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Detroit’s Revenue Loss Estimate Grows to $410 Million

Detroit projected an additional loss of $62 million and 50,000 jobs last week. Still, although the city needs to make adjustments to balance the budget, officials manage to remain optimistic: “It’s a solvable challenge.”

(TNS) — As the city grapples with steep revenue losses due to the coronavirus, Detroit, Mich., officials now project the city will lose an estimated $410 million during the 16 months since the start of the pandemic.

That loss includes another $62 million acknowledged last week during the city's fall revenue conference that officials say will vanish amid a deepening economic downturn, which has included the loss of more than 50,000 jobs and the scaled-back restart of Detroit's three casinos, a major blow to the city's wagering and income tax collections.

The new deficit projection also comes months after Detroit Mayor Mike Duggan laid out aggressive cuts to stave off a lesser virus-induced shortfall of $348 million over the span of March 2020 to June 2021.

"It took away our cushion to deal with a crisis. It was the crisis," Duggan said of the pandemic. "If we get hit with a second one, we don't have a cushion, and that's a concern." Nearly 85 percent of the funding hole has been covered. That includes $151 million in surplus and rainy day funds and $147 million pulled from other sources, including capital improvement funds, blight remediation funds, federal transit funds and cost savings. Most of the city's 8,000-member full-time workforce also endured reductions in their hours and pay, which saved another $50 million.

The city expects to offset its growing deficit primarily with its fund balance and federal dollars. But other "continued adjustments" will be required to solve it, said David Massaron, Detroit's chief financial officer.

That, in large part, will mean fine-tuning the return-to-work schedules of some 2,000 city workers who were laid off or placed on furlough or workshare during the outbreak.

"I would anticipate a large number of those (workers) staying in that status for a continued period of time," he said.

The city expects to close its books on the fiscal year that ended June 30 this week, which includes adjustments to cover $154 million of the deficit. It also has addressed $194 million of the current fiscal year's shortfall, and will soon finalize plans for tackling the remaining $62 million projected loss.

"Sixty-two million in a billion-dollar budget is a challenge, but it's a solvable challenge," Duggan said. "We're used to operating frugally, and we'll manage through it."

The painful cuts in recent months are aimed at ensuring a state-appointed emergency manager isn't put in charge of finances again for a city six years removed from the largest municipal bankruptcy in history. The city is required under state law to keep a balanced budget. If it's unable to, the state's Financial Review Commission "doesn't have a choice" but to step in, Massaron said.

"That's why it was so important in March of last year for us to quickly adjust the budget and work with City Council to collectively rally around a plan that sees us in a fiscally responsible way of managing through the pandemic," he said.

Detroit was hard-hit by the virus early on, logging a peak of 332 confirmed cases in a single day on April 1. The daily average now hovers at a dozen cases per day.

Michigan's outbreak prompted statewide restrictions from Gov. Gretchen Whitmer that led to the closure of schools, businesses and Detroit's casinos, which generated about $600,000 in tax revenues for the city per day.

The city projects casino tax revenues to come in at about $135 million this fiscal year, which accounts for the capacity limitations and comfort level of consumers. That compares with $184 million in tax revenue in the 2019-20 fiscal year.

The city's casinos reopened in early August with a state-mandated 15 percent occupancy rate. They've generated about $2 million per week — or about 50 percent of typical tax revenues for the month of August.

Massaron said Friday that the first weeks of casino revenue data are coming out ahead of projections, but "it's too early to draw a conclusion." The city had projected $3 million per month would be coming in during the initial reopening phase.

"You have pent-up demand. We don't know how much of that is an initial spike and whether it will settle back down," he said.

Eric Bussis, chief economist and director of the state Treasury Department's Office of Revenue and Tax Analysis, noted Thursday that the city's forecast "can probably strike the balance between upside risk and downside risk given the uncertain nature of where we are right now."

The Bankruptcy Legacy

The city was released two years ago from the strict oversight of a Financial Review Commission installed as part of Detroit's landmark bankruptcy after it achieved consecutive balanced budgets and other conditions established under the plan.

In December, Moody's Investor Services deemed Detroit among the weakest of the country's 25 largest cities in its preparedness to weather a financial downturn, citing worries over pension contributions, fixed costs, volatile revenues and capital needs.

The city, through a funding package coined the "grand bargain," was able to shield the city's arts collection from creditors in its bankruptcy and soften cuts to retiree pensions.

The plan also relieved Detroit from much of its pension payments through 2023. In 2024, Detroit will have to start funding a substantial portion of the obligations from its general fund for the General Retirement System and Police and Fire Retirement System.

In recent years, Detroit stood up a dedicated fund to amass $377 million toward those payments.

"Our big risk is 2024 and 2025 and always has been," said Duggan, noting that's when bond and pension payments will come due. "We're going to do some belt-tightening, but we're going to be OK."

The city also has taken a hit on income tax revenues spurred by job loss and the volume of nonresidents — which make up half of the city's income tax revenue — who are working remotely. A tax refund liability for those workers is expected to peak in 2021.

A University of Michigan forecast in August predicted the pandemic's toll on the city's economy will be "deep and long-lasting," with jobs here not rebounding until 2023. A city forecast provided Thursday projects a return to pre-pandemic employment levels by the end of 2022.

The city, due in part to the large-scale real-estate projects underway, is on track for a quicker recovery than Michigan as a whole, which is not expected to regain pre-pandemic employment levels until 2024.

