Lansing — A little more than three years after emerging from the largest municipal bankruptcy in U.S. history, Detroit is poised to trigger an end to state oversight “very soon,” Michigan Treasurer Nick Khouri said Friday.
The city would do so by posting its third straight budget surplus.
“I think everyone, including me, has just been impressed with the progress that’s been made in the city of Detroit, both financially and operationally,” Khouri said.
In approving the “grand bargain” that helped pave the way for the city to exit bankruptcy in December 2014, Michigan legislators required that a financial review commission oversee the city’s finances, including budgets, contracts and collective bargaining agreements with municipal employees.
The commission can waive its authority if the city has adopted and adhered to deficit-free budgets for three consecutive years. Khouri, who chairs the commission, said it is likely as city officials “are about to run their third” straight surplus.
At that point, the commission “really essentially steps aside and lets the local council, the mayor run the city on a day-to-day basis,” the treasurer told reporters during a taping of “Off The Record” on WKAR-TV. “And they are very close to meeting that milestone.”
In fact, Detroit may already have met that mark. The city’s 2017 fiscal year ended June 30, but officials must complete an audit before certifying annual financial numbers, a process they plan to complete by the end of this month.
Detroit Chief Financial Officer John Hill expects the city and state Treasury to certify the financial audit by March or April, paving the way for an oversight waiver from the review commission.
“I think it would be a huge accomplishment for the city,” Hill said, telling The Detroit News the 2017 surplus may be end up larger than an unaudited $38.5 million projection from November.
The anticipated release from state oversight is a testament to Mayor Mike Duggan’s “insistence on the financial strength of the city and also the council working together to make sure that we do conservative budgets and that we executive those budgets,” Hill said.
Kevin Kubacki, executive director of the Financial Review Commission, highlighted the unaudited surplus projection in a Dec. 1 letter to Gov. Rick Sndyer, attributing it to “unfilled vacancies” in city government and “revenues trending above the adopted budget.”
Kubacki also noted the city has established a 10-year budget forecast, calling it “an important tool to ensure that long-term obligations are monitored and that short-term decisions are made in the context of appropriately balancing the city’s many funding needs.”
A third consecutive budget surplus would be the latest sign of financial stability for Detroit city government, which has created an irrevocable trust to begin required pension legacy obligation payments in 2024 and was recently awarded credit rating upgrades from two notable agencies.
Moody’s Investors Service in October upgraded Detroit’s rating and assigned a positive outlook, suggesting the possibility of future upgrades. The city’s economy “remains vulnerable” but is “showing real progress,” the agency said.
Duggan is expected to present another balanced budget proposal in late February. Coming on the heels three surplus years, “we’re really poised to go back to those rating agencies for another upgrade,” Hill said.
In its October upgrade, Moody’s warned of economic unknowns that could still pose future problems in Detroit, namely the massive contributions that loom for the city’s two pension funds.
The grand bargain -- which in part lessened pension cuts for retirees through hundreds of millions of dollars in contributions from private philanthropies and $195 million from state government -- relieved the city of most of those payments through 2023. The city’s new irrevocable trust is designed to set aside money for payments set to being in 2024.
The mayor’s upcoming budget will show Detroit is keeping pace with requirements to increase contributions on an annual basis, Hill said, calling the trust a“good strategy” by Duggan and the council that will get the city “used to putting aside more and more each year.”
The commission has already notified Snyder that Detroit may soon meet requirements to waive the oversight, but Khouri said the state will not do so before the city’s 2017 finances are audited and certified.
“What’s most important is following the statute,” he said. “Unless there’s a change in law, when they hit three years of surpluses, that’s when the oversight goes away.”
Lawmakers expanded the commission in 2016 to also oversee Detroit Public Community Schools, a debt-free district created as part of a $617 million state bailout. The commission includes outside financial experts and city officials, including Duggan, Council President Brenda Jones and Superintendent Nokolai Vitti.
As of December, Kubacki said commission staff and council were “developing a protocol” with the city on the assumption an oversight waiver will be granted. The commission would have to approve a waiver annually while continuing to monitor city finances for at least another decade.
Removing state oversight would give Duggan and the City Council the ability to negotiate contracts and make budget changes without approval of the financial review commission.
The city would continue biannual consensus revenue estimating conferences also required by lawmakers as part of the grand bargain.
“That’s worked very well to make sure we have conservative budgets,” Hill said of the revenue conferences.