Detroit has its emergency manager: Now what?

Rod Meloni discusses next steps after state appoints emergency financial manager in Detroit

By Rod Meloni - Reporter, CFP ®
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DETROIT - Governor Rick Snyder did not use the words but his actions said what any parent might: "enough of the messing around."

This part he did say: "It's time to roll up our sleeves and get to work." He made it clear, as did Kevyn Orr, Detroit's newly appointed emergency manager, that for all the consternation and gnashing of teeth, the idea of emergency management is a far better fate than the one awaiting if too many citizens are unwilling to get onboard: Bankruptcy!

Orr pulled no punches when I asked him in the news conference about the Detroit City Charter. The State Review Team said in no uncertain terms that the Detroit City Charter as written is an impediment to forward progress and contributed significantly to the City's inability to extricate from the financial morass it finds itself mired. The state's new emergency manager law, that will take effect just three days after Orr moves into his City Hall office, prevents him from violating the charter.

I asked Orr if he had read it and whether he felt it might prevent him from making the necessary moves to solve Detroit's vast money problems. He said yes he had read the charter, no he cannot violate its directives on his own. But he said if he gets consensus, particularly from City Council, then change is not only possible but liberating.

"When I say consensual I mean really, let's get at it and work together because we can resolve this as people of good faith. Don't make me go to the bankruptcy court. You won't enjoy it," Orr said.

He said that last piece twice in two different ways as not to be mistaken. Mess with him, make his life miserable, fight him tooth and nail, he can and will pull the bankruptcy lever. He did not have to say that will exponentially increase the cost of fixing Detroit and could quite possibly remake the city in the image of some judge in southern or eastern Ohio instead of someone sitting here on the ground in the city. Now there are those bellicose few who are happy to say "bring it," as if jumping into a 3-foot-deep swimming pool from a high dive head first makes sense.

What he is saying as clearly and as gently as he can is that everyone in the city is far better off with his decision making. Many distrust those kinds of remarks as a Faustian bargain they can do without. Sadly though, after half a century of City leaders kicking the can down the road, they are left with two choices: worse and worst.

Yet for all the public pronouncements of teamwork and olive branches back and forth [city council decided today not to sue Orr's appointment in court] there is something brewing that might make Orr's threat academic. A new Michigan State University study of Michigan Retiree Healthcare Benefits shows some staggering and frightening numbers that may seal Orr's deal and negate his threat before he ever hits the City County building's 11th floor. Detroit's future obligations are just under $5 billion or half of the city's total debt load. What that means in practical terms is before the City can even pay its out-of-control bills 30 cents of every dollar is already spent. That cost breaks down to s $6,965 for every man woman and child in the city; five times more than any other Michigan city's retiree healthcare costs.

The report deems this "Not sustainable." That would be a monumental understatement considering only half the city pays its property taxes and the average value of a Detroit City home is roughly $7,000. There is [by comparison] next to no money coming in and the costs continue to spiral out of control. Add to that another monster hiding in the closet: unfunded pension obligations.

The city is currently auditing those numbers but I am told preliminary findings show the city's pension funds are grossly [and quite possibly criminally] underfunded. Many of the investments the funds went into are in real estate that has lost most if not all of its value. If in fact these findings are correct, there isn't enough good will in the state to keep Detroit out of bankruptcy! There are no good, simple or easy answers.

So while the young, fit, energetic U of M grad will bring his vast turn around and bankruptcy experience to the emergency management table, he is not Superman. It appears more than likely the numbers will decide where Detroit ends up, not Kevyn Orr. What's next?: the largest Chapter 9 Municipal Bankruptcy in U.S. history unless something dramatic or miraculous happens.

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