In a nutshell

• The City of Detroit’s FY2023 $1.2 billion General Fund budget has been lauded as a “return to normal” spending plan to restore the pre-pandemic status quo and manage fiscal risks with contributions to reserves and spending restraint.
• City revenues have recovered from their pandemic hit with income tax revenue gains from non-resident workers returning to their Detroit workplaces and the addition of blue collar and service industry jobs. Appropriation highlights focus on returning operating department funding to pre-pandemic levels, paying off debt and putting tax dollars into various savings accounts.
• While the approved FY2023 budget is balanced, the long-term budget forecast projects that on-going revenue growth will not be sufficient to meet estimated spending pressures in the near future. This forecast, based on a number of assumptions, presents a small, but growing, operating budget shortfall beginning in FY2027.

Summary 

The FY2023 City of Detroit Budget has been lauded as a “return to normal” budget restoring the pre-pandemic status quo and managing risks with contributions to reserves and spending restraint. When the pandemic struck, the mayor outlined nearly $350 million in pandemic-related spending cuts to maintain a balanced budget without laying off any full-time city employees. Since then, the city has seen revenue growth beyond initial projections and appropriated funds in the new FY2023 budget are set to restore all pandemic-related budget cuts.

The FY2023 overall budget of $2.5 billion is balanced. It marks a 4.9 percent increase from the $2.3 billion budget in FY2022. Operating budget balance is achieved without use of rainy day fund reserves or one-time federal COVID-19 relief dollars. 

The FY2023 budget is a reflection of the city’s revenue outlook which continues to improve following two challenging fiscal years of revenue losses driven by the pandemic. Recurring city revenues that make up the city’s general fund are forecasted to exceed pre-pandemic levels. 

Budget stabilization was aided largely by strong recovery in onsite wagering taxes and collection of new internet gaming and sports betting tax revenues. More favorable projections of remote work also bolstered city revenues as municipal income tax collection estimates were higher than had previously been expected.

The city’s $826 million in American Rescue Plan Act (ARPA) funds add stability to the city’s budget and financial standing by accelerating projects to improve the tax base and community well-being while preserving reserves and resources that would have otherwise been used to fund improvements and shortfalls. None of the city’s funds are being used as revenue replacement or for recurring expenses which place the city in a good position to increase its annual budget.

The FY2023 General Fund budget includes increases in recurring expenses as well as one-time spending items. The FY2023 budget makes targeted investments in key areas of the city such as beautification, transit, city reserves, and pension funds. It also aims to restore the pre-pandemic status quo budget as the economy and revenues of the city continue to recover post pandemic.

However, the budget does face some significant revenue risks that must be monitored to avoid disrupting the current balance between ongoing revenues and expenses. These risks include slower than projected growth in General Fund revenues, slower than anticipated employment and wage growth, the persistence of remote work models, economic impacts from changing workplace and consumer behavior, reductions in local funding from the state and federal government, additional COVID-19 variant-related economic disruptions, inflation, the war in Ukraine, and continued supply chain issues. 

In addition to these potential revenue risks, the city will have to resume annual contributions to its two pension funds from the General Fund in FY2024. Part of Detroit’s historic bankruptcy agreement included a debt-cutting plan and a nine-year break from dealing with most of the pension related debt; instead, those pension costs were met through contributions from private parties and the State of Michigan, part of the Grand Bargain agreement that followed the city’s bankruptcy. That reprieve is almost up.

The city will have to fund a substantial portion of the obligations for the General Retirement System and the Police and Fire Retirement System beginning 2024. This will impact the city’s bottom line in a way that it has not since the 2014 bankruptcy agreement.

The FY2023 budget manages risks by making concerted contributions to reserves and employing spending restraints. As it stands, the budget is balanced because of the city’s conservative financial and economic forecasts that are a result of strong institutional frameworks and strong fiscal discipline supported by policies, transparency, and action. 

While the approved FY2023 budget is balanced, the city’s long-term budget forecast shows that projections of on-going revenues will not be sufficient to meet spending pressures in the near future. This forecast, based on a number of assumptions, presents a small, but growing, operating budget shortfall beginning in FY2027. City officials must monitor the long-term health of the budget and take all necessary steps to maintain operating balance or risk heighted oversight from the Financial Review Commission.

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 to improvements in infrastructure, neighborhood beautification, and addressing equity issues is coming from one-time contributions. While this 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.  

Structurally, this creates a potential problem for the city’s future because one-time contributions do not account for service needs that will need to continue to be funded once those one-time expenditures are exhausted. The city’s revenue baseline will have a hard time sustaining expenditures in the future that will require more government spending to maintain new infrastructure, personnel and services. 

In addition to the pension contribution payments that will resume in FY2024, the city has to continue growing its tax base to increase city revenues in a manner that will sustain new, acquired expenditures or use more restraint when considering new expenditures to live within realistically expected revenues.