Detroit bill calls for full exit from state oversight
There's talk at the legislative level over freeing Detroit from its now-limited state oversight as the stain of the city's Chapter 9 recedes and its recovery continues.
Sen. Sylvia Santana, D-Detroit, in March introduced a bill that would formally remove the state from overseeing Detroit’s finances.
“The time for the so-called ‘Grand Bargain’ has come and gone, and so too should the parameters of that law,” Santana said. "Detroit is financially solvent, and it’s time we give back what is owed to the people who made sacrifices for this to happen, especially on their retirement income.”
The city already exists with little direct state involvement after having been given back control of its finances last year. The release of active state oversight came after the city met the requirements of posting three consecutive balanced budgets but the state's Financial Review Commission will meet every year for the next decade to determine whether the city should continue having local control.
After 10 consecutive years of annual waivers, the commission dissolves.
“We will carefully study Senator Santana’s bills,” Detroit CFO, Dave Massaron, said. “The city has full confidence that it will have consecutive balanced budgets into the future to achieve the elimination of the FRC without the need for legislative actions.”
Jane Ridley, an S&P Global Ratings analyst, said the limited role the state currently has provides a certain level of comfort that the city won't return to its bad habits.
“The FRC played a really important role with the city as they were coming out of bankruptcy but a lot of what they have accomplished to date has been on their own policy changes,” Ridley said. “The FRC doesn’t have a lot of influence on their day-to-day policies but very importantly, there is still that oversight role so they can sound the alarm if something starts to go wrong. We don’t have any reason to think that is going to happen. The city has been very consistent.”
In February, S&P upgraded the city to BB-minus from B-plus in recognition of its stabilizing fiscal picture. Moody’s Investors Service rates the city Ba3.
“Our expectation is that Detroit has changed its policies and changed its operations,” Ridley said. “It has changed a lot of things since 2013 and those things wouldn’t go away with or without the FRC, and so not having them there, I don’t know from the day to day what the difference would be.”
Eric Lupher, president of the Citizens Research Council of Michigan, an independent policy research organization, said the bill "is more cleaning up statute than making any sort of substantive change." He said he believes the state should always be monitoring what the city is doing.
“We should all keep an eye on what they are doing and if you were an investor you would want to know that they are not going to go back to the bad habits when times do get tough," Lupher said.
Lupher said that the city finances are dependent on income taxes, state revenue sharing, casino revenues and property taxes. Out of the four, the casino tax seems to be the most stable. "Detroit has a balanced budget and come out in the black since coming out of bankruptcy, but it has very much benefited from the economy," Lupher said. "The underlying conditions on why Detroit got into the situation was not in any way changed by bankruptcy or the period after that. There is still population loss — they are hopeful that that will bottom out sometime soon and population will start growing again, but that hasn’t happened yet. The area outside of downtown and midtown area continue to be blighted — there are good neighborhoods but the disinvestment of the city, the results of urban sprawls and flight away from city continue to be there."
Last month, Detroit Mayor Mike Duggan proposed a $2.4 billion budget. Duggan said his proposed 2019-20 spending plan should satisfy state overseers, in part, because it sets aside $45 million in the city’s rainy day fund which increases the reserves to 10% from 5% of the general fund budget. The council has until the end of May to approve or amend the budget. The reserve increase would be an extra layer of protection for a potential economic downturn, he said.
"While the budget looks OK for '19 and '20, we need to think about 'What if a recession happens in '20? What if a recession happens in '21, are we thinking far enough ahead? "Duggan said. "If we run a deficit, the [FRC] is back."
Although general fund revenue is up by around $34.4 million — a 3.3% increase from fiscal 2019 — expenses have also increased by roughly $35 million.