Detroit bumps up revenue projections

Detroit revenues remain on an upward trajectory thanks to healthier income and utility tax prospects, but clouds loom over the toll of a potential recession and longer-term pressures lie ahead as pension contributions resume.

Revenue and economic projections offered good near-term news, leading the city’s revenue estimating conference to raise recurring revenues expected in the current fiscal year by $39.1 million to $1.23 billion as income and utility taxes are expected to perform stronger than previously anticipated. Another $1.3 million of non-recurring revenues are expected.

The conference voted Monday to raise projected recurring revenues for the next fiscal year that begins July 1 by $39.2 million to $1.25 billion.  

“Despite projections of a mild national recession, the Detroit economy has proven to be more resilient,” said Detroit Chief Financial Officer Jay Rising who is a member of the voting conference along with Michigan Treasury Department Chief Economist Eric Bussis and George Fulton, director emeritus of the University of Michigan’s Research Seminar in Quantitative Economics.

The city will close out the current fiscal year with a rainy-day fund of $138 million — or 12% of budgeted revenues — after a planned $30.7 million deposit.

The city expects income tax collections to grow to $375 million this year — after a $29 million loss due to remote work losses to income tax— from $369 million last year and then $393 million in fiscal 2024 after a $26 million loss due to remote work. The city is banking on more workers who live outside the city returning to their offices but stressed that its estimates remain conservative.

Wagering taxes from casinos and internet/sport gambling accounts for $254 million of revenues this year and a projected $258 million in 2024. Stronger-than-expected internet gaming collections are offsetting weaker on-site gambling receipts.

Modest revenue growth of about 2% is projected through 2027 in a four-year fiscal forecast the city must compile and submit to the Detroit Financial Review Commission under state law. Revenue estimating conferences are held in February and September.

The commission was put in place after the city’s December 2014 exit from Chapter 9 to monitor compliance with plan of adjustment requirements, like the maintenance of balanced budgets. The city will seek a sixth one-year waiver from direct state oversight in late spring/early summer.

Economic projections are drawn from the Detroit Economic Outlook for 2022-2027 which is crafted by the City of Detroit University Economic Analysis Partnership, which is made up of economic researchers at the city, Wayne State University, Michigan State University, and UM’s Research Seminar in Quantitative Economics.

Last year, Detroit gained 8,000 jobs, with blue-collar jobs leading the way, bringing the city employment 6,000 above pre-pandemic levels. Growth is projected to keep rising through 2027. Positive wage growth is also projected to continue. White collar job growth faces a tougher road.

Risks to the projections include a slowing of casino revenues 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 the projections and the city’s automobile manufacturing sector, pent-up demand — as recent years’ 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, said the report’s author Gabriel Ehrlich, director of the Research Seminar in Quantitative Economics.

Upsides to the forecast include the potential for positive impacts from big development projects underway that the city does not factor into the revenue estimates, workforce development and labor force participation gains, higher state-shared excise tax from adult-use marijuana, and additional state revenue sharing.

Gov. Gretchen Whitmer has called for a one-time and recurring increase in that revenue stream as part of the next budget.

One big project announced last week calls for an investment of $2.5 billion to fund a new $1.8 billion hospital and research facility operated by Henry Ford Health that would anchor a mixed-used residential, affordable housing, commercial, and retail center. The health system is working with Detroit Pistons owner Tom Gores and Michigan State University on the project.

The fiscal 2024 projections serve as a base for the budget Mayor Mike Duggan will send to the City Council March 3rd. Duggan last week asked the City Council to approve changes to the current $2.45 billion budget allowing the city to spend down $156 million of a $203 million prior-year surplus.

The proposal spends $86 million on capital projects, sends $60 million to a risk management account that covers judgments and settlements, and puts an additional $10 million into the Retire Protection Fund. The latter is the city’s special account set up to offset the burden on the general fund when pension payments resume next year.

The remaining surplus will be incorporated in Duggan’s fiscal 2024 budget proposal.

The city must resume pension payments — estimated at about $135 million — in fiscal 2024. 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.

To help manage the future impact on the general fund, the city established the Retiree Protection Fund and expects it will hold $460 million by the end of fiscal 2023. The RFP and remaining Grand Bargain funds are expected to be exhausted in fiscal 2035, with the $154 million annual payment then coming fully from the general fund.

The two plans were frozen in bankruptcy and replaced for new hires going forward with hybrid plans that combined elements of both defined benefit and defined contribution plans.

The police and fire fund threw a wrench in the planning as 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 was set for Feb. 22, but is being rescheduled due to scheduling conflicts.

“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 last month. “However, risks remain with an uncertain amortization schedule, a potential mismatch between revenues and expenditures in FY2029, and the expiration of Grand Bargain money.”

The city has no borrowing planned this year as it continues to spend down its first tranche of voter-approved Prop N bonds sold in 2021 for blight removal and continues to spend down federal COVID relief dollars, according to the finance team.

The city has won a series of upgrades since emerging from Chapter 9, but its underlying general obligation ratings remain speculative grade in the BB category.

The city’s Budget, Finance and Audit Committee last week discussed allegations leveled against the city at a January council meeting by Malik Shelton that it violated public notice requirements on planned general obligation bond issuances.

The council asked the Legislative Policy Division to review the claims and, citing detailed information from bond counsel Miller Canfield, concluded in a Jan. 25th report the city had met all legal requirements. The committee reached the same conclusion after reviewing the report.

Shelton was among plaintiffs in a lawsuit that accused the city of exceeding its borrowing limits. The trial court found that because the bonds had been issued the claim was barred from proceeding. The appellate court in September upheld the ruling.