasury’s Bureau of Local Government Services said, in exceptionally quite tones “I do not anticipate, based on the Review Team’s work, another consent agreement is an option.”

He pointed to the City’s existing consent agreement and found a “notable lack of enthusiasm by the city to move forward” considering it moved on little in 5 months after the agreement was signed. He said he had “little confidence the city could or would abide by a second consent agreement.” He brought up another consent agreement because it is what the City is asking for.

Headen does not believe the city should get that option considering how it did not act under the old one.

10:40AM

The state finished its case in exactly 20 minutes. Now it is the city’s turn.

Deputy Corporation Counsel Edward Keenan disputed Headen’s assessment. He said the City of Detroit does in fact have a satisfactory plan based on the fact that the existing plan is the State’s own plan.

He handed the testimony off to attorney Irvin Corley who went on to tell the hearing officer the city’s current plan has 25 points that it is moving forward. He moved on to the milestone agreements and how the city is working on the implementations that have made the kinds of cuts and changes in healthcare cuts, pension changes, head count and other restructuring puts the city in a surplus of nearly $100 million by June of 2014.

He said It is understandable that the existing plan is slow to move. Lack of resources, challenges by employees, poor i.t. functions, legal challenges. Corley said “arguably it could take 2 years to make such a plan to make progress. We have made many strides in eight months.”

He went on: ”we content the deficit is $772 million dollars not nearly a billion dollars as the review team contends.

Corley wants to give a different perspective on long term liabilities which exaggerates the city’s financial problem. The water and sewer department are supported by fees and has no impact on the city’s general fund. $1.5 billion pension obligation certificates and other post-employment issues can be backed out. When you take other items that have funding behind them the city is only about half a billion dollars in long term debt. The state of overstating the scope of the problem.

Corley said: Using relentless forward cooperation the city and the state can make a modified consent agreement. [this is a slap at the governor of the state of Michigan who likes to use the phrase “positive forward action”.]

10:45AM

Mary MacDowell, the hearing officer, shot back that in reviewing the city’s situation that the City Council could have moved on implementation of the consent agreement far more quickly.

She wants to know how the city can defend its position that it could have moved more quickly.

Corley said “these things take time.”

David Whitaker said many of the problems in looking back… legal challenges… I’m afraid a new initiative bringing in a new emergency manager might add to the delays. We’re beyond having the consent agreement delays.

He went on there is a plan in place, a cash plan too. We claim that it is a satisfactory plan that will get us through the initial period. You have to understand the agreement is a binding contract. It was emphasized by the state.

This document is scheduled to last for three years beyond where the City reaches fiscal stability.

The document also required the program management director and the CFO serve a five year term. They are less than one year in. It was contemplated in the beginning this would take a long time. It is no surprise, after the city voids this plan after eight months.

It was not enough time for the city to reach the fundamental changes given the shortness of time to operate. It is our contention that the current plan should be followed to work this plan through. The governor has said on more than one occasion that he wants to be a partner.

The city needs a partner, we need resources that we don’t have but the state does have. We should work together as a benefit to the city sthe state and the entire region. It is important the city comes back. It is our contention that patience be given and work as partner instead of blowing up a plan that’s designed to take years. We would say the current plan should be allowed to see its way through.

10:52AM

Rebuttal by the state: Headen said the city’s actions of cuts in healthcare, furlough days and the like. There appeared to be a lack of enthusiasm for cutting and no sense of urgency to move on the cash crisis.

He said: Counter measures $6 million surplus this year… we’re aware of that, but that remains to be seen. Mr. Corley points out two thirds of the counter measures are structural. There are problems with timed payments due. The changes the city has made are inadequate.

Finally with regard to longterm liabilities: we did not suggest that some of those liabilities don’t have revenues attached to them. But there is still long term liabilities in the city. I could back out my mortgage from my liabilities but I still owe it. That is the same with the city.

The city owes $14.9 Billion dollars and picking out certain items with dedicated revenue stream changes the staggering amount of long term debt it will have to carry.

11AM

Keeland is rebutting the state:

He says it is predictable that in Public Act 4 and other challenges . I would predict if this action leads to an appointment of emergency financial manager it will lead to a flurry of lawsuits which will delay things and he doesn’t want the city to suffer as a result. The agreement with the state has not lapsed, I would suggest introducing an emergency manager will lead to more litigation and still more problems and delays.

Irvin Corley’s turn: we have thrown in low hanging fruit in ways to cut and reduce spending. We’re going to have full year savings now from union contract changes. In regard to interest rate swaps the downgrade last November is a potential triggering event. Why ad an additional layer of trouble with an emergency manager? The city has sufficient revenue coming in to cover bonds, a continual revenue stream that is coming in and has been on the books for years.

Whitaker said: I guess in my neighborhood where I grew up we were taught a deal is a deal. You probably heard the same thing.

The deal is not over, keep the current deal you have in place. It can grandfather in and the law is clear on that regard. If there are more milestones that need to be added, we can incorporate more. No document is perfect. The truth is everything can be improved and to the degree that financial stability is on the table. I would have to disagree that the city council is not cooperating. The contract is working.

You’re getting the information that you contracted for and you are getting the information that can get more revenue up.

The plan in place gets us where we want to be, instead of the displacement of public officials which I believe is beyond undemocratic. I say stay the course!

Hearing over.

WATCH LIVE: Detroit City Council appeals in Lansing over possible EFM