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Detroit avoids state takeover threat, agrees to financial consent agreement

While Detroit struggles financially, the automakers based in or near the city have enjoyed a financial resurgence.

Story highlights

  • City faces insolvency; vote prevents Michigan state takeover
  • Without more cost cutting, the city won't be able to pay its bills come June
  • City of Detroit struggling, but its automakers enjoying financial resurgence

The Detroit City Council passed a financial consent agreement Wednesday evening with a 5-4 vote, which grants the city the power to void contracts and slash costs but not provide state funding or loans to bail the city out of its financial problems.

City and state officials avoided a Thursday deadline to save the city from the threat of looming financial insolvency or a takeover of city government by Michigan.

The consent agreement was backed by Mayor Dave Bing and Michigan Gov. Rick Snyder.

The deputy mayor of Detroit, Kirk Lewis, signed off on the consent agreement on behalf of Bing, who is recuperating from a hospital stay.

Snyder issued a statement shortly after the vote and commended the council for acting "responsibly," but said there is still work to be done.

"The magnitude of the city's financial challenges means that many difficult decisions lie ahead," the governor said. "We must build on this spirit of cooperation and be willing to act in the city's long-term interests."

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The review team voted to accept the agreement before the city council met.

Fierce opposition from unions -- in a city that remains a bastion of labor power -- threatened to stymie efforts to pass the rescue package.

If the city council did not agree on the deal, Snyder could have, by law, appointed an "emergency manager" who would have assumed the powers of the mayor and council to run day-to-day operations.

The city council was under pressure from the public and city unions to reject the deal with the state. At the same time, it would lose its powers if Snyder went ahead and named an emergency manager.

The only action it has taken this week to deal with the crisis was to double the city's corporate income tax to 2%.

Years of decline in population and businesses and a shrinking of the tax base have pushed Detroit into a deep financial hole despite a recent resurgence in the U.S. auto industry.

Without more cost cutting, the city won't be able to pay its bills come June. An estimate in January, the most recent available, was that the city would be down to $20.9 million in the bank by the end of this week.

An emergency manager would have had the authority to void contracts with unions and vendors. He or she could also sell off various city assets, from the water department to valuable art in the city's museum.

As the debates, negotiations and lawsuits raged this week, they did so without Bing, who was recently released from the hospital after serious intestinal surgery and won't return to work for two weeks. Both Bing and Snyder said they want to avoid a state takeover, which in itself could be the first step toward the largest municipal bankruptcy in the nation's history.

While Detroit continues to struggle financially, the U.S. automakers based in or near the city have enjoyed a financial resurgence.

General Motors reported a record profit in 2011. And a pick up in auto sales and hiring has led to a nearly two-point drop in Michigan's unemployment rate over the last 12 months, the biggest improvement of any state.