Detroit’s tax revenue projections surpass pre-pandemic levels

Detroit’s fiscal recovery from the COVID-19 pandemic gained ground, according to its latest round of revenue and economic projections, thanks to growing income tax and internet gambling tax revenues.

The city expects to collect $1.137 billion in general fund revenue in the current fiscal year, including $1.087 million of recurring revenues that serve as a baseline for future years. Estimates of one-time revenues were raised by $50 million and recurring revenues by $24 million compared to previous estimates in September.

The revised fiscal 2022 estimate brings projections above pre-pandemic levels.

“The city’s revenue outlook continues to improve following two challenging fiscal years of revenue losses driven by the pandemic,” Steve Watson, Detroit’s deputy chief financial officer, said during the Feb. 18 Revenue Estimating Conference.

The projections raised expected fiscal 2023 revenues to $1.147 billion from a prior estimate of $1.118 billion with annual growth of about 2% annually through fiscal 2026 when general fund revenues are projected to total $1.213 billion, up from a September estimate of $1.163 billion.

Internet gambling tax revenue, which began flowing to city coffers midway through fiscal 2021, is expected to rise this year, accounting for $70.1 million of $248.8 million of gambling-related revenue. The internet figure is up from $26.6 million last year and should grow modestly through 2026 when it’s projected to generate $76.9 million. That brings overall gambling-related revenue to $273.6 million in fiscal 2026.

Income taxes continue to bounce back rising to $287 million this year and $317 million next year are projected to remain below pre-pandemic levels until 2024 when they are expected to then surpass the 2019 level of $338 million.

The loss of income taxes from non-Detroit residents with Detroit-based jobs who are now working remotely is expected to ebb only slightly this year compared to the peak last year of $54.5 million. The city expects to miss out on $53.2 million this year, $45.2 million in 2023, $32.8 million in 2024, $33.8 million in 2025, and $35 million in 2026.

The city’s finance team and officials from the University of Michigan laid out new revenue estimates for the current fiscal year and next four years as well as the city’s overall economic prospects during the Feb. 18 meeting. The conference discussed and approved the forecast Friday.

The numbers will provide the backbone for the fiscal 2023 budget Mayor Mike Duggan will present to the City Council March 7.

Under state law, the city conducts biannual, independent revenue conferences in February and September with the numbers guiding the city’s budgeting practices and its four-year fiscal plan that it’s required to submit to the Detroit Financial Review Commission.

The commission was put in place after the city’s 2014 exit from Chapter 9. The city must provide independent estimates, a four-year fiscal plan, and must keep its books balanced to maintain independence from direct oversight.

The city has received waivers from the commission to operate outside of direct oversight for the last four years. The current waiver lasts through June 22.

The voting conference members are Detroit Chief Financial Officer Jay Rising; Michigan Treasury-designee Eric Bussis, the treasury’s chief economist and director of the Office of Revenue and Tax Analysis; and George Fulton, director emeritus of the Research Seminar In Quantitative Economics at the University of Michigan.

Risks abound in the projections with factors that could throw a wrench in the numbers ranging from a slowing casino recovery to other recessionary pressures, a larger than anticipated non-resident remote work impact if new COVID-19 variants emerge, and prolonged inflationary and supply chain pressures.

Upsides could boost the numbers depending on residential, commercial, and industrial development activity in the city, labor force gains, state-shared excise taxes from adult-use marijuana that is pending, and the potential for additional state and federal funding.

Michigan Gov. Gretchen Whitmer has proposed a 5% ongoing increase in revenue sharing with local governments along with a one-time 5% increase for fiscal 2023. The city is receiving about $210 million in state shared revenues this year.

The city’s rainy day fund, which must be maintained at a minimum of 5% of expected expenditures, is holding steady at $107 million. Last year officials planned to draw down $50 million to help cover the pandemic’s fiscal losses but restored it in the current budget. Officials doubled the 5% of expense target to 10% of expenses in fiscal 2020.

The projections focus on recurring growth as pension pressures loom large. The city’s Retirement Protection Fund, known as the RFP, aims to bring its balance up to $365 million to help the city cover roughly $202 million of pension contributions that resume in 2024.

Contributions were put on hold to give the city breathing room after the bankruptcy and the special trust fund was put in place. Based on current projections that will help the city only through fiscal 2027, so revenue growth is needed to help manage the burden.

“We anticipate modest revenue growth in future years. We will maintain fiscal responsibility in our budget to ensure we achieve a balanced four-year financial plan,” Rising said.

On the economic front, the forecast predicts a faster recovery for Detroit than for the state overall with resident employment recovering to pre-pandemic levels by the end of 2022 and jobs at establishments within the city boundaries reaching pre-pandemic levels by early 2023, according to the forecast prepared by the City of Detroit University Economic Analysis Partnership.

The partnership is joint effort by researchers at the city, Wayne State University, Michigan State University, and the Research Seminar in Quantitative Economics. 

Job gains are driven by major projects that include Stellantis and General Motors automotive plant expansions and a new Amazon distribution center.

The city lost 47,000 jobs due to the pandemic and as of June of last year it had recovered 33,000 or 70%, said Gabriel Ehrlich, director of RSQE. Moderate growth should continue and exceed pre-pandemic levels in 2026.

Job gains are expected to hit 12,200 this year with moderating growth in the coming years. The major catalyst is blue-collar jobs, including construction and manufacturing, while those in the service industry return roughly to their pre-pandemic levels by the end of the forecast period, the report said.

Wages are growing but inflation is cutting into the economic impact of those gains. Ongoing supply chain disruptions and higher input costs pushed local inflation to 7% year-over-year in December, its highest since 1981. The report anticipates inflation falling off later this year to a rate of 4.6% and dropping to 2.4% in 2023 but during the conference officials cautioned the current projections could worsen for fiscal 2022.

The Citizens Research Council of Michigan sees the economic momentum as a good sign putting to rest worries the pandemic would derail the city’s post-bankruptcy recovery but also cautions that more work is needed.

“Updated projections show Detroit is making clear progress in its economic recovery from the pandemic as employment and wages are expected to grow and tax revenues continue to rise,” the council said in a blog post Friday.

But some of the new jobs are temporary due to construction projects.

“This presents a question about long term economic sustainability for the city’s tax revenues,” the council said. “A return to pre-pandemic revenue levels is a good sign but the city still has work to do to develop growth of the tax base and a non-transient employment base.”

The city issued $80 million of general obligation debt in 2020 for public safety, recreation and transportation projects, marking its second stand-alone deal to sell without support since emerging from bankruptcy. The city returned in early 2021 with a $175 million stand-alone GO issue under a $250 million blight removal bond program approved by voters.

The city has won a series of upgrades since emerging from Chapter 9 but its ratings remain speculative grade. Ahead of the $175 million GO sale, S&P returned the outlook on its BB-minus rating to stable from negative. Moody’s Investors Service rates the city Ba3 with a positive outlook.

Federal aid also has helped the city recover from the pandemic. The city is using $400 million of its $826 million share of the American Rescue Plan Act to restore budget shortfalls.

The other $426 million goes to a Detroit Future Fund that would fund community investments, including allocations toward jobs, small businesses, housing support, home repair, neighborhood initiatives, employment services, and addressing the digital divide.