Crain's Detroit Business: Dave, when you entered the administration in early 2014, obviously the mayor was sharing power with the emergency manager still, what did the functions of city government look like at that stage in the middle of the bankruptcy?

Massaron: Well, it seems like a lifetime ago, but really at that point all of the functions of city government were chaotic. There had been such a lengthy disinvestment in our workforce, in our capital and in all of the things that enable the city to do its job. Really a number of things weren't functioning, whether it be the lighting system, our bus system — nothing was really functioning at the level that it should. And everything needed to be redesigned so that city government would function. Really, in the beginning, it was very chaotic as we tried to get the necessary equipment, tools and people into position to carry out the functions of the city.

One of the main goals of the bankruptcy was to relieve the city of debt, to free up money for basic operations. At the outset of the bankruptcy, four out of every ten dollars was going to some type of legacy cost, whether it was operating debt or pensions or retirement. What's that number look like today?

The number is much lower today and part of that is there's a ten-year holiday the city enjoys, in large part, from pension payments. I think we project, in the future, it's going to go up anywhere between 11 percent and 25 percent. But that's much more in line with our peer cities and functioning governments than where we were headed. If the growth in our pension and other long-term obligations of the city had continued unabated without the bankruptcy, it would subsume basically the entire city budget as we get into 2024 and '25. It would have been completely impossible to operate going forward.

And when you think about that, bankruptcy was about a balance sheet issue. But it really wasn't the balance sheet that drove why we went bankrupt. We went bankrupt because we had achieved what I'd call a service insolvency, which is that people who lived and worked here, they were getting such poor services that they were leaving. And what happens when you hit that service insolvency level is more and more of your tax base erodes and you can deliver less and less services. And you're never able to get to a point as a city where you can provide services that people want to live and work. And until you get out of that cycle, there's no escaping a continual decline.

At the time of the bankruptcy exit, they talked about $1.5 billion would be freed up over ten years for investment. How has that shaked out? ... I know the mayor, your boss, is very much focused on a lot of data. Maybe you can talk about those meetings you have where he's asking about how the data is doing.

So those are sometimes my favorite and least favorite days of the week. They're Wednesday mornings, where we all have to report on how we're doing operational toward the mayor's long-term goals. As you mentioned, I joined the city in a different role ... during the period in which we were improving services. One of the things I was responsible for was DDOT (Detroit Department of Transportation). DDOT had gotten to the point where we were pulling out 65 to 75 percent of the buses. Our on-time percentages were in the 50 percent range. It really wasn't a service that you could rely on without getting there an hour or two early because you didn't know if the bus was going to show up. There, the bankruptcy enabled us — coupled with some federal support — to order upwards of 180 new buses. We were actually able, through investments in management and the restructuring both the internal finance operations and grant operations, to deploy 2,000 more weekly trips — and we haven't increased our budget on an operating basis. But freeing up capital and developing the Office of Grants to monitor how those grants are spent and to deploy them as efficiently as possible has enabled us to dramatically improve services there to the point where we're at the national average of on-time bus arrivals.

The point I guess I'm trying to make here is it's not just the ability to invest that $1.5 billion — that was an important outcome of bankruptcy — it also was the ability to restructure our finance operations to develop a grants office that announced a couple of days ago that it's raised more than $1 billion since its inception. ... Those types of restructurings have been a big part of us moving forward.

As for the $1.5 billion ... we've been able to invest (in pensions) numbers equal to what the Plan of Adjustment anticipated, but we've had to find other sources. And we've had to find other sources because immediately after the bankruptcy we realized we had a pension funding problem where the projected 2024 payment in the Plan of Adjustment is about $111 million and right now we project it at $164 million. So we knew we had a $50 million delta that in the future we're going to have to meet. And, candidly, we anticipate that number's going to be higher.

Let's just break that down a little bit, cut a little of the CFO talk out of it.

I apologize (laughing).

You basically had a $50 million shortfall from what the consultants hired by the emergency manager were projecting. They had a little more rosy projection?

I hesitate to call it a more rosy projection because it deals with mortuary tables or when we project retirees would die. So they were more pessimistic about that, which leads to a more rosy financial picture because ultimately your pension obligation pays until there's no one to pay the benefit to. When those (mortuary) tables were updated, we discovered we had, on an annual basis, that $50 million short fall. And keep in mind, we were going to go from zero dollars under the Plan of Adjustment to $111 million. When you add another $50 million, that's a really difficult thing for a city to plan for.

Your predecessor, John Hill, developed a fund to try to make this road a little easier to climb. Can you talk a little about the pension trust fund, how it was set up and how it's going to work?

This is something that I think as an administration is one of the things we're most proud of. There are very few cities in the country, and maybe the world, are planning for obligations that come due in ten years. And what (former CFO) John Hill designed and was passed by City Council and was approved by the mayor is what we call the Retiree Protection Fund. Effectively, it is an account where we deposit and plan to deposit $350 million over that 10-year plan, which wasn't in the Plan of Adjustment but ... will put us in a better position to meet that future pension obligation.

