Detroit could see a budget gap in 2027

With the city’s bankruptcy nearly 10 years in the past, Detroit’s financial picture is still the subject of intense examination and debate. Esmat Ishag-Osman, a policy analyst for the Citizens Research Council of Michigan, says budget shortfalls loom as the city resumes pension payments next year.   

“Over the last seven decades, the city has consistently lost population. While population increases, infrastructure and geography do not,” Ishag-Osman tells WDET. “The city tends to spend a good amount of money in maintaining the city from that perspective.”

According to a recent report authored by Ishag-Osman, Detroit is expected to see a small, but growing budget shortfall beginning in 2027.

“The city’s long-term budget forecast shows that projections of ongoing revenues will not be sufficient to meet spending pressures in the near future,” writes Ishag-Osman. “Cost pressure from the restored pension contributions are expected to push city spending above available revenue starting in fiscal year 2027, reinforcing the need for contributions to be made to reserves as well as exercising spending restraint and identifying budget efficiencies.”

Listen: Esmat Ishag-Osman discusses Detroit’s issues with scale, the effects of resuming pension payments and the impact of one-time contributions on the city’s budget.

WDET’s Eli Newman spoke with Esmat Ishag-Osman about his analysis of Detroit’s budget. Read an excerpt of their conversation, edited for brevity and clarity, below.

Eli Newman, WDET: Mayor Mike Duggan called this most current budget a “return to normal” budget for after the pandemic. And as you write in your report, that $2.5 billion budget is balanced. But you do say that there are some risks to the money the city gets in revenue, so specifically employment and wage growth. So what’s going on there exactly?

Esmat Ishag-Osman: The risks are slower than projected growth in general fund revenues, slower than anticipated employment and wage growth, the persistence of remote work models, economic impacts from workplace and consumer behavior, reductions in local funding from the state and federal government. Additional COVID-19 variant related economic disruptions, as well as inflation, the war in Ukraine and continued supply chain issues.

So a lot of these current events are playing into what’s going on locally here in Detroit?

Yes. When we discuss potential future budget gaps, the preference is to focus on the spending side of the equation rather than revenue side of the equation for the city. Because at the end of the day, spending is much more in the control of government than is the revenue base.

I think anybody who’s been paying attention to the city’s finances is aware of the bankruptcy that happened. As part of the Grand Bargain, the city put its pension payments on pause and in 2024, those annual contributions start back up again. So what do you expect to happen then?

Future budget gaps are going to grow larger with legacy pension risks based on higher annual required contributions to the retiree protection fund balance. (Editor’s note: Ishag-Osman later clarified the previous statement to say: Future budget gaps grow larger with legacy pension risks based on higher annual required contributions and the Retiree Protection Fund balance being exhausted sooner.) Starting next year, the city is going to start having to make contributions from its general fund to these two pension funds.

What the city has done very well is that the city has put a lot of money into savings, so the Retiree Protection Fund is essentially a savings account that the city has deposited hundreds of millions of dollars to cushion the blow of the amount of pension contributions that need to be made starting in 2024.

The city right now is placed itself in a good place to be able to start making those payments off. However, there is this discrepancy in the payment schedules right now between the two pension funds, of which the mayor’s administration has actually filed a lawsuit to try and have both payment schedules be at that 30-year mark. Because they argue of the negative impacts that may present the city’s bottom line.

Right, so if the city isn’t able to get the resolution from this lawsuit that it’s seeking, we are going to expect some of these budget shortfalls occurring in 2027?

Yes. Let me translate what that even looks like: More specifically, beginning in fiscal year 2027, annual revenues are expected to grow at about 1.8% per year, while annual expenses are expected to grow at about 2.5% per year. And this translates to a baseline budget gap of about $11 million in fiscal year 2027, that grows about $10 million larger every year as expenses continue to outpace revenues.

The good news is that this budget gap requires remedial action to maintain fiscal balance. That’s not too big of a gap right there. So what that means is if we keep going at this pace, the city will just have to pump its brakes a little bit with its spending and expenditures that it has right now.

Just in terms of like what it means to pump the brakes, what tools does the city have to be able to slow this trickle a little bit?

I don’t want to conjecture at what kind of cuts the city could make. But the city has done that in the past. The city had to do that in 2020 when the COVID-19 pandemic hit. About $350 million worth of budget cuts. And we’ve recovered from that. We recovered from that strong.

Best-case scenario, if revenues performed better than the city’s baseline forecast, then that budget gap would be delayed by two years and would not develop until fiscal year 2029. And potential revenue upsides include revenue gains from development projects that are underway, proposed state revenue sharing increases in state shared marijuana excise tax.

If revenues performed worse than the city’s baseline forecast, then the budget gap would occur immediately, as soon as next fiscal year. And these downside revenue risks assumes 30% nonresident remote work persists and a 10% on-site gaming gap versus pre-pandemic levels and so this would require the city to take immediate action to maintain a balanced budget.

Is this kind of shortfall inevitable? Is there anything that the city can do to prevent something like this from happening?

The current baseline projection or the best-case scenario projection is inevitable. Now a lot of things can change between now and then. But some of the reasons why the shortfall may be happening too is because structurally, there is a question about sustainability and the kind of spending that the city has been doing since the Plan of Adjustment. The city has implemented many programs and departments that have been funded by one-time contributions. Much of the spending related for example to improvements in infrastructure, neighborhood beautification and addressing equity issues is coming from one-time contributions. So while the spending has been important and necessary for the city’s growth, it may prove to be unsustainable in the long run because the city will not have the revenue baseline to support the additional infrastructure, services and personnel.

There’s no need to panic right now. The city’s in a good place fiscally. It’s just going to require intentional, good practice of monitoring the city’s fiscal health, which the city has shown to be doing. But there are structural risks that exists that can be a threat to sustainability long term. And we just got to keep monitoring it.

Photo credit: City of Detroit/Flickr