Change of Heart Over Detroit

DETROIT—In 2011, Michigan Gov. Rick Snyder said bankruptcy wasn't an option for the city of Detroit. Two years later, he changed his mind, deciding that it was the Motor City's only remaining move.

How Michigan voters view Mr. Snyder's decision last week to sign off on the nation's largest municipal bankruptcy filing—a courageous stand or a disappointing flip-flop—could help decide the Republican's political future. It comes on the heels of the governor's controversial signing in December of right-to-work legislation, a move followed by a sharp drop in his approval ratings below 50% in recent polls.

As Detroit's plight worsened, Mr. Snyder's opinion on bankruptcy shifted earlier this year—before his move in March to appoint Kevyn Orr as the city's financial manager, said a person familiar with the matter.

In an interview Friday, Mr. Snyder said he had no doubts in the final hours before the Thursday filing. "This was clearly the right thing to do. There weren't viable options left," he said. "What would happen if we didn't do what we did? Today would be a worse day than yesterday."

Detroit could remain in the hands of a bankruptcy judge in 2014 as the governor gears up for an expected re-election race. Battles among city-worker retirees, bondholders and others over who gets paid could be ongoing.

"After repeatedly promising he would not lead Detroit into bankruptcy, Gov. Snyder's failed leadership and broken promises will be fresh in voters minds in 2014," Michigan Democratic Party Chairman Lon Johnson said in a statement Sunday.

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Reuters

Michigan Gov. Rick Snyder says 'this was clearly the right thing to do.'

Michigan Senate Minority Leader Gretchen Whitmer, also a Democrat, said Mr. Snyder's changed position "means he has an enormous credibility issue," though she added in an interview she was unsure if Detroit could have avoided bankruptcy.

"The governor did the right thing, not the political thing here," the speaker of the GOP-dominated Michigan House of Representatives, Jase Bolger, said Sunday.

Mr. Snyder isn't worried about political fallout, said his spokeswoman. The "governor was clear that he wanted to avoid bankruptcy and use [it] only as tool of last resort," spokeswoman Sara Wurfel said Sunday by email. "That's what the last two years have been about, exploring all other options."

In an interview Sunday on NBC, Mr. Snyder said: "We worked hard on the process because again that's something to be avoided." He added he isn't "happy to be in this situation."

The 54-year-old Mr. Snyder, a certified public accountant who served as chief executive of computer maker Gateway Inc. and worked as a venture capitalist, was a political novice before running for governor in 2010.

Political observers said it is too early to predict Mr. Snyder's re-election chances. "I think the guy is a real CPA, interested in balancing the books, boosting the rainy-day fund and getting a budget done on time," said Bill Ballenger, editor and publisher of Inside Michigan Politics. "But Michigan's economy is still struggling and unemployment is much worse than the national average."

Mr. Orr said he hopes the city can emerge from bankruptcy by fall of next year, though some experts predict a longer slog through court.

The bankruptcy filing lists $18 billion in long-term liabilities for the cash-poor city, including $5.7 billion owed for retiree health care and $3.5 billion to pensions for city workers.

Labor unions and the city's pension funds are fighting potential cuts in retirement benefits by suing the state, arguing that Michigan's constitution protects the pensions. A state judge in the capital of Lansing sided with them, ordering Michigan not to allow Detroit to file for bankruptcy. But the order came too late Thursday and state officials are appealing that decision, saying it now is a matter for federal bankruptcy judge Steven Rhodes, who is overseeing the city's case.

On Sunday, Detroit Mayor Dave Bing said he hasn't ruled out a federal bailout for the city. But in separate broadcast interviews, Messrs. Snyder and Orr said it was an unlikely prospect, a view echoed by White House officials.

In the Friday interview, Mr. Snyder emphasized Detroit's 60-year population decline and the failure of local leaders to implement fully a consent agreement he had signed in April 2012 to stabilize the city's finances.

Mr. Orr, since his appointment as emergency manager, concluded that decades of deindustrialization, political corruption, reckless lending practices along with the population exodus gave the city no choice but to seek Chapter 9 bankruptcy protection.

Mr. Snyder won election in 2010 after promoting himself as "one tough nerd," an outsider from the business world who could ease Michigan's deep economic troubles.

After taking office in early 2011, he preached a mantra of "relentless positive action," and avoided politically sensitive issues he said would distract from his agenda for reviving Michigan's economy.

Once viewed as a moderate among more conservative GOP governors in Wisconsin and Ohio, who challenged collective-bargaining rights early in their administrations, Mr. Snyder now has little support to lose among union activists after signing the bill in December that loosened unions' abilities to compel workers to join their ranks.

Many in Detroit also have objected to his tax and labor policies and his push for more power to overhaul financially troubled municipalities.

But steering Detroit into bankruptcy and supporting the right-to-work bill could help Mr. Snyder with fiscally-minded conservatives if he decides to seek a second term next year.

"I think we're already seeing benefits from the difficult decisions we've made on streamlining the tax codes and improving the labor climates," said Mr. Bolger, the House speaker.

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