Is Detroit Going Bankrupt? State Takeover Possible
Business + Economy

Is Detroit Going Bankrupt? State Takeover Possible

REUTERS/Rebecca Cook

Michigan Governor Rick Snyder on Friday officially declared Detroit in a fiscal emergency, setting the stage for a state takeover of the city's financial management and ultimately the possibility of the largest municipal bankruptcy in U.S. history.

The Republican governor said he agreed with a February 19 report by a six-member team of experts that concluded Michigan's largest city is in dire financial shape and a plan put in place last April to aid Detroit was not sufficiently working.

The expert team Snyder assembled in December did not officially recommend the appointment of an emergency financial manager, leaving that decision up to the governor.

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Snyder said he had identified a top candidate to be the emergency manager but declined to identify the person. "I believe it's appropriate to declare the city of Detroit in financial emergency," Snyder said at a forum in Detroit.

Detroit officials now have 10 days to request a hearing with the governor about his determination.

After the hearing or the expiration of the 10 days in the case of no hearing, the governor confirms or revokes his determination. A confirmation will assign management of Detroit's fiscal emergency to a Local Emergency Financial Assistance Loan Board composed of three state officials, including the treasurer, who are all Snyder appointees. That board would also appoint a manager for the city, under the current state law.

Detroit officials also will have the ability to appeal the fiscal emergency determination in state court. But that move would likely not delay the appointment of a manager, who could ultimately recommend the city file for bankruptcy. A Chapter 9 municipal bankruptcy by Detroit would be the largest ever in the United States.

Detroit has faced the steepest population decline of any American city in recent decades. Once the fifth largest U.S. city that shone as the birthplace of the U.S. automotive industry and Motown music, it now ranks 18th with about 700,000 people - after suffering a 25 percent decline in population between 2000 and 2010.

With the exodus of residents and jobs as the auto industry contracted, the city has suffered from declining tax revenue and rising crime while saddled with the infrastructure and labor costs of a bygone era.

An emergency financial manager for Detroit would have the power to develop a financial plan, revise or reject budgets, consolidate departments, enter into service contracts with other local governments, reduce or eliminate the salaries of elected officials, sell eligible city assets, lay off workers and renegotiate labor contracts. The manager cannot abrogate labor contracts or impose taxes without voter approval under the state's 1990 law.

A new Michigan law that takes effect March 28 will allow existing emergency financial managers to remain in place and will give them additional powers, including the ability to revise or terminate collective bargaining agreements.

By Steve Neavling of Reuters. Additional reporting by Karen Pierog in Chicago.