The governor of Michigan declared a fiscal emergency in Detroit on Friday, clearing the way for the appointment of an outside manager with broad powers to oversee the finances of the debt-ridden city.
The emergency manager could recommend a bankruptcy filing if he or she found the city’s fiscal problems were insurmountable. If Detroit took such a step, it would be the largest municipal bankruptcy in US history.
Rick Snyder, Michigan’s Republican governor, declared the emergency after a state panel recommended the move. Calling it a “sad day”, he told a city forum: “It’s time to say we should stop going downhill.”
Members of the city council, dominated by Democrats, did not attend the forum. They met on Friday morning to discuss whether to take legal action to challenge Mr Snyder’s appointment of an emergency manager.
Mr Snyder’s announcement launches a 10-day period during which the city council can appeal. “We have to fight till the end, but we have to fight smart,” councilwoman Saunteel Jenkins said.
Mr Snyder had said he has a candidate in mind for the post as emergency manager. The manager would be in place for at least 18 months before the city council would be able to vote the manager out.
The business community welcomed the appointment of an emergency manager. The head of the city’s chamber of commerce said it would allow tough decisions to be made to revamp the city’s bureaucracy.
“We’re collectively quite hopeful that this is the step that the city needs to knock down the last barrier to continued economic growth in the region,” said Sandy Baruah, president of the Detroit Regional Chamber.
The declaration marks an embarrassing turn for the Motor City, which has $14bn in long-term liabilities and an accumulated general-fund deficit of $327m.
The traditional home of US car manufacturing, Detroit has been devastated by decades of globalisation during which its core manufacturing jobs have moved overseas. Even as its population and tax base have shrunk – dropping from 1.8m in 1950 to 700,000 today – its liabilities related to bonds, pensions and healthcare benefits have ballooned.
A recent resurgence by the city’s carmakers – including the “Big Three” of Ford, General Motors and Chrysler, the latter two of which suffered bankruptcy – has done little to stem its decline.
Detroit is not alone – other major cities, notably Chicago, are in similar straits, struggling to afford pension and retiree health benefits they have promised their employees in the past. Such problems are being exacerbated by factors including an ageing work force, slow economic growth and low interest rates that depress investment returns.
In 2009, almost a third of the Obama administration’s $878bn stimulus plan went to local governments to help them pay their bills. But the current budget impasse in Washington means the federal government is unlikely to extend a helping hand.
Last week, a Michigan financial review committee issued a report saying that only state intervention could solve Detroit’s fiscal woes which, by 2017, could see 83 cents of every dollar of police and firefighter payroll spent on pensions.
At a press conference after the report’s release, Mr Snyder said he did not want to see the city declare Chapter 9 municipal bankruptcy, and that it could be avoided.
In November 2011, Jefferson County, Alabama, filed the largest US municipal bankruptcy, involving $3.14bn in bonds. Three California cities – San Bernardino, Mammoth Lake and Stockton – also filed last year.
Dave Bing, Detroit’s Democratic mayor, who was among those opposed to the appointment of an emergency manager, said on Thursday that he was “a team player” who wanted to work with the state.
“There are things [the state] can do to help us get out of this situation faster than we can do it by ourselves,” he said.
Mr Snyder has proposed a complete overhaul of the city’s operations.
The appointment of an emergency manager would mark the failure of an agreement last April that saw the state offer financing to help the city avoid bankruptcy in exchange for more financial oversight.