Bad for Business

City of Detroit

City of Detroit officials already experience difficulties attracting vendors. Most companies say they avoid doing business with the city because of the government’s historic and notorious reputation for slow payment to suppliers. And the worse is still to come.

Trying to forestall the imposition of an emergency manager, the cash-strapped city has announced that its vendors will be paid on a priority basis. I suppose that means department heads will determine what products or services are most critical and, perhaps by extension, what companies will survive or become extinct. But this is a cockamamie idea.

Detroit does have a financial crisis that needs immediate attention. City general fund expenditures exceeded revenues by almost $58 million in FY 2010 and $97 million in FY 2011. By some estimates, the cumulative deficit in the general fund for FY 2011 will exceed $196 million.

Because the fiscal problem of Detroit is spending, it’s difficult to see how the new vendor payment protocol will address the fundamental issue. In all likelihood, this solution will add to the myriad bureaucratic deficiencies that frustrate current and potential suppliers.

The city’s reputation for elevating slow payment to a crude art is legendary. Firms doing business with the city routinely identify bottlenecks in the accounting and receiving sections of the various departments. The city has also been known to reject submitted invoices as improper, which forces the vendor to submit another invoice and endure another long wait.

For the city, late, under-payment, or rolling over payments to vendors is another form of cash-flow borrowing. For small and minority businesses, unpaid debt creates survival issues for those least likely to be able to afford long payment delays.

The effort exerted by the city to not pay bills on time pales in comparison to the time and expense vendors waste on trying to get paid. Many don’t have dollars in reserve to survive a late payment schedule, or to take legal action against the city on which they are dependent. Fearful of losing business, they tend to mute their anger and borrow to cover their payrolls and expenses at high rates.

Some vendors complain that it often takes the city a year to settle debts. Others are discouraged from bidding on contracts out of concern about ever getting paid. Even those accustomed to the red tape don’t always receive timely payment for their services. Many have concluded that doing business with the city is just too much of a hassle.

The slow pace of disbursements expose taxpayers to higher costs as well. Failure to make payments within the due date specified in contracts prevents the city from taking advantage of discounts. Worse, delinquent disbursements leaves the city vulnerable to ever-higher costs on the front end when it can’t compete for the top vendors or the best prices.

Mayor Dave Bing pledged to make the city government more business friendly. That promise is jeopardized by recurring cumulative deficit spending; severe cash flow shortages that result in improper reliance on inter-fund and external borrowing, and long debt of $17.1 billion, including interest.

Arguably, the city’s options to deal with the budget crisis are dwindling.  But this delayed-payment plan will do nothing but expedite Gov. Rick Snyder’s deployment of an emergency manger, and further stymie the city’s recovery. So while the city probably can’t avoid an EM, it also can’t afford to hold businesses at bay until it gets its financial act together.

The flawed strategy is also further evidence that the mayor and City Council have an uncanny ability to be fiscally irresponsible. Lowering costs ultimately requires restructuring the service delivery system. However, both branches of government continue to defy logic by coming up with the most destructive, uncreative accounting and financial “wizardry” imaginable.

Nothing they have put on the table will correct the time-consuming and jobs killing accounting labyrinth, or benefit taxpayers.

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