After Detroit bankruptcy: Optimism, but 'challenges are real'

Five years after Detroit's historic bankruptcy filing, the city has risen from financial ruin to a promising future few could have predicted

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Five years after Detroit's historic bankruptcy filing, the city has risen from financial ruin to a promising future few could have predicted.  

Officials say the city now has its financial house in order, posting four consecutive years of balanced budgets while crafting a plan to stave off another collapse by addressing looming pension obligations.

That upswing has allowed the city to regain full control of government operations after it emerged this spring from strict state oversight put in place as a provision of its restructuring plan. City officials have touted improved services, including the installation of 65,000 new LED streetlights and better trash pickup, public safety response and bus service. 

"There’s a sense of optimism in Detroit like I’ve never seen before in my life," said retired U.S. District Chief Judge Gerald Rosen, who is credited with pulling together a funding plan that helped speed Detroit's bankruptcy exit.

"The challenges are real though. Nobody is minimizing the challenges."

That funding plan that was key to Detroit’s bankruptcy exit — known as the “grand bargain” — relieved the city of much of its financial obligations to the city's two pension funds through 2023.

The deal, designed in part to lessen retiree pension cuts, pumps the equivalent of $816 million into the city's pension funds over 20 years through contributions made by private foundations, state taxpayers and private donors to the Detroit Institute of Arts.

But in 2024, Detroit will have to start funding a substantial portion of its pension obligations from the city's general fund.

In response, Mayor Mike Duggan's administration put together a protection fund, he said, "to make sure that our employees never again face pensions being cut."

"We're running a balanced budget and putting money aside to make sure that never happens again," he said. "It shouldn't have happened the first time."

By 2024, the city expects to have deposited $335 million into what's been coined the Retiree Protection Fund, which is a designated account to help offset the future contributions. City officials already have set aside more than $100 million. 

A portion of the funds accumulated in the trust will be used each year from 2024 through 2033 to offset the annual contribution coming out of Detroit's general fund.

The administration projects that city revenues will have sufficiently increased by the time the general fund is responsible for covering the first payment of $143 million on its own in 2033. 

The city's funding mechanism — to cope with the annual future payments into the Police and Fire Retirement System and General Retirement System — has earned Detroit higher marks in the bond and credit markets and among state leaders.

If earnings meet the bankruptcy plan’s assumed return rate, the city’s contribution in 2024 from its general fund would be $143 million. But if there are no earnings, the city's required payment could soar to $344 million or more. The contributions would be annual and could continue for 20-30 years, based on projections. 

Pain and gain

The Motor City's comeback story isn't without pain, both supporters and critics of the city's restructuring say. 

Concessions taken during the city's Chapter 9 filing on behalf of active workers and retirees continue to devastate some.

Laverne Bronner-Wilson retired in 2016 after working for 32 years for Detroit’s Human Resources Department. She started a new full-time job as a secretary a few weeks later.

“I had to get a job because with the bankruptcy, it eliminated my health care,” said Bronner-Wilson, 56, who lives in Garden City. “I didn’t want a lapse in insurance coverage. Some people are paying $700 to $800 a month in insurance coverage.”

The city got out from under its $4.3 billion retiree health care liability by creating independent health care trusts, known as Voluntary Employee Beneficiary Association, or VEBA. One trust is for general retirees, another is dedicated to police officers and firefighters who retired by Dec. 31, 2014. 

Detroit dropped its traditional health insurance plan for retirees not eligible for Medicare in spring 2014. Instead, retirees and survivors were provided a monthly stipend, based on income level.

Bronner-Wilson said she doesn’t believe the health care concessions were justified.

“I’m not satisfied,” she said. “It didn’t have to be as bad.”

The city is still grappling with poverty and violent crime rates that remain among the highest in the nation. It's also faced with a troubled school system and lags in neighborhood recovery and inclusion.

East side resident Jay Henderson said growth has been noticeable in the downtown and Corktown, but improvements haven’t reached his neighborhood.

“Currently, it hasn’t affected us at all,” said Henderson, 65, who is president of the Riverbend Community Association. “It’s supposed to be coming. We haven’t had any gigantic groundbreakings. That generates growth right there. Everybody wants to move to an area like that.”

Changing core

In contrast, the city's Midtown is "booming" with apartment building and condos, said Pat Felder, who has lived there for 30 years and believes Detroit is "on a comeback."

The city's core is transforming with the addition of the $863 million Little Caesars Arena in Midtown, and a planned 50-block entertainment district as well as $1 billion mixed-use development underway at the former Hudson's site downtown. Further out, the historic Michigan State Fairgrounds could one day become the home of a major employer, a regional transit hub and provide amenities to residents as developers and the city see use for the large property.

"I feel as though Detroit is coming back. When people come to visit people they say, ‘I haven’t been here in a long time, and it’s really improved,’” said Felder, a member of the Virginia Park Block Club Association. “I have seen ups and downs, but I think we’re on the right track. I know it’s going to take a lot of time.”

