Duggan's deficit plan: Tap surplus, trim pay, cut jobs

Christine Ferretti
The Detroit News

Detroit — Mayor Mike Duggan wants to tap into the city's surplus funding, lay off part-timers and reduce the pay and hours of some city employees to stave off a $348 million deficit anticipated over the next 16 months stemming from the coronavirus pandemic.

The mayor, during a virtual town hall Tuesday, laid out his proposal to offset the shortfall he anticipates will be about $154 million in the current fiscal year, ending June 30, and $194 million in the next. 

Duggan said about 80% of the funding hole can be covered with $151 million in surplus and rainy day funding and $147 million pulled from other sources, including capital improvement funds, blight remediation funds, federal transit funds and cost savings.

But most of the city's 8,000-member full-time workforce must endure reductions in their hours and pay to close the entire budget gap, he said. 

Under the mayor's plan, one group will earn 10% of their pay while working 10% of their regular hours. Another will work 80% of their hours and be paid 80% of their regular wages, and those in 100 executive posts, with earnings of $125,000 or more, will take a 5% pay cut to save a total of $1 million. A final group of about 5,500 workers including police, firefighters and EMTs, will continue working at full pay and full hours. All worker groups would forgo a pay increase slated for July 1. 

Union groups with existing contracts will have to agree to do without the cost of living increases, Detroit's Chief Financial Officer Dave Massaron said. 

Also, the plan to draw $50 million from the rainy day fund in the next fiscal budget will need the council's approval. 

To further reduce costs, Duggan wants to lay off 200 part-time, temporary and seasonal workers. 

According to Duggan's plan, cutting part-time workers will save $6 million, while the pay and work reductions will save $44 million. The cuts, he said, "are going to hurt” but “we can handle it.”

The mayor said the job changes will kick in April 20. The reductions allow for employee health care to be protected, and the workers will be eligible for both unemployment and the extra $600 per week in federal stimulus money. 

“If the economy opens up faster and comes back faster we’ll ease that off,” he said. “If it comes back slower, we’re going to have to come back and lay people off instead of going to 10%.”

The city, six years removed from municipal bankruptcy, is suffering major losses in some of its top funding sources: gaming and income tax revenues and revenue sharing dollars. It's also spent millions on measures to help combat the spread of the virus. 

Detroit is among the hardest-hit communities in the country. As of Tuesday, the city reported 7,020 confirmed cases and 33 new deaths from the virus. Overall, 424 people in Detroit have died.  

The mayor has said he wants cuts being proposed to take effect immediately. 

Duggan said city officials want to solve the crisis "without drama" and avoid the risk of having the state's Financial Review Commission step back into active oversight. That commission was activated by the city's bankruptcy.

"If the review commission is in place, they run the city of Detroit's life," he said. "If we run a deficit, the review commission pops back to life and stays for a minimum of three years again. If we don't handle this deficit ourselves, the state of Michigan is going to be running this city again and I'm going to do everything I can to ensure that doesn't happen."

Besides its revenue losses, Detroit has spent millions in its battle against the respiratory illness, including at least $11 million early on in capital funding for response-related activities as well as $400,000 to secure some of the first 15-minute tests and machines to detect the virus. The effort helped get hundreds of public safety workers cleared and back on the front lines. 

Detroit Mayor Mike Duggan

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.

Massaron said Tuesday that the city has shown that it's willing to make "decisive leadership decisions" on the front end rather than waiting until "we're past the point of where we can address it."

“The city, in the middle of a pandemic, has been able to put together a plan that we’ve briefed the state on, the state’s found credible and we believe is credible to address a nearly $350 million revenue shortfall over 16 months that occurred in the course of two months.”

Wayne County Executive Warren Evans noted Tuesday that he effects of the pandemic will be felt for months and years to come and the county is not immune.

"Wayne County faces many of the same economic realities as does its largest city," said Evans, who directed his staff in recent weeks to prepare new revenue forecasts on the impact of COVID-19 shutdowns.

When they are complete, he intends to outline steps "we must take together to ensure the basic and essential services of government continue.”

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. The casinos have been closed since March 16 to help stem the spread of COVID-19.

Before the pandemic hit, the mayor detailed a $1.1 billion general fund spending plan in what he called his "tightest budget" since taking office as part of a proposed $2.4 billion budget for 2020-21, which begins July 1.

The proposal called for more funding for one-time infusions to boost the city's rainy day fund and a dedicated trust to help meet its upcoming required contributions for retiree pensions. 

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.

The plan also relieved Detroit from 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.

Massaron has told The News that the city is going to take "very dramatic action" to ensure it's in the best position to meet its long-term obligations, including those promised for pensioners. 

Detroit regained local control of its finances in April 2018 when it emerged from the strict oversight put in place as a condition of its historic bankruptcy in 2013, by having balanced books.

On Tuesday, the mayor said the budget crisis will mean delayed road repairs, increasing blight and closed recreation centers. 

“While the immediate credit risk for the city is contained, the situation surrounding Coronavirus is rapidly evolving and the longer-term impact will depend on both the severity and duration of the crisis," said Moody's vice president David Levett, lead analyst for Detroit, in a statement. 

"Detroit’s revenue structure is significantly exposed to economic downturns because gambling and income taxes comprise two of the two largest revenue sources," Levett noted. "That said, the city’s fiscal 2019 audit, which was released in December 2019, showed that the city has an improved capacity to respond to stresses. Detroit has amassed an exceptionally strong cash position for a city of its size, with more than half a year’s expenses in reserves."

That position, he added, was in part what led to Moody's revision in February of the city's outlook rating

The agency, at the time, revised its rating outlook on Detroit to positive from stable, citing "robust operating performance" producing "very healthy reserves" as well as an "improved job base" fueling "rising income tax receipts."

Eric Lupher, president of the Citizens Research Council of Michigan, has said that the financial consequences of social distancing are affecting all aspects of the nation’s economy, including government finances. Detroit, he said, stands to be hurt by the downturn more than other governments because its "financial recovery is rooted in its revenue sources."

On Tuesday night, Lupher called Duggan’s plan “creative human resource management.”

“You have some workers that are basically idle, so how do you pair that situation with the state and federal benefit programs that are in place to manage through this crisis,” said Lupher, adding it’ll take some buy-in but the “alternative is a lot of people having a lot of pain.”

On Friday, Duggan announced that front-facing workers and public safety employees will get additional compensation for continuing with their jobs in the face of the crisis.

The mayor approved a policy that went into effect Monday, providing employees the equivalent of $800 a month in additional pay for COVID-19.

It will apply to fire, police, EMS, health department staff, water department workers, DDOT bus drivers, general services and building department inspectors. In all, the hazard pay covers workers in six city departments and from approximately 14 unions. 

In announcing the hazard pay policy, Duggan pointed to the need to reduce costs to fend off the deficit, saying, "I wish we could do more."