DETROIT, Wed Jul 18, 2012 6:11pm EDT (Reuters) – Detroit’s mayor recently imposed 10% pay cuts on city workers and found other savings from benefits in a bid to save the city’s cash-strapped coffers $102 million a year.
“This is a tough day for me, a tough day for city workers and a tough day for all of Detroit,” Mayor Dave Bing said in a statement. “However, it is a necessary day – but it’s still a tough day.”
Detroit has been hard hit by a steep drop in population, years of severe budget deficits and escalating employee costs.
“The city can no longer borrow, hoping to cover this deficit pending. Without action the city will shut down,” Bing said.
A rescue deal in April gave the state of Michigan more control over Detroit’s finances and suspended its requirement to negotiate with unions, allowing Bing to impose the new contracts even though the city council rejected the plan.
Detroit Chief Financial Officer Jack Martin said the cuts – which are effective immediately – and a planned $137 million bond for refinancing were vital to keep the city’s finances alive. The bond issue, initially planned for June 27, was postponed until August.
“If we don't do this ... we will be out of cash approximately Oct. 15,” Martin said.
Local governments across the U.S. are struggling to maintain services as their revenues shrink, a delayed effect of the country’s deep recession. Detroit’s financial troubles were particularly severe due to a steep fall in population and lower revenue for large auto firms such as General Motors.
Unions said that the new contracts could spell more trouble for the city. If Bing wants to attract business to Detroit, the cuts to fire and police workers are particularly wrong-headed, said union leader Dan McNamara, president of the Detroit Fire Fighters Association.
Just over half of the $102 million expected annual savings will come from health care benefit cuts. Some $2.5 million in salaries previously paid to full- and part-time union officials must be reimbursed, a city’s statement detailed. Other measures include reductions in an hourly shift pay premium, while additional days off, bonus vacation days have been eliminated.
Prior to the cuts, the city’s projected budget deficit stood at $197 million and its long-term debt at $7.9 billion.
Representatives of some of the 48 unions for the city’s nearly 11,000 workers accused Bing of taking advantage of the city’s financial crisis to impose new work rules and pay cuts without negotiations.
As bad as the financial crisis is in Detroit, it’s even worse in other municipalities.
For example, San Bernardino, the third California city planning to file for bankruptcy since June, would default on debt, freeze vacant jobs and quit paying into a retiree health fund under a three-month proposal to the city council.
The city is preparing a longer interim plan to make it through its expected bankruptcy period, when it will financially regroup under court protection from a financial hole created by a combination of the bad economy and poor management. Among the recommendations: $3.6 million in deferred debt and lease payments, including on pension bonds and infrastructure bank loans.
The three-month Fiscal Emergency Operating Plan follows a trail blazed by Stockton, Calif., which is seeking bankruptcy protection and wants to restructure debt, end retiree health payments and continue to send full contributions to the state fund which manages city pensions. Mammoth Lakes is the third Calif., city to seek bankruptcy protection.
San Bernardino, like Stockton, would not stop payments to the California Public Employees’ Retirement System, the state pension fund which runs some city funds as well.
(Additional reporting by Peter Henderson.)
© 2011 Thomson Reuters. Click for Restrictions.
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