Former U.S. Bankruptcy Judge Steven Rhodes, who presided over Detroit's bankruptcy case, said the city’s ability to maintain balanced and surplus budgets since its bankruptcy and restore basic city services is impressive and creating an environment for economic development. 

“Investment is coming into the city from all over the world, and the city has a reputation now as an attractive place to invest,”  said Rhodes, who signed off on Detroit's exit plan in November 2014.

Since Mayor Mike Duggan took office in 2014, EMS and police response times have been cut by more than half. EMS has gone from an average response time of 18 minutes to about 8 minutes, and police dropped from 30 minutes to about 12 minutes, according to Duggan's office. 

The city has replaced much of its aging fleet of buses, and its Department of Transportation has undertaken a major service expansion, adding 10 24-hour and express routes from city neighborhoods to its downtown core. 

Detroit’s council signed off on agreements in 2014 that privatized the city’s garbage pickup. The move was designed to save the city $6 million, improve services and remove Detroit’s burden of finding adequate staff and funding to invest in repairs to its aging fleet. The emergency manager-led deals also instituted curbside recycling and bulk pickup every two weeks, instead of quarterly.

Thinking ahead

Detroit has fared well in its financial path out of bankruptcy, state and city officials say. 

A surplus of $44 million is projected for the 2018 fiscal year, Detroit's Chief Financial Officer John Hill said. That follows several years of similar positive results.

The city ended its 2017 fiscal year with a $53.8 million general fund operating surplus, and revenues exceeding expenditures by $108.6 million. In the 2016 fiscal year, the surplus was $63 million, and it was $71 million for 2015. 

Hill said five years ago the city was just trying to manage what was in front of it. Now, it's budgeting out further and doing what it can now to minimize the impact of future obligations, including pension and debt service payments. 

Income tax revenue increased 15 percent in the last four years — it's $292.1 million for fiscal year 2018, up from $253.8 million in fiscal year 2014.

The property tax collection rate has also increased to more than 80 percent in fiscal year 2018 compared to 69 percent in fiscal year 2014, according to the CFO's office. The collection rate was about 79.8 percent for 2017, officials said.

State equalized and assessed property values may be up, but taxable value changes for Detroit have been "marginal," says Detroit Treasurer Christa McLellan, noting income tax, not property tax, is a major revenue source for the city. 

The 2018 tax year was the first that Detroit has seen an increase in taxable value in at least a decade, she said.

As a result, the city assumes it will collect $124 million in fiscal year 2018 compared with $129.4 million in fiscal year 2014 as taxable valuations change.

Those collections, officials note, consist of multiple sources including assessments for the current tax year, delinquent real and personal property tax from a Wayne County revolving fund, county auction proceeds and personal property tax reimbursements from the state.

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'Things are looking up'

Meanwhile, May data from the U.S. Bureau of Labor Statistics showed 227,894 Detroiters were employed. The figure jumped 1,690 from the month prior and 21,326 from January 2014, when Duggan took office. 

"Things are looking up. More Detroiters are employed now," Hill said. "That’s part of what we believe is driving our increase in (income) tax collection."

Detroit’s labor force also grew by nearly 3,000 residents in May. The unemployment rate for May was 7.9 percent, down from nearly 18 percent in January 2014. 

The administration has credited the improvements to city job training and placement efforts.

Hill said the city has multiple safeguards in place to ensure it doesn't slip back into insolvency. Among them, Detroit is conservative in its projections and doesn't budget income until it comes in.

Due to the city's financial responsibility, a nine-member financial review board unanimously voted in April to release Detroit from oversight. Until then, the board had the final say on city budgets, collective bargaining agreements and contracts over $750,000.

As a nod to Detroit's improving financial reserves, Moody's Investors Service in May announced an upgrade of the city's issuer rating and outlook.

David Levett, a senior analyst and vice president for Moody's, said Detroit has made great progress in planning for upcoming challenges, namely its pension obligation. But still there are no guarantees.

“The city has done a lot of planning for that cliff, so to speak. But it’s not like the issue has completely gone away," he said. "The remaining risk is assets could perform lower than expected in those plans, or it could be more volatile returns."

'It needed to be done'

Gov. Rick Snyder said he hoped July 18, 2013, would go down as the lowest day in Detroit's history.

Saddled with $18 billion in debt, unable to pay its bills or provide basic services, that's when the governor authorized the city to file the largest municipal bankruptcy in U.S. history.

"It was an opportunity to bring the city back," Snyder told The Detroit News in a recent interview. "It needed to be done."

Detroit's bankruptcy was the culmination of a half-century of residential flight, a dwindling tax base, deferred investment and financial mismanagement. 

"Citizens of Detroit were not getting the services that they deserved because of the crushing burden of all the historic debt," said Snyder, noting streetlights were out, trash wasn't being picked up and emergency response times lagged. 

"People tend to forget. They think it was a quick situation. It wasn't."

Struggling financially, Detroit entered into a consent agreement with the state in spring 2012. By the following February, a review team concluded the city failed to restructure its debt or come up with a viable plan to resolve its money problems, prompting Snyder to sideline then-Mayor Dave Bing and the City Council with the appointment of emergency manager Kevyn Orr, who declined to comment for this story. 

