Detroit’s Finances in Worse Shape than Previously Thought

Image via Flickr User Bernt Rostad

For years Detroit’s has faced budget challenges with a declining tax base and increasing debt obligations. For the past few months, budget analysts have been predicting that the city will file for bankruptcy this year, and a new report provides evidence that Detroit’s finances are in even worse shape than previously thought.

Concerns about the city’s finances led the state to appoint a team to review the budget. If the team determines that the city is in a state of “fiscal emergency,” the state will appoint an independent financial manager under Michigan’s controversial Public Act 4 of 2011. However, if Mayor Bing can successfully negotiate some concessions with public sector unions, this fate may be avoided:

Mayor Bing said he expects to reach an agreement with the city’s unions by the end of the month.

“I’m sitting in a lot of meetings,” said Bing during an appearance at the auto show. “(City unions) are open-minded to change finally. We don’t have any options.”

While the review team’s complete findings are not yet available to the public, preliminary reports indicate that the city’s budget is in worse shape than previously thought. The city had not been factoring public employee retiree health benefits into its budget, and current estimates put this unfunded liability at $5 billion, bringing Detroit’s total debt to $20 billion.

Retiree health benefits, known as Other Post-Employment Benefits, or OPEB, present a challenge in many municipal budgets. Localities are often not held to the General Accepted Accounting Principles when reporting their budgets, leaving the potential for these liabilities to be left off of the books. Eileen Norcross’ research in New Jersey uncovered a similar problem in two localities that were treating OPEB as pay-as-you-go obligations rather than contributing to retiree’s OPEB requirements as they were employed.

Obscuring these liabilities in Detroit has painted an overly rosy picture of the city budget for many years. Now the city is home to more retired public employees than active workers, making it difficult to fund these increasing benefits.

Betty Buss of the Citizens Research Council sums up the current situation accurately:

“The city has made a lot of promises. Past leaders have entered into a lot of agreements; have made a lot of decisions that cost huge amounts of money. But, at the same time that its developed huge debts that go out to 2036 and beyond, revenues have been shrinking.”

While the city’s fiscal distress may lead to increased willingness for union concessions, it remains to be seen whether Bing will achieve enough concessions to close Detroit’s $150 million budget shortfall in the face of this debt burden.