Dec. 3 (Bloomberg) -- Detroit’s finances will be given a preliminary review by state officials starting Dec. 6, Michigan Treasurer Andy Dillon said, in what may be the first step toward the appointment of an emergency manager.
The 18th-largest U.S. city may face $400 million in penalties if an emergency manager is put in charge, because of swap agreements made with two banks that helped Detroit borrow money in 2009, according to Ted Damutz, senior credit officer for Moody’s Investors Service in Chicago.
Dillon is aware of the potential penalty, Terry Stanton, spokesman for the state treasury department, said by e-mail. He said the financial review is only a first step in a process that may lead to state intervention.
Detroit faces a $44 million cash shortfall by June, on top of an accumulated $155 million deficit. Yesterday, Mayor Dave Bing and City Council members denounced the potential state action, saying the city will heal itself. Republican Governor Rick Snyder has said that while he doesn’t want to name an emergency manager, the city needs help.
“The goal of the mayor and governor is to avoid the appointment of an emergency manager,” Steve Serkaian, a Bing spokesman, said yesterday by telephone. So concern that the swaps penalties may kick in is “speculative,” he said.
The penalties were included in a renegotiated financing agreement after the city’s credit rating was cut in 2009, Damutz said yesterday in a telephone interview. He said the city could try to renegotiate terms if an emergency manager takes over Detroit’s finances. A Moody’s report lists the banks as Zurich- based UBS AG and Siebert, Brandford, Shank & Co. in New York.
Karina Byrne, a UBS spokeswoman in New York, didn’t immediately respond to a message seeking comment on the swaps, left after normal business hours. A person answering a call to Siebert’s West Coast headquarters in Oakland, California, said no one was available to provide a comment on the deals.
Dillon, in a conference call with reporters yesterday, said he ordered a preliminary review because of the city’s worsening cash flow and because the mayor, City Council and union leaders have been unable to agree on a plan to reduce the deficit.
Bing has proposed eliminating 1,000 of the city’s 11,000 jobs, while the council wants to cut 2,300 positions, including 500 from the police and fire departments.
The financial examination will be completed within 30 days, Dillon said. If it shows sufficient distress, a formal review may be ordered to determine further action, which Dillon said wouldn’t necessarily mean the appointment of a manager.
The city’s difficulties “are fixable,” Dillon said. He dismissed the possibility of a municipal bankruptcy.
A state law passed this year broadened the powers of emergency managers over municipal finances, including the ability to nullify union contracts, with the treasurer’s consent. Detroit’s schools are already under control of such a state-appointed overseer.
“It’s our goal to work together with the city in coordination and to have a good, healthy city of Detroit, because that’s critical to the future of Michigan,” Dillon said.
Dillon’s action is “unfortunate,” Bing said in a statement. He said the city would cooperate with the review.
“We believe we have the right plan to address the city’s fiscal crisis,” the mayor said. “We will continue to work with the City Council, our unions and other stakeholders to achieve the necessary cuts and concessions, including pension, health- care and work-rule reform.”
A review can be triggered when a municipality’s bond rating falls to BBB or lower, or the equivalent, Dillon said. Detroit is rated Ba3 by Moody’s and BB- by Fitch Ratings -- both three steps below investment grade. Standard & Poor’s puts the city’s credit one level higher at BB.
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