Kudos to Hamtramck Mayor Karen Majewski and her city manager, Bill Cooper. Finally government officials who have decided to face the realities of Michigan's economic environment and choose a path of restructuring versus incremental borrowing.
Instead of being met with praise from politicians, Gov. Jennifer Granholm, along with her band of PA 72 stalwarts, is attempting to force Hamtramck to borrow against future revenue sharing.
(Public Act 72 allows the governor to appoint an emergency financial manager to insolvent local governments.)
Why is it that every time Michigan municipalities face insolvency, the answer is to create more debt versus facing the obvious and beginning to restructure?
First, Detroit creates a $250-million secured credit card to "balance" its budget; never mind that as of the end of 2008 Detroit had a fund deficit of almost $1 billion. Now the state is trying to force Hamtramck to take a loan it will not possibly be able to pay back? When does this end?
At best, this will delay the inevitable and, at worst, set a terrible precedent of continuing to use debt funding to address structural issues -- a practice that, as evidenced by Detroit, is unsustainable.
Here's the quick math. Hamtramck's annual budget approximates $19?million; approximately $3 million of this amount is consumed immediately for pension costs. This amount is likely to increase, given that Hamtramck's actuarially determined pension obligations exceed the assets by more than $32 million as of the end of 2009.
Similarly, other retiree benefits, such as retiree health care, consume $2 million per year and are likely to rise, given that Hamtramck's actuarially determined other post-employment benefits obligation of $30?million is completely unfunded.
In all, 26 cents of every dollar generated goes to take care of those who no longer work for Hamtramck. At current expense growth rates, this will likely exceed 30 cents by 2014, excluding any increase in required contributions to retiree plans.
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Tack on top of this the dispute between Detroit and Hamtramck regarding tax revenue from General Motors' Poletown plant. If Detroit were to win its $7 million lawsuit or withhold taxes it collects from Poletown, Hamtramck's fiscal 2010 revenue could dip by $3?million.
A reduction in property values could cost the city as much as another $1? million, leaving $15 million to fund approximately $5 million in retiree costs and approximately $15 million to $16 million in other employee costs.
It doesn't take a genius to realize that this is not a workable situation and that fixing the problem will take more than buying time. If Hamtramck is going to save itself, it must restructure its operations, including its union contracts. Only a bankruptcy offers a comprehensive and, more important, timely solution for doing this.
Appointing an emergency financial manager at this point will likely drag out the process while Hamtramck's financial situation only gets worse.
Why the state would even entertain the idea of pouring more money in a de facto bailout of a city that it will not allow to restructure is beyond me. The decision is atrocious.
I am sure the politics of presiding over Michigan's first municipal insolvency plays a role. Continuing down this path will only result in Hamtramck's inevitable failure and cost taxpayers significantly more in the end.
Marcus Darnell Hudson is treasurer of Tecumseh Products.
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