Detroit on track after bankruptcy, report says Looming city pension obligations, other debt repayment remains substantial, commission finds

Matthew Dolan | Detroit Free Press

The city of Detroit is on track with its sweeping restructuring and reinvestment plan rolled out almost one year ago when the city exited the nation's largest municipal bankruptcy, according to a new commission report.

In a biannual report to Gov. Rick Snyder, the Detroit Financial Review Commission concluded that the city has been in compliance with the plan in its first year by providing commission members with updated financial plans.

The commission has reviewed and approved 237 city contracts and one collective bargaining agreement between the city's transportation department and a transit union. In addition, the city has amended its budget and issued new debt with the review and consent of the commission, according to the report.

In an interview Monday, Mayor Mike Duggan described the relationship between his administration and the Financial Review Commission as a positive one.

"As long as we balance our budgets and pay our bills, we’re going to get along with the Financial Review Commission just fine," Duggan said.

He added that the city remains on track to post balanced budgets for the 2014-15 as well as the current, 2015-16 fiscal year. By early 2018, the mayor said he anticipates that "we will be out of the control period," putting the review commission into a dormant mode and enabling the city to run without strict oversight.

Until then, the nine-member commission created in November 2014 serves as a check on the formerly bankrupt city. The oversight was designed in large measure so Detroit meets its obligations under the so-called 'Grand Bargain,' a public-private funding plan to help preserve the Detroit Institute of Arts and reduce the size of cuts to the city's pension holders.

The commission made up of appointees by the governor, mayor and City Council has power to review and approve the city's budget, major contracts and labor agreements for a number of years to try to keep the city on a sound fiscal course.

One of the brighter spots in the city's progress so far has been its bottom line.

Detroit expects it will record a larger-than-expected surplus for the year ending June 30, 2015, according to the report. Based on first-quarter fiscal year 2016, which ended in September of this year, the city projected a $35-million budget surplus for the current year.

But Detroit officials and their pension funds are still wrestling with a looming pension bill that has recently grown. That's thanks in part to new actuarial calculations based on updated mortality tables use to determine how long retirees are expected to live.

The new system also was slow to take hold, allowing for greater-than-expected payouts through March of this year to some pension holders.

The commission's director wrote in his biannual letter to the governor that the city has formulated a strategy to address the pension balloon payments starting in 2024 by hiring a consultant to examine the numbers by the end of the year. But these financial forecasts could change, according to commission staff.

"It is important to understand that many changes in the projections will occur over the next few years and these changes may be positive or negative," commission executive director Ronald Rose wrote to the governor in a letter dated Nov. 24. The Free Press obtained a copy of the report today.

Part of the challenge is that for years, Detroit is obligated to pay little to nothing into employee pensions. But then, a bill now estimated at $195 million comes due that had caught city and pensions officials off-guard, raising doubt about the data used in bankruptcy to calculate the city's obligations.

The city's balloon payment due in 2024 for its two pension funds has risen to $195 million, or about 71% above the original $114 million projected under the city’s bankruptcy exit plan approved by a federal judge last year.

No one has a recently updated forecast yet of what the city's pension bills look like in the decades after that. Rose said in his letter to the governor that, "in years after 2024, the annual amount payable decreases by about $2 million per year."

The unexpected jump could be contentious if the city decides to boost pension payments at the expense of other investments such as public safety and blight removal. But others say Detroit could make bigger pension payments sooner without threatening the city's financial health.

The city's post-bankruptcy budget was designed with a surplus for contingencies. City coffers could also grow, improving the city's ability to pay in the future. Returns on pension investments over the next nine years may outpace expectations, lowering the city's estimated payment.

Paying pensioners is not the city's only sizable bill.

The current annual debt payments through fiscal year 2025 are $147.4 million a year on average, according to the commission.

Detroit's credit rating - a sign of how the financial markets judge the city's financial health — is still a mixed bag. The city has an investment-grade rating on the bankruptcy-exit financing bonds secured by a lien on city income tax revenue. But city’s general obligation bond rating remains below investment grade.

Over the next six months, commission officials said they are looking for the city to make progress on a number of fronts, including: