Duggan: Detroit will run $100M deficit due to COVID-19 outbreak

Christine Ferretti
The Detroit News

Detroit — The economic slowdown caused by the coronavirus pandemic is wreaking havoc on the finances of Detroit, a city just six years removed from exiting the largest municipal bankruptcy in U.S. history.

Mayor Mike Duggan said Tuesday that he expects the city will run a $100 million deficit this fiscal year amid the COVID-19 crisis and said "there will be painful cuts" as a result. But the mayor said shelling out dollars to protect residents remains Detroit's priority list.

"We're going to spend what we need to, to take care of our residents," Duggan said during a Tuesday afternoon media briefing. "Then, as a community, we're going to have to deal with the fact that we have a major budget deficit."

Detroit is among the hardest-hit areas in the country. Its confirmed cases of COVID-19 reached 5,501 on Tuesday, and the city's death toll climbed to 221. 

In its battle against the respiratory illness, the city, Duggan noted, spent $400,000 to secure some of the first 15-minute tests and machines to detect the virus in the country. It's a move that's helped get 450 public safety workers back out on the front lines, he said.

Duggan's financial projection comes after a December report from Moody's Investor Services that deemed Detroit among the weakest of the country's 25 largest cities in its preparedness to weather a financial downturn. It cited concerns over pension contributions, fixed costs, revenue volatility and capital needs.

Among the biggest hits Detroit is taking is the closure of the city's casinos, which Duggan says has cost the city about $600,000 per day in revenue.

In 2019, the Detroit casinos put forth $184.2 million in wagering taxes and development agreement payments to the city. They also contributed $117.8 million in gaming taxes to the state of Michigan for 2019. The Michigan Treasury Department estimated the new sports betting laws that came online last month would bring $19 million annually in new revenue to the state.

Intake personnel approach vehicles as COVID-19 testing begins at the Michigan State Fairgrounds begins on Friday, March 27, 2020.

But the casinos have been closed since March 16 to help stop the spread of COVID-19. And on Tuesday, MGM Grand Detroit, MotorCity and Greektown posted sharp drops in revenue in March and for the first quarter of 2020. For the month of March, aggregate revenue plummeted 59.1% from March 2019, to $57.4 million.

Detroit only regained local control of its finances two years ago when it emerged from the strict oversight of the Financial Review Commission put in place as a condition of its historic bankruptcy in 2013 by having balanced books.

"We've run balanced budgets year in and year out since I've been here," said Duggan, who has served as mayor since 2014. "We've never talked about a deficit. We're going to solve it. But there's going to be a point at which we're going to talk about cuts, and they are going to have to be painful cuts."

Last month, before the pandemic hit, the mayor detailed a $1.1 billion general fund spending plan as part of a proposed $2.4 billion budget for 2020-21, which begins July 1.

Detroit Chief Financial Officer Dave Massaron told The Detroit News on Tuesday that the city has suffered substantial revenue income tax and gaming revenue losses during the virus outbreak.

Although the city's revenues are falling short of projections, Detroit has fund balances and surpluses to help it absorb the blow, he said. The city's unassigned fund balance is $123 million. There are other sources the city also can draw from, he said.

Massaron said a threat of another bankruptcy is "not part of our thinking."

"A team is in place to meet this challenge," he said. "We will have to watch and see how deep and painful the cuts are, but right now, there's enough room in the budget and with our reserves to manage our way through it."

Doug Bernstein, a bankruptcy lawyer at Plunkett Cooney in Bloomfield Hills, said under former Mayor Kwame Kilpatrick, the casino tax was the city's biggest revenue source. Today, city officials have said it still accounts for about 20% of the budget. Income tax is now the largest source.

The funding challenge is serious but likely not as bad as it would have been had the city not already gone through bankruptcy earlier this decade, Bernstein said. 

"The pandemic has impacted every industry, every kind of business, everybody's life," he said. "I don't recommend any rash decisions. You have to analyze, and you don't know where the end of this is."

Eric Scorsone, an associate professor and director of the Center for Local Government at Michigan State University, said all communities will be looking for help after this crisis. 

Scorsone, who also is a senior advisor to the city of Flint, said there is concern about how long the shutdown will last. Some cities, he said, are already considering cashflow borrowing.

"Is it going to be a few months? Is it going to be the whole year?" he said. "If it’s going to last six months that would really make the outlook a lot more problematic for a lot of cities."

In Detroit, Duggan's administration has worked to build up its reserves and a strong management team, said Scorsone, who assists with the city's forecasting under a partnership with the University of Michigan and Wayne State University.

"That said, this is unprecedented," he added. "Every local government is going to be looking to the federal government. The reality is, this is bigger than everybody."

Detroit City Councilman Scott Benson said he expects the deficit number will be larger than what the mayor anticipates. But the city, he said, is in a good position based on its conservative budgeting, fiscal management and fund reserves. 

"Conservative fiscal policy has paid off. Living beneath your means, putting money away for a rainy day, and we are having a storm right now," he said. "We are in a very good position in the city of Detroit to withstand this and to come out on the other side without much harm."

Beyond casino and income tax, the city is also losing bus and parking ticket revenues. It might take a couple years to get back to the status quo. There likely will be cutbacks in demolitions and other city services, such as street sweeping, which were boosted in recent years, he said. 

Benson, who also serves as a trustee for one of the city's two pension funds, said he's concerned about the funds with the market downturn.

"It has a negative impact on the entire value of our portfolio," said Benson, a trustee of the city's General Retirement System. 

Bruce Babiarz, a spokesman for the city's Police and Fire Retirement System, said the fund is operating and paying all due retirement benefits to beneficiaries every month. 

The city, through a funding package coined the "grand bargain," was able to shield the city's arts collection from creditors in its bankruptcy and soften retiree pension cuts.

Under that plan, Detroit is relieved of much of its pension payments through 2023. In 2024, Detroit will have to start funding a substantial portion of the obligations from its general fund for the General Retirement System and Police and Fire Retirement System. It's also established a dedicated fund to amass more than $300 million to help meet the contributions. 

"The pension fund assets are largely dependent on market forces. Those forces are on the pandemic rollercoaster right now, and we are optimistic that we will have a market recovery," Babiarz said in an email.

"The City of Detroit has used great foresight to establish and irrevocably fund the Retirement Trust Fund to create a funding cushion for 2024. We are all in this together and will work collaboratively to resolve the projected funding deficit."

For Shirley Lightsey, former president of the Detroit Retired City Employees Association, who helped negotiate the pension deal in the city's Chapter 9, the situation sparks renewed fears. 

'We've given up enough. The retirees, there's just nothing left," she said. "This is a large upset. We never thought anything like this would happen. I'm concerned that they may have to come back to us for another cut."

Birmingham-based attorney Ryan Plecha represented retiree groups in Detroit's bankruptcy and said while he and Lightsey don't anticipate another bankruptcy,  the worst-case scenario "is an offshoot of going through that process the first time."

Plecha said it's unclear how the volatility in the markets will impact the funds in the short or long terms.

"The city has been being proactive in setting up the stabilization fund they are contributing to in case of a rainy day," said Plecha of the law firm Kostopoulos Rodriguez, PLLC.  "But I don't think anyone expected a typhoon."

Massaron said the city is going to take "very dramatic action" to ensure its in the best position to meet its long-term obligations, including those promised for pensioners. 

"It's also why the actions of the governor and compliance with this (stay home, stay safe) order is so important," he said. "The quicker we get through this, the more likely the city and everyone in the city is able to return to a more vibrant economic life, which will lead to revenue."

Meanwhile, Duggan presented a chart Tuesday that showed the slowing rate at which deaths have doubled during the outbreak, citing figures from late March through now, showing, at one point, the deaths doubled within two days. Numbers since doubled over three days and then doubled in four days. 

"Now, what we're seeing is the rate of doubling is slowing to every five or six days," he said. "This is the first glimmer of light we've seen from the data since this pandemic started."