Detroit's fiscal health is holding steady but pension funding and
The two threats hung heavily over a meeting Monday of the
The commission held direct control over the city after its 2014 exit from bankruptcy until the first waiver was granted in 2018, on the condition that the city meets fiscal targets, including a balanced budget.
The content of the
Mayor Mike Duggan's administration warns that proposals a charter review commission wants to make will cost $2 billion over four years and could drive the city back into bankruptcy.
Charter review commission members call that an exaggerated "sky is falling" assessment. “There is nothing...that dictates a dollar amount" that has to be spent, Review Vice-Chair Nicole Small told the DFRC.
The pension funding burden is more certain, because the city must resume contributions in fiscal 2024 when a $202 million contribution is due under agreements struck as part of its exit from Chapter 9. A special trust fund known as the Retiree Protection Fund built up since 2018 will help cover the first few years of contributions but only through fiscal 2027.
“One of the city’s top goals is certainly to identify additional dollars that can go into the RPF to help stretch out this ramp up” in payments and also to identify new revenue sources and expense savings so the city can “meet this pension contribution once the RPF runs out,” Steven Watson, one of the city’s deputy chief financial officers, told the commission.
A structural imbalance occurs heading into fiscal 2027. If revenues do better than projected, a structural gap is delayed a year or two.
The city began putting money into the special fund in fiscal 2018. From the fiscal 2018 balance of $108 million it’s grown to about $235 million this year and is projected to close out fiscal 2022 at $320 million.
“We’ve been building up room in our budget every year with these RFP deposits to get ready for that for that pension payment in 2024 and then starting in 2024 we would make the payment from a combination of the city’s general fund and the RPF,” Watson told the commission. “By fiscal 2027 the RPF is depleted and we have a large pension increase we have to face that year as well as another large” one the following year.
The city will use $123 million from the RFP to cover the roughly $202 million fiscal 2027 payment with the remainder coming from the general fund. Reliance on the RPF shrinks over the next few years but it’s still eventually exhausted in fiscal 2027.
One uncertainly on the pension issue is an effort by some pension fund managers to shrink the amortization schedule to 20 years from the current 30 years. City planning has been based on a 30-year term. A 25-year term would raise the anticipated $202 million contribution in 2024 to about $217 million and a 20-year term would raise it to $241 million.
The city’s current fiscal condition is holding steady with a balanced $2.3 billion budget that includes a $1.1 billion general fund for the fiscal year that begins July 1.
General fund revenues dropped in fiscal 2020 as the pandemic hit to $927.5 million from $1.05 billion in fiscal 2019, with fiscal 2021 revenue projected to fall to $843 million. Revenues are expected to climb to $995 million in fiscal 2022.
Non-resident income tax revenue dropped about $23.4 million in fiscal 2020 because of remote work and are expected to decline $85 million for fiscal 2021. The projected loss tapers off to $26 million in fiscal 2022 but the city is factoring in a potential 10% permanent change.
Gambling taxes plummeted to $132 million in fiscal 2020 from $184 million in 2019 as casinos were shuttered to combat the spread of COVID-19 and are expected to further fall to $103 million in fiscal 2021 before recovering to $170 million in fiscal 2022.
The city hopes to use some of its $826 million share of federal American Rescue Plan relief to meet the city investment requirements under the bankruptcy plan of adjustment aimed at improving living standards.
“We want to address some of those issues” such as blight removal, infrastructure, and health and safety, said Detroit Chief Financial Officer Jay Rising.
Rising was previously “acting” CFO but the City Council this week made the appointment permanent.
Mayor Mike Duggan Tuesday night laid out his ideas for using the funds with about $400 million going to cover tax revenue losses in the city’s budget. The remainder would go toward combating “intergenerational poverty” through programs, job training, foreclosure prevention and fund neighborhood investments, parks and recreation, public safety, and to provide small business funding. The city will hold public meetings seeking input.
The city’s fiscal presentation followed the Charter Commission’s attempt to dispel city warnings that proposed revisions slated to go to voters on an August ballot would bankrupt the city. The city’s price tag — now down to $2 billion from an initial assessment of $3.4 billion earlier this year — amounts to a “sky-is-falling” and “over-exaggeration” that can’t be trusted, several charter commission members told the DFRC.
The DFRC’s authority and scope of review are limited to ensuring fiscal balance and other targets are met and that’s tracked by the market.
Rising noted that the DFRC may not have a direct say in the charter revisions but has sweeping power to rescind or refuse to renew the waiver from oversight if budgetary balance is threatened so members need to “understand the risks to the city.”
A review of the charter revisions by Michigan Attorney General Dana Nessel raised a series of concerns about the legality of some provisions and the potential a fiscal crisis could be triggered, prompting Gov. Gretchen Whitmer’s rejection in an April 30 letter to the charter commission.
One DFRC member underscored the worry during the Monday meeting. “The city’s finances are fragile” with the pension holiday ending, said David Nicholson. “I think we are going to have just watch and wait.”
The charter commission sought to pick apart the city’s assumptions with its own assessment from Dale Berman, a University of Michigan professor in human resources and labor relations. Berman’s lengthy report laid out specific areas where charter projections run counter to city projections and asserted that the city used faulty methodology in arriving at its estimates.
One example is youth teen job programs that the city believes would cost $260 million over four years. That number is based on employing most teens in the city and it’s not a mandate.
“The charter language grants discretion,” Berman said. "This is an example of the city” going to an extreme and “suggests the unreliability of the Duggan administration estimates.”
The charter commission made additional revisions and returned them to Whitmer but on Monday she declined to review them saying it was too late. State charter statutes allow the governor to weigh in on proposed changes but her rejection doesn’t preclude them from going to voters, according to the AG office. City attorneys say the governor’s approval is needed.
If approved the changes would go into effect in 2022. Two lawsuits have been filed contesting the Detroit City Clerk’s certification to put the questions to voters. The charter was last revised in 2012. Voters in 2018 approved the commission to consider revisions.
The city has won a series of upgrades since emerging from Chapter 9 but its ratings remain speculative-grade. Ahead of a recent $175 million general obligation sale for blight removal, S&P returned the outlook on its BB-minus rating to stable from negative.
