News Story

Commentary: Detroit's Fiscal Emergency Cannot Wait; Manager Needs to Fix Administration

Kevyn Orr recently began his tenure as Detroit’s emergency financial manager, assigned to fix the government’s finances. Some question the legitimacy of the placement after voters rejected Public Act 4, the Local Government and School District Fiscal Accountability Act, via referendum in November.

Unfortunately, strong emergency manager legislation is important because Detroit's financial emergency cannot wait.

Public Act 4 allowed the state to declare that a local government or school district in Michigan faced a financial emergency and, if the government unit had no plan to adequately address the fiscal emergency, to empower an emergency manager with authority over the government through its crisis. The law was an update of rules to keep local governments from insolvency in existence in Michigan since 1988.

But, declaring that such managers are fundamentally undemocratic, a citizen initiative gathered signatures and put the law up for referendum. The law was rejected by voters 53-47. Supporters made a mistake, however, by putting the law up for referendum — by  having voters reject the legislation, the state's older emergency financial manager law was reinstated. The older legislation still allowed the governor to appoint someone to control a government unit facing a fiscal emergency.

The old legislation had some problems: it was causing long-term confusion over who controlled what in the Detroit Public Schools and it didn't necessarily equip the managers with the tools necessary to fix the government's problems, such as the power to amend union collective bargaining agreements.

Legislators revised it, hoping to address some of these vestigial issues, but also allowed the local government more options to address their fiscal problems themselves.

The state is fundamentally responsible for its local governments, setting the rules by which local governments operate. One of those includes a requirement to maintain a balanced budget and to address any deficits as they occur. The state even helps local governments raise cash in the near-term in case fiscal problems arise.

But if the state's rules and assistance do not prevent the government unit from approaching insolvency — the point where the government does not have the cash to pay its bills as they are due — the state is obligated to take a more active role.

It's no secret that Detroit is facing fiscal problems. On paper, the city has had insufficient assets to pay for its liabilities for over a decade. It passes budgets that have little to do with what the city takes in income and what it spends. It has substantial long-term debt — $9.3 billion, plus $5.7 billion owed for optional retiree health care. There are administrative problems galore.

For instance, the city's auditors found that city human resources records weren't consistent about when people were hired and when they left their jobs. Nor does the city reconcile its bank statements in a timely fashion, track its inventory well, or keep track of its capital assets.

Moreover, as the state's findings indicated, city budgets have had little to do with the city's revenue or spending — presumably the primary concern of a budget.

Keeping appropriate books and effective management is vital to addressing the government's fiscal situation. It allows managers to identify waste, fraud and abuse, which should be important in a city where so many former politicians have been convicted of corruption. But it also ensures that the services that the city is supposed to provide actually get provided.

No one votes for mismanagement, but sometimes the decisions of elected officials result in it.

The state tried to get Detroit to fix its own problems — city officials signed on to a fiscal stability agreement with the state. But implementing the plan was slow and Detroit was again getting close to running out of the cash necessary to pay its bills.

There aren't too many other options available to state officials to address the financial emergency in Detroit. It's possible for the state to bail the city out. But unless the city fixes its financial controls, it's likely only to prolong the city's problems.

It's also possible that the city can get permission to enter a bankruptcy court, where a judge has the ability to nullify the city's debts. However, bankruptcy judges do not run the city — it remains in the hands of city officials and the administrative problems can go unaddressed as judges simply slash financial claims on the city.

This leaves the state the most palatable option of appointing Orr as emergency manager, and he will have his hands full with Detroit. Success is not guaranteed, but there are few other options available to fix the city.

As I wrote in The Detroit News, administrative problems are like problems with the brain's central nervous system — the proper messages don't get sent to the head. Detroit will not begin functioning properly until its administration is addressed.