Monday, November 21, 2011

10 Things You Should Know About the City of Detroit's Finances

Adding It All Up
The City of Detroit once again finds itself in the midst of a financial crisis. This time around, it faces the distinct possibility of running out of cash as early as February 2012. Mayor Dave Bing delivered a speech last week in which he outlined his ideas for keeping Detroit afloat; one which most observers have called inadequate at best. The City Council is currently working on there own proposal.

In the coming days and weeks, it is likely that Detroiters will see numbers, spreadsheets, and graphs fly through the news media as elected and appointed officials - as well as the various labor unions and other interested parties - offer competing plans to find the proverbial light at the end of the tunnel for the Motor City. Many of the ones that I have seen thus far seem to be written in accordance with the old college adage, "If you can't dazzle them with brilliance, baffle them with baloney."

(That's not the original wording of this adage, of course. However, I endeavor to keep this blog "family friendly.")

As I think about all of this, I have come to the conclusion that there are ten things that every Detroiter should know about our community's financial condition as well as the politics that surrounds said condition.

#1. Our Debts Are Huge
Mayor Bing and others like talking about how "unsustainable" pension costs are for the City of Detroit, even though our beloved Mayor pushed pension reforms through a few months ago that - at the time - he said solved the problem. Regardless, the fact remains that reforming our legacy costs will only take us so far. The real problem, in my opinion, is all of the debt that we have accumulated over the years.

The City of Detroit carries billions of dollars in debt. Between all of the various budget categories (our general fund plus the non-departmental and various enterprise agency funds), the City of Detroit is responsible for debt service payments of $556 million for the current fiscal year. That is drastically larger than our pension costs.

#2. The Solutions Offered Are Small
Reacting to Mayor Bing
Mayor Bing talks about privatizing city services. He wants DTE to take over our street lights, even though DTE was responsible for 5 power outages in the Warrendale neighborhood this year alone. He also wants to allow a third party to manage out city's bus service, even though such a service won't have the ability to make our aging bus fleet any younger.

The City Council wants to add additional layoffs and cuts to the plan.

Others have talked about regionalizing at least some of the services that the City of Detroit currently provides.

These solutions will likely postpone the point where the City of Detroit finally runs out of cash. None of them, however, appear large enough to change things truly.

Moreover, there is also the fact that every service that is cut gives residents and businesses one less reason to stay in Detroit. When they leave, they take their tax dollars with them. As such, every service cut for budget reasons often necessitates another such cut the next year. This is the downward spiral that Detroit has been in for decades.

#3. The City of Detroit is Headed for Bankruptcy by 2017
Mayor Bing has demanded, and received, a series of concession from the City of Detroit's labor unions. In spite of concession after concession - as well as service cuts and new fees for residents and visitors - the City of Detroit is again in the familiar position of running out of cash. Eventually, we will run out of cash even if the unions agree to his current demand for concessions.

Detroit is Headed Here
One then has to ask: how will we meet our debt service payments once we have run out of cuts to make?

I'm sure Mayor Bing and the City Council will juggle things around and make enough cuts to enable us to get through the next few months. After that, there's another budget crisis and another round of cuts awaiting for it. As someone who has written a couple dozen articles about the City's budget, and has been following the process for close to 20 years, I have to say that my best guess is that we'll likely hit the proverbial budget cutting wall by 2017.

If we haven't gone into bankruptcy voluntarily then, or made changes that are much, much bigger than anything that is currently proposed, then our creditors will likely drag us into bankruptcy on an involuntary basis.

Some will say that I'm being to pessimistic and point to something that a group of hipsters are doing that will save the city. Others, of course, will say that I'm being overly optimistic by suggesting that the City of Detroit might actually make it all the way to 2017 without being hauled into bankruptcy court. Either way, I stand by my prediction.

#4 Refinancing Our Debt is Essential
There are very few communities that can support more than half of billion dollars in debt service payments every year for an extended period of time. With so many of our residents living below the poverty, Detroit clearly isn't one of those cities.

The challenge, of course, is that a refinancing of this magnitude requires a certain level of cooperation from Wall Street - unless it happens under the supervision of the U.S. Bankruptcy Court.

#5 Wall Street Thinks Short Term
Speaking of Wall Street, I feel a need to pause and remind everyone of one important thing about those who work on Wall Street. Generally speaking, they tend to think fairly short term. They tend to look at things with a 3 - 6 month time horizon. Occasionally, they might look at things with a 1 or 2 year time horizon, but that's about it.

#6 Residents Need to Think Longer Term
Homes in the Warrendale Neighborhood
Much will likely be said about Wall Street in the coming weeks and months. All of it needs to be tempered by the short term horizon that they make their decisions on. Since most residents bought their homes with a 30 year mortgage - and since this is our homes and not just another transaction - we as residents need to be the ones who think about the long term picture.

If we don't think about what our life will be like 3 or 4 years from now, no one else will.

#7 Politicians Make Bankruptcy More Likely
One of the great ironies of this entire situation is that government officials who stand in front of TV camera and vow that the City of Detroit will never go into bankruptcy actually make it more likely that we will go bankrupt. In order to understand why this is true, one needs to go back over some of the things that I've talked about thus far.
  • The City of Detroit is paying $556 million in debt service payments, which is way more than it can afford;
  • Because we're paying more in debt service than we can possibly afford, it is essential that we refinance our debt;
  • Refinancing our debt requires a certain level of cooperation from Wall Street, which is populated by people who base almost all of their decisions only a few months out at a time;
  • Because an involuntary bankruptcy is still a few years away, and they base their decision in months rather than years, such a prospect does not factor into their decision making;
  • Since this prospect isn't a part of our decision making, no one on Wall Street really has any incentive to help the City of Detroit refinance its debt load - unless the prospect of us entering into a chapter 9 bankruptcy on a voluntary basis is suddenly a part of the equation.
When government officials insist that a voluntary bankruptcy will never happen, no one on Wall Street has any incentive to do anything big enough to change the dynamics of Detroit (i.e., help us refinance our massive debt load.) In my opinion, a much better tack to take would be to say something to the effect of, "We don't want to go into bankruptcy. We would prefer to restructure all of our debts outside of it, but we might not have an alternative."

The News Isn't Good
#8 Other Cities May Get Dragged Into Bankruptcy
If the City of Detroit were to go into bankruptcy on a voluntary basis, there is a good chance that it could be structured in such a way that only Detroit goes into a chapter 9 bankruptcy. However, if we wait a few years until an involuntary bankruptcy happens, neighboring communities simply do not stand a chance.

#9 Politicians Don't Want Anyone Looking at Them
I'm convinced that the main reason why the City of Detroit hasn't already refinanced its massive debt load is that no one in power wants that many attorneys and accountants looking over their books. They already fight FOIA requests like a Deadbeat Dad would fight a paternity test.

Residents looking for information are routinely shuttled from office to office by one bureaucrat or another.

I shudder to think what would happen if dozens of accountants and attorneys suddenly wanted unrestricted access to every financial record the City of Detroit had.

#10 Residents and Businesses Must Be Involved
It is tempting to let Mayor Bing and the City Council duke this one out with the labor unions. Unfortunately, no matter which one of them "wins", we will all lose unless we keep the long term picture is kept in mind.

We have to ask one question consistently: Will whatever plan they adopt truly solve our community's problems or is it merely another temporary bandage?
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