What do the city's revenue streams look like? If there were a big layoff of let's say mortgage bankers at a certain company down the street here and a housing downturn, how would the city be prepared to sustain the loss of income tax revenue?

Chad, you're bringing up a good point, which is what is our preparedness for a recession. We modeled out in last year's budget what various levels of recession would do to our budget, whether it's a 2001 internet dot come kind of moderate recession or the more cataclysmic recession that the city faced later in the 2000s and the early part of 2010 and 2011 before the city started to recover. It's a pretty healthy hit to our balance sheet. One of the things we've tried to do, that Moody's recognized, is continuing to build our reserves so we're able to sustain operations and make changes to our operations gradually. At the end of the day, if you have recession, they tend to come on quick and to cut costs takes time because you have to plan that out in a way that ensures citizens still get the services they need. We are getting more and more prepared in this coming budget. We'll be setting aside more in reserve. We have created with City Council a fiscal sustainability working group where we're trying to plan out where we could cut that would have as little impact as possible on our baseline services so that when the day comes — because we always assume at some point an economic contraction is in the future — we'll be prepared to meet it. We've also paid down long-term debt in a way to give us more breathing room in those years when our budget gets tighter.

Isn't it also true that around 2026 expenditures are supposed to start exceeding revenues? I imagine that adds an additional layer of challenge. How else is that being prepared for?

That is a tremendous challenge. One of the things we did is we issued our first ten-year fiscal long-term outlook report this year is we tried to calculate out if we give all of the services we give today and we assume the labor cost increase and CPI increase on goods and services that we buy, what that will look like when we compare it to how we project revenues to go. And you're completely right: In 2026, we begin to cross the line where our expenditures exceed our revenues. ... We're going to have to identify efficiencies where we do what we do today more efficiently. And we're also going to continue to have economic growth to grow our tax base. And I think every year we've been able to meet or exceed those targets and we're hopeful to be able to continue to do it. Of course, an economic contraction would change that and that means in 2026 the level of services residents get we have to find a way to maintain at a baseline. But we may very well have to make cuts.

You talk about growing the tax base. There's an inherent issue with the constitution of the state that caps that growth. At the same time, the city has been granting a healthy stream of tax abatements to get people to bring jobs and economic development to the city. Ford in Corktown, Fiat Chrysler Automobiles' new Jeep plant on the east side on Mack Avenue and any number of projects in greater downtown. Is that going to catch up to us at some point in this next decade where we've abated a whole bunch of the tax growth and there's not a lot of room to make up for those losses?

Well, tax abatements have existed in the city for decades. The way we try to look at it is each time there's a tax abatement that's offered, my office does an analysis as to whether there's a position return on investment. And we make the decision that the level of abatement based on that analysis. But you're absolutely right, because of the way the Headlee Amendment works, the city's property tax (revenue) is a very small portion of our general fund, say about $118 million for a $1 billion (general) fund. And that property tax for other governments is a very stable revenue source. And we rely, in large part, on income taxes, which is much less stable. So for Chrysler to come, there's a number of abatements they get on property taxes. The people who work there will be paying income tax and that will be a great revenue boost when it comes. But, of course, if the economy turns and FCA doesn't need to keep those employees employed, we'll have a bigger revenue hit. And we don't have the stabilization force of a property tax. That's inherent in the way Michigan has structured local government and it's what we have deal with.

If you get 5,000 new employees working at $25 an hour or so, the income tax is sizeable enough to make up for the loss of the property tax?

I don't have the return on investment sheet in front of me. But the city and state put a considerable amount of subsidy into that transaction, whether it be certain abatements on taxes or property that relates to FCA. But at the end of the day, each of those employees will be paying income tax. Through our analysis, based on what FCA committed to do in the relevant development agreements, the city comes out ahead. ... The other thing that was negotiated into the agreement by the mayor is Detroiters have a first opportunity to apply for those jobs. Detroit Employment Solutions Corp. has done an amazing job of getting people into that que. And if we can provide opportunity for our residents that attracts more residents, but probably more importantly, allows our existing residents to have an advantage and an opportunity compete for what is a really good job.

Ultimately at the outset of the bankruptcy, none of these programs even existed. None of this work was being done. You had a city that was essentially dysfunctional on service fronts. A lot has changed since the city emerged from bankruptcy.

A lot has changed, and we do a lot more. And what is so great about this job and this city and the people who live here is they always raise the expectations as we improve. So everyday it's a new challenge that we have to figure out how to meet and everyday we're going to struggle and work to meet that challenge. I really do have confidence that the city can weather the next recession. And the reason I have confidence is the mayor and City Council have always been aligned around fiscal prudence and fiscal stability in making budgeting decisions. And I have no reason to believe that's going to shift. That obviously is the key to us moving forward. And I will also say the other key to us moving forward has been the alignment with the philanthropic and business community — everybody pulling in the same direction around the same set of policies has enabled us to do so much more, so much more quickly than we thought we could.

Contact: [email protected];

(313) 446-1654; @ChadLivengood

Hear the entire interview on crainsdetroit.com/theConversation