Fiscal Emergency Drives Detroit's Home County Toward Consent Agreement With State of Michigan

Faced with a structural deficit that has averaged about $52 million in recent years, and billions of dollars in unfunded pension and healthcare liabilities, the Wayne County Commission on Thursday selected a consent agreement with the state of Michigan as their tool of choice for resolving the jurisdiction’s recently declared financial emergency.

The commission voted 12-2, with one abstention, for the consent agreement. It was one of four options on the table under the terms of the state’s local financial emergency law. The other three were a state-appointed emergency manager, bankruptcy, or a neutral evaluation process that might have led to mediated agreements with creditors and public employee labor unions.

Wayne County Executive Warren C. Evans had voiced support for the consent agreement over the other alternatives and applauded the commission following their vote. “After carefully considering the available options, they made the right decision,” he said in a statement.

But what lies ahead for Wayne County is uncertain, according to Michigan State University’s Eric Scorsone, who is an expert on public finance and the state’s local government financial emergency law.

“This is the first time a county has come into this process, so it’s going to mean we’re going to have some ambiguity about how well it’s going to work,” he said.

Evans now has 30 days to iron out the details of the consent agreement with state officials.

In April, the county executive released a recovery plan, which he has touted as a roadmap for achieving long term solvency for the county. It includes cuts to public worker wages and benefits.

He pointed to the plan in his statement on Thursday saying: “The consent agreement will ensure our ability to fully implement our Recovery Plan and stabilize the County for the future.”

Wayne County has a population of about 1.7 million people and encompasses Detroit, which emerged from Chapter 9 bankruptcy protection itself last December.

Lisa Washburn is the managing director at Municipal Market Analytics Inc., an independent research firm based in Concord, Massachusetts. In her view, it’s unlikely that the situation unfolding in Wayne County will rattle the municipal bond market.

“Wayne County, like Detroit was, is a known struggling credit,” Washburn explained. “While it’s not great to have any municipalities in distress, it’s hard to see there being a systemic impact.”

Observers say that, going forward, getting public employee unions to agree to concessions will be a key factor in how the county’s financial emergency plays out.

Failure to meet the terms of the consent agreement could mean that the state ends up stepping in and calling for the neutral evaluation process, or appointing an emergency manager, which would substantially diminish the power local elected leaders have to resolve the county's fiscal problems.

The appointment of an emergency manager could also create a potentially awkward political situation. Wayne County is considered one of Michigan’s Democratic strongholds, and Gov. Rick Snyder is a Republican.

So far, only one of the city’s 10 full-time labor units, the International Union of Operating Engineers Local 324, has agreed to benefit modifications that are in line with the recovery plan, according to James Canning, a spokesman for the county executive’s office.

Canning noted on Wednesday that while Evans would like to see deals reached with public workers at the bargaining table, the legal authority in the consent agreement will provide the county with extra leverage should negotiations reach an impasse.

Under Michigan’s Public Employment Relations Act, local jurisdictions with financial emergency consent agreements are not subject to collective bargaining. This means that the county could move to achieve some of the goals in the recovery plan without union buy-in.

“It would allow us to impose the savings we need upon the bargaining units,” Canning said of the consent agreement. But discussions between unions and the county are ongoing and he emphasized that for the time being “we’re going to continue to negotiate in good faith.”

The county has already identified about $23 million in savings, according to Canning, which will go toward addressing the structural budget deficit that has averaged roughly $52 million during the last four years. The county is looking to make up the difference, he said, with concessions from public employee unions.

Requests for comment from AFSCME Council 25, which represents about 2,000 workers in Wayne County, went unreturned.

But last week, the Detroit Free Press reported that Council 25 President Al Garrett said his preference for resolving the financial emergency was neutral evaluation. In characterizing the consent agreement process, he said the intent is to “screw collective bargaining.”

Some of the numbers surrounding the financial emergency are daunting. 

The county executive’s office has said that the county needs about $910 million in order to fully fund its pension system. That amount comes on top of roughly $1.3 billion in unfunded healthcare liabilities. Evans has also said that the county’s pension system is in worse shape than Detroit’s when the city filed for bankruptcy, and that it is only about 45 percent funded.

While the recovery plan floated earlier this year does not include reductions to vested pension rights for retired or active employees, it does propose changes related to retirement age requirements, employee contribution rates and how average final compensation is calculated. The average final compensation figure is a factor used to calculate pension benefits.

The plan also calls for the elimination of healthcare benefits for future retirees and a 5 percent wage cut for most employees, with an exception for nurses, police officers and prosecutors.

As the financial emergency process continues, the county is also moving toward finalizing a settlement that would bring an end to a legal case lodged by retired public employees, who claimed that the jurisdiction had unfairly decreased their healthcare benefits. The settlement involves transitioning the retirees off of county-funded healthcare plans and providing them with a monthly stipend instead.

In addition to the fiscal challenges tied to labor costs, the county is also paying debt service on bonds issued in 2010 to build a jail that remains unfinished. Construction was halted in 2013, after revised estimates showed the final cost of the project ballooning from about $300 million to around $391 million. The county has also seen declines in property tax revenue in recent years, adding further strain to its finances.

Scorsone said something to watch as the situation evolves would be recovery plan projections on revenue and spending.

"These recovery plans are nothing but assumptions," he said. "How reasonable are those assumptions?"