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Panel finds Detroit in dire shape; up to governor to act

Michigan Governor Rick Snyder holds a news conference to talk about why he signed into law, earlier in the day, right-to-work laws in Lansin
Michigan Governor Rick Snyder holds a news conference to talk about why he signed into law, earlier in the day, right-to-work laws in Lansin

By Steve Neavling

DETROIT (Reuters) - An expert panel concluded on Tuesday that Detroit faces a fiscal emergency in a city plagued by "operational dysfunction," leaving Governor Rick Snyder with a controversial decision of whether to declare a financial takeover by the state.

If Snyder does decide to appoint an emergency financial manager for Detroit, that person could decide that the city's only course for survival would be a bankruptcy filing, the most feared and radical action that could be taken.

Michigan's treasurer, Andy Dillon, who was part of the six-member review team, said he did not expect the city, General Motors' home town, to be forced into bankruptcy.

The review team appointed by Snyder said Detroit, which has been hemorrhaging cash amid a declining population and a decimated economy, has not made the financial decisions that will put the city on a path to recovery.

"The team collectively believes the city needs assistance in making the difficult decisions necessary to achieve the significant reforms that are so crucial to the city's long-term viability," Dillon said in a statement.

The report did not officially recommend the appointment of an outside manager, although Dillon said the review team believes one is needed. The team felt the decision should be left up to Snyder, he said.

Snyder, a Republican, plans to review the report "carefully and closely," according to spokeswoman Sara Wurfel.

"He won't make a determination immediately, but sooner rather than later," she added. Snyder has 30 days to act on the report.

Detroit has faced the steepest population decline of any American city in recent decades. Once the fifth largest U.S. city that shined 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.

The report described a chaotic administration of the city. For example, it said Police Department and city officials gave differing figures on police staffing, and the review team could not resolve the discrepancies.

"Operational dysfunction contributes to the city's serious financial problem," the report said."

Ronald Goldsberry, an independent consultant and member of the review team, cited Detroit's burden of "chronic deficits and its long-term liabilities" in the report's statement.

SPLIT VIEW ON BANKRUPTCY

Dillon said at a press conference that he did not anticipate a bankruptcy filing by Detroit, which if it were to occur would be the biggest municipal filing in U.S. history.

"I do think we can navigate around this," Dillon said.

Others were less sanguine on the subject. State Senator Jack Brandenburg, one of the Republicans who constitute the majority in the state legislature, said Snyder will have no choice but to appoint an emergency manager for Detroit.

"And the (manager) is going to have to take the city into bankruptcy," he said.

Even if an emergency financial manager did recommend a bankruptcy filing, a panel of state officials could block such a move.

The review team's recommendation is just the latest step in Detroit's long battle to get its financial house in order. The city has been under state scrutiny for more than a year, struggling to avoid a state takeover amid its mounting debt problems.

Detroit residents on Tuesday said that if the state does take over city affairs, for them the worst may be yet to come, as they fear more cuts and hardship.

"The state wants to tear up our city," said Kelsey Adams, a lifelong resident of Detroit. "We can't let that happen."

DEFICITS AND DEBT

Snyder has said that he has compiled a "short list" of candidates qualified for a position of emergency manager should he decide one is needed. Any appointment would be controversial because the manager could sell assets, lay off workers and renegotiate labor contracts. Every step of the process could be challenged in court.

Detroit Mayor David Bing and the city council would stand to lose much of their power if an emergency manager is appointed.

"If the governor decides to appoint an emergency financial manager, he or she, like my administration, is going to need resources -- particularly in the form of cash and additional staff," Bing said in a statement after the report was released.

The report said Detroit continues to deplete its cash reserves and faces a cash deficit of $100 million by June 30 without significant spending cuts. The city has long-term liabilities including pensions exceeding $14 billion, it said.

Snyder assembled the review team in December after slow progress on restructuring Detroit's sagging finances and operations under an April 2012 consent agreement between the city and Michigan.

(Reporting By Steve Neavling; additional reporting by Karen Pierog in Chicago and Dawson Bell in Lansing, Michigan; Editing by Greg McCune and Leslie Adler)

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