Consent and dissent

The short-term fix — and the long-term gorilla in the room

There are lots of daunting numbers swirling around Detroit's financial crisis, but none of them is more devastating than this one: 237,493.

That figure represents the decline in the city's population between 2000 and 2010.

Let that sink in for a moment.

At the start of this new century, Detroit had more than 950,000 residents. That number has been reduced by more than 25 percent, according to census numbers released last year. Nearly one-quarter of a million people. Gone. And as they fled, or were driven away, hundreds of millions of tax dollars went with them. Property taxes. Income taxes. Business taxes.

From 2002 to 2011, the city's annual revenues decreased by more than $250 million. 

Two weeks ago, with Gov. Rick Snyder wielding the threat of an emergency manager like a loaded pistol, the City Council, on a bitterly contentious 5-4 vote, joined Mayor Dave Bing in signing off on a consent agreement that's intended to help stanch the flow of red ink.

Those city officials who signed off on the deal say they had no real choice. Had they not agreed, then the governor stood ready to pull that trigger and appoint an emergency manager with the power to, among other things, remove elected officials from office and sell off city assets.

However, the law creating the emergency manager position is being challenged on two fronts. A lawsuit filed in state court claims it is unconstitutional. In addition to that, a union-backed drive appears to have collected enough signatures to allow the state's voters a chance to give thumbs up or down on the emergency manager law, known officially as Public Act 4. If the state confirms that the requisite number of signatures have been collected, then the law gets put on hold until voters have their say.

Given that, say opponents of the consent agreement, the city should have held firm and fought to maintain complete sovereignty.

It's a contentious issue with valid points on either side.

On the one hand is the fact that Detroit's leaders have long failed to make the far-reaching and difficult structural changes necessary to ensure the city remains financially solvent. There have been warnings for years that a crisis would occur if action wasn't taken. But, as more than one person has observed, officials in many ways opted to "kick the can down the road," continuing to borrow massive amounts of money to pay the city's bills, and merely forestalling the day of reckoning that has finally come.

Even so, this is supposed to be a democracy. For many in Detroit, having the state usurp the power of duly elected local officials strikes to core principles. The often violent struggles that preceded the Voting Rights Act of 1965 are still a fresh and painful memory for some, and the importance of that cannot be dismissed.

There is, though, an equally important aspect to this whole debate that has been largely absent from the discussion so far.

Though officially called a "Financial Stability Agreement," even the most austere measures being forced by the state are not going to provide Detroit with economic stability as long as the city continues losing people at a rate of more than 20,000 residents a year.

Mayor Dave Bing has repeatedly stated that Detroit's downward spiral can't be reversed by austerity alone; there's no cutting our way out of the problem. 

The city is far from alone in facing daunting deficits. Places as far-flung as Harrisburg, Pa., Jefferson County, Ala., and Stockton, Calif., are wrestling with insolvency.

It is even bigger than that. Consider the financial upheaval in European countries like Greece, or even the fierce debate under way over America's national debt and the fallout that continues from the financial meltdown that began in 2007, and it becomes apparent that at the heart of all this are profound questions about capitalism itself.

Although there are aspects that are unique to Detroit, the case can be made that the city that once occupied the cutting edge of modern industrialism is again at the forefront of change, only now it is leading the way in trying to figure out how to survive in a world economy that is awash in debt.

And debt is certainly something Detroit knows about.

How we got here

In April of 2005, as he was leaving his appointed job as Detroit's auditor general, Joe Harris issued a searing indictment of Detroit officials. 

In a presentation to the Detroit City Council, Harris pointed out that former Mayor Dennis Archer, in 2000, warned that the city would be overwhelmed by debt within a decade without drastic measures to reduce the size and costs of city government.

Throughout his 10-year term, Harris continued to issue similar warnings, but they went largely unheeded by the council and Mayor Kwame Kilpatrick. A pattern emerged: Budgets with unattainable revenue projections would be submitted and approved. When the resulting deficits would inevitably arise, the city would borrow money to cover the shortfall, creating long-term debt to address immediate spending needs.

As the financial review team appointed by the state reported last month, city officials repeatedly adopted budgets that "knowingly overestimated revenues." 

To cover the shortfall, the city borrowed and borrowed and borrowed. From 2005 through 2011, the city took on more than $600 million in new debt to meet its general fund expenses. The problem with that kind of borrowing is that, as with households making basic purchases on credit cards, meeting obligations becomes increasingly difficult because repayment of that debt becomes more and more of a burden.

