Detroit mayor announces furloughs to avoid bankruptcy

Detroit City Council is balking at next step in a state plan to restore financial stability to the embattled city, delaying a $30 million infusion of state funds.

By MARK GUARINO | The Christian Science Monitor

posted November 21, 2012 at 4:55 pm EST

In order to make up for a $30 million shortfall expected by year's end, Detroit Mayor Dave Bing announced on Wednesday that city employees will take unpaid furloughs and that he would implement “other cost-savings actions” starting the first of January.

“We will ensure that revenue-generating departments are not impacted by these cost-cutting measures. Most importantly, I want our citizens to know that public safety will not be jeopardized,” he said in a statement.

The cutbacks are a response to the latest pushback from the Detroit City Council over demands by state officials to bring long-needed financial stability to the city.

On Tuesday, the city council voted 8-1 against hiring Miller Canfield, an international law firm with offices in Detroit, tasked to shepherd the city though a fiscal reform plan established by the Michigan Department of Treasury last week. Failing to hire the firm puts the city out of compliance with the plan, which is designed to provide the city with access to $30 million in bonds held in escrow since March. The bond money was part of $137 million that the state has raised on the city’s behalf through a debt sale.

Had the city agreed to move forward with Miller Canfield, the state would have released $10 million to the city that same day, with an additional $20 million by mid-December. In a state released late Tuesday, Mayor Bing said the vote “is one more example of how city council has stalled our efforts to bring financial stability to the city of Detroit.” He added that the only remaining cash infusion on the city’s horizon was property tax revenue due in January.

City council members rejected the $300,000 contract with Miller Canfield primarily because it presented a conflict of interest, as the firm was hired by the state to write the agreement that the city is now tasked to follow. Some members also criticized Bing for suggesting the city will go bankrupt by the end of the year and said that they deserved more time to seek other bids.

During Tuesday’s meeting, council member Kwame Kenyatta described the contract as “a violation of morals,” according to the Detroit News Wednesday. “I don’t see how any member at this table in good conscience on behalf of the people of the city can vote for this,” Mr. Kenyatta said.

Council President Charles Pugh also blasted the mayor, telling WXYZ-TV, the local ABC television affiliate,  that the law firm “was shoved down our throat, and we felt like we were being forced into accepting one particular law firm."

"The city of Detroit should not go broke due to one law firm," he added. "If that’s the stance he’s taking, then I think he needs to sit down and rethink his position as mayor.”

Most of the city’s most powerful unions took the city council’s side. A representative for the American Federation of State County and Municipal Employees told the council that a criminal inquiry into the selection of Miller Canfield was needed.  Late Tuesday, the union released a statement calling for a federal and state investigation.

Political scientist Vincent Hutchings at the University of Michigan in Ann Arbor says that it isn’t shocking that the city and state continue to wrestle over procedural issues over how to regain financial stability in Detroit. Besides an obvious political party split – Detroit has long leaned for Democrats while the state legislative majority is Republican – there is also a racial divide, which is “always a subtext in Detroit-Lansing relations,” Mr. Hutchings says.

“People are more inclined to acquiesce to intervention if they think the party seizing control has their best interest at heart. It may well be the governor’s office has the best interest of Detroit in mind, but it does seem patently clear the city council doesn’t think that’s the case,” he adds.

Because both sides represent different interests, it may be unlikely for true harmony down the road “because they don’t have the same worldview and don’t represent the same interest,” Hutchings says. “So the real question is: Why should we expect them to come together?”

In talking with reporters Wednesday, Bing said the city will not miss debt payments and promised that the savings from the furloughs will only be used to diffuse the city’s financial crisis.

“Bankruptcy is not an option,” he said.

Earlier this year, Michigan Gov. Rick Snyder (R) avoided appointing an emergency manager to take control of Detroit’s finances following a state commission report that showed the city’s budget deficit reaching $200 million and a looming emptying of cash reserves. At that time, Moody’s Investors Services issued two separate downgrades of the city’s tax credit rating.

Instead, the governor pushed for a consent agreement that conceded budgetary power to city officials but allowed the state to play a more supervisory role through a chief financial officer tasked to usher the city along to meet fiduciary guidelines outlined in the agreement terms.

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