Even if Detroit stopped functioning as a city and did nothing but collect taxes and pay its creditors, it couldn’t pay off its debts in 20 years, according to a new report out by a state-appointed emergency manager. That report by Emergency Financial Manager Kevyn Orr paints a bleak picture of the struggling city, which is expected to end the year with a $162 million shortfall.
“The city’s operations have become dysfunctional and wasteful after years of budgetary restrictions, mismanagement, crippling operational practices and, in some cases, indifference or corruption,” wrote Orr.
Detroit has been on unsteady financial footing for years, and since 2008 has spent as average of $100 million more each year than it has taken in. Without the loans it has taken to patch up budget gaps and cover payments, it would have a budget deficit of $600 million.
And as its debt goes steadily up, Detroit’s revenue is expected to decline because of tax reform and changing demographics. The city would run out of money by the end of the year if it wasn’t relying on bonds and deferring its pension obligation, according to the report.
With its debt stacking up, Detroit has been putting off paying its obligations, including pensions. In fact, pension and health care costs are one of Detroit’s biggest financial challenges. The city has two pension funds, one for general employees and one for fire and safety. Fewer than half of employees on the general plan were active, and payments to retirees take up 70 percent of payroll. For the fire and police fund, 114 percent of payroll goes to retirees, according to the report.
Retiree costs take up one-third of the city’s general fund budget, according to an analysis by the Detroit Free Press. Of the city’s nearly $15 billion in long-term obligations, $2.1 billion is pension liabilities.
Detroit owes $5 billion in retiree health care alone, according to a March report by Michigan State University economist Eric Scorsone. That accounts for 39 percent of the total unfunded retiree health care costs in the state.
“It should be noted that Detroit is unique in that almost 50 percent of its governmental debt is related to pension obligation certificates,” Scorsone wrote.
But Detroit’s struggles extend beyond its budget. Blight is one of the city’s most “pervasive and pressing problems,” Orr said. It has almost 80,000 vacant buildings, which adds to its safety problems.
When it comes to safety, Detroit faces significant problems as well. There have been five police chiefs in five years, and morale is “extremely low,” according to the report. Of the city’s 52 fire department facilities, 12 are inoperable on any given day because of a lack of staffing and equipment.
Finally, many of the problems stem from bureaucracy and poor management, Orr said.
“In some cases, changes to the city charter and the city code, or other legislative initiatives, may be needed to support needed operational enhancements and reduce unncecessary bureaucracy,” he said.
Orr’s report was required by law after his first 45 days in office, and doesn’t include details of the emergency manager’s plan for fixing the mess he has taken over. More details will come out in the next several months.
One of the problems Orr will face is continued refusal in Detroit to admit how huge the problem is, his spokesman told the Free Press.
“There’s a certain undercurrent in Detroit that either, ‘We don’t believe the numbers’ or ‘We don’t believe it’s as bad as they say, and it will get better with time,’ ” said spokesman Bill Nowling. “Unless we change and restructure city operations, it’s not going to get better.”