It is not that the city didn't make any cuts. From 2002 through 2011, the city's workforce went from 17,480 employees to 11,824, a reduction of more than 30 percent. Other costs, however, continued to rise. In 2002, the city was paying out $76.2 million a year in pension costs and $119 million in what are known as "other post-employment benefits" — which primarily cover the medical expenses of retirees not yet eligible for Medicare. Those two items total more than $195 million, which represented about 7.8 percent of the city's total revenues, according to the annual financial reports the city is required to submit to the state.

A decade later, in 2011, those costs had ballooned to $133.3 million for pensions and $325 million for the other post-employment benefits. That combined annual total of more than $458 million represented more than 19 percent of the city's total revenue. 

State law prevents the city from attempting to lower those payments for the retired workers already receiving them. 

Back in 2005, with those costs already visible on the horizon and Kilpatrick sitting in the mayor's office, Harris told the council that it would have to step up and take the lead in ensuring that the city lived within its means. But that didn't happen. 

"Lansing and Wall Street will be watching," he said as his 10-year term as auditor general expired. "Failure by this body to satisfactorily develop a plan to address the anticipated shortfalls may be your last opportunity to do so for several years because your failure will prove that our elected officials are incapable of governing this city."

The warning proved prophetic.

Harris is now the appointed emergency manager for Benton Harbor, which has had its own years-long descent into a fiscal hole.

In a phone interview last week, Harris told Metro Times that it is vital that the city provide core services such as police, fire and public transportation, but that it is going to have to find "cutting-edge" ways to ensure that government operates both effectively and frugally.

Not surprisingly, Harris, who briefly served as Detroit's chief financial officer while Ken Cockrel Jr. served as interim mayor after Kilpatrick was forced to resign, is a proponent of state intervention, saying that the city is in dire need of qualified and innovative experts. 

Under the terms of the consent agreement entered into two weeks ago, a nine-member financial advisory board has to be established within a month. That board — with members appointed by the governor (3), mayor (2), City Council (2), state treasurer (1) and one member jointly appointed by the mayor and governor but subject to confirmation by the council — will provide "targeted operational and technical support and consultation" in a variety of areas including payroll and accounting, and financial reporting. It will also monitor and report on the city's "ongoing financial performance."

In addition to that board, the city is also required to hire a chief financial officer and program management director.

Final decisions will continue to rest with the city unless it fails to meet the conditions outlined in the agreement. Those reforms include such things as income tax collection improvements and consolidation of departments. 

David Whitaker, director of the council's Research & Analysis Division, explained it this way in a report issued before the council's vote:

"The basic mechanism of the agreement works essentially like a light switch; city government continues to have power until there is a 'Reform Default Condition' in which the PMD [program management director] and FAB [financial advisory board] determine that they are not doing enough ... to pursue the state's reform agenda."

At that point, the switch is flipped and the state is granted the power to unilaterally determine policy and make financial decisions for the city. In other words, if the city fails to abide by the terms of the agreement, the equivalent of an emergency manager will take over.

The public, at least the part of it that showed up to weigh in on the issue in front of the City Council in recent weeks, was sometimes thoughtful, but more often outraged, if not belligerent. One community activist declared that anyone who voted for the agreement was either "too stupid, retarded or traitorous for the people to allow you to stay in office." 

Councilmember JoAnn Watson, according to published reports, raised the issue of $220 million the state promised to provide to Detroit in return for the city agreeing to lower its income tax rates. The deal was struck when John Engler occupied the governor's office, but the money never materialized. 

Watson also brought up the issue recently when speaking at a national gathering of anti-foreclosure activists held in Detroit. Just as the city has been devastated by the loss of property tax revenues the crisis triggered — a crisis caused at least in part by predatory lending practices that often targeted low-income minority homeowners the banks knew wouldn't be able to repay loans once higher interest rates kicked in — Detroit is feeling the sting of high bond rates because of its financial predicament.

At this point, Detroit has a rating equivalent to "junk bond" status. 

Watson and other critics of the consent agreement, such as activist attorney Jerome Goldberg, say that, just as the banks are being shielded from losing money on their bad loans as homeowners are shoved to the curb, the state's primary interest is ensuring that the bondholders' investment is protected, no matter how much the city might suffer.

The consent agreement contains no promise of a cash infusion from Lansing to help Detroit through the crisis, even though state revenue-sharing has been cut by nearly 30 percent since 2002.

The state, however, did agree to let the city borrow another $137 million so that it would remain solvent in the coming months. Otherwise, Detroit's coffers were expected to run dry by summer. 

