5 years out of bankruptcy, can Detroit avoid another one? – Detroit Free Press

Tuesday marks the five-year anniversary ofDetroit's exitfrom thelargest city bankruptcyin the nation's history.

Now billionslighter in debt and running $100 million-plusannualsurpluses, Detroit isin phenomenally better financial shape than when itentered the bankruptcy, which lasted 17 months.

But the process didnot eliminateall futureobstacles,and whether the citycankeepits budget act together and avoid a do-over bankruptcy is a question that may find ananswer over the next five to seven years.

The first big challenge comes in mid-2023, when Detroit's "pension holiday"ends and it must startmaking fullyearly contributionsabout $163 million a year and every yeartoward two city retirees'pension funds. The city was given avacation from pension payments as part of its post-bankruptcy restructuring plan.

Detroit Mayor Mike Duggan, left, accepts a check from Michigan Governor Rick Snyder, as outgoing Detroit emergency manager Kevyn Orr, back right, watches during Press conference to announce the City of Detroit's exit from bankruptcy at the Public Safety Headquarters in Detroit on Wednesday, December 10, 2014.(Photo: Detroit Free Press)

The next obstacle arrives in about 2026, when expenditures in Detroit's annualbudget are projected to begin exceeding revenues.

And yet another hits in the mid-2030swith the expiration of the so-called "Grand Bargain" money that saved city pensioners during the bankruptcy fromdeeper benefits cuts.

"We still have a lot of challenges ahead," said Gerald Rosen, a retiredfederal judge who was the mediator in Detroit's bankruptcy case. "But I dont think anyone could have predicted on July 18 of 2013 that in six years, we'dbe where we are.The city has rebounded; its fiscal health is terrific now compared to where it was."

When Detroit filed for bankruptcy in thatsummer of2013,it was beyond broke and face down in $18 billion ofdebt, unable to payfor many basic city services and at risk of seeing an artwork firesale attheDetroit Institute of Arts to pay offcreditors.

More: Even 5 years later, retirees feel the effects of Detroit's bankruptcy

More: How Detroit went broke: The answers may surprise you and don't blame Coleman Young

It was the culmination of many bad things,including a giantexodus of residents, plummeting tax revenues, a billion-dollar borrowing binge and a failure by leadersto cut expenses when they needed to.

The bankruptcyeradicated$7 billion in debt, eliminatedbillions morein future payments and health-care obligationsforretired city workersand savedDIA artwork from a forced sale.

When Detroit exitedbankruptcy onDec. 10, 2014, the future wasn't supposed to be one of endless austerity.Detroit was givenarestructuring path, called thePlan of Adjustment, that envisioned the cityspending $1.7 billion over 10 years to financenew investments andimprovements toservices.

YetDetroitdidn't emerge with an entirely cleanslate. The city still had debt and future obligations on its books andthe problemof a predominately poor and still-shrinking population within a 139-square-mile city oncehome to 1.2million in 1980.The latest population estimate is 673,100 as of last year.

To prepare forthe coming spikein required pension payments,Detroit City Council and Mayor Mike Duggan created aRetiree Protection Fund to squirrel away some of the budget surplus moneyto later ease the shock of thebigpension payments that startin the 2024 budget year,whichactually begins July 1 of2023.

The protection fundwasn't in the original restructuring plan, but became necessary whenit emergedthat pension consultants during the bankruptcy had used outdated mortality tables whichlowballed the city's estimated pension payments.

TheRetiree Protection Fundis expected to have $335 millionin it by the time the "pension cliff" arrives next decade.

In another move,Detroitrecently doubled the size of its rainy day fund to better prepare for any economic downturn. The rainy day fund is now about 10% of the general fund, up from 5%.

Financial expertshadwarned that two ofDetroit's three largest annual revenue sources income taxes and gaming taxesfrom thethree casinosare atrisk if and when the next recession happens.

There wasnt a single dissenting voice on (city)council, because they all understand the importance of that,"Detroit Chief Financial OfficerDavid Massaron saidabout the rainy day fund increase.I think well be able to manage any economic headwind and the pension cliff in2024."