Bing, who took office amid a $330 million accumulated deficit, said his goal was to change the direction of the city. In his first three years as mayor, Bing was forced to make "very ugly decisions." Among them — scaling back benefits and cutting salaries by about 10 percent. 

"It was obvious we were already bankrupt," he said. "We had just not filed for bankruptcy."

Detroit's nearly 16-month journey through municipal bankruptcy helped it drop $7 billion in debt, restructure another $3 billion and pump $1.7 billion more into service improvements over a decade.

The city's landmark debt-cutting plan also slashed $7.8 billion from payments to retired workers and allowed Detroit to escape $4.3 billion in retirement health care benefits.

Detroit general retirees took 4.5 percent cuts to their base pension and lost an annual cost-of-living increase under the city's plan, while public safety retirees' pensions remained intact but their cost-of-living adjustments were reduced. 

Snyder said "nobody wanted to do any of that," but it was necessary to get the deal done.

"This was complex and complicated," he said. "Everyone needed to give something."

Doug Bernstein, a bankruptcy lawyer at Plunkett Cooney in Bloomfield Hills, said the city's Chapter 9 case was resolved more quickly than many smaller bankruptcies, and was more successful.

"But you don't discount the people who were actually hurt by it. In every bankruptcy, somebody is going to get hurt to a certain extent," he said. "It will never seem fair or a success to them, and I get it."

A ways to go

The biggest success of Detroit's bankruptcy, Rhodes said, was getting the city, its political leaders and residents to focus on the necessity of proper budgeting and restoring municipal services.

But the schools remain an "enormous" challenge, said Rhodes, who formerly served as the city school district's transition manager. 

Detroit Public Schools Community District has a new superintendent and school board members who are enacting sweeping reforms to address academics, attendance and teacher shortages. But there's still a ways to go.

"As I said when I confirmed the plan, and I think it’s still true today, that Detroit's recovery will not be complete until families are comfortable moving into this city because they are comfortable with the education their children will get in the public schools in the city," he said. 

Detroit's population loss has slowed, meanwhile, to a 10th of its pace the previous decade, but the city has yet to post a rebound from a decline that began after 1950, U.S. Census Bureau estimates showed in May.

Detroit's population was 673,104 as of last summer, a decline of 2,376 residents. The drop is close to the previous year's loss of 2,770.

Bing himself noted the positive turnaround of Detroit's downtown, Midtown and Corktown. But residents in many city neighborhoods are "still floundering, figuring out how they come back."

"We have not really done much in helping a lot of our neighborhoods, and that's where our focus has to be," Bing said. "We talk a good game, but there's no follow-through."

The Duggan administration has targeted several neighborhood corridors for redevelopment with $42 million from the Strategic Neighborhood Fund. This spring, Detroit announced plans to raise an additional $130 million to continue revitalization efforts in seven other Detroit districts.

Minority inclusion

Bing also has often been critical over a lack of minority inclusion in the city's turnaround.

The issue is still of central concern, some of which played out this month in front of Detroit's City Council as members grilled the city's administration and its land bank over whether enough is being done to ensure minority and city-based firms are getting fair access to millions worth of demolition work.

"There's still a lot of anger with a lot of people," Bing said. "We need to make sure we are including, as best as we can, as many people in these neighborhoods that decided to stay here for the tough times."

Wage and benefit reductions prior to and through the bankruptcy have hit the city's police force particularly hard, says Detroit Police Officers Association President Mark Diaz.

Diaz said he's worried about the city's future outlook if it can't stem the tide of police departures. Detroit has lost more than 800 officers to other departments offering more competitive wages and benefits since 2014, including 133 this year alone, he said.

Diaz said today there are 1,600 officers answering runs, down from about 2,000 during the city's bankruptcy.

"The problem we have today comes down to attrition," he said. "We're losing officers as a result of what happened in bankruptcy."

Duggan said police officer retention is a top priority and some progress has been made. Starting pay coming out of bankruptcy had been $31,000, and now it's $38,000, he said.

"We are still losing too many officers, but we are hiring more than we're losing and continuing to put more officers on the street," he said. 

Duggan said the city will continue to reopen contracts to improve pay, noting a recent wage increase for Detroit police command officers. But said the city has 9,000 workers and he has to consider them equitably.  

"What we continue to do is try to raise our employees' salaries as fast as we can responsibly," he said. 

For Duggan, the biggest concern right now is high car insurance rates. It's an issue he's worked to address that's carried over from his first term. He intends to continue to push in favor of getting a "driver's choice" auto insurance reform plan through, he said. 

Rhodes said Detroit's recovery will take decades, and that assumes the leadership of the future will have the same focus Duggan and his staff have demonstrated.

"Ultimately, the fiscal welfare of the city and the city's ability to provide adequate municipal services is a responsibility of the residents themselves," he said.

"In our democracy, it is true that our political leaders are responsible for the decisions they make, but we are responsible for the politicians that we elect."

 

 

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