Down the Road Questions about the State of the Motor City

February 24, 2016. Share on Twitter

State of the Motor City. In his third State of the City address, Detroit Mayor Mike Duggan described the significant changes in Detroit since its emergence from the nation’s largest ever municipal bankruptcy—but warned of serious challenges to the city’s fiscal sustainability. He outlined the significant human and public infrastructure gains since the city’s plan of debt adjustment was approved by retired U.S. Bankruptcy Judge Steven Rhodes, including significant reductions in violent crime and homicides, improved public safety responses, and the massive upgrading of bus service and street lighting. He pointed to ongoing blight removal and demolition efforts, adding jobs, and cutting car insurance rates. He noted his leadership efforts to restore the quality of Detroit’s public schools—an issue which, absent both significant state aid and a signal turnaround in the wake of abysmal leadership under the state-appointed emergency manager, threatens his goal of restoring the city to be one to which young families with children would want to move—reiterating the urgency of restoring an elected school board. He noted the city had successfully razed 8,000 abandoned homes—part of the city’s significant efforts to lure more people to Detroit. The city has cut ambulance response times in half from 18 minutes, and Mayor Duggan said the city will soon work on improving pay for emergency medical technicians and firefighters. Detroit will hire 200 officers this year, he said, and equip them with technology to recognize license plates in a bid to help arrest more than 1,000 people with outstanding warrants for a gun crime. Detroit Police Chief James Craig has put together a new fugitive apprehension unit to go after the more than 1,000 people with outstanding warrants for gun crimes, including car-jackings and armed robbery, Mayor Duggan, noting they will be using technology equipped with photos and license plate information of suspects: “We are tired of the gun violence. We are not putting up with it anymore.” The mayor added he will propose plans to continue with Detroit’s massive demolition effort with a goal of 20,000 houses by the end of 2017. In two years, the city has razed 8,000 houses and last week it was announced that Michigan was eligible for $323 million in federal funds to tackle blight. Starting Tuesday, residents can call 911 to report scrappers, he said, in still another sign of the city’s recovery since emerging from bankruptcy. “They’re going to arrest them and haul them away,” Mayor Duggan said. He also referenced several new initiatives unveiled in recent weeks. Last week, Mayor Duggan announced a $40 million fund to help 1,000 buyers obtain mortgages in Detroit and overcome a gap in property appraisals that has thwarted neighborhood revitalization.

Detroit’s Fiscal Sustainability. In his address, Mayor Duggan reported his office would submit its FY’2017 budget, one, which he noted: “will be balanced for a third straight year.” Nevertheless, the Mayor warned of serious fiscal threats to Detroit’s nascent recovery, especially with regard to the looming $491 million deficit in Detroit’s public pension liabilities, reminding listeners that if the city takes no action to reduce those obligations, the general fund will have to contribute $83 million more a year to the two funds, commencing in FY’2024. Noting that he did not intend to “panic” over the pension fund deficit, he said his office is acting to bring in an expert to review and analyze pension liability estimates used as part of the city’s plan of debt adjustment—and that his budget would include $20 million over two years from the city’s budget surplus specifically targeted to reducing that deficit: “We are going to get on it now…We are not asking anybody for a bailout. We are going to have to address this problem. We are going to do it honestly.”

The public pension warning comes in the wake of last fall’s report from the Detroit Financial Review Commission which found in its actuarial projections that Detroit’s required annual contribution or ARC to its two pension funds in FY2024 could increase by $80 million compared to the projections used in its federally approved plan of debt adjustment. Thus, while the city’s plan of debt adjustment provided significant pension relief to the city with regard to contributions to the General Retirement System and Police and Fire Retirement System through 2023, it is after that, beginning in FY2024, that the document requires the city to start funding a substantial portion of the pension obligations from its general fund—an amount projected under the approved plan to be $113.9 million, but raised more than 80% late last year to $196 million in a report by the actuarial firm for the city’s retirement systems—based in part on mortality data contemplated in the bankruptcy plan projections. Yesterday, Mayor Duggan said former Detroit Emergency Manager Kevyn Orr and the city’s bankruptcy consultants may have “used the wrong assumptions,” adding that he has directed the city’s Law Department to evaluate any claims against the city’s former bankruptcy consultants, who were paid $177 million dollars: “I don’t know whether it’s actionable or not, but we’re going to pursue it,” noting he had authorized the city’s chief litigation officer to review the bankruptcy consultants’ work during Detroit’s municipal bankruptcy to determine if there are possible legal claims. 

The Costs of Municipal Bankruptcy. Detroit Mayor Mike Duggan, in his address, said he would assess whether the City of Detroit should file suit against some of the city’s bankruptcy consultants for using what he said were outdated data—here creating a miscalculation of jaw-dropping proportions: the total $491 million pension fund shortfall. The Mayor, as noted above, aimed especially harsh criticism at former Detroit Emergency Manager Kevyn Orr and his consulting team, albeit adding: adding: “We’re going to manage it, and we are not going to ask anybody to bail us out…We are going to keep our pension funds solvent…We are going to keep our promises to retirees. They were broken once and we are going to make darn sure it doesn’t get broken again.” 

The costs to a city or county of filing for and going through municipal bankruptcy are costs for which there is little choice but to pay in order to ensure the provision of critical public services–yet, as we have seen in Stockton, San Bernardino, and Detroit–the costs are not just a signal drain on the city’s coffers–but they come at the expense of funds and investments critical to a municipality’s long-term fiscal sustainability. 

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