U.S. economy

FAQ: Michigan's Takeover of Detroit


Once one of the largest cities in the U.S., Detroit has lost half its
population over the past 50 years

Photograph by Jeff Kowalsky/Bloomberg

Once one of the largest cities in the U.S., Detroit has lost half its population over the past 50 years

By the end of this month, Michigan Governor Rick Snyder will name an emergency manager to rescue Detroit’s finances. Whoever lands that unenviable task will face a city saddled with $14 billion in debt obligations and a $327 million operating deficit—a shortfall one-and-a-half times the size of the entire budget of Michigan’s capital, Lansing. The manager will also be granted vast powers to roll over the will of citizens and local elected officials. Here are some answers to questions about what’s happening in Detroit:

It’s been bad in Detroit for years. Why is this happening now?

The city—once one of the largest in the U.S.—has lost half its population over the past 50 years. The resulting drop in revenue has caused Detroit to spend more than it takes in and to borrow ever-larger amounts of money to cover expenses. In 2012, the state declared a financial emergency and entered into a legal agreement with the city. Under the agreement, the city promised to collect more taxes, renegotiate its bond obligations, and undergo a financial review. When the review came out in February, accountants found that Detroit had sunk into an even deeper fiscal hole. Last Friday, the governor moved to appoint an emergency financial manager.

Is Detroit bankrupt?

Detroit hasn’t declared bankruptcy in court. With Snyder’s approval, the manager could begin bankruptcy proceedings for the city, but that would probably be a last resort.

What can the emergency manager do?

Whatever he wants to, more or less. The manager is like a little technocrat: He or she can completely reorganize the city’s finances without the consent of local elected officials. That could include rewriting or voiding union contracts that cover medical care for city workers, laying off city workers, voiding contracts with vendors, restructuring the city’s debts, and taking over the pension system. The manager can also sell the city’s assets, which include, for example, parking meters, the art museum, and the municipal zoo.

This sounds like it could make a lot of people angry.

Yep. The state should expect a barrage of lawsuits from vendors, retirees, bondholders, and unions, says Bettie Buss, senior research associate at the nonprofit research group, Citizen’s Research Council of Michigan.

What other hurdles are there?

Selling assets isn’t as easy as it sounds. There’s no guarantee that the manager could find buyers. Detroit has been trying for years, with little success, to sell the 66,000 abandoned properties it owns. The city’s water and sewer systems are profitable; they are also under federal control, so it’s not clear that the city has the right to sell them. Selling the museum’s art collection would hobble its ability to attract future donors. The biggest question is how much more can be squeezed out of the city’s workers, who have already seen pensions and salaries cut.

What has Detroit done to avoid this predicament?

Officials have made attempts to save money, but they haven’t worked. Last year, officials slashed municipal workers’ salaries by 10 percent. Health insurance contributions were increased to 20 percent. Officials have already almost halved the city’s workforce, cutting the rolls from 17,000 in 2003 to fewer than 9,700 now. Future pensions have been reduced. (Current benefits are protected by the state constitution.) When the city’s credit rating was downgraded to double-C, the state stepped in and guaranteed $137 million in bonds. “That’s kept the city from having ‘payless’ paydays,” says Buss.

So what happens now?

The city has 10 days to appeal the governor’s decision. If the city appeals, it would have to prove in court that the governor has abused his authority. Buss says the state would be likely to prevail.

And then will the city have any say?

Not right away. After 18 months, local lawmakers can vote the manager out of office.

Dwoskin is a staff writer for Bloomberg Businessweek in Washington. Follow her on Twitter: @lizzadwoskin.

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