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    After over three months of investigation into Detroit’s finances, the State Treasury, through its Financial Review Teams, issued its final report to the Governor on March 26th. The report details the financial struggles of the city over the past six years and brings to light just how big of a hole Detroit has dug for itself. The final report is a key part of Public Act 4, the Emergency Manager Legislation. The Act stipulates that the Financial Review Team can come to one of four conclusions in its report based on its investigations and dealings with the city: 1) Mild or no financial stress, 2) Severe financial stress but with a consent agreement in place, 3) Severe financial stress with no consent agreement worked out, or 4) Financial emergency with no satisfactory plan (Emergency Manager recommended). In Detroit’s case, the Financial Review team stopped short of recommending an Emergency Manager to be appointed to the city, instead going with the third option of severe financial stress with no consent agreement. .

    While it is ultimately the Governor’s decision on whether or not to appoint an emergency manager, the State in this case may be taking into consideration an exceptionally hostile atmosphere over the prospect of a state takeover of Detroit both by the local government and the citizens of Michigan’s largest city. The Governor has widely repeated that he would like to see more cooperation between the state and local government, and that he does not want to take over or run Detroit. But the question is how do the results of the Review Team investigations in Detroit compare to the results of other Review Team investigations that did lead to emergency manager takeovers? While every city has different conditions and circumstances, comparing Detroit’s report to Flint, Benton Harbor, Ecorse, and Pontiac may hold some answers to the State’s intentions for the future of the city.

    The results of the investigation of the Detroit Review Team report, which led to the conclusion of severe financial stress, can be summarized in these fifteen points:

    1) Over consecutive years, actual expenditures by the City of Detroit have been significantly greater than budgeted appropriations.

    2) City officials failed to file an adequate Deficit Elimination Plan as required for the 2010 fiscal year in order to address a $155 million General Fund deficit.

    3) General Fund deficits have exceeded $100 million each year dating back to 2005, and are projected to amount to more than $196 million in 2011. From 2010 to 2011 alone, the General Fund deficit increased by 62.5%.

    4) The City addressed the deficit by issuing new long term debt amounting to over $600 million between 2005 and 2010.

    5) The City failed to follow Deficit Elimination Plans in 2008 and 2009 due to incapable management of city finances and unrealistic goals.

    6) Annual debt service requirements for the City amount to almost $600 million, for a long term debt that is likely close to $12 billion including pensions, component units, and employee benefit liabilities.

    7) City engaged in risky interest rate swaps prior to 2008, and lost big, and could soon be liable for terminating payments in the hundreds of millions of dollars.

    8) Detroit’s Credit Rating has been downgraded to ‘junk’ status by major rating agencies. The most recent downgrading of existing debt occurred in March 2012, which is now five to six levels below investment grade.

    9) City used inter-fund borrowing for debt service and pension funds that resulted in even greater deficits.

    10) The team found significant cash flow shortages and overestimations. City will experience a cash shortage starting in April 2012 of $1.6 million projecting to grow to $44.1 million without remedial action.

    11) City has had continual difficulty meeting pension obligations, and issued $1.44 billion in “pension obligation certificates” in 2005.

    12) Questionable audit balances have been identified in the pension system

    13) Poor financial management has greatly threatened the City’s continued use of multiple federal grant programs.

    14) City officials adopted misleading budgets that knowingly overestimated revenues.

    15) Collective bargaining agreements proposed by the city will not yield their projected savings.

    These results definitely share some similarities with the investigation reports filed for Benton Harbor, Ecorse, Flint, and Pontiac: cities that which are each run by Emergency Managers right now. (Note: The Review Team Final Report for Pontiac recommended a consent agreement, but an Emergency Manager was later appointed.) Upon reviewing these reports, there were eight significant commonalities among these four cities that led to an Emergency Manager appointment. These eight indicators include:

    1) Exceptionally large or accumulating general fund operating deficits that existed for three consecutive fiscal years in the city at the time of the investigation.

    2) A required Deficit Elimination Plan that was either submitted and not approved, or approved and not followed.

    3) Significant cash flow shortages that were accompanied by a large multi-year deterioration of the City’s pooled cash position.

    4) The City engaged in inter-fund borrowing or unauthorized transfers to compensate for cash shortages.

    5) The investigations found significant and widespread accounting and recordkeeping deficiencies. Ledger and Financial Records did not match actual balances, and inaccurate reporting contributed to a state of uncertainty about city finances among city officials.

    6) Untimely or inaccurate audits were filed by the city.

    7) The City Budget was not accurately amended in timely manner to reflect accurate revenue and expenditure trends.

    8) Significant General Fund deficits continued into current fiscal year of the investigation.

    As shown, the continuing problems with the Deficit Elimination Plan, which is listed as an investigation point in the law (Public Act 4, Section 13.3(g)), is common to Detroit, and all four of the Emergency Manager cities. Large and long term General Fund deficits pertaining to P.A. 4 Section 13.3(e)&(j) is a significant indicator for the five cities, as are large scale inter-fund loans and borrowings (Act 4, Section 13.3(h), and projections of significant deficits in the current year and future years. In three of the four Emergency Manager cities, not meeting pension or retirement system obligations was also a factor. Three of the four also were found to have significant variances between budgeted and actual revenues and expenditures in consecutive years. Lastly, the threatened end to federal grant programs is listed as an indicator in both Detroit and Benton Harbor’s Final Review Team Reports.

    Detroit’s final report did not include as much on ledger and financial recordkeeping problems compared to the other cities, nor was there anything about late audits and late budget revisions that were reported by the Review Team. Other things like the interest rate swap disaster and the credit rating downgrades are largely unique to Detroit. The sheer amounts of the deficits and long term debt for Detroit are staggering compared to the other cities, but this can be somewhat accounted for by size differences.

    Detroit does have many complexities due to much greater size, but the investigation results do show that the City is facing at least some, if not most, of the same significant factors that led to emergency managers in other Michigan cities in the recent past. As the City and the State continue to wrangle over a consent agreement, Detroiters are waiting to see what solutions to their city’s financial emergency could possibly be agreed upon. And though the Governor has told citizens that there will not be a complete state takeover of the city, he now does, in fact, have plenty of justification for such a move.


    Pontiac Review Team Report, 2008

    Ecorse Review Team Report, 2009

    Benton Harbor Review Team Report, 2010

    Flint Review Team Report, 2011

    Detroit Review Team Report, 2012

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