Detroit within months of bankruptcy

Over the past several weeks, Detroit Mayor Dave Bing has offered a stark picture of the city’s near-term prospects. By April the government will run out of money. The city faces a shortfall of $45 million, with an accumulated deficit of $180 million.

Detroit’s problems didn’t start yesterday. As The Economist writes the combination of falling property values, shrinking population, the rising cost of public services in a sprawling city, and the effects of the recession, “have provided the trigger for the crisis.”

Mayor Bing’s plan to shore up the city’s budget includes raising revenues with an increase in the C-corporation tax, and collection of past receivables, cutting spending by eliminating furloughs, a 10 percent pay reduction, 1000 layoffs, minor changes to retiree pensions, modified contributions to employee health plans, outsourcing the management of bus services, and a 10 percent reduction in vendor payments. These actions are estimated to save $258 million.

The wild card is what will happen to Detroit’s pension system. Without reform the city’s rising pension costs will continue to batter Detroit’s finances. The city’s pension and health care costs represent 13 percent of Detroit’s budget, or $218.5 annually. Unless Detroit’s 45 unions agree to structural changes, the Mayor warns, Detroit will be taken over by a state-appointed receiver according to Michigan’s emergency manager law.

Mayor Bing’s plan doesn’t have a great deal of support from the City Council with the rhetoric becoming increasingly charged against the Mayor and the notion of a state takeover of the city’s finances. But in order to avoid a takeover the Mayor and Council must come to an agreement. In the meantime, Moody’s is reassessing the city’s general obligation debt and sewer bonds ratings. Standard and Poor’s rates Detroit’s long-term general obligation debt BB, with a stable outlook.