Dillon Meets Barrow and Detroit Bankruptcy?

FOR IMMEDIATE RELEASE
TODAY, MARCH 6, 2013

DETROIT COUNCIL MEMBER JOANN WATSON AND ACCOUNTANT TOM BARROW MEET WITH MICHIGAN TREASURER, ANDY DILLON ON EMERGENCY MANAGER
 

Discussion Reveals Serious Flaws in Governor’s “Financial Emergency”!

Watson and Barrow Conclude That Entire Crisis is Contrived!


DETROIT (March 6, 2013) On Monday, March 4, 2013, Michigan State Treasurer, Andy Dillon, acting on behalf of Governor Snyder, summoned each member of the Detroit City Council to one-on-one private meetings. Each Council member was allotted 30 minutes to name four “sacred” things that they did not want the EFM “to touch” in return for their cooperation with a state appointed Emergency Financial Manager (“EFM”).

City Council leaders Charles Pugh and Gary Brown went together and of those who went at all to their meeting did so alone and without benefit of staff or advisers  Recognizing that such a meeting with the State Treasurer was of great importance to the City, the Honorable JoAnn Watson enlisted Citizens for Detroit’s Future’s President, Tom Barrow, an expert in municipal finance and accounting, and asked that he accompany her to query the Treasurer on her behalf. The Treasurer was informed by Ms. Watson that she would attend and will have someone with her. No names were mentioned and her meeting was set to be the last of the gatherings.


Upon arrival, Councilwoman Watson and Barrow were greeted by Andy Dillon, Treasurer of the State of Michigan. Councilwoman Watson explained that Barrow was her adviser in this matter. Treasurer Dillon proceeded to explain that the purpose of the meeting was to seek Councilwoman Watson’s support for the EFM asking what four things she would like to go untouched by the EFM in return for her cooperation.

Barrow was never so proud to be a Detroiter then at that meeting as he watched Councilwoman Watson refuse the bait in every form in which it was advanced. Councilwoman Watson then proceeded to ask for the money owed to the City of Detroit by the state under and agreement between the Archer Administration and then-Governor John Engler to hold Detroit’s State Revenue Sharing constant in exchange for Detroit’s promise to lower its personal and corporate income tax rates (which Detroit did).

Mr. Dillon dismissively retorted said that that agreement was “not enforceable”, to which Barrow explained that “oral contracts are enforced everyday and this one is in compelling need of such enforcement” except that in this circumstance the city’s Mayor simply lacks the will to seek such enforcement.

When Ms. Watson then invited Barrow to initiate her more specific and technical line of inquiry, Barrow began by asking for specificity to his queries on behalf of the Councilwoman. The following is a paraphrasing of that exchange.

Treasurer Dillon’s tone, inflection and manner made it exceedingly clear that Detroit will have an EFM appointed and that actually any appeal would be futile as the railroad is already running.

Barrow began by asking what the basis was for the EFM and was told it was “to correct the balance sheet” and “the long-term legacy debt”. Stating that his response was vague, Barrow asked exactly what that meant and whether he was speaking of the city’s “$12 billion debt” referred to in news media accounts, which Dillon confirmed.

Using a standard finance technique, Barrow then proceeded to parse that debt seeking specificity, asking on behalf of the Councilwoman whether the EFM intended to renegotiate the Bond Debt currently being held by the banks. The Treasurer explained that that was not the reasoning, in short, “No”. Puzzled, Barrow then asked if the EFM would be renegotiating the Revenue Bonds securing the Water Department’s Sewerage Fund and was again told “No”. He then asked would the EFM be renegotiating the Revenue Bonds securing the Water Fund itself and was told “No”.

After explaining that that was the entire city’s formal long-term debt, Barrow asked if the state was really concerned about the future pension costs and Dillon confirmed that the purpose of the EFM was to cut the city’s future health and pension costs. Astonished, Barrow stated that future costs do not put Detroit in a “Financial Emergency” today and asked why state officials had not made this stated real purpose clear so that the Mayor and Council would approach city workers and retirees respectfully and negotiate a solution. The Treasurer sat quietly and did not respond.

