April 5, 2012 / 1:45 AM / in 6 years

Detroit avoids state takeover, more oversight looms

DETROIT (Reuters) - Detroit avoided a takeover by the state of Michigan on Wednesday after both a review team and the city council approved a consent agreement that will put the city’s struggling finances under stricter control.

The deal, which was passed by the city council in a 5-to-4 vote, “ensures that the future of Detroit is determined by Detroiters and its elected officials,” Detroit’s Deputy Mayor Kirk Lewis said after the late vote.

Earlier in the day a review team appointed by Michigan Governor Rick Snyder also approved the deal to avoid the appointment of an emergency manager to run the city’s finances. The decision came after a state appeals court lifted a temporary restraining order that had stopped the team from meeting.

Detroit has suffered a staggering population decline in recent years, causing its revenue base to shrink. Companies that once paid hefty taxes, including General Motors Co, have reduced their presence in a city long synonymous with the auto industry.

“We all want Detroit to succeed. This agreement paves the way for a good-faith partnership that will restore the fiscal integrity taxpayers expect and ensure the delivery of services that families deserve,” Snyder said.

“The magnitude of the city’s financial challenges means that many difficult decisions lie ahead. We must build on this spirit of cooperation and be willing to act in the city’s long-term interests,” Snyder said.

Under the deal, Michigan will install a chief financial officer, a nine-member advisory board and a project manager to assist the mayor and ensure the tenets of the agreement are fulfilled.

The consent agreement “puts us on track to restructure our City financially and reestablish an infrastructure to make sure Detroit never faces these financial conditions again,” Lewis said. Mayor David Bing was unavailable for comment as he was recently readmitted to the hospital for the second time in a month.

The deal will give the city some state oversight, while requiring more rigorous short-term revenue estimates as well as a three-year budget projection. The state could eventually appoint an emergency manager to essentially run Detroit if covenants in the agreement are broken.

“It’s not going to be easy. We’re going to have to do more, to do more cutting, some public-private partnerships. We’re going to still have to make adjustments. This is just the start,” said Charles Pugh, president of the city council.

The city, which was expected to run out of cash in May, would get some relief through the restructuring of some outstanding debt and the issuance of new debt.

Under the deal it is planned that some outstanding bonds will be restructured to push $37 million in April 1 and May 1 debt-service payments into future years, and issue $100 million of new bonds to fund its fiscal 2012 and fiscal 2013 self-insurance payments.

Detroit’s bond ratings are in the junk category.

Detroit would also have to rework its collective bargaining agreements with unions, some of which have filed a challenge in U.S. District Court claiming the consent agreement would unfairly impair labor deals ratified by their members last month.

“Now we will work on coming up with a restructuring plan with the state. We have to make sure that our 10,000 employees don’t miss a payment,” said Saunteel Jenkins, a member of city council.

Reporting by Bob Carr, John D. Stoll, Karen Pierog, Bob Carr, Editing by Tiziana Barghini, Jan Paschal and Paul Simao

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