Detroit foresees end to state oversight
The city of Detroit expects to get the keys back to its financial house this spring for the first time since it exited bankruptcy in 2014.
The question is whether it can keep the house in order once state oversight ends — and local elected officials regain control over budgets and contracts.
With two balanced budgets and an audit of a third expected in May, city officials anticipate they will be released early next year from the strict financial controls required under Chapter 9 restructuring.
The shift is especially important as voters cast ballots Tuesday for the Detroit leaders who will chart the city’s direction. Both Mayor Mike Duggan and challenger Coleman Young II have offered plans on how they would guide the city financially.
Gov. Rick Snyder said he’s optimistic about the city’s ability to manage finances on its own.
“They’ve been hitting those milestones, and I hope they continue to hit them — that’s a good thing for all of us,” Snyder told The Detroit News.
There is evidence that the oversight is no longer warranted: Detroit’s credit has been upgraded among rating agencies, its employment rate is up and property values are climbing.
The city, in a financial update last month, noted economic development in some neighborhoods and Detroit’s downtown, job creation efforts and growth in multifamily home construction.
Experts say bankruptcy allowed Detroit to drop billions in debt, setting it on a solid financial path. But the city faces massive future payments for past borrowing and pension obligations that are difficult to plan for.
“It really takes the economic environment to cooperate, as well as some very good and focused financial management. Right now, that seems to be all there,” said Lisa Washburn, managing director of the Concord, Massachusetts-based firm Municipal Market Analytics.
“Eventually, I suspect there will be another economic downturn and how that affects that region, that’s something outside of their control. But it can’t be outside of their field of vision.”
The landmark municipal bankruptcy set forth strict conditions to help Detroit avoid falling back into debt.
A nine-member commission, which under the law includes Duggan and City Council President Brenda Jones, currently signs off on the city’s four-year budget plan, certain contracts and transactions. It’s also empowered to review, modify and approve operational budgets.
The commission was established as a condition of a financial aid package approved by the state Legislature to defray cuts to Detroit retiree pensions and shield the Detroit Institute of Arts collection from bankruptcy creditors.
There are still protections even if the city is released from oversight, Detroit officials note.
The state-mandated commission would continue to meet monthly and could step back in if necessary, the city’s Chief Financial Officer John Hill said. The city would continue to hold revenue estimation conferences in February and September to set budgeting limits for each fiscal year, as well as develop a four-year financial plan.
Detroit’s numbers are headed in the right direction when it comes to property values, income tax collection, median income and employment. Among the positives:
■The city’s taxable value is projected to climb by about $100 million, from $6.4 billion based on the taxable values from the end of the 2016 calendar year to $6.5 billion at the end of this year, according to data from the CFO’s office.
■The city projects an increase of about $30 million in its residential real estate — the first boost in the property class in almost two decades. Detroit’s level of owner-occupied homes went from a low of 59 percent in 2010 to a projected 74 percent in 2018, based on findings from the reappraisal, officials say.
■City figures show income tax collection has gone from $263.2 million in the 2016 fiscal year to a forecast of $285 million for 2017, based on unaudited figures.
■The city’s employment has gone up from 206,568 in January 2014 to 233,068 this July, according to labor statistics.
■Detroiters’ median household income was $28,099 in 2016, a 7.5 percent hike from the previous year, according to U.S. Census estimates released in September.
Not as encouraging are poverty and crime rates.
The poverty rate has dipped 4 percentage points to 35.7 percent, Detroit’s lowest since 2008. But the rate is still the highest among large U.S. cities, as is the city’s violent crime rate.
“You can’t ignore what’s happening in the downtown and Midtown, but Detroit is obviously so much bigger than that,” said Matt Butler, a vice president at Moody’s Investors Service and lead analyst for Detroit. “The real story here going forward is how is Detroit able to re-create that development in other areas of the city.”
‘Showing real progress’
The city filed for bankruptcy in the summer of 2013 and officially exited on Dec. 10, 2014, with a plan to shed $7 billion in debt and pump $1.7 billion into restructuring and city service improvements over a decade.
Last month, Moody’s Investors Service upgraded Detroit’s credit outlook and praised the city for its gains. Detroit’s economy “remains vulnerable,” the report noted, but adds it “is showing real progress.”
Detroit recorded a general fund surplus of just over $63 million in fiscal year 2016 and expects an additional surplus for 2017 of about $38.5 million. For 2015, the surplus was about $71 million.
But Moody’s warns of economic unknowns that could pose future problems, namely the massive contributions that loom for its two pension funds.
A funding plan forged through Detroit’s bankruptcy coined the “grand bargain” relieved the city of much of those payments through 2023. But in 2024, the city will have to start funding a substantial portion of the pension obligations from its general fund for the General Retirement System and Police and Fire Retirement System.
The initial payment was first contemplated at $113.9 million, but city officials later said estimates had been off, in part because of outdated mortality tables. If earnings meet the bankruptcy plan’s assumed return rate of 6.75 percent, the city’s contribution in 2024 would be $167 million. If there are no earnings, it could soar to $344 million or more.
Contributions to the pensions would be annual and could continue for 20-30 years.
Investment returns have varied greatly. To minimize a shortfall, the city’s administration established a dedicated Retiree Protection Fund that’s expected to pull together $335 million in the coming years to help meet the required contributions. The City Council would contribute a dedicated amount from its general fund each year. So far, $105 million has been set aside.
Moody’s has called the fund a “credit positive action,” noting, however, that once it’s depleted in 2033 the city will be required to fund annual pension payments directly from its budget.
Retooling debt structure
The greatest concern now, Hill said, is retooling the city’s debt structure.
In October, Detroit solicited requests for proposals from investment banks that could help address debt tied to past capital borrowing and millages.
“We think revenues should increase, but if we can also deal with the structure of the debt and lower those payments then the city will be much better off,” said Hill, adding a plan, he said, would “set the city on the course to have dealt with two of its major challenges.”
Late last month, Duggan and Young briefly addressed the city’s finances during a debate.
Duggan said Detroit’s City Council has been rigorous in making sure that we “watch every dollar that we have” and he expects the city will be released from oversight this spring.
Under the management of the city’s current mayor and council, Duggan told The News, “we won’t ever lose self-determination again.”
Despite the city’s expected departure from oversight on its budgeting and contracts, Young believes Detroit still won’t have enough say.
Young said he wants to find efficiencies and reduce costs. He contends the city is “top heavy” in its staff to manager ratio.
“These are some of the things I am willing to do to make sure we have a balanced budget and our finances get back in order,” he said.
Regardless of who wins the mayor’s job, Washburn, who followed Detroit closely during its bankruptcy, said the city will have to keep tight reins on its budgeting.
“In theory, it would be great to have as much money plowed into redevelopment as possible, but that comes at a cost,” she said. “With less than seven years away from having to start making pension payments again, you don’t want to find yourself in a budgetary hole at a time when you can see it coming.”