A state-appointed review team has determined Detroit is in a financial emergency, paving the way for Republican Gov. Rick Snyder to appoint an emergency manager who would need to come up with a new plan to get the city out of its fiscal crisis.
The team released its findings Tuesday, saying in a report to Snyder that "no satisfactory plan exists to resolve a serious financial problem."
The review team pointed to the city's ongoing cash crisis, which have threatened to leave the city without money to pay its workers or other bills. It noted that the city's deficit could have reached more than $900 million in fiscal year 2012 if the city had not borrowed enormous amounts of money; that Detroit has long-term liabilities, including underfunded pensions, of more than $14 billion; and that the city's bureaucratic structure makes it difficult to solve the financial problems.
"The cash condition has been a strain on the city," said state Treasurer Andy Dillon, a member of the review team. "The city has been running deficits since 2005 ... (and) masking over those with long-term borrowing."
Under Michigan law, Snyder has 30 days to decide for himself whether there's a financial emergency. Mayor Dave Bing would have 10 days to request a hearing. Snyder could then revoke his decision or appoint an emergency manager.
The emergency manager would be responsible for overseeing all of the city's spending. Bing and the City Council would keep their jobs, but the manager would decide all financial matters. And only the manager would have the power to authorize the city to take the bankruptcy route.
James McTevia, president of a Michigan-based firm that specializes in turnaround management, said an emergency manager could halt the city's borrowing, freeze debt and restructure finances, including voiding contracts. "The checkbook needs to be taken from the politicians," he said.
However, others said that even with an emergency manager, municipal bankruptcy may be the city's only way out of the financial mess.
"Is it imminent? Well not tomorrow," said Doug Bernstein, managing partner of the Banking, Bankruptcy and Creditors' Rights Practice Group for Michigan-based Plunkett Cooney law firm "You need to give a financial manager the opportunity to formulate a plan and let the plan have a chance to succeed or fail. It may not avoid a bankruptcy, but you don't need to do a bankruptcy today."
Snyder spokeswoman Sara Wurfel said he will review the team's report carefully.
"He won't make a determination immediately, but sooner rather than later," she said. "The governor believes that a strong and successful Detroit is key to Michigan's continued comeback."
Bing said Tuesday's report shouldn't have surprised anyone.
"My administration has been saying for the past four years that the city is under financial stress," Bing said in an emailed statement. "If the Governor decides to appoint an emergency financial manager, he or she, like my administration, is going to need resources — particularly in the form of cash and additional staff.
"As I have said before, my administration will stay focused on the initiatives that most directly impact the citizens of Detroit: public safety, public lighting, transportation, recreation and neighborhood blight removal."
Each of the six review team members agreed on the financial emergency determination, Dillon said.
If Snyder moves ahead and appoints an emergency manager, Detroit would be the sixth and largest city in Michigan to have one. The cities of Benton Harbor, Ecorse, Pontiac, Flint and Allen Park are currently under state oversight. School districts in Detroit, Highland Park and Muskegon Heights also have managers.
A new state law taking effect in late March gives local governments the chance to choose their own remedy when a review team finds a financial emergency exists. However, Detroit loses those options if an emergency manager is put in place before the new law goes into effect, said Terry Stanton, Treasury spokesman.
City Council President Pro Tem Gary Brown said the pace of fiscal change in Detroit has been too slow.
"The political will has often not been there to make the necessary and bold fiscal reforms," Brown said in a written statement. The statement went on to say, "Without a doubt, we need the support and accountability that a State of Michigan partnership offers. We cannot address our legacy obligations alone. And, as Detroit goes, so goes Michigan."
Now that the depth of Detroit's woes is clearer, the most efficient path to recovery needs to be taken and that falls to Snyder, Dillon said.
"A lot of the ingredients for the turnaround of the city are in place," Dillon said. "Now we just need to execute. I do believe strongly that Detroit is fixable and can see brighter days ahead."
The six-member review team began looking closely at Detroit's books in mid-December. Another team had done the same about 12 months earlier, but stopped short of declaring a financial emergency. That team's findings eventually led to a consent agreement in April between Snyder and Bing.
Bing's administration has struggled in meeting some of the consent agreement requirements, partly due to conflicts with the City Council and a challenge to the deal by then-Detroit corporation counsel Krystal Crittendon. The City Council voted last month to "unappoint" Crittendon from that position.
Bernstein said that at this point, it would be difficult for Snyder not to appoint a fiscal overseer to Detroit.
The report confirms "part of what we've already seen, in that the deficits have been running for the better part of a decade," Bernstein told The Associated Press.
He also said the city's underfunding of its pension liabilities is huge.
"I don't know if the word 'shocking' is the right word," Bernstein said. "It's just the magnitude. That's going to be a major hurdle. How you fix that is going to be a major, major undertaking."
Associated Press writers David Eggert in Lansing, Mich., and Ed White in Detroit contributed to this report.