Municipal Blueprints for Fiscally Sustainable Futures

February 24, 2014
Visit the project blog: The Municipal Sustainability Project

Blueprint for the Motor City’s Future. Detroit Mayor Mike Duggan will submit his proposed budget to the Detroit City Council today—some two months earlier than usual, because the Motor City’s post-bankruptcy budget approval process is more rigorous. Nevertheless, few expect the city’s first post-bankruptcy budget to stray far from the $1.1-billion spending plan included in a three-year budget emergency manager Kevyn Orr cobbled together last year. Nevertheless, there will be a fundamental change: the Mayor’s budget not only must be approved by the Council, but also by the Michigan Financial Review Commission—a key provision in the adoption of the so-called “Grand Bargain” which not only became the fulcrum for the city’s plan of debt adjustment, but also created a signal change in the state-Detroit relationship, making the new state oversight commission ultimately responsible for approving the city’s budget. That means that the city’s first post-bankruptcy budget must be submitted 100 days before the next fiscal year, which is now March 23rd―a signal change from prior years when Detroit, like most cities across the country, simply had to adopt its budget before the new fiscal year, which used to be July 1. Nevertheless, City Council President Pro Tem George Cushingberry Jr. does not anticipate the new, state level of review will create too much of a burden, noting: “We’ll all be on the same wavelength overall,” albeit, that is somewhat of an understatement, because, as Councilwoman Raquel Castaneda-Lopez puts it: “We’re restricted by the plan of adjustment,” the blueprint U.S. Bankruptcy Judge Steven Rhodes approved to give Detroit federal blessing to exit from municipal bankruptcy. Moreover, yesterday, Detroit CFO John Hill reported at the monthly meeting of the new Financial Review Commission that Detroit’s adjusted revenues are coming in close to targets. According to the Motor City budget adopted last year, Detroit’s departmental expenditures for the 2015-16 fiscal year are estimated to include $315 million for police, $143 million for the fire department, $10 million for the mayor’s office, and $7 million for the city council. On the revenue front, the city expects to be over anticipated revenues, notwithstanding lowered assessed values on homes in many neighborhoods citywide from 5% to 20% this year. With those reduced assessments, Detroit had anticipated receipt this year of $102 million in property tax revenues; however, CFO Hill advised the Mayor and Council that greater taxpayer confidence that the city has addressed demonstrated concerns about the integrity of its assessment process has resulted in a signal bonus: because homeowners appear to feel that their properties are more accurately valued, more are paying their taxes, and the city now expects it will receive a minimum of $114 million. Mr. Hill advised the Council that he is now projecting property taxes will reap some $254 million, $10 million less than was projected in the city’s plan of debt adjustment or exit plan—a shortfall to which Mr. Hill attributed a number of causes, including a higher number of workers in the city being paid on contract, rather than as employees―meaning their municipal income taxes are not withheld.

Fixing Cities’ Income Leaks. Detroit Mayor Mike Duggan yesterday reported he is working with Michigan state legislators and Gov. Rick Snyder, as well as mayors of more than 20 cities around the state, on a critical issue: collecting municipal income taxes. Detroit, which has the broadest tax base of any city in the nation, has income taxes as its largest single source of revenue—about 21 percent; yet it suffers from a singular problem: non-collection—especially with regard to commuters—both with regard to those coming into the city, but also residents who commute out of the city. These non-collections have meant a shortfall of as much as 50 percent of what was owed. Thus, Mayor Duggan is focusing on changes in state law to force suburban companies to withhold income taxes on residents of cities that levy income taxes. In addition, the Mayor reported there are discussions about how to collect income taxes on Detroit residents who live in the city, but claim suburban addresses, in many cases to avoid paying auto insurance rates that Mayor Duggan says average about $3,600 a year per household, generally double what is charged the average suburban driver.

