Detroit facing challenges one year after bankruptcy

Brian J. O'Connor
Detroit News Finance Editor

One year after exiting its historic Chapter 9 municipal bankruptcy, the city of Detroit’s balance sheet shows the city making some financial progress.

In a Nov. 24 report to the governor, the city’s Financial Review Commission notes that on the plus side, the city projects a $35 million surplus for the budget year that ends in June. That bonus is far outweighed, though, by projections that now add $83.4 million to the city’s 2024 pension obligations, a 75 percent increase.

The city’s bankruptcy removed about $7.4 billion in debt from the city’s books. The reorganization gave Detroit a decade of breathing room on city pensions and injected some new cash to patch up decayed city services. But the city won’t be back on a sound financial footing without attracting more businesses and residents to increase its tax collections.

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“It’s still very early in the cycle,” noted Matt Fabian, managing director of Municipal Market Advisors, an independent municipal finance research firm that kept a close eye on the city’s financial restructuring.

Said Fabian: “Detroit’s plan is a fragile one.”

The city’s 1,165-page plan of adjustment for life after bankruptcy came together quickly, and some of its projections may already be off. While the city is out from under its old debt, it still faces the challenge of finding a way to run and rebuild a city that’s lost 1.1 million residents since 1950.

“Fundamentally, it depends on Detroit’s revenues growing to create tax revenues and to show some decent growth,” Fabian said. “Any number of things will crop up, but the expectation of the plan is that economic growth will happen and cover those added expenses.”

Both of those things appear to be happening. The city has been required to stick to a budget compiled by former Emergency Manager Kevyn Orr this year. According to an audit for the Financial Review Commission for the three months ending Sept. 30, revenue fell $3 million short, expenses were cut by $33.5 million and interest on city debt was trimmed by $4.6 million.

An encouraging sign was that revenue from property and utility taxes was better than the original budget, but $35.1 million in public lighting revenue and blight grants never materialized, and won’t be received by the city’s general fund.

“The city is doing exactly what it should be doing in its budgeting,” said Ron Rose, executive director of the Financial Review Commission.

Rose added that much of the savings on expenses in the budget came from the city being unable to hire as many people as planned, including 200 open jobs for police officers. That’s because the pay is too low, so the city is moving to raise those salaries, which will remove that savings from future budgets.

The jump in the city’s projected pension costs is the result of a change in how long the pension funds estimate retirees will live to collect payments, explains Michael VanOverbeke, general counsel for the city’s General Retirement System. That change already was in the works during the bankruptcy, he adds.

In the bankruptcy, the city cut $7.8 billion from payments to its retired workers, who saw their pensions cut by as much as 18 percent. The city also has escaped $4.3 billion in retirement health care benefits.

The pension settlement was central to the city’s financial restructuring — including the much-heralded “grand bargain” that has foundations, charities and even the Detroit Institute of Arts contributing to make up some of the lost pension money. But pensions were the big problem that put the city into bankruptcy in the first place.

It was the city’s desperate attempt to keep up with its pension payments in years past that ultimately led to the bankruptcy. That came in the form of payments owed on a complex 2005 deal created by the corrupt Kilpatrick administration that leveraged Detroit’s casino tax revenue to plug a $1.4 billion hole in the funds. Payments on those investments, called certificates of participation, totaled nearly $40 million due in June 2013, a payment the city missed because it was very nearly out of cash and just one month away from declaring bankruptcy.

In the same month, Emergency Manager Orr reported that the city would miss $100 million in pension payments. And while the city had earlier estimated that it needed to cover an accumulated shortfall of $640 million in pension promises, calculations by Orr and his consultants pegged the city’s pension gap at $3.5 billion.

By comparison, the projected payment of $194.4 million looks easier, but still will be a challenge for a city that must also spend to rebuild shattered neighborhoods and re-establish basic city services, such as lighting and water, and bolster its struggling police and fire departments.

The pension system operates under a new management setup, a decided break with a past that included systematically overpaying benefits, mismanagement, poor investments and outright fraud. The two systems, one for general workers, the other for police officers and firefighters, each have new independent investment committees that oversee where the money goes, in addition to the pension boards.

The general system has been selling off its one-off investments and is now interviewing management firms to run the $2 billion-plus in assets, explains Ken Whipple, chairman of the GRS Investment Committee, who counts among the pension plans big issues “a lousy stock market.” As of Wednesday, the Standard and Poors 500 index is nearly flat for the year.

That could change in the next nine years, but when it comes to the city’s required pension contributions, Whipple warns, “It’s likely that when we get to 2024 that there will be a large payment due.”

Detroit needs to pay $20 million to the pension plans during 2016 and the next three years, then pays nothing from 2020 until it must start financing its entire pension liabilities in 2024. One option is for the city to start contributing more than its schedule to pay now under the plan of adjustment — if it can increase city revenue or afford to divert money from other needs.

“There are always tight times,” Whipple says. “In some sense, this is not as postponeable as buying a new fire truck.”

Faced with the possibility of a big increase in pension payments, the city is hiring a consultant, with the request for proposal due out by January says Rose, of the Financial Review Commission. Those recommendations will be presented to the commission.

“We’re hoping for a pretty tight timetable. A lot of details are still being worked out,” Whipple says. Adding that the projected payments, “were a surprise, but the city has come up with a responsible plan to start dealing with it.”

The next pivotal moment in the city’s financial recovery starts in February, when an independent panel will project city revenue for the 2017 fiscal year, which begins in July. After that, the city puts together its first independent budget since the emergency financial manager took control. In addition to a one-year spending and revenue plan, it must also include three years of projected budgets, Rose says.

“We’ll see what the mayor’s priorities are in terms of spending,” Rose says, “and what the city is projecting in terms of revenue.”

Twitter: @BrianOCTweet

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