Friday, October 14, 2005

Auditor: City may go broke

Without deeper budget cuts, Detroit is sure to run out of money, says its financial watchdog.

By Lisa M. Collins / The Detroit News

Joe Harris, Detroit auditor general Error processing SSI file Comment on this story Send this story to a friend Get Home Delivery

With a dwindling tax base, a recalcitrant union work force, and pension and health care benefits it cannot afford, Detroit is running out of money and will not be able to pay its bills if major changes aren't made, according to a report released Thursday by Detroit Auditor General Joe Harris.

"The truth is that Detroit's treasury is hemorrhaging," said Harris, whose 10-year term as an independent city auditor appointed by the City Council ends in November. "Insolvency is certain. The only question is the timing."

Detroit Finance Director Sean Werdlow recently told the City Council that Detroit could run out of cash as early as December. That same day, Mayor Kwame Kilpatrick told the council that if the unions did not agree to contract concessions by Monday, he would announce layoffs.

The city is spending $15 million more a month than it brings in, Harris' report says. Most of these costs are in salaries and benefits.

Insolvency would mean that Detroit would not be able to pay workers and contractors on time. If payroll, medical benefit or bond payments are late, the state government would have to consider appointing a financial manager to oversee the city's finances, as Michigan has done in Hamtramck and Ecorse.

Deputy Mayor Anthony Adams denied Harris' projections.

"To suggest that insolvency is right around the corner is totally irresponsible," Adams said, adding that Harris' report is "baseless."

The city has taken "serious action" to bring the city's deficit in line, Adams said. He said Kilpatrick is extending the deadline on his threatened layoffs to consider an alternate plan to cut health care costs proposed by city unions. He didn't offer specifics.

"We have to give them extra time," Adams said.

Al Garrett, president of the city's largest municipal union, AFSCME, said there is no way city unions can be painted as "greedy."

"We've been at the table," Garrett said. It's the city that has refused to cut perks for nonunion workers and nonessential costs, he says.

Garrett said Kilpatrick is asking for too much, including a 10 percent pay cut and a "monumental" shift in the cost of health care back to the worker. The proposal would roll back the clock on health care plans to the 1970s, Garrett said, with more out-of-pocket costs for workers such as deductibles for hospital stays.

"We are going to wrestle with the problems in front of us, but we are not going to let the workers bear the brunt of the financial problems facing the city," Garrett said.

The state of Michigan is monitoring Detroit but has no plans to take over the city's finances, said Terry Stanton, spokesman for the state Treasury Department.

"We believe Detroit has the capability to manage itself," Stanton said. "It has a plan for fiscal recovery, and like any such plan, it includes sacrifices and protections for the residents of the city."

Yet the city's deficit could hit $336 million by June 2006, Harris said. Adams says the number is incorrect, but City Council financial analysts have come up with a similar figure.

Two weeks ago, Kilpatrick pegged the deficit at $79 million.

"We can't go on misleading the public that everything is fine. The mayor said we don't have a problem, that we have a $79 million problem. I have to respond to that. I know better," Harris said.

Kilpatrick has cut the budget considerably to decrease spending, including cutting the recreation department in half and laying off workers. Yet his current plan to balance the budget includes new revenue sources that Harris and some City Council members have questioned as "improbable."

Those include union concessions and borrowing against annual lease payments the city receives from the Detroit-Windsor Tunnel.

The unions must come to the table, the city must completely revamp its bureaucracy and the state must repeal Public Act 312 -- which requires a third-party arbitrator to decide what Detroit pays its police officers in salary and benefits -- in order for the city to get on its feet, Harris said.

Act 312 is a big issue because "right now the arbitrator decides the city's cost of public safety," Harris said.

Layoffs aren't the only answer because the city would have to lay off half its work force, or 6,000 employees over the next five years, to shore up the budget.

The financial crisis did not occur solely on Kilpatrick's watch, Harris has said, but grew slowly over time as residents and businesses left the city. The looming deficit crisis has been apparent for six years or longer, stretching into the Archer administration, when Detroit enjoyed surpluses mirroring national prosperity and saw its work force bulge by 2,000 employees, while continuing to lose its tax base.

Louis Schimmel, the municipal bond expert hired by former Gov. John Engler to take over financial management in Ecorse and Hamtramck, says Detroit's financial situation mirrors that of General Motors Corp. and Delphi Corp.

"In Detroit, the problem is that it's been so horribly mismanaged," Schimmel said. "They always think the answer is money. The answer is not money. It's changing the structure. You can liken it to what's happening in the corporate world. In the '60s and '70s, companies were giving away health care benefits they couldn't afford to pay and all kinds of other things. The cost was made up by the cost of the car. The employer said, 'We are in our heyday; we can afford this stuff.' And then China showed up, and India and everywhere else. And Delphi said, 'The cost of labor is so expensive we can't compete.' The same thing is going to happen to cities.

"I predict in the coming years there will be a lot of Detroits. In Detroit, all the spending caught up with them."

Mayoral candidate Freman Hendrix, who served as deputy mayor under Archer, said that he would consider privatization of some services as a tool to use where appropriate to cut costs, as has Kilpatrick and other mayors, though he doesn't back privatization as a form of management in general. And, he said, he would not be afraid of layoffs. Nonessential city services will likely be eliminated, and city departments will have to be closed, he said.

"I've consistently said the size of city government is too big. We're going to have to streamline the size of city government," Hendrix said.

You can reach Lisa M. Collins at (313) 222-2300 or lcollins@detnews.com.