Legacy Costs and Indebtedness of the City of Detroit December 2011
As City of Detroit officials struggle to reduce the city government’s deficit and provide essential services, a key fiscal consideration concerns the city’s liability for future payments. These costs include legacy costs for unfunded pension and other post employment benefits (OPEBs) for city government employees; the annual cost of pension obligation certificates; the principal, interest, hedging and other costs associated with bonded debt; and other contractual obligations of the city.
At June 30, 2010, all funds of the City of Detroit had $6.4 billion of outstanding bonded debt, including $5.2 billion attributable to the Water and Sewerage system, and over $600 million of other future obligations. Included in the $6.4 billion of outstanding bonded debt was $1.0 billion of general obligation debt, which equates to debt of about $1,400 per resident of the city. There will be $467.7 million of interest due on this $1.0 billion of principal; including principal and interest on general obligation debt equates to more than $2,000 per resident.
The city had $1.5 billion of outstanding pension obligation certificates and other unfunded costs associated with personnel totaling $5.6 billion: $481.5 million of unfunded actuarial accrued liability (UAAL) in the General Retirement System, $134.2 of UAAL in the Police and Fire Retirement System. Because pension obligation certificates were used to fund the pension systems, the General Retirement System was 87.1 percent funded and the Police and Fire Retirement System was 96.6 percent funded on June 30, 2010 (the General system was 65.8 percent funded and the Police and Fire system was 79.5 percent funded if the value of the pension obligation certificates was excluded).
Detroit also had $5.0 billion of UAAL for other post employment benefits, but the city continues to pay these liabilities on a pay-as-you-go basis. If the city had made the annual required contribution to fund OPEBs on an actuarial basis in fiscal 2009-10, it would have allocated $313.9 million, rather than the $149.7 million actual payment; an additional $164.2 million would have been paid from city accounts to fund future liabilities, reducing the amount available for current operations. Nonetheless, the city government’s future liability for non-pension benefits promised to city retirees is about $7,000 per resident.
The amounts listed in Table 1 for bonded debt and certificates represent the principal outstanding; as noted, the amounts that will be paid on those liabilities will also include interest and could include other costs as well. Payments on the vast majority of the debt will be spread out decades into the future. Nonetheless, payments on limited tax, general obligation debt contributes to the city’s cash flow problems, and further issuance of such debt will make cash flow that much more precarious. Payments for pensions and retiree benefits are also stressing the city’s cash flow, even though the payments are insufficient to reduce the unfunded actuarial accrued liabilities.
Just as the kinds of future liability differ, the consequences of failing to pay these obligations when they become due also differ.
In the city’s current (fiscal year 2011-12) budget, the accumulated prior years’ deficit is recorded as $208.9 million. This is 13.2 percent of the total appropriations for general city agencies; it is slightly more than the net amount expected to be received from the city’s property tax; and it is equal to about $300 per resident of the city. The budget defers $153.7 of the accumulated prior years’ deficit to future periods, leaving a current appropriation of $55.2 million to satisfy the deficit. The operating deficit is an addition to the bonded debt, legacy costs, and other obligations described above.
Any credible deficit elimination plan must incorporate a means to resolve the city’s future liabilities. Any discussion of shifting responsibility for providing services, whether to a regional transportation entity or a regional water and sewerage authority, or of controlling the growth of future costs, must also consider the obligated future costs that are associated with the services that are now provided by the City of Detroit.
Detroit’s mayor, Michigan’s governor, and a host of commentators have raised the possibility of state appointment of an emergency manager for the cash strapped city. This report notes the authority a financial manager would have relative to the city’s various kinds of debt and liabilities.
Detroit municipal income tax revenues declined from $278.3 million in 2006-07 to $212.7 million in 2009-10; current year property tax revenues for general operations declined from $183.7 million in 2006-07 to $168.0 million in 2009-10. With local tax revenue reductions exacerbated by reductions in state revenue sharing payments, the city’s strategy of financing current operations with future revenues is not sustainable. Without major structural changes, limited tax debt, pensions, and other post employment benefits will continue to absorb increasing amounts of the general fund, leaving less and less for essential public services.