DETROIT – In the first week of January, as Detroit readies to visit the North American International Auto Show, a financial review team will move itself into Detroit City Hall. This review team will be made up of recommended members sent by the Governor, the Treasurer, the Department of Management and Budget, the Senate Majority Leader, the Speaker of the House and a couple of residents from the City of Detroit thrown in for good political measure. They will do a serious and deep dive on the City's books.
They will also grill department heads and even City Council members. They will attempt to decipher whether the city has no financial stress, some financial stress which would likely lead to a consent agreement between the Mayor, City Council and the Governor. Governor Rick Snyder and State Treasurer Andy Dillon think this is the right answer.] City Council and Mayor Bing do not and swear they can come up with their own solution. Yes, negotiations between Detroit's 45 unions and the City are ongoing where healthcare, work rule and pension concessions of many millions of dollars are needed and difficult to get. All indications are there is some progress, but so far the Mayor's office keeps putting off any deadline where it might announce a plan to solve the City's crisis on its own.
Let's get real here. The Mayor swears he is working well with City Council and the Unions. The Treasurer and the Governor keep saying it looks like things are going well; but they warn there's little margin for error here. In the end, for all of the political niceties, it is the numbers that will decide and they won't lie. There is one big number looming large on the horizon no one on the financial team will be able to ignore. $14 Billion.
This is the City's pension obligation. It's vital to remember that unlike General Motors, that promised to build better, more fuel-efficient cars that people wanted to drive, there is no new product plan for the City of Detroit. Its revenue base is property taxes. The City's average home value is something in the neighborhood of $7000. The collectable tax on a home value that small amounts to pennies; when the City can even collect. So when the review team looks to decide whether a debt that large is payable in the future, there will be serious concerns. This will be the real moment of truth and it will also force the Governor's hand. A payless payday for city employees would require an emergency manager; something no one from Detroit to Lansing wants.
But what the Treasurer was asked about in his conference call today announcing the financial review team, he sidestepped in large measure. It is the specter of a Chapter 9. [Municipal Bankruptcy] A $14 Billion pension obligation may mean to the City what that Albatross of a municipal incinerator meant to the City of Harrisburg, Pennsylvania. And even when Harrisburg filed, the Federal Judge in the case refused to allow it.
So where does this leave the City of Detroit? Where it has been from the beginning of this crisis, in deep and serious trouble. While residents, politicians and even business people hope for the best and genuinely want to believe the Mayor's proclamations he can turn the city's finances around, the evidence is quite the contrary. Do not be surprised if one day in the next year or so a Federal Judge, and likely on outside the City of Detroit, will be required to step in and decide what is to become of the City of Detroit. If you think an emergency manager will be tough, consider what someone who doesn't live here with the authority to void every contract and push the reset button might do. It's too horrible to contemplate, but sadly, we must.