The Week in Public Finance: Detroit May Be Out from Under State Oversight, But Its Problems Are Far From Over

The Motor City still has massive debt and pension obligations. Remaining independent will involve a precarious balancing act.
by | May 4, 2018
The monument "Transcending," in Hart Plaza in Detroit, is dedicated to Michigan's labor movement. (David Kidd)

Less than five years after it declared what was then the largest municipal bankruptcy in history, Detroit emerged from state financial oversight on Monday. But the milestone is largely a symbolic one: The Motor City is still deeply troubled.

There's no question that Detroit has improved. The city has reported balanced budgets in each of the past three years, a big turnaround from the years leading up to its $18 billion bankruptcy. But a big part of that success is because it was able to unload $7 billion of its liabilities during the bankruptcy process. That deal also gave the city temporary pension payment relief, meaning its current budgets don’t include the full cost of the city’s retirement obligations.

Detroit officials say they're focused on preparing to resume debt and pension payments in 2024. The city is projecting a $36 million surplus this year, thanks in part to increasing property tax revenues. Those trends play a big role in officials' plan to have $335 million set aside by the 2024 deadline to restart payments.

Still, notes S&P Global Ratings, the current balance is fragile: “The city's challenge will be to manage these rising costs in relation to economic growth, and the costs the city incurs to support [that] growth."

One such cost the city is grappling with when it comes to growth is blight removal. Bankruptcy may have helped the balance sheets, but it didn’t change Detroit’s physical problem. Thanks to the half-century of population decline, entire neighborhoods have been practically abandoned, thus making it difficult and expensive to serve the remaining spread out, isolated pockets.

What's more, to spur reinvestment in abandoned neighborhoods, the city is spending millions to raze vacant buildings. It cost the city nearly $70 million last year and is projected to cost more than $150 million in 2018 and 2019. Seeing as Detroit’s total general fund budget is about $1 billion, these are no small considerations.

Given these concerns, some think the city’s emergence from oversight was incredibly speedy. By comparison, Flint, Mich., which never went into bankruptcy, was under state receivership for more than six years, and some cities in Pennsylvania have been under state oversight for decades. Rather than suggestive of an actual turnaround, municipal analyst Matt Fabian suggests the exit from oversight shows "that the state continues to value a narrative of quick rebound versus evidence that [one] can be sustained."

Too speedy or not, the decision this week to release Detroit from oversight is significant in a larger sense: Since 1977, at least one city agency has been subject to some kind of oversight by a government entity. With Monday's announcement, it's the first time in more than 40 years that Detroit’s elected leadership has complete control of government functions.

To remain independent, most agree that leadership and disciplined spending will be key. On that last item, S&P happily notes that Detroit's revenue forecasts are conservative and don’t assume increases from economic expansions that have been announced or are already in progress.

Observers are further encouraged by the city's economy: Quicken Loans and Ford Motor Company have been investing hundreds of millions in business operations in the city. On the same day Detroit exited from state oversight, the Ilitch family -- owners of the fast food pizza franchise Little Caesars, among other things -- unrelatedly confirmed plans for another $200 million investment in the city.

"Capital goes where it’s invited and stays where it’s welcomed," Detroit News columnist Daniel Howes, who credits Mayor Mike Duggan and the city council, recently wrote. "Right now, Detroit is showing a refreshing ability to do both: to attract investment by business leaders who know the city, its leaders and its foibles best."

But, notes Fabian, elected officials come and go. "Not only is the path forward threatened with each election cycle," he says, but the state is unlikely to intervene with any more aid if the city’s recovery hits a setback. "Going forward,” he says, “the city is likely on its own."

 

In other public finance news this week:

Oregon Launches 'Sustainability Bonds'

Seeking to capitalize on the growing popularity of environmentally and socially responsible investing, Oregon is selling a new kind of municipal bond. Called Oregon Sustainability Bonds, the $40.2 million taxable bonds will help finance affordable housing projects and will have a higher level of transparency. Each year, Oregon will report on which projects received sustainability bond money and how much of the bond proceeds are left until the funds are spent in full.

The Oregon Housing and Community Services Department will select which projects receive the money; ultimately the goal is to build 500 units of affordable housing for rent and purchase.

 

Pension Payment Growth Slowing

State and local payments into pension plans are higher than ever, but a new analysis shows the annual increases are not as stark as they once were. In 2011, pension payments on average jumped by 8.6 percent, according to Fitch Ratings. That followed major stock market losses during the financial crisis that eliminated about one-quarter of pension plan holdings. Now, year-over-year increases are hovering below 4 percent.

While that’s an improvement, it still means that pension plans are pressuring state and local budgets. That's largely because most systems are underfunded to some degree and, as a result, require higher and higher payments. Fitch notes that over the past decade, payments into pension plans have jumped a whopping 74 percent.

Meanwhile, growth in state and local tax resources is only about one-third higher. “Slower growth is taking place against a backdrop of longer-term unfavorable factors,” says Fitch Raings' Senior Director Douglas Offerman, “that will continue to push the carrying costs of pension liabilities higher over time.”

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