Monday, March 27, 2017

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Civil Disobedience and Detroit’s financial manager

Michigan’s Governor Rick Synder may be greeted by protestors when he arrives for a meeting today on Detroit’s financial condition. His recent appointment of Kevyn Orr as the city’s emergency financial manager has angered many of Detroit’s residents who are afraid he has powers that are far too sweeping and is thereby destroying local control. The purpose of the financial manager law is to help the city stave off bankruptcy and allows the emergency manager the ability to renegotiate labor contracts and potentially sell city assets. The last recession has worsened the already-struggling city’s financial outlook. Detroit has a $327 million budget deficit and $14 billion in long-term debt and has shown very little willingness to make the kind of structural changes it needs in order to stay solvent.

Detroit’s problems are acute. The city’s population has fallen from 1.8 million to 700,000, giving the city, “a look and feel that rivals post World War II Europe.” But as Public Sector Inc’s Steve Eide writes, the real problem is that local leaders have proven unable to deal with fiscal realities for far too long. His chart shows the consequences. The gap between estimated revenues and expenditures over time is striking. In sum, Detroit overestimates its revenues and underestimates its spending, by a lot, when it plans for the budget. That is a governance and administration crisis and one that the state has decided needs outside intervention to set straight.

Standard & Poors likes the appointment and has upgraded Detroit’s credit rating outlook to “stable.”