Detroit mayor takes another stab at $250M blight bond referendum
Detroit Mayor Mike Duggan is billing a revised $250 million blight bond proposal as a means to fund demolition and renovations while creating jobs to keep the city’s post-bankruptcy progress on track amid the coronavirus pandemic.
The council may consider putting the plan — called “Proposal N for Neighborhood Improvement” — on the November ballot at a meeting Tuesday. The council in November voted against the original plan laid out by Duggan, but he said the new version, crafted with council input, addresses some concerns that drove opposition by providing greater city oversight, a commitment to saving some homes and a commitment to use locally based companies.
“We’ve got the capacity to borrow the money without any increase in the property tax rate" and with rates low and seven upgrades in hand since the city emerged from its historic Chapter 9 bankruptcy in late 2014, “Detroit is in a good position” to borrow, Duggan said. “We’re going to put Detroiters to work.” The city remains several notches away from investment grade despite the upgrades.
The plan would provide funding to demolish 8,000 blighted properties over the next three years and rehabilitate another 8,000. The city estimates that 14,000 homes are in need of demolition.
The city’s ongoing blight plans have hit a roadblock as the city shifts spending priorities to deal with budget shortages due to the pandemic-driven economic shutdown that’s hurt gambling and other tax revenues. The city must maintain budgetary balance or it faces a return to direct state oversight under its bankruptcy exit rules.
If the council agrees to send the measure to voters on the November 3 ballot, and it’s approved, the city would issue unlimited tax general obligation bonds as soon as December, John Naglick, the city’s chief deputy chief financial officer said during a Budget, Audit and Finance Standing Committee this week.
About 64% of the borrowing would be offered with a tax-exempt structure and the other 36% as taxables, allowing the city more flexibility in what it does with some properties. The city won’t require a tax increase to repay the borrowing as the current millage would support bond repayment as revenue is freed up from retiring debt.
Naglick told council members it is a good time to borrow, given low rates, strong demand for taxable paper, and the upgrades. If the city waits and the economy picks up, interest rates could rise, he warned. “This is a very good time to borrow.” The city issued its first standalone borrowing since its 2013 bankruptcy in December 2018.
The city will pay premium rates in the 4% to 5% range because of its junk ratings, Naglick noted. “It takes a while to rebuild our credit rating,” he said.
The committee advanced the proposal to put the bond question to voters at a meeting Wednesday during which some council members and members of the public questioned whether the spending represented the best use of city dollars, whether it would put the city’s financial progress at risk, and whether more time should be taken to review the plan before sending it to the full council for debate.
Council President Brenda Jones laid out her policy questions to be addressed during the council meeting in a letter to the public, saying concerns include “Will the bond transaction threaten the fiscal solvency of the City of Detroit? Do the various departments have adequate record keeping and oversight practices to ensure efficient use of the dollars and protect resident property taxes?”
Jones is also concerned whether city residents adequately benefit from new jobs and that adequate outreach will be conducted to inform residents of how the program could benefit them.
Duggan first pitched the bond plan last year but the council rejected it due to series of issues, including mismanagement of the existing plan. The troubles were underscored by a critical city audit that came out ahead of the vote and an ongoing federal probe. Critics also wanted more assurances that residents would benefit through employment and questioned the amount wanted for rehabbing homes. Published reports also attributed the failed vote to strains at the time between the mayor and council.
The city’s economic progress is threatened by the fiscal toll of the COVID-19 pandemic, S&P Global Ratings warned when it moved the city’s outlook to negative on its BB-minus issuer rating in April. “In our view, Detroit is adequately situated to absorb the pressures over the coming months given its proactive management that has acted quickly and its very strong reserve and liquidity position but a delayed return to pre-pandemic revenue stability or much steeper decline in revenues than projected, would prove very challenging for the city,” S&P said.
Balanced budgets allowed the city to exit direct state oversight last year. It’s built reserves to help manage the looming resumption of pension contributions, but it has little room for error without slipping backward and it’s heavy reliance on economically sensitive taxes makes it all the more vulnerable to a recession.
Capital spending and blight removal could also be impeded by the COVID-19 revenue hit setting back economic recovery efforts. Duggan is closing a $348 million revenue hit in the current budget through the use of fund balances, cuts, layoffs, and by diverting blight and other program funding.