Forecast dives into Detroit's economic prospects
Detroit, in partnership with the University of Michigan, released its first-ever economic forecast providing a deep dive into the city's post-bankruptcy recovery that shows labor and income gains.
The city contends the forecast released last week verifies that its financial position is on the mend and the economic strategy employed since exiting its landmark Chapter 9 bankruptcy case five years ago is working, said Detroit’s Chief Financial Officer Dave Massaron.
Up until now, economic trends for the city have been looked at from a regional perspective. Massaron said that drawing the distinction between the region and the city helps the city provide better revenue projections going forward. It also helps the city to analyze whether or not the investments the city makes are working to drive economic opportunity for Detroiters.
"Right now a lot of our economic data is regional, in the metro Detroit region, and the city’s economy, while there are some similarities at least in terms of overall trajectory, there is a real significant difference," Massaron said. "What this enables us to do is to provide more pinpointed data on what is happening in Detroit and how our policies are impacting the economic trajectory of the city. This forecast allows us to give better data to investors and to our forecasters about what makes up the city economy as opposed to region.”
Massaron said that as the city worked on 10-year projections and its revenue forecasting process, it made the decision to put out a request for proposal to hire a university partner to provide the city with economic forecasting and local Detroit data. The process was launched by former CFO John Hill who steered the city's finances during the bankruptcy filed in July 2013.
Among the positive trends the forecast shows are ongoing gains in household income, employment and labor force participation through 2024 and a 1.7% growth rate in employment for Detroit in 2019, exceeding the 1% growth rate of household employment in Michigan last year.
Detroit's unemployment was more than 18% in 2013 when the city filed for bankruptcy, researchers said. Figures for 2019 aren't yet available, but researchers expect the unemployment rate was about 8.6%.
Fiat Chrysler's new $2.5 billion assembly plant and the $4.4 billion Gordie Howe International Bridge project between Detroit and Windsor, Ontario, Canada, should provide new job opportunities, according to University of Michigan economist Donald Grimes. The city partially bond financed the purchase of land needed to land the deal with FCA last year.
Lisa Washburn, a managing director for Municipal Market Analytics, said the statistics aren’t surprising.
“The growth in jobs and employment above the state should be expected given the recent private investment in the city and that it is from a depressed post-bankruptcy base,” Washburn said.
Moody’s Investors Service rates Detroit's general obligation bonds Ba3, three notches below investment grade, and last upgraded the city nearly a year ago. S&P Global Ratings in February upgraded the city’s general obligation ratings to BB-minus — also three notches away from investment grade — from B-plus.
Moody’s analyst David Levett said there is a lot of positive activity in the city right now. “There was a slowdown in job growth in this past year which was noted in this report,” Levett said. “There was the General Motors strike coming off a strong year but I wouldn’t say anything too surprising here.
Moody’s noted in a separate report that the six-weeks-long United Auto Workers strike against GM was a bigger economic threat to Michigan and its local governments than other states because of its higher exposure to the auto manufacturer.
Howard Cure, director of municipal bond management for Evercore Wealth Management, noted the city's fortune is still heavily tied to auto; manufacturing is still a big component of their overall employment so fortunes will rise and fall on that. Financial and business services, and leisure and hospitality are expected to see the most jobs gains, while manufacturing is projected to remain Detroit's second-largest sector.
“The two parts somewhat troubling are that manufacturing doesn’t require the same number of employees because it's more modernized, and that the Detroit area has a low education level. Not a high proportion of the population has higher education which is something where a lot of the manufacturing jobs are,” Cure said. “I still think that there is a level of vulnerability there but the trends are good.”
Cure said that most striking negative static the report highlights was the city’s labor participation rate, which currently lag the state average by almost 14%. Labor force participation is expected to rise from 47.3% to 48.5% between 2018 and 2024, according to the report. The report highlights that the increased economic activity in downtown Detroit and elsewhere in the city is creating a substantial number of new jobs, but until there is “establishment-level employment data” available, the exact spillover effects will be hard to quantify.
“Detroit has a long way to go and to have such a low labor participation rate is troubling but they are going in the right direction,” Cure said.
Cure said that another troubling point, just from a finance point of view, is that while the report highlights the positive trends for the city and how it could help their income tax, those trends won’t help the city’s other major revenue streams, including property tax and state revenue sharing, because that is constrained by state laws. The city's recurring income tax revenue is up 26% over five years. For the 2019 fiscal year, it was $321 million, according to the latest unaudited figures. In 2014, it collected $253 million.
“Hopefully their income tax will improve and at least they can see a stabilization of their property tax base so they won’t lose out. So we will see how the city benefits in this economy, financially,” Cure said. “They are also expanding the service sector jobs and you would like to see the city getting more diverse rather than a heavy reliance on manufacturing and automotive.”
Washburn said the city’s relatively weak demographic profile and questions about its economic resiliency in a down cycle will likely keep Detroit below investment grade territory for the medium term.
Massaron said, despite the promising projections, the city remains committed to preparing for an economic downturn. To that end the city has more than doubled its rainy-day fund, which is now about 10% of the general fund, up from 5%.
The city had a general fund balance of $611.2 million at the end of fiscal 2018; it reported a $73 million total fund deficit at the end of fiscal 2013. Fiscal 2019 fund balance expected to be larger, pending completion of the audit.
However, Massaron said that no matter how quickly the city’s economy is projected to grow versus the rest of the state or the prior year, the report showed that Detroit’s revenues don’t grow as quickly as the economy.
“We just need to be prepared for the fact that there is a lag between when we see the revenue growth and when we see the economic growth,” Massaron said. “A forecast is only a forecast and right now, given the headwinds that we have had over the last couple of years on a national basis and the local GM strikes, it's really good to see that there is continued growth projected for the city but we know that we are in a period of instability where any number of things can occur that could cause the economy to contract and we need to prepare for when that happens.”
As for plans to access the bond market, Massaron said the city is still in the process of sizing the second series of bonds that are part of $225 million, tax-exempt borrowing the city council authorized in December 2018. Those bonds are likely to price at some point this summer, he said.
Masaron said that the city is also looking forward to working with council on the authorization of a larger blight elimination and neighborhood rebuilding ballot question for debt at some point this summer. Mayor Mike Duggan’s administration failed to gain city council approval last year to put a $250 million blight bond on the March ballot.