Making the Fiscal Grade? Even as the Motor City is moving forward towards solvency and fiscal sustainability, there are harder questions with regard to its public schools, whose debt burden is considered key to the district’s revival and survival—and, of course, to Detroit’s future. Thus, the Coalition for the Future of Detroit Schoolchildren, a group which is crafting recommendations for Michigan Gov. Rick Snyder on options to reconstruct the system’s fiscal foundations has made clear that one option might be municipal bankruptcy. The Coalition is seeking to put together formal recommendations to submit to Gov. Rick Snyder by April Fool’s Day—an ambitious effort which likely will be as critical to Detroit’s fiscal future as the school system’s. The Detroit Public School System (DPS) currently faces an annual debt service total of around $56 million a year―the equivalent of about $1,200 per student—an unsustainable level. In an interview with the Detroit News last week, one of Gov. Snyder’s advisors said one possible legislative proposal would be for the state to authorize the creation of a new debt-free district for DPS―with the debt being serviced by an outstanding levy until it matured; nevertheless, the advisor, John Walsh, told the News that the Governor had been adamant about ruling out municipal bankruptcy as an option—an option, in any event—which may not be pursued under Michigan’s law absent the governor’s approval. Currently, DPS carries roughly $2.1 billion in debt, of which some $1.6 billion are in unlimited-tax general obligation bonds, secured by Michigan’s School Bond Qualification and Loan Program, with another $325 million by long-term state aid revenue bonds, secured by an intercept feature on state aid; and $108 million is in the form of loans from the Michigan School Loan Revolving Fund, according to Moody’s.

A Bridge Not Too Far. The U.S. Supreme Court yesterday, without comment, said it will not review a June appeals court decision concerning a new Detroit-Windsor bridge, removing another hurdle to the publicly financed span’s scheduled completion in five years—effectively allowing to stand a U.S. Sixth Circuit Court of Appeals ruling which upheld the Federal Highway Administration’s approval of the Delray neighborhood in Detroit as the preferred location for the U.S. side of a new bridge crossing to Canada. Opponents of the bridge claimed the FHWA had violated the National Environmental Protection Act, Administrative Procedures Act, principles of environmental justice, and other federal laws. U.S. District Judge Avern Cohn in 2012 had dismissed the lawsuit by the Latin Americans for Social and Economic Development, Citizens with Challenges, Detroit Association of Black Organizations, and other community groups — along with the Detroit International Bridge Co., which owns the privately held Ambassador Bridge and wants to build one next to it. Yesterday’s decision comes five days after Canada and the U.S. reached an agreement in which Canada will put up the hundreds of thousands of dollars to build a U.S. Customs plaza at the New International Trade Crossing and be repaid through tolls. The $2.1 billion bridge is to be two miles from the Ambassador Bridge and could open as early as 2020—it is expected to handle as much as one third of all U.S.-Canadian trade. Last June, the U.S. Coast Guard had issued a required permit for a publicly owned bridge from Detroit to Canada — clearing another key hurdle in the high-profile project.

Tense Futures & Pasts. San Bernardino City Manager Allen Parker thinks things might be looking up, reporting that, at mid-year, San Bernardino might well be on the verge of a significant turnaround: it has reached the middle of its fiscal year with a balanced budget. While that might not seem a cause for celebration for most cities, it appears to signal a change in fiscal direction fundamental to this city’s future sustainability. Mayhap equally importantly, it appears to signify that the municipality has avoided backsliding as the costs of putting together its plan of adjustment to halt the fiscal bleeding and other unexpected costs have imposed extraordinary challenges the its precarious margin for budget balance to its current fiscal year budget. Mayhap Mr. Parker puts its most aptly: “We stopped the bleeding…Revenue just exceeded — just by a bit — what we projected, and we were able to contain costs, so we’re on schedule to finish the year in the black.” That is a marked change from a year ago—a time when the city seemed to be on the down fiscal escalator, with its then midyear budget review demonstrating the city’s budget was balanced only by omitting $22.9 million in deferred payments. In contrast, now the city appears to have cleaned its balance sheet with regard to its California Public Employees’ Retirement System (CalPERS) obligations, and, perhaps of greater significance there is, as Manager Parker puts it: “[N]othing hidden in (the budget).” That is not to write that the future path to fiscal solvency and a painless exit from municipal bankruptcy will be easy: Mr. Parker happily reports that “The 12 months (of fiscal year 2014-15) have been solved,” but “[T]he Plan of Adjustment has other difficulties.” The rocky fiscal road ahead will require a fiscal plan to come up with nearly $200 million in needed infrastructure improvements, funds to meet expected increases to CalPERS payments, and more. Thus the Council convened a public review of the full fiscal year budget last evening to invite public input and comment—especially with regard to four changes: to approve increases in estimated revenues in the amount of $1.3 million in the General Fund; to approve increases in appropriations in the amount of $1.3 million in the General Fund; to approve budget transfers in appropriations in the amount of $1.46 million; and to approve increases in appropriations in the amount of $593,936 in the Traffic Safety Fund for the purchase of police vehicles. Longer term—in our dawning age of shared services, Mr. Parker reports the city is actively looking at outsourcing services—a challenge that has proven hard for the city in past attempts—but one, especially in the face of fire overtime costs—that will be defining for its fiscal future.

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