The Treasurer then proceeded to present the “Financial Review Report” and explain that General Fund borrowings in the past were revenues in the General Fund. Barrow explained that Long-Term borrowings can never be revenues in a municipality’s or a School District’s General Fund. Rather, such Debt over a period of years is properly accounted for in the Long term Debt Group of Accounts, referred to as the Debt Service Fund.

The Treasurer repeated his claim and Barrow emphatically disagreed that such accounting treatment by the state is improper under Governmental Accounting Rules. Barrow proceeded to explain that Long-Term borrowings are only depicted in a General Fund’s analysis of “Sources and Uses” in reconciling the General Fund’s Fund Balance so as to effectuate a debt defeasment (pay off prior city losses by issuing Long-Term debt). Barrow explained that such borrowing is never revenue of a General Fund according to Governmental Accounting Standards. The Treasurer disagreed.

[Note: Please refer to Page 43 f the City’s 2010 Comprehensive Annual Financial Report certified by KPMG wherein Long-Term Bonds were issued to defease prior period’s deficits. In that report, the City of Detroit issued $251 million of “deficit defeasement bonds”. In the Revenue Section note that there is NO revenue from a Bond Issuance as Dillon treats it. Also note that in the “Other Financing Sources (Uses)“ Section, where the General Fund Fund Balance is reconciled, “Sources” include the $251 million to defease the General Fund deficit].

Councilwoman Watson then asked and the Treasurer confirmed that the City of Detroit has not missed any bond principal payments; has not missed any bond interest payments; has not missed a payroll; and has not failed to pay any obligation. The Treasurer also agreed that all of that was true.

Finally, the discussion turned to current cash requirements as that is the stated reasoning for a state takeover. Barrow asked about the $137 million borrowed in November 2012 explaining that in the 2012 Audited Financial Statement’s “Subsequent Events” footnote, $79.5 million went immediately to defease the prior year’s short-term tax anticipation notes leaving $60 million of tax anticipation notes in the state’s bank account and held on behalf of the City of Detroit. Barrow’s unstated reasoning was to determine whether there was a short-term cash crisis necessitating a “Financial Emergency”.

Barrow then queried the Treasurer as to how much of the remaining $60 million has the city drawn upon since November 2012 and was told none...ZERO! This admission alone made it clear that the City has adequate operating cash. He then informed the Treasurer that the KPMG audited financial statement’s footnotes revealed that Detroit had a $66.5 million reduction in state revenue sharing last year as a result of the state’s prior depressed economy but that the current economy has improved dramatically and that revenue sharing would be expected to increase in the 2013-2014 fiscal period and Mr. Dillon agreed. Barrow further indicated that such increased state revenue sharing would increase the 2013-2014 fiscal period’s cash flows. The Treasurer also agreed. The Treasurer further agreed that the city’s General Fund has had operating surpluses for a number of years except for “Transfers Out”.

Based on these revelations, the discussion turned to the city’s “Transfers Out” as shown in the General Fund [which drains the General Funds excess revenues] in an effort to determine which transfers an EFM will address that the city itself could not. The Treasurer indicated that it will be the subsidy to the City’s Transportation (D-DOT) and Lighting Departments (Public Lighting).

After explaining that D-DOT is not intended to make a profit but provide a needed service, it was clear that a decision had implicitly been made to transfer D-DOT to the recently created Regional Transportation Authority effectively removing all revenue and superintending control from the City of Detroit.

With the allotted half hour up, Barrow then told the Treasurer, in no ambiguous terms, that in his opinion, the review teams’ accounting was flawed, that a city meeting its obligations makes no clear case for a “Financial Emergency” or an abrogation of a city’s democracy rendering its elected officials powerless.

Conclusion

Afterwards, Barrow reviewed the meeting with Councilwoman Watson and explained that he was now convinced, more than ever, that by misusing accounting rules and using flawed reasoning, the “financial emergency” is contrived so as to enable an appointed Detroit EFM to privatize the city’s bus system; to privatize the city’s public lighting system; to bust the city’s unions by privatizing clear city functions and thereby lay-off Detroit’s work force destroying thousands of city households under the phony guise of right-sizing. Moreover, State officials, without informing the duly and democratically elected officials of the City of Detroit of the real reason, seek to impose upon current workers and pensioners changes in health care and benefits to their detriment even as the City has already taken its one-time losses by getting out of the “credit swaps” and “derivative” markets (the financial instruments that caused the mortgage crisis).

