As the city of Detroit returns to a near-normal budget situation after two difficult pandemic years, it is looking to increase the amount it is hoarding for the looming “pension cliff”.
The city should invest an additional $30 million in its Retiree Protection Fund, Mayor Mike Duggan said Monday during the presentation of his proposed $1.2 billion overall budget for the next fiscal year 2022-23, which starts in July.
The Detroit City Council will review the budget over the next two weeks, make changes, and then vote on whether to approve it.
In July 2023, at the start of the city’s 2024 fiscal year, Detroit will have to start paying off its pension debt – that’s the “cliff”. And the money it stores now will serve to cushion the blow these payments will take on the budget.
City, police and fire department pensions are an old liability that plagued Detroit before its historic 2014 bankruptcy and still hangs over its future. As part of its bankruptcy debt reduction plan, the city had a nine-year pause in dealing with most of that debt, but now the reprieve is almost over. The city expects to pay about $140 million from its general fund in the first year of debt repayment.
“We’ve set aside, now, about $370 million. We’re offering another $90 million this year,” instead of the previously planned $60 million, Duggan said. “So when we get to that cliff, we’ve been planning all along to fund that 2024 cliff so that our retirees aren’t back in bankruptcy court…”
The budget Duggan and his team presented on Monday is a big change because it’s now based on a “recovering economy,” reverting to pre-pandemic revenue assumptions, city chief financial officer Jay Rising said. to the city council.
“What we’re presenting today is a post-crisis budget, a post-COVID budget,” Duggan said Tuesday.
He did not mean that the pandemic is over, but rather that the city begins to pay its operating costs on its own.
“That’s basically how we’re going to have to operate long term, and it’s going to be tight,” Duggan said.
The Retiree Protection Fund isn’t the only savings bucket Detroit has its sights on, despite how “tight” finances continue to be. It also has something called the Rainy Day Fund, set aside to give the government some preparedness to deal with a potential emergency, like a major economic downturn.
Detroit managed to weather the pandemic-induced recession without pulling money out of those savings, but it also wasn’t able to add to the fund those years either.
This upcoming budget, however, Detroit plans to deposit $30.7 million into its rainy day fund, bringing the total to $138 million. Then it would add $15 million in fiscal year 2024 and $5 million in fiscal year 2025, bringing its total reserves to $158 million, more than 12% of the city’s annual budget.
“The standard for cities with quality credit scores is that your rainy day fund is 15% of your balance. Over time, we’ve increased that to 10%,” Duggan said. “It’s not enough to get us a prime credit rating, but we felt like it was all we could do, considering all the other needs in the city.”
The deadly COVID-19 pandemic has hit the city of Detroit and its residents hard. Financially, the city faltered, losing revenue and leading Duggan to propose $350 million in budget cuts.
The federal government’s pandemic stimulus funds have helped. Then the city also got $826 million from the US Federal Bailout Act which it used to bring back employees from furlough and cover other shortfalls — among other uses.