In a nutshell:

• On September 12, Detroit officials will get updated projections for city tax revenues through 2027.
• Economic indicators point to growth in employment at city establishments and among residents, with employment recovering to pre-pandemic levels by early 2023.
• General Fund revenues have performed better than the latest baseline forecast suggesting a projected budget gap in FY2027 could be delayed by two years.

As Detroit gets ready for its upcoming revenue estimating conference on September 12, the updated 2021-27 Detroit Economic Outlook report paints a picture of continued and sustained economic recovery in the short term. Consistent with previous projections, Detroit is expected to recover from the pandemic after facing greater economic challenges than Michigan or the U.S. overall.

Detroit’s revenue estimating conferences happen twice a year – in September and February. The September conference report sets the revenue assumptions underlying the mayor’s proposed budget plan released at the beginning of the year, while the February conference report typically sets the stage for legislative proposals and the collaborative work between the mayor and city council around the final budget.

Blue Collar Job Growth Driving Economic Recovery

The Detroit Economic Outlook report breaks down Detroit’s employment picture into two primary indicators: payroll employment at city establishments and employment among residents. Payroll employment (jobs in the city) had recovered about two thirds of its initial pandemic losses through last September and is expected to recover to its pre-pandemic level by early 2023. A total of 17,400 payroll jobs are projected to be added within the city by the end of next year. Annual job growth is predicted to increase 3.0 percent in 2021, 5.4 percent in 2022, and 2.7 percent in 2023. 

Employment for city residents reflect a similar positive outlook but with a slight caveat. Detroit residents had recovered nearly 95 percent of their pandemic job losses by March, however, that number dropped by 1.4 percent in April and May. Fortunately, this is seen as temporary and a fuller jobs rebound is projected through the forecast period. 

Driving this job growth is employment in blue collar industries, with big development projects such as the Stellantis and General Motors automotive plant expansions, Amazon’s new distribution center, and construction of the Hudson site and the Gordie Howe Bridge accounting for many of these jobs. Lower educational attainment service industry jobs and higher educational attainment service industry jobs are expected to contribute little to the city’s employment growth through 2027.

In addition to job growth, Detroiters are also expected to see wage growth. Detroit payroll employees are expected to see average annual wage reach $89,500, a 34 percent increase over 2019 level. Forecasters predict that the city’s average wage rate will be approximately 15 percent higher than the average state wage by 2027. 

While this is all positive, there is a sustainability trade-off when white collar jobs are replaced with lower-paying lower educational attainment and blue collar industry jobs. Many lower educational attainment and blue collar industry jobs tend to be part-time or temporary, creating the potential for wage gaps and smaller income tax collections. 

Job growth is expected to begin slowing to an average of roughly 2,500 jobs per year by 2024 and 2025 and 600 jobs per year in 2026 and 2027 as a result of these big development projects being completed. Slower job growth could impact the city’s bottom line through a reduction of income tax revenues.

As big development projects wrap up in 2026 and 2027, the city must consider what is going to backfill the loss of jobs from these projects. The city is not seeing any growth in white collar jobs and is seeing very little growth in lower-educational attainment service industry jobs. The city cannot rely solely on blue collar industry jobs to keep driving the city’s economic growth for the foreseeable future.

Detroit’s Downtown Recovery Moving Slow

While the city continues to inch its way back to pre-pandemic levels, it has not seen the same level of recovery in its downtown activity. A recent analysis of smartphone activity data found that downtown Detroit was at 42 percent of its pre-pandemic activity level this past March and May. 

This is also corroborated in the Detroit Economic Outlook report citing that foot-traffic visits to establishments in the education and healthcare, retail trade, and leisure and hospitality industry groups dropped off sharply at the beginning of the pandemic, remained depressed throughout 2021, and only recently have started showing signs of recovery. 

Of large U.S. and Canadian cities, Detroit’s downtown recovery ranked 59th out of 62. This trend presents a concern about long-term sustainability for the city. A drop off in foot traffic and downtown recovery is indicative of the change in work models the city has seen since the pandemic hit. The number of people working remotely has reduced the level of foot traffic downtown. 

The slower pace of downtown recovery suggests that a return to pre-pandemic levels is unlikely to occur soon. This may impact businesses and employment in the near future which will have an adverse effect on city revenues. For now, the slow pace of downtown recovery has not impacted city revenues. Continued economic recovery from the pandemic could help offset some of the loss in activity Detroit’s downtown has experienced over the last two years. Big development projects could attract more patrons to the city which may increase downtown activity over time even as remote work models continue to persist.

Detroit’s General Fund Revenue Outlook

The promising economic growth spurring Detroit’s recovery is reflected in the budget. City revenues are performing better than expected and exceeding projections from previous revenue estimating conferences. 

The February 2022 revenue estimating conference projected Fiscal Year (FY)2022 General Fund revenues to be $1.13 billion, up $141.5 million (14.2 percent) above the FY2022 budget. These projections were more promising than the projections made at the September 2021 and the pre-pandemic February 2020 revenue conferences. FY2022 year-end revenues (Detroit’s fiscal year runs from July 1 to June 30) came in higher than expected.

The General Fund is funded primarily through five sources: municipal income taxes, casino wagering taxes, property taxes, utility users’ taxes, and proceeds from state revenue sharing payments. The city’s recent analysis shows that the amount of FY2022 revenue exceeded the projections from the February 2022 revenue conference by $123.1 million (11.3 percent). The chart below shows these improvements. 

General Fund Revenue Projections versus Actual, FY2022

Source: City of Detroit OCFO – Office of Budget

Note: “Other Revenues” includes revenues from interest, penalties, fees, assets, permits, licensing, investment earnings, etc

Revenues for each of the five main tax sources exceeded projections from the February 2022 revenue estimating conference. The municipal income tax exceeded February projections most drastically as actual revenues were $73.5 million (25.6 percent) higher than anticipated. 

Detroit’s Improving Economic Outlook

After more than two years of battling through the COVID-19 pandemic, Detroit has remained resilient and continues to recover from economic challenges. Even as threats of a potential recession loom, Detroit’s revenues have been exceeding city spending and the labor force continues to grow. Reviewing the economic forecast and the city’s updated financial report, we note a few key takeaways. 

The city’s budget surplus for FY2023 has grown as revenues have exceeded city spending in FY2022. As of June, actual revenues have exceeded city spending by $106.2 million. This places the city in a good financial position as the FY2024 budget process gets underway. The FY2024 budget will be the first, since the city exited bankruptcy, to take on the city’s pension obligations. Having more revenue than was previously projected will allow the city to meet its pension obligations without immediately needing to compromise services. 

The second takeaway deals with a potential budget gap that was forecasted to start as soon as FY2027. Our previous budget analysis showed the city was projected to see a budget gap develop in FY2027 based on baseline revenue estimates and projected spending. 

The improved baseline revenue forecast suggests that the budget gap may be delayed until FY2029. Revenue gains have been driven mostly by growing income tax and casino wagering tax revenues. However, income tax revenues tend to reflect the strength of the economy so a recession could threaten this rosy outlook.  

A third takeaway from the Detroit Economic Outlook report reveals promising employment and wage growth in the city. Overall, Detroit is forecasted to maintain faster growth than the state through 2023. 

However, current economic and fiscal forecasts suggest that Detroit will continue to be challenged attracting more white collar jobs. For income tax revenues to sustain their projected growth, the city will need to see more job growth in the higher- and lower-educational attainment service industries. More opportunities in higher-educational attainment service industries will increase the average wage gain in the city and create more sustainable jobs for the city’s economy.