Big Apple's bite

What's occurring now in Detroit isn't unprecedented. In 1975, New York City was on the verge of bankruptcy. 

A report from the nonprofit Citizens Research Council in Detroit described the dilemma.

"The potential impact of a New York City bankruptcy on the city, state, nation and beyond could not be predicted, but the effects were expected to be very serious. If bondholders prevailed, services would be devastated, potentially resulting in strikes and social disorder. ... If services were protected, bondholders would not be paid and the financial markets would be affected."

Looking for a way out of the mess, the state Legislature created an Emergency Financial Control Board composed of the governor, mayor, state and city comptrollers, and three private industry experts. 

The board "had control of the city's bank accounts, could issue orders to city officials, and could remove city officials from office. It could review and reject the city's financial plan, operating and capital budgets, collective bargaining agreements, and borrowing. Most importantly, the EFCB forced city officials to take politically unpopular actions (and conveniently provided a scapegoat for those actions)."

There was also a request for a federal bailout, which then-President Gerald R. Ford vowed to veto. He eventually relented on assistance, however, and Congress approved extending a $2.3 billion line of credit to the city. 

The measure passed the U.S. House by a mere 10 votes.

Within four years, the city's budget was balanced and it was again on sound enough footing to obtain cash through the commercial bond markets. Eleven years after the board was created, its control over city finances was suspended.

However, the city continues to submit its financial plans to the board, which retains the authority to "reimpose control" if the city fails to meet various conditions, including failure to pay debt service when due.

New York City officials were no more pleased with the idea of external control than Detroit's are. Former New York City Mayor Ed Koch described the city as being an "indentured servant" to the financial control board.

U.S. Rep. Hansen Clarke, a Detroit Democrat, last month held a press conference to announce that he intends to ask the federal government to find the funds to help Detroit through its crisis just as New York City was helped. He admitted that as much as $1 billion might be needed, according to published reports.

But given the Tea Party's influence on the Republican-controlled House, and the emphasis conservatives are placing on budget-cutting as the fall election approaches, it is difficult to see Clarke's efforts as anything more than quixotic at this point.

Given the help New York City received, however, is it really unreasonable to think that if Detroit is to recover, it is going to need help in refinancing its massive debt?

Harris, the former Detroit auditor general now running the city of Benton Harbor says it is unreasonable.

If the feds step in to help Detroit, he says, what about other financially stressed units of government? Such places as Jefferson County in Alabama and Stockton in California.

Sounding much like a hard-line conservative, Harris — echoing the sentiments he says were voiced at a municipal bonding conference he recently attended in Philadelphia — says that Detroit created its financial mess, and it is now incumbent on the city to make the cuts necessary to ensure that it remains solvent. Otherwise, the state will step in and do the job for it.

Labor's pains 

In his 2005 presentation to City Council, Harris, along with chastising the mayor and council for lacking the political will to put the city's financial house in order, also heaped criticism on Detroit's labor unions:

"Unless the city's unions accept the reality of the city's financial quagmire, unless city officials make the decisions that are necessary to keep Detroit afloat, a receivership will not only be the outcome, it will be preferable to the dysfunctional government to which our citizens are being subjected."

Seven years later, the city's unions say they've given back — and given back. A coalition of 33 city unions representing about 4,500 workers (not including police and fire fighters) in late March agreed to a 10 percent pay cut and other concessions that would have saved the city nearly $100 million. The Bing administration initially signed off on the deal, then reneged after Lansing said it wasn't enough.

As a result, the new contract wasn't sent to the City Council for ratification.

Richard Mack, an attorney for the coalition, says the state's insistence that the unions concede even more despite the fact that a deal had been reached speaks to what he described as the Snyder administration's hostility toward organized labor in general. 

"They wanted to take on the unions, and take them on they did," Mack says of Snyder and state Treasurer Andy Dillon, a Democrat appointed by Republican Snyder to the post. 

Mack points to union provisions in the consent agreement — such as the elimination of "bumping rights" that allow senior employees to stay in their jobs over others when layoffs are made — as one example of a stipulation that he says has nothing to do with saving the city money. 

"What they did was go after bread-and-butter union issues," says Mack.

On the other hand, the state — which has socked away $255 million in its rainy day fund since Snyder took office — isn't offering to lay any money on Detroit's table. 

"What they did was allow the city to borrow more money so that it could service existing debt," Mack says.

But even council members who voted in favor of the consent agreement say that's not enough.

