In a nutshell
- On September 15, the city got an updated look at just how much money the city budget is projected to have annually through 2026.
- Revenues are on course to exceed previous projections by a fairly large amount due in large part to the successful casino reopenings and the launch of internet gaming activity.
- The fiscal’s recovery may not benefit all Detroiters as employment in service sectors and lower-educational attainment service industry groups could continue to lag for years.
Between the exit from bankruptcy in 2014 and the onset of the pandemic in 2020, Detroit was on a nice run economically. The city was growing as new development, restaurants, and businesses continued to pop up year by year. A diverse, young demographic filled residential properties of the downtown area bringing new life to what was once a desolate big city. Tax revenues began to rise as more people lived, worked, and played in the city.
When the pandemic hit, however, initial reactions were pretty grim. Economic forecasters projected that the economic disruption from COVID-19 would derail the city’s recovery. Based on recent economic forecasts those fears appear to be unfounded. On September 15, the city got an updated look at just how much money the city budget is projected to have annually through 2026. This update comes as city officials begin planning and budgeting for the next fiscal year. The biennial revenue estimating conference held last month brought encouraging economic news for the city and its finances.
The past year has seen no shortage of challenges for state and local economies. After 18 long months of suffering through the economic effects of the coronavirus pandemic, Detroit’s recovery seems to be well on its way. In this blog, we analyze the numbers reported by the city’s most recent revenue estimating conference and discuss what the city’s projected financial recovery means for Detroit residents and the future of the city post-pandemic.
Detroit’s Revenue Estimating Conference
As a condition of the State of Michigan’s role in the Grand Bargain of the City of Detroit in 2014, the city is required by state law to maintain a chief financial officer (CFO) position, annually adopt a running four-year financial plan, and hold revenue estimating conferences each September and February. These required fiscal practices are designed to keep the city solvent and help maintain balanced budgets. During the revenue conferences, city officials and stakeholders receive updates on the national, state, and city economic outlooks. Importantly, the conference principals (city CFO, State Treasurer, and an economic forecaster) use these updates to approve official forecasts of city revenues for the current and two succeeding fiscal years. These revenue forecasts are used by the mayor and city council in the development of the city’s annual operating budget and plan for future spending.
The September conference report sets the revenue assumptions underlying the mayor’s proposed budget plan released at the beginning of the year, while February’s conference report typically sets the stage for legislative proposals and the collaborative work between the mayor and city council around the final budget.
The previous February 2021 revenue conference projected FY2021 general fund revenues of $931.1 million, 5.9 percent ($58.5 million) less than the FY2021 adopted budget in April 2020. This also represents a massive 21.3 percent reduction ($252.6 million) from pre-pandemic revenue estimates in February 2020. The lower projections were a result of three main factors. First, slower casino reopenings have impacted the city’s casino wagering tax revenue due to limited capacity. Second, reduced restaurant and bar capacity have cut into the city’s income tax revenue. Lastly, losses from longer periods of nonresident remote work also has affected the city’s income tax revenue with nonresidents’ income being taxed at lower rates than residents. The decline in general fund revenue was driven by reduced income taxes and casino wagering taxes.
Deteriorating economic trends leading up to the February 2021 conference contributed to projections of the FY2021 revenue shortfall; the city’s actual recurring general fund was expected to drop from $927.5 million in FY2020 to $843.1 million (9.0 percent) in FY2021. Below is a chart from the recent September conference showing the city’s actual and projected recurring general fund revenue (FY2019 to FY2026). The updated numbers show a more promising economic outlook for the city as the FY2021 recurring general fund revenue is now only projected to drop to $913.9 million, a decline of just 1.5 percent.
Recurring General Fund Revenue, FY2019-FY2026
Source: City of Detroit OCFO – Office of Budget
Note: Excludes non-recurring revenues, such as bond proceeds, asset sales, and one-time tax payments.
The economic impact of COVID-19 upon the city also caused unemployment rates in the city to rise from 8.8 percent in 2019 to 20 percent in 2020. The city’s total payroll job count and the payroll jobs held by Detroit residents was projected to recover quicker than expected during the February 2021 conference. Pre-COVID-19 levels of total payroll employment were projected to return by 2022 and levels of Detroit resident employment were projected to return by 2023.
City’s Financial Outlook Improves
Given Detroit’s diverse employment and economic base and the many different taxes levied by the city, there will always be a number of changes to the various economic forecasts and revenue projections coming out of the biennial revenue conference. The September 2021 conference is no different, but it is also notable for a couple of significant developments.
