DETROIT (Reuters) - A takeover of Detroit’s shaky finances by the state of Michigan can be avoided by showing that the city is willing and able to fundamentally change how it works, Mayor Dave Bing said on Tuesday.
“There are things we must do here and we’ve got to show clear evidence that we’re not opposed to change,” Bing told Reuters in his office in downtown Detroit.
“If we don’t and we continue going down the path we were going, it’s a bottomless pit....We’ve been working diligently for quite some time to put measures in place so we don’t go there,” Bing said.
Any day now, a review team appointed by Republican Governor Rick Snyder could complete its scouring of Detroit’s sagging accounts and recommend an emergency financial manager for Michigan’s biggest city. The manager could decide filing for bankruptcy, unless the move is blocked by state official. Such a filing would be the largest municipal bankruptcy in U.S. history.
“We think there’s light at the end of the tunnel,” Bing added. “We’re not overly optimistic, but at the same time we’re nowhere near as pessimistic as some others.”
Detroit’s chief financial officer, Jack Martin, said meetings with the review team have gone well.
“We would say the progress has been outstanding, but we don’t always know what motivates decisions in Lansing,” he said, referring to Michigan’s capital.
Bing said that Detroit has received $20 million from the state that “will take us through the April time frame” and that ongoing winter tax collections will “help get us through the end of the fiscal year.”
The $20 million came from a bond sale last year that raised about $137 million and was initiated because Detroit was precariously close to running out of cash. Worries that the city’s weak finances could result in debt defaults or even bankruptcy have led credit rating agencies to push Detroit’s ratings deeper into junk territory.
The city’s downward spiral has been decades in the making, but one of the biggest factors has been a steep population drop that has reduced its revenue, resulting in years of budget deficits.
Since Bing, a former automotive supply company executive and National Basketball Association player, came to office in 2009, Detroit has cut more than 2,000 employees and reduced benefits and wages for those who remain on the payroll. But the slow pace of reform and opposition to some measures by the nine-member city council prompted the state to tie release of some of the bond money to specific goals and to launch the review process.
The city’s labor costs, including health care and pensions, are slated to drop to $968 million, or nearly 49.5 percent of the operating budget, in the fiscal year ending June 30 vs. $1.14 billion, or 45.5 percent, a year earlier.
LONG-TERM DEBT ‘MAJOR PROBLEM’
In the last few months, a majority of the council has supported Bing’s reform measures to stave off further state intervention.
“We’ve been working diligently for quite some time to put measures in place so we don’t go there,” Bing said.
CFO Martin, who was appointed last May as part of an agreement between Detroit and the state of Michigan said that now the city’s short-term cash flow problems have been solved, an ”emergency manager is easily avoidable....
“But our long-term debt is a major problem,” he said, adding that Detroit, which has about $8.2 billion of outstanding rated debt, holds weekly talks with investment banks and bond insurers. And talks are continuing with counterparties over the termination of interest rate swaps, which were triggered amid credit rating cuts last year. The termination could cost the city as much as $440 million or about 22 percent of its operating budget.
“As they stand right now, there are no threats being made to do anything about our position with the swaps,” Martin said, adding the city is looking for ways to unwind the swaps through a debt restructuring. In the meantime, there is the possibility of an agreement that preserves the rights of the city and the counterparties, he added.
“That has not been executed yet,” he said. “It’s been under discussion for several months and that may come to a conclusion some time within the next couple of months.”
Martin said Detroit is about 70 percent of the way through cutting an additional 500 people from its payroll, a process that will be completed by June 30. He said he also sees room for concessions from the city’s unions on healthcare, but added that no further layoffs were planned because services for the city of 700,000 would be hit hard.
Additional reporting by Karen Pierog in Chicago; Editing by Tiziana Barghini, Mary Milliken and Leslie Gevirtz