Dealing with debt 

In 1975, New York City's bondholders "agreed to renegotiate city debt to extend maturities and lower interest rates," according to the Citizens Research Council report.

So far, similar discussions involving Detroit's debt haven't occurred. Figures vary, but Detroit's debt has generally been reported to be about $12 billion (although much of that is associated with the Water & Sewerage Department, and will be repaid from fees charged users throughout the region).

But at some point, those talks are going to have to be put on the front burner, says City Councilmember Ken Cockrel Jr. (son of Ken Cockrel Sr., a legendary champion of progressive causes in the city).

Debt, he says, "is a gigantic gorilla that is crippling Detroit. Moving forward, we have to discuss ways to deal with it."

It's not just Detroit, he says. "There is growing concern in many cities about their ability to meet bond debt."

Former City Councilmember Sheila Cockrel (Cockrel Sr.'s widow) tells Metro Times that the consent agreement could help the city do that.

If the powers that be see that Detroit is actually getting its financial act together, "instead of continuing to kick the can down the road," lenders might be more open to negotiations.

But turning things around is going to be painful. Ken Cockrel Jr., who describes himself as a longtime supporter of organized labor, says that the city unions have to realize that the landscape here has permanently changed. The city's survival demands it.

Council President Pro Tem Gary Brown, formerly a deputy chief in the Detroit Police Department, voices similar sentiments. He, too, voted for the consent agreement. Like Ken Cockrel Jr., he saw it as the only way to avoid imposition of an emergency manager that would be able to make cuts unchecked — and also have the authority to sell off city assets.

Both Cockrel Jr. and Brown say the obligation of the city can't be to provide employment. It can't be if the city is going to survive. Local government is going to have to be whittled down to the point where it is only providing core services: police, fire, trash pickup, public lighting and transportation.

What's crucial is that those services are of high quality. They will have to be. And schools will have to provide the city's children with a quality education.

That is the only way to halt the exodus of people that has been so devastating. That's just the starting point. The key to turning the ship around — and it won't be anything that happens quickly — will be attracting not just young single people, but also families and empty-nesters.

The state is going to have to play a big role. Brown says Snyder can take a big step in that direction by using the power of the governor's office to push for consolidation of the Detroit Department of Transportation and the suburban SMART bus system, followed by overall expansion of service both in the city and the region as a whole. 

As Sheila Cockrel says, disinvestment in the city began as far back as the 1940s. Reversing that trend isn't going to be easy, but it has to be done, not just for Detroit, but the entire metro area.

That's just one example of what some say is the real key: a government mind-set that, along with seeking efficiency, also strives to invest in the city's economic health.

Real recovery

The Rev. D. Alexander Bullock, state coordinator for the progressive Rainbow PUSH Michigan organization, opposes the consent agreement signed by the city. He sees it as a curtailment of voting rights people shed their blood to win, and he rails at the thought that they are being signed away.

Like JoAnn Watson and others who argued against the agreement, he also thinks that the imposition of austerity measures will only continue to drive people from the city and exacerbate Detroit's economic woes.

"To talk about economic stability without talking about economic recovery does not move us in the right direction," he says. 

Detroit didn't cause the Great Recession of 2008. And it didn't create the auto industry's problems or drive manufacturing to Mexico or overseas. Neither is the city responsible for collapse of the housing market and the foreclosure crisis. It is a victim, with tens of thousands of families driven from their homes, which were left vacant to be stripped bare by scrappers.

And he sees using the threat of imposing something as draconian as an emergency manager to get officials to sign the consent agreement as "gangster politics."

"It's not really a choice if you are being coerced into doing something," he says.

He's troubled by the fact that the discussion so far has focused solely on issues of "financial cut and cap" and not on ways that government should be used to spur economic recovery.

What is absent in Detroit is a larger vision. It is not enough to simply say we are going to cut. That won't lead the city out of the devastation. 

"Detroit is demoralized at this point," he says. "What it needs are public officials with bold ideas. Right now, expansion and investment are not part of the political lexicon. And they need to be.

And it is not just Detroit.

The problems may be more profound in this city, but the situation is far from unique.

"Poverty and disinvestment" in America's urban areas "has to become part of the national conversation" in the run-up to November's elections, he asserts.

If it's not, then the people who are the lifeblood of this city are going to continue to flow out of it, and there will no recovery as long as the patient continues to bleed.

Curt Guyette is Metro Times news editor. Contact him at 313-202-8004 or [email protected]

Scroll to read more Metro Detroit News articles


Join Detroit Metro Times Newsletters

Subscribe now to get the latest news delivered right to your inbox.