State needs Detroit EFM to succeed

Guest Editorial
Detroit has a state-appointed emergency financial manager. Kevyn Orr carries the hopes of Michigan on his shoulders.

There are no guarantees. The fiscal challenges Michigan’s largest city faces are profound. Some believe they are overwhelming.

Despite resistance to an EFM from most members of the city council, Detroit was in no position to fix its financial crisis on its own. City government is awash in red ink.

The latest state review of Detroit’s books found the troubled city’s budget deficit was more than $300 million. If not for a state-controlled escrow account that aided the municipal government in the past few months, it’s unlikely Detroit could have paid its bills.

Worse is the city’s $14 billion in unfunded pension and employee retirement obligations. To stave off labor costs, city officials struck contract agreements that increased employees’ future pensions instead of raising their pay.

But the city also issued bonds to cover its pension payments — $1.4 billion in 2005. Last year, $129.5 million in debt — 9.3 percent of the general fund budget — was added largely to repay loans that service its bond obligations.

Orr’s mission is to turn around Detroit’s failing fortunes in 18 months. He called his task “the Olympics of restructuring.”

His credentials recommend him. A 54-year-old Washington, D.C., lawyer who specializes in bankruptcy turnarounds, Orr was a partner with Jones Day, one of the nation’s leading law firms. Jones Day played a critical role in Chrysler’s 2009 bankruptcy reorganization.

Orr must improve city services, fix the city’s employee pension and employee benefits crisis and dramatically improve the city’s debt problem.

He has said he wants to cooperate with city officials, a commendable, but difficult, intention. His role diminishes their power, and the measures he might take are tough ones most elected officials would consider politically dangerous.

If Orr does his job well, Detroit will be given a dose of fiscal medicine that is hard to swallow. But the city needs that kind of intervention to survive and eventually to prosper again.

Gov. Rick Snyder pledged to lead Michigan to financial recovery. That won’t happen if its largest city languishes in fiscal peril.

We’re counting on Orr to prevent Detroit’s demise.