In a nutshell
- The February 25 revenue estimating conference provides projections of just how much money the city budget is expected to have annually through 2026.
- General Fund revenues are on course to exceed September projections by modest amounts due in part to favorably adjusted income tax revenue estimates.
- Projections show that the city’s fiscal recovery will benefit from employment rates of blue collar workers more than any other industry group in the city, with higher educational attainment service industries growing at the slowest rate.
Updated projections show Detroit is making clear progress in its economic recovery from the pandemic as employment and wages are expected to grow and tax revenues continue to rise.
Initial reactions to the pandemic were grim as economic forecasters projected that the disruption would derail the city’s recovery post bankruptcy. As we approach the end of the city’s bankruptcy agreement in 2023, fears that the city’s economic recovery would be derailed appear to be unfounded. Detroit continues to recover from the COVID-19 recession.
General Overview of the Revenue Estimating Conference
On February 25, the city got an update of just how much money the city budget is projected to have for the next fiscal year and annually through 2026.
These revenue estimating conferences are required as a condition of the State of Michigan’s role in the Grand Bargain in 2014. They are a best practice of state and local governments. They are done twice a year leading up to the budget adoption process designed to help maintain balanced budgets.
The revenue conference projects Fiscal Year (FY)2022 General Fund revenues to be $1.13 billion, up $141.5 million (14.2 percent) from the FY2022 adopted budget in April 2021, and more promising than the projections made at the September 2021 revenue conference and pre-pandemic February 2020 revenue conference. The chart below shows annual General Fund revenue projections for FY2022 to FY2026 from the September 2021 conference and the February 2022 conference.
General Fund Revenue Comparison to September 2021 Conference
Source: City of Detroit OCFO – Office of Budget
Note: Non-recurring funds include bond proceeds, asset sales, and one-time tax payments.
General Fund revenues for FY2023 are forecasted to increase 0.87 percent over FY2022 as peak pandemic effects on nonresident and resident remote work and casinos gambling tax revenue continue to wear off. The conservative forecasts for FY2024 through FY2026 show modest annual growth of around 2.9 percent. Revenue increases have been driven mostly by growing income tax revenues based on adjusted expectations over remote work going through 2026. All other revenues are expected to see stable, but modest growth.
Revenue Projections Have Improved
Since the September 2021 revenue conference there has been a change in income tax revenue projections. Estimates for FY2022 to FY2026 are projected to see an average cumulative increase in revenues of 10.5 percent. The chart below highlights income tax revenue estimates over this period from the two conferences.
Estimated Income Tax Revenue FY2022-FY2026 ($ in millions)
Source: City of Detroit OCFO – Office of Budget
Expectations around remote work have changed, impacting income tax revenue projections in a positive way. The city levies an income tax at different rates for residents and non-residents. Detroit taxes the income of city residents at a 2.4 percent rate and collects 1.2 percent from non-residents. Non-residents are only subject to the city income tax if they physically work in the city. As hybrid models of work and full remote work started to become normalized, it placed the city in a vulnerable position. Resident income tax payments are at risk of diminishing due to employees working from home.
Recent projections expect the prevalence of remote work to decrease. According to the February 2022 report, remote work losses are estimated to be most pronounced in FY2021 and FY2022, but are expected to flatten out modestly through FY2026. This is due to the changing composition in the city’s work force as more blue collar jobs from high profile development projects become available.
Two industry groups are driving growth in the city’s income tax. The bulk of employment gains are coming from the blue collar sector made up of jobs in manufacturing, transportation, warehousing and utilities. The lower-educational attainment service jobs are in accommodations, food services, arts, entertainment, and recreation. People who hold these jobs cannot work remotely.
Due to the expected changes in the composition of the city’s overall workforce in the coming years, the city has adjusted its projections for the amount of remote work that will take place. Contrary to previous projections, this signals a future that is more similar to the pre-pandemic era as more of the labor force will be composed of in-person work. Unfortunately, there is a trade-off when white-collar jobs are replaced with lower-paying lower-educational attainment and blue collar industry jobs. That tradeoff is sustainability. 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.
While the advent of the pandemic has sped up the normalization of remote work, it is still too early to know how evolving working models continue to shape other industry groups in the city.
Employment and Wage Gains Accelerating
One of the biggest takeaways from this conference is the continued recovery of lost jobs in the city. According to the Detroit Economic Outlook report by the University of Michigan, Detroit has now recovered four-fifths of its job losses from the start of the pandemic. The city is expected to see 27,200 job gains between 2022 to 2026. It is expected that the city’s job count will return to pre-pandemic levels in 2023.
When the pandemic hit in 2020, Detroit’s unemployment rate maxed out at 22 percent but has since fallen to 10 percent in 2021. The city’s unemployment rate will not see another dip until 2023, falling to 8.7 percent and remaining near that level through 2026.
In 2021, the number of blue-collar industry jobs exceeded pre-pandemic levels by 9 percent and these gains are projected to continue throughout 2022. By the end of 2023, job growth is expected to climb to almost 21 percent above pre-pandemic levels.
Job counts have not been as favorable to the higher-educational attainment service industries and lower-educational attainment service industries. Higher-educational attainment services include public and private education and healthcare, finance, information, most business services, and public administration. Job counts in this employment group declined significantly in 2021 but are expected to make a recovery to pre-pandemic levels by 2024.
Lower-educational attainment service industries have suffered the worst from the pandemic’s impact, shrinking by 36.4 percent in 2020. A full recovery is estimated to make its way by 2024 and projected to climb to about 1.5 percent above pre-pandemic levels by 2026. Out of the three industry groups, higher educational attainment service industries are seeing the slowest rate of growth to pre-pandemic levels.
While the higher-educational attainment service industry group is expected to see the fewest number of jobs, annual wages for this group are projected to grow by a cumulative rate of 30 percent over the forecast period. Workers in lower-educational attainment services earned substantially less than workers in other industry groups due to many jobs being part-time. However, forecasters estimate lower-educational attainment service industries to have the fastest wage growth at 36 percent, and blue collar industries to have the slowest wage growth at about 10 percent cumulatively through 2026.
Revenue Recovery Does Not Mean Pre-Pandemic Normal
The city is projecting economic growth based on actions initiated before the pandemic. Big development projects including the opening of the Stellantis Mack Avenue Assembly plant, the retooling of General Motors’ Factory Zero, construction of the Gordie Howe International Bridge, and Ford Motor Company’s new Detroit campus have bolstered blue-collar employment in the city. This is contributing to the projected growth in jobs, wages and income tax revenue.
In addition, the growth of sports betting and remote gambling options has provided the city with revenue streams that have helped to offset some of the tax revenue losses since the pandemic. While projections show a promising financial picture for the city’s future and continued recovery of employment and wage gains, Detroit’s budget recovery does not mean a return to pre-pandemic normal. Some of the new jobs coming to Detroit are temporary. For example, many blue-collar jobs are in construction which tend to go away once a project is completed. This presents a question about long term economic sustainability for the city’s tax revenues.
For income tax revenues to sustain their projected growth we 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.
Higher paid jobs in the higher-educational attainment service industries may also attract residents to the city, thus growing the tax base. A return to pre-pandemic revenue levels is a good sign but the city still has work to do to develop growth of the tax base and a non-transient employment base.
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