One major takeaway is that revenues are on course to exceed previous projections by a fairly large amount. Detroit’s budget picture seems more promising moving forward as the city’s revenue outlook is projected to improve significantly after two fiscal years of revenue losses driven by the economic impact of the pandemic. Below is a chart showing the general fund revenue comparison between the February 2021 conference and the September 2021 conference. General fund revenue projections rose by $253.6 million for FY2021 and FY2022; a 14 percent increase over estimates from seven months ago.
General Fund Revenue Comparison to Feb 2021 Conference
Source: City of Detroit OCFO – Office of Budget
Note: Non-recurring funds include bond proceeds, asset sales, and one-time tax payments.
Another revelation from the most recent conference is the financial importance of the successful casino reopenings and the launch of internet gaming activity in January 2021. The new internet gaming activity has provided the city with supplemental revenue from sports betting taxes. The projected revenue gains have helped to further stabilize the city’s four-year revenue forecast.
One of the most substantial risks to the economic health of Detroit in the post-pandemic world is the reduction in municipal income tax revenues as hybrid models of on-location and remote work and fully remote work continue to be the way of the future. Detroit, as well as other Michigan cities reliant on municipal income tax revenue, are in vulnerable positions as much of their income tax payments are to diminish due to non-resident employees working from home. Detroit’s municipal income tax revenue increased by 42 percent from 2014 to 2019, but fell by about 20 percent from 2019 to 2020 because of the pandemic.
The revenue gains projected from the new internet gaming and sports betting taxes ($242.2 million over the next three fiscal years) should help offset the expected decline in city income tax revenues from nonresidents working remotely following the pandemic. The new gaming revenue saved the city’s revenue forecast from staying below pre-pandemic levels with the expected drops in annual income tax receipts.
One final takeaway was the continuing prediction of Detroit’s economy bouncing back faster than expected with employment data suggesting a growing labor force accelerating opportunities in blue-collar and higher-educational attainment service industry groups. Detroit’s recovery from the pandemic has been projected to be stronger than the state and much of that is supported by several large development projects in the city. Much of the job growth in Detroit is an expansion of the blue-collar industry as manufacturing, construction, warehousing and transportation sectors boom from various big development projects set to begin in the coming years.
Forecasters project municipal income tax revenue to increase by an average of 3.84 percent over the next five fiscal years (FY2021 to FY2026). Part of this can be attributed to the drop in Detroit’s unemployment rates which have been declining quicker than projected during the pandemic. Unemployment among Detroiters has recovered to approximately three percent below its pre-pandemic level. Detroit’s unemployment rate was at an average of 22 percent in 2020 compared to a projected average of 9.5 percent that is expected to maintain for the rest of 2021. This is expected to gradually decline to 6.9 percent by 2026. But is the recovery the city is seeing going to benefit all Detroiters or a select portion of residents?
Inequities in an Expanding Labor Force
It seems as though Detroit’s fiscal recovery may not benefit all Detroiters. Employment in service sectors and lower-educational attainment service industry groups could continue to lag for years which could result in numerous business closures and lowering demand for downtown services as remote work proliferates.
In addition, the numbers show there is still a need to increase the ability of Detroiters who are working to earn enough to support their families. According to the Detroit Economic Outlook report by the University of Michigan, the average wage rate at jobs located in Detroit in 2020 was roughly 23 percent higher than in the state overall ($73,000 compared to $59,400). However, the high wages at Detroit establishments do not translate into high wages for many city residents as wage and salary income per employed resident averaged $36,100 in 2020.
This income problem is fundamental to the city’s recent narrative of there being a “Tale of Two Detroit’s” – a running theme of the city’s new downtown demographic reaping the benefits of the city’s economic growth, while residents in the neighborhoods lag behind. With about 90 percent of Detroiters being employed in 2019, 30 percent of those residents working full time earned enough to sustain a family of three at a middle-class standard of living. Most residents with families in the city live in the neighborhoods, not in the downtown area where much of the economic growth is taking place. Differences in Detroit workers’ ability to earn a higher wage income that will sustain a middle-class family are based on educational attainment and skills training.
As the city continues to stabilize its revenue forecast and returns back to pre-pandemic levels of economic growth, it must put an emphasis on providing access to higher education, skills development, and job training. Investment plans for the ARPA recovery funds will need to focus on initiatives that will prioritize and maximize programs to address these gaps and help residents from the city’s neighborhoods.