Detroit cleared for fifth year of independent operations

BY SourceMedia | MUNICIPAL | 06/28/22 04:20 PM EDT By Yvette Shields

Detroit received clearance to operate independent of direct state oversight for a fifth year as it considers asking the federal bankruptcy court to intervene in pension fund actions that will add to its fiscal strains when contributions resume in 2024.

The Detroit Financial Review Commission granted another one-year waiver at its June meeting Monday. The commission was put in place after the city?s December 2014 exit from Chapter 9 to monitor compliance with the plan of adjustment and provide oversight of city finances.

?Based upon a review of the city?s financial information, submitted reports, and presentations and discussions during the finance and contracts subcommittee meetings, staff recommends the Financial Review Commission certify that the city of Detroit has met the statutory conditions ? and grant the city of Detroit the year-five waiver,? reads commission documents.

The city must show it?s adhering to statutory targets that require adoption of a deficit-free budget and a four-year financial plan, maintenance of a budget reserve equal to 5% of general fund expenses, and it must demonstrate the ability to access the municipal market to meet its capital needs.
Detroit skylinein addition to the city's current, balanced fiscal 2022 budget fiscal year 2021 marked "the seventh straight year of audited balanced budgets and operating surpluses,? the report noted. ?The FY23 budget increases the budget reserve to $138 million, 12% of expenditures? after a $30.7 million deposit.

The city?s longer-term goal is to build the reserve up to 15% of expenditures based Government Finance Officers Association?s best practices. The budget for fiscal 2023 totals $2.45 billion. The city plans on a $15 million fiscal 2024 deposit and $5 million deposit in fiscal 2025.

Mayor Mike Duggan has said a 15% target is needed to help win back investment-grade ratings.

?The pension pressures will be a long-term budget challenge for the city,? the report noted.

Pensions pose the most daunting threat to the city?s future fiscal health, especially given one of its fund?s move to shorten the unfunded amortization period to 20 years from 30 years. Most contributions were put on hold until 2024 as part of the city?s confirmation plan.

The city does have some breathing room. An actuarial determined contribution of $186 million expected as recently as last year has since been lowered to about $135.4 million due to ?extraordinary FY ?21 investment returns? of 27.4% for the general retirement account and 27.11% for police and fire retirement along with revised mortality tables.

The city?s Retiree Protection Fund, established as a cushion,will hold $460.4 million by the end of fiscal 2023.

?That?s significantly more than the $335 million the city had planned originally,? the report said. The city deposited an extra $80 million in fiscal 2022 and plans on an additional $30 million ? on top of an already planned $60 million contribution ? in fiscal 2023. ?The CARES monies in FY '20 and FY '21 helped the city achieve budget surpluses, which allowed the city to roll some of it, and other one-time windfalls, into the RPF.?

By fiscal 2040, all or most of the estimated $148 million payment would come from the general fund. The schedule is based on current actuarial estimates, the police and fire fund?s move to a 20-year amortization and maintenance of the general employee fund at 30 years.

Pension fund stakeholders agreed to the 30-year amortization schedule during negotiations mediated by now-retired U.S. District Court Chief Judge Gerald Rosen, Mayor Mike Duggan said earlier this year when he signalled his intent to return to the court to block the change.

City officials told the commission Monday their attorneys are still working on the matter and have not yet filed a motion with the court.

Backers of shrinking the amortization period believe it's needed to stabilize the fund's health and to keep funding ratios from dwindling in the coming years should investment returns falter.

Deficit spending or any other violations would trigger a return to direct oversight. The city must meet its targets for 10 years after active oversight ends to operate fully independent of oversight. A balanced 2023 budget would mark a half-way point to ?having the state gone for good,? Duggan said.

The city?s finance team has warned of variables that threaten projections, including the trajectory of casino and internet gambling tax revenues and ongoing income tax losses stemming from non-residents with city-based jobs who continue working remotely.

The city has won a series of upgrades since emerging from Chapter 9, but its ratings remain speculative grade.

Earlier this year, S&P Global Ratings moved the city?s rating further up the speculative grade scale and restored revenue-backed bonds to investment grade. S&P raised the rating on $361 million of unlimited tax GO debt issued in 2018, 2020, and 2021 to BB from BB-minus. Moody?s Investors Service a week earlier had raised the GO rating one notch to Ba2.

S&P raised to BBB-minus from BB-plus $157 million of 2014 income tax bonds issued through the Michigan Finance Authority?s local government loan program and $162 million of utility tax-backed Public Lighting Utility debt sold through the local government loan program. Moody?s does not rate the debt.

The city has a total of $2 billion of debt including $1.5 billion of GOs with enhanced or revenue pledge ratings. The number includes $649 million of GOs issued through the Michigan Finance Authority and linked to the state?s rating because it is supported by the city?s share of distributable state aid. Both S&P and Moody?s assign a positive outlook.

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.