Detroit EFM? Going through the motions

Rod Meloni discusses likelihood, time table for emergency financial manger in Detroit

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DETROIT - While Governor Rick Snyder and State Treasurer Andy Dillon said today they're leaving the door open for the City of Detroit to redeem itself, let there be no doubt: Detroit will get an Emergency Financial Manager.

He or she will likely take up residence in the Mayor's Office Suite by the end of January. After all of the emotional drama the Treasury Department's been through with the City for the past year, [remember ‘before you take over our city we will burn it down' and P.A. 4's demise?] making certain all the I's are dotted and the T's crossed have become an important norm. That is where we are, the State going through the motions. Tuesday night the State declared a "serious financial problem" after a preliminary financial review by Treasury. The process under Public Act 72 can take up to a month. Treasury needed a week, and why not? It's had unfettered access to Detroit's books for a year now and knows the numbers through and through. Still, all the bases need to be touched for the runs to count.

Read more: Is emergency financial manger inevitable for Detroit?

Now, as the result of this all of a sudden "discovery" of a "serious financial problem" Andy Dillon and the Governor have created a financial review team for Detroit. Its members are the Treasurer, Michigan Auditor General Thomas McTavish, Ken Whippel, Darrell Burks, Dr. Ronald Goldsberry [from Detroit's Financial Advisory Board] and Frederick Headen, Dillon's state lawyer. Together this group will take yet another look at the City's pathetic excuse for financials and make a determination whether a "financial emergency" exists. The team gets up to ninety days to make its decision. Dillon says it's likely they can do this in under 30, but again, they need to go through the motions. Based on what the financial review team tells him, the Governor will then decide whether an Emergency Financial Manager needs to be appointed. Count on it!

To his credit, the Mayor is going down swinging. Dillon told Bing and his beleaguered turn around team last week the only way it can avoid an EFM is to find roughly forty million dollars in cash while the review team does its review. So, today Mayor Bing trotted out his Chief Financial Manager Jack Martin and new City Finance Director Cheryl Johnson to announce they intend to start collecting delinquent property taxes and sell off impounded cars for scrap as a way to raise that needed cash. Of course, this is something the Mayor said he would do this time last year and only could scare up ten or eleven million dollars during that time. So while the pronouncement is right minded and the norm in any other city; it's simply too little too late. Frankly, it's also inadequate to the task of staving off an EFM. This we know because Dillon said Wednesday knowing how close to the financial edge Detroit is he is already interviewing EFM candidates.

This means there is a pink slip for each and every member of the Detroit City Council. While it may meet in special session between now and the end of January, its days of holding court on how to spend money the city doesn't have and holding up progress are finished. Mayor Bing, who also bears considerable responsibility for this ignominious end, will fare somewhat better. Treasurer Dillon told Local Four News today that in Cities where EFM's are in place, [Flint and Pontiac] the mayor is kept on to help steer through the murky waters of paring back expenses and becomes co-captain of the turnaround. Ultimately though, the EFM is the one who makes all of the financial decisions.

Now comes the ultimate question; will Detroit end up in Chapter 9 Municipal Bankruptcy? Treasurer Dillon said Wednesday afternoon "Chapter 9 is not imminent. This can be resolved outside of that. That's our hope." There can be no doubt that is his and the Governor's hope. And while hope springs eternal, we are all now acutely aware the city's cash is not. Detroit has roughly seventy million dollars left in an escrow account, money it borrowed earlier in the year as a stop-gap to get to next June 30th. Dillon has been and is now still sitting on that cash. He released ten million dollars last week and he is now renegotiating the so-called milestone agreement Council and the Mayor could not complete previously as a way to release roughly twenty million the City needs to get through December without those legendary payless paydays. The Treasurer says he will need a minimum of fifty million in cash to deal with the turn around. But let's get real here. For all of Dillon's assertions to the contrary, once in, The EFM puts Chapter 9 into play. How? Because P.A. 72 says the EFM is the only person who can tell the Governor whether municipal bankruptcy is avoidable. Dillon is trying to get his preferred restructuring firm, Conway McKenzie, in place to help with that difficult determination. They will take a long serious look at whether it makes sense to declare the nation's largest ever municipal bankruptcy.

The Governor will likely have to make that very difficult decision. In a previous blog regarding Detroit's finances, I wrote "all roads lead to Chapter 9" because as a veteran journalist having covered more bankruptcies than I ever want to even count [General Motors, Chrysler, Kmart, Lear, Delphi] Detroit's financial troubles far exceed anything anyone can solve through budget cuts and layoffs. We won't know for certain whether it's preventable until sometime next spring or summer. Let's hope it won't happen, but it sure seems as inevitable as the EFM.

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