Development projects, including the construction of a new TCF Bank headquarters, Ford Motor Co.'s reinvention of Michigan Central Depot and Bedrock's Husdon's site, have brought more construction activity than Detroit has seen in nearly a half-century and the promise of hundreds more workers in the long-term.

"The city had solid fundamentals in terms of being poised for ongoing growth coming into the COVID-19 recession," said Gabriel M. Ehrlich, who heads the Department of Economics at the University of Michigan, at the city's revenue conference. "We think a lot of those fundamentals really do remain in place."

In the early months of the outbreak, the city's 8-9 percent unemployment rate spiked above Great Recession levels to nearly 39 percent. About 45,000 Detroiters remain unemployed today, two times more than prior to the pandemic. The unemployment rate in July was about 18 percent.

There have been about 53,500 jobs lost in the city from the first quarter to the second quarter of the year, or about 23 percent of the payroll job count, which includes resident and nonresident workers. It's a sharp decline that mirrors the state.

Waiting for More Relief

The major threats to the city's finances are the course of the disease here and the fate of a proposed $1 trillion federal coronavirus relief package. And the city is operating now on a number of assumptions, including that there won't be another large outbreak.

Eric Lupher, president of the Citizens Research Council of Michigan, said cancellation of concerts, conferences and the age of crowd-free sporting events also hurts the city's bottom line.

"There's no spinoff benefits from having those events on the restaurant or bar scene," he said. "That affects the number of workers in those restaurants and bars, and people are not coming and staying in hotel rooms to be close to the venues."

Downtown restaurants said they've been feeling an economic crunch from the virus.

On a typical workday, the Joe Muer restaurant had been filled with General Motors Renaissance Center employees and other nearby offices. But these days are anything but typical.

The drastic decline of people working at the office has led to fewer diners walking in for shrimp and scallops. Lunch business at the seafood restaurant is down a minimum of 50 percent, owner Joe Vicari says. He had to cut back on staff by 25 percent and obtained a U.S. Small Business Administration Paycheck Protection Loan to help. He’s thankful GM helped its tenants with rent relief.

But most of the money he received from the Paycheck Protection Program, $500,000 for Joe Muer and $400,000 at his other restaurant Andiamo, is almost gone.

And now GM executives have told salaried workers not to expect to come back to work until June 2021, 15 months after they left their offices for home amid the pandemic.

"Now with the cold weather coming and none of the GM employees coming back until June, we are very concerned," he said.

AKtakeaway, a fast-casual restaurant on Jefferson Avenue offering up Mediterranean bowls, sandwiches and salads, has yet to reopen since closing in March when the virus hit Michigan.

About half of the 18 employees who worked there went to the AK location in Ferndale, co-owner Joe Wegrzyn said.

“For a business that really operates from 11:30 until 2:15 … without having those boots on the ground, there's no market for us to actually operate,” he said. “We had significant sales daily up to March 16."

Metro Detroit as a whole has lost out on 143 bookings for conventions and sports groups in 2020. That represents an attendance of 473,889 people and direct spending of more than $225 million, said Renee Monforton, a spokeswoman for the Detroit Metro Convention & Visitors Bureau.

The Metro region, she said, usually has about 19 million visitors per year who spend $6 billion.

In Detroit, 50,000 guests planned to visit Ford Field this July for a three-day Alcoholics Anonymous conference and a separate group of 46,000 was expected to gather there for a Detroit Football Classic this fall.

Downtown Detroit hotels also suffered greatly, with occupancy rates dropping below 18 percent this July compared with 73 percent during the same month the year prior.

"Before this started we were on such a roll downtown," she said. "We were anticipating a banner year this year."

There might be fewer shoppers and diners roaming the streets of downtown these days, but that hasn’t caused Detroit developer Bedrock to back down on the projects it has scheduled.

The developer is still pushing forward on the Hudson's site, a 1.3-million-square-foot mixed-use development that includes 400,000 square feet of office space. The project is scheduled to be finished by the end of 2023. The developer is about to hire a national broker to market the space to local, regional and national tenants.

“In Detroit, we are in a particularly unique position to be able to recruit national office users into our marketplace,” said Larry McLaughlin, executive vice president and chief development officer of Bedrock.

Though the trend has been to have workplaces with people working closely together, there’s a theory that after the pandemic there will be a push to separate people more, requiring larger office spaces.

“We look at this as a very much a temporary situation obviously longer than anybody likes … but we certainly don't see the world changing permanently,” McLaughlin said.

Bedrock has helped its tenants with rent throughout the pandemic. First, businesses in Bedrock's properties received complete rent forgiveness for April, May and June.

In May, the developer announced its “Bedrock Relaunch” program, which allowed eligible businesses to opt into new agreements to they pay their landlord 7 percent of their gross sales from July through the end of the year instead of their usual monthly rent.

Duggan on Friday also referenced the developments underway by major Detroit employers, Fiat Chrysler Automobiles NV and General Motors.

FCA is building the first new assembly plant in the city in nearly 30 years by expanding its idled Mack Avenue Engine Complex to build Jeeps. GM is taking its Detroit-Hamtramck plant and turning it into the automaker’s first fully electric assembly plant.

The new GMC Hummer EV will be built at the plant. Neither automaker has backed down on the projects despite the pandemic costing their companies billions.

“I would be far more concerned if GM pushed off the launching of the electric vehicles at the Detroit-Hamtramck plant," Duggan said. "That is a huge part of our future there.”

©2020 The Detroit News. Distributed by Tribune Content Agency, LLC.

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