Finally, the fact that $60 million of the $137 million of tax anticipation notes remains unused as of today, March 6, 2013, and without factoring in hundreds of millions of dollars in uncollected business and property taxes and million of dollars in television rights from sporting venues due to the City by entities which are fully collectible and by not factoring in anticipated increases in State Revenue Sharing, makes clear that the City of Detroit indeed has no immediate justification for a crisis and makes the need for a state takeover a well-orchestrated contrivance.


CONTACT: Tom Barrow, President
313-5-detroit(t) 533-8764, Opt 4 or Ext 1010
tombarrow@aNewVisionFor Detroit.com

BANKRUPTCY FOR DETROIT?

Tom Barrow Addresses Bankruptcy

Alonzo Fleming requested a response regarding rationale for Detroit filing for bankruptcy from Tom Barrow through his blog. The response is a telling tale that needs to be read.

Tom Barrow says:
February 24, 2013 at 8:03 PM 

Hello Alonzo Rick Fleming and Cherice, I hesitate to respond to your challenge because it will just be a tit-for-tat thing which I do not want to do. However, I believe some response will give city naysayers a lucid reply to yours and Mr. Snyder’s “Ross Perotesque” presentation as to why we do not need a EFM. Bear in mind that the presentation was created by his people and selectively slanted and deigned to make a point in their own favor.

I accept that I do not have access to the governor’s fancy boards but I and Detroiters have financial common sense as do most folks when it comes to their money.

I begin asking excuse my typo’s as I do not type. I also ask that the reader imagines themselves owning 3 nice, highly desirable expensive rental properties. Each property has 23 years left on its 30 year mortgage which was taken out to buy the houses. The properties have great long-term committed tenants who pay their rents making the properties so profitable that you can save money each year, money which you keep in the bank account which, of course, you own.

Now also imagine that you work for an established company, are secure and make a comfortable salary. You also have a son in college who takes most of your excess salary to pay his UCLA tuition. Imagine also that you own your own home and have 22 years left on your 30 year mortgage. All of your mortgages come to about 20 times more than you make but no problem, you can pay them off as agreed. You are making all of your mortgage payments and have never missed one and do not see that you ever will.

Now imagine that you get a letter from a lawyer who says that you are incompetent and he intends take you to probate court to have you removed from your affairs. The lawyer says you have four mortgages amounting to 20 times more than you make every year and you need someone to manage your affairs because you must be incompetent. The lawyer makes a nice presentation which shows you as effectively broke. The lawyer wants you to sell off your houses to get rid of that long-term mortgage debt. Hell, Alonzo, the lawyer says, you don’t know what you’re doing.

Now, lets substitute characters. You are the City of Detroit and the rental properties are the Interceptors, water mains and infrastructure of the Detroit Water Department the city owns stretching out to Birmingham, Pontiac, Rochester, Auburn Hills etc. Also substitute the rental tenants to be the customers of the Detroit Water and Sewerage Department (Detroit, Rochester, Pontiac. Auburn Hills and Birmingham etc). Now also substitute the money that the landlord has in his bank to be the $250MM of “Unrestricted” money sitting in Detroit’s Water Department bank account.

Finally, substitute your home to be the General Fund of the City of Detroit and the homes mortgage to be the Bonded Debt and expenses to run the City of Detroit and UCLA to be the General Fund’s principal and interest bond payment and operations.

My friend, the City of Detroit pays its bond principal, pays its bond interest, pays its payroll, pays its bills and has not defaulted on anything. It has cash in the bank as evidenced by it has yet to draw down on state moneys being improperly held. Its also has a Water Department with $250MM of unrestricted cash (that is money above the eater department’s bond requirements).

Of course, I can’t do a slick presentation like the governor because I do not have access to the resources but I and fair minded Detroiters everywhere have common financial sense. It is clear no EFM or probate action is warranted under these circumstances. That is why I say Chapter 9. It is a BIG bat. The conservatives will not want Detroit and the banks to discuss their Bond (Mortgage) Debt, particularly since it is being paid as agreed. My friend, these are the facts in written form. Use Snyder’s clever self-serving presentation and our own Detroit audit report to fill in the details here. We are not a valid candidate for an EFM period. They want our stuff!!!