Detroit Mayor Mike Duggan’s proposed fiscal 2024 budget and four-year financial plan tackles the city’s post-Chapter 9 pension funding cliff, offers some property tax relief and moves the city closer to fully shedding state oversight, he told the City Council.
The city would draw $73 million from its proposed $1.3 billion general fund to make the expected $149 million contribution to its legacy pension plans with $57 million coming from the special Retiree Protection Fund account. The city set up the fund to cushion the impact of the scheduled resumption of pension payments in fiscal 2024.
The other $19 million comes from remaining “Grand Bargain” funds put in place as part of the city’s 2013-2014 bankruptcy exit.
Resumption of the contributions has long loomed large over the city’s budget and drove the decision six years ago to set up the Retiree Protection Fund and funnel annual and supplemental payments into it. It now holds $473 million.
“This year’s budget is historic. This is the year that was supposed to be financial doomsday, that the financial analysts said would be the year of the fiscal cliff where the city of Detroit was going to be back in financial crisis,” Duggan told council members during his budget presentation Friday.
“The feared fiscal cliff is a hill. It’s a steep hill and it’s not easy to manage but because of the discipline of the last eight years you have a budget that handles it and balances — a little tight but without any cuts or crisis,” Duggan said.
The city has won a series of upgrades since emerging from Chapter 9 in late 2014, but its underlying general obligation ratings remain speculative grade in the double-B category.
The city’s two pension plans were frozen in bankruptcy and replaced for new hires with hybrid plans that combined elements of both defined benefit and defined contribution plans.
To limit pension cuts in the bankruptcy plan of adjustment, the city struck what was labeled the Grand Bargain: an $816 million fund with contributions from the state, the Detroit Institute of Arts, and various charities. Pension contributions were funded exclusively from the Grand Bargain giving the city a 10-year payment break.
The city plans to trim $3 million off its annual use of the Retiree Protection Fund so that the fiscal 2027 draw is down to $48.2 million, leaving a balance of $263 million.
The long-term plan is to draw the fund down at incrementally lower amounts falling to about $25 million in a decade until it’s exhausted in fiscal 2040. Grand Bargain annual contributions of $18.7 million continue through fiscal 2034.
The police and fire fund threw a wrench in the planning when it approved moving to a 20-year amortization schedule from the existing 30 years, which would drive up the annual payment.
Duggan argued the city can’t afford the change and last August asked the federal bankruptcy court to intervene and block the change. A bankruptcy court hearing is set for March 15.
The mayor’s overall budget proposal totals $2.6 billion with the $1.3 billion general fund up $150 million from the current one that covers spending through June 30. The pension payment and raises for various employee groups accounts for most of it.
The budget would mark the Detroit’s 10th balanced spending plan and if the city stays on track with its four-year financial plan that runs through fiscal 2027 it could fully exit Financial Review Commission oversight.
Active oversight ended in 2017 after the city met balanced budget and other targets but the review commission remains in place for a decade after that, so the threat remains that Detroit could come back under direct oversight if it fails to hit metrics including keeping its budget in balance and having the ability to access the municipal market.
“We are three years away from having complete self-determination,” Duggan said. “We can see the day when the state of Michigan is out of our business for good.”
The council will vote on the budget package next month and it then heads to the review commission, which will vote in late spring or early summer on whether to waive state oversight for a sixth year.
If the city hits the 10-year mark leading to the dissolution of the FRC, the city must still meet various fiscal requirements under state legislation that it now abides by, including adoption of a four-year financial plan and use of a revenue estimating conference to project revenues that form the basis for budgets.
The city is making a $12 million deposit into reserves bringing them to $150 million as part of spending plans for a current year surplus. Another $10 million was also sent to the Retiree Protection Fund.
The $150 million reserve equates to 11% of revenues, exceeding the city’s 5% requirement, but still short of a 15% future goal , said Chief Deputy Chief Financial Officer Tanya Stoudemire.
Revenues are projected to rise by more than $100 million next year mostly on the strength of income tax collections and then taper down to more modest growth in the $20 million to $25 million range annually through 2027.
The city collected about $254 million in income taxes a decade ago and the bankruptcy plan of adjustment projected they’d grow to $313 million by fiscal 2024, but the city anticipates $393 million next year.
The council recently approved plans to spend $157 million of the current $230 million surplus and Duggan’s proposed budget would spend all but $9 million of the remaining balance.
The spending plan would also directs $13 million in funding for blighted housing removal. Voters approved $250 million in general obligation-backed borrowing to demolish or renovate 16,000 blighted properties. The city sold $175 million in 2021 and is still spending down those proceeds.
The city has 4,000 more properties to demolish and 3,000 to sell and expects to wrap up that work by the end of 2024 allowing for a shift to work on privately-owned properties. Duggan told the council the city would be challenged to use tax-exempt bond proceeds for that work so discussions loom over spending to tackle those 4,000 to 5,000 properties.
The city will reduce property taxes by levying for eight mills to repay its blight borrowing instead of nine later this year and next year will lower it to seven.
“We are going to have a tax cut for the first time in my memory,” Duggan said. Homeowners with $50,000 in taxable value will save $50 this year and $100 next year.
While city officials anticipate Detroit will balance its books in the coming years, risks loom from the impact of a possible recession and whether the uptick in development and job growth will remain on track. Duggan and the finance team led by Chief Financial Officer Jay Rising stressed the need to solely use the city’s American Rescue Plan Act dollars for one-time investments and to maintain the rainy day fund.
Pressures for city services, hiking public wages, and giving retirees a cost-of-living hike also weigh on future budgets as the Grand Bargain funds and Retiree Protection Fund are exhausted.
Duggan told the council that if a recession doesn’t result in too steep a drop in revenues he hopes to return next year with a cost of living adjustment for retirees.
Detroit in February raised its revenue projections thanks to healthier income and utility tax prospects even as clouds loom over the toll of a potential recession and the longer-term pressures of pension contributions.
The revenue estimating conference lifted recurring revenues expected in the current fiscal year by $39.1 million to $1.23 billion because income and utility taxes are expected to perform stronger than previously anticipated and recurring revenues for the next fiscal year were raised by $39.2 million to $1.25 billion.
Risks to the projections include a slowing of casino revenue growth, persistent high inflation, larger-than-expected Federal Reserve rate hikes, lower natural gas demand than anticipated, longer lasting changes in economic activity, and slower employment and wage growth.
While a potential recession’s impact weighs on budget projections via the city’s automobile manufacturing sector, pent-up demand — recent years’ vehicle sales were held down by supply chain issues — should help soften the blow and allow the city to avoid the same deep wounds of past downturns.
“Detroit’s revenue recovery and updated actuarial valuations have provided additional financial stability for the city, putting it in a favorable position to tackle upcoming legacy pension contributions,” the Citizens Research Council of Michigan said in a blog post earlier this year. “However, risks remain with an uncertain amortization schedule, a potential mismatch between revenues and expenditures in FY2029, and the expiration of Grand Bargain money.”