Detroit — The city is planning to shore up a dedicated trust for retirees by another $100 million to meet pension obligations that will come due in 2024.
The Duggan administration created a Retiree Protection Fund in 2017 to amass $335 million to address the looming shortfall in its two pension funds. Detroit’s CFO says the additional money is needed to meet future pension obligations.
“We’re going to have to identify another $100 million in order to meet that obligation in fiscal year 2024 and beyond,” Detroit CFO Dave Massaron told The Detroit News on Wednesday. “We need to ramp up so we’ll be able to make that payment over the course of the next 30 years.”
Detroit’s Deputy CFO Tanya Stoudemire, during a Wednesday budget presentation before a City Council committee, noted the CFO’s office will propose to the council in the spring a supplemental deposit of $30 million for the fund, and over the next two years it will recommend another $70 million in supplemental deposits.
The city, through a funding package coined the “grand bargain,” was able to shield the city’s arts collection from creditors in its bankruptcy and soften cuts to retiree pensions.
The plan also relieved Detroit from much of its pension payments through 2023. In 2024, Detroit will have to start funding a substantial portion of the obligations from its general fund for the General Retirement System and Police and Fire Retirement System.
The city’s bankruptcy plan of adjustment assumed the city’s first pension payment would be around $111 million. But newer actuarial figures pegged it closer to $170 million.
With the impacts of COVID-19 and disappointing investment returns, it’s expected that the payment will be $200 million, Massaron said.
“It’s a significant increase from where it was, but it’s manageable,” he added. “We just have to continue to work on managing it and making sound decisions now.”
Massaron said city will draw some of the funding from its unassigned fund balance. Other operational adjustments might be needed in the 2022 and 2023 fiscal years to meet the procontributions.
“We’re early in budget development and there’s so much uncertainty in the recovery of the economy right now …,” he said. “Ultimately, it will come down to figuring out a way to deliver services as efficiently as we can. We might need to sharpen our pencils more and rely a little bit on revenue recovery at the same time.”
Despite the need to carve out more funding for pensions, Massaron noted Detroit has been able to weather the financial impacts of COVID-19, which dealt the city a $410 million shortfall in the last and current fiscal years.
Moody’s Investor Services on Monday affirmed the city’s Ba3 positive credit rating for “managing well through substantial budgetary challenges.”
Moody’s had revised Detroit’s outlook to positive in February, prior to the pandemic. But just affirmed its rating after a review factoring in the recession prompted by the virus.
The city’s strong reserves helped it manage through the financial hit because of the outbreak, but “risks remain,” the Monday report notes.
“A second shutdown would hit the city hard. The city’s significant service and capital needs have not gone away,” the report said. “Even in a scenario of steady recovery, further action will be needed to close out-year budget gaps and to accommodate growth in pension costs in the budget.”
Overall, Detroit has faced $410 million in losses over a 16-month span tied to COVID.
The deficit projections reported by The News in September are deeper than first anticipated by Detroit Mayor Mike Duggan, who laid out aggressive cuts this spring to stave off a lesser virus-induced shortfall of $348 million from March 2020 to June 2021.
The funding hole was addressed, in part, with $151 million in surplus and rainy-day funds and $147 million pulled from other sources, including funds for capital improvement, blight remediation and federal transit funds, and cost savings. Most of the city’s 8,000-member full-time workforce also saw reductions in hours and pay, which saved another $50 million.
The city expects to offset its growing deficit primarily with its fund balance and federal coronavirus relief dollars. But Massaron has said that other “continued adjustments” will be required to solve it.
That, in large part, will mean fine-tuning the return-to-work schedules of some 2,000 city workers who were laid off or placed on furlough or workshare during the outbreak.
In its Monday report, Moody’s noted Detroit’s rating could be upgraded in the coming years if its financial reserves remain healthy and the city bolsters the retiree trust. It could risk a downgrade if those areas, or an economic rebound, lag.
Dave Levett, Moody’s vice president and lead analyst for Detroit, said the city has kept is reserves steady or slightly growing despite the pandemic due to its early response. It’s also made reasonable assumptions in budgeting for its top revenue sources, wagering and income taxes.
“Detroit did respond earlier than a lot of other cities to make expenditure adjustments,” said Levett, noting the city has accumulated large reserves in recent years and was able to maintain a healthy level even after dipping into those to help offset COVID-19 deficits.
But at 20%, Detroit’s unemployment rate is nearly double the national rate, and its economic dependence on the auto industry exposes it to a recession, he said. The pending pension spike also remains a factor in Detroit’s ratings post bankruptcy.
“Without that extra funding they could deplete that Retire Protection Fund quicker than expected if returns don’t perform,” Levett said.
The city’s bankruptcy plan assumed a 6.75% rate of return. But if assets return less than that assumed rate, the city will run out of funds in the protection fund trust faster than it had anticipated.
On Wednesday, the council’s fiscal analyst Irvin Corley praised the city’s early financial actions to combat losses from COVID-19. He stressed, though, that the city will be grappling with the spiking pension contributions and hopes a funding policy can developed by the next budget talks.
“That’s something that’s still lingering in the background and we have to keep in mind as we go forward,” he said. “Hopefully, the COVID impact will go away more quickly and we just come together and wrap our hands around the pension issue.”
Stoudemire and Massaron said Wednesday that the city has maintained six straight years of operating surpluses to help build up its rainy-day fund and retiree trust, which was projected to have at least $335 million by July 2022. Currently, the fund has about $185 million.
The city, based on its reductions to address the shortfalls and federal Cares Act aid, was able to close out the 2020 fiscal year with an unassigned general fund balance of $83 million. Detroit doesn’t expect revenues to recover until 2023.
“We have significant challenges on the horizon but the work we’ve done enabled us to weather this,” Massaron said. “Many other communities are going backwards and we’re continuing to hold steady through what was an economic contraction and a revenue contraction that’s unparalleled in the city’s history in the last 20 or 30 years.”