Council President Brenda Jones, who is also a member ofthe Detroit Financial Review Commission, declined through a representativeaninterview for this story.

The city's other big revenue source, its roughly $200-million-per-yeartake ofstate revenue-sharing funds, is projected to drop by a modest degreeasalikely resultof Detroit havinga smallerpopulation inthe 2020 U.S. Census than in2010.

"The mayor's office has been mobilizing to make sure everyone is counted, but the effect could still be negative for Detroit," financial analysts at S&P Global Ratings said in a report this year.

Mayor Duggan cited theRetiree Protection Fund when asked last weekwhether the city would be ready to makeitslarge pension payments.

"Thats a big reason why weve had so many credit upgrades," he told the Free Press."So I feel very good about where we are.

Wall Street credit rating agencies have praisedDetroit since the bankruptcy for its stabilizedfinances, revitalizeddowntownand success in attracting newhigh-profile development projectssuch as the Flex-N-Gate automotive supplier plant, Ford's train station redevelopmentand this year's announcement of a largeFiat Chrysler plant expansion.

The city's income tax receiptshave grownmore than$70 million since leaving bankruptcy.

But despite giving Detroit some creditupgrades, the rating agenciesstill deem the city's debt assomewhat risky and below investment grade, what is commonly known as "junk."

Financial analysts notehow most of theeye-catching growth hashappened in and around downtownnot throughoutthe city and how Detroit city schools, now known as theDetroit Public Schools Community District,are still struggling and "could also become a major drag on revitalization beyond downtown."

In addition, Detroit did a citywide parcel-by-parcel reappraisal several years agothat resulted in some lower property tax assessments.

"Detroit is left with a combustible brew: a reliance on volatile revenue sources and growing fixed costs," Moody's Investors Service said in reportlast year. "Detroit's combined debt and pension burden compared to the property tax base is extremely high compared with other major cities."

Even so, Detroit hit a milestonelast December when itsold about $135 million in general obligation bonds for capital improvements,at a surprisingly low4.8% interest rate for a junk-rated city not long out of bankruptcy.

The bond sale was not only the city's first sincebankruptcy, butalso itsfirst bond sale inmore than 20 years that didn't require "credit enhancements," such as buying bond insurance, to reassure investors and get abetter rate, according to Massaron. The city even upped the size of the sale by over $20 millionin response tostrong investor demand.

"We were a number of times oversubscribed, which means we had more investors than we had debt to sell,"Massaron said, "which shows that people believe in the continued resurgence and financial stability of the city.

One of itsbiggest achievements was theGrand Bargain, anunprecedented dealthat pooled about $820 million over 20 years inphilanthropicfoundation money and state funds toshore up city retirees' pension fundsandsafeguard the DIAcollection.

Steven Rhodes, the federal judge who presided over the bankruptcy, memorably warned representatives for thecity's retirees to not dismiss the Grand Bargain, even though the deal called forcuts to pensions and health care benefits.

From left, Chrysler executive Reid Bigland, General Motors Mark Reuss, Ford Motor Co.s Joe Hinrichs, Detroit Institute of Arts Director Graham Beal, Detroit emergency manager Kevyn Orr, Chief U.S. District Judge Gerald Rosen and DIA Arts Chairman of the Board Eugene Gargaro Jr. listen during a news conference announcing pledges to the DIAs grand bargain commitment in June. (Photo: Romain Blanquart/Detroit Free Press)

Detroit's bankruptcywas officially classified as a Chapter 9 municipal bankruptcy.

"Now is not the time for defiant swagger or for dismissive pound-the-table, take-it-or-leave-it proposals that are nothing but a one-way ticket to Chapter 18," he said. "This is bankruptcy jargon for a second Chapter 9."

In the end, the city's two older pension plans were frozen and retirees saw their benefits cut. Still, the cuts were smaller than they likely would have been without the Grand Bargain. Twonew pension plans were createdfor current and future workers. About 32,000 active or retired workers were impacted.

The police and firefighter pensioners didn'tface upfront cuts to their pension checks, but saw their2.25% annual cost-of-living increases reduced to about 1%. They also took cuts related to health care.

The city's general retirees took a 4.5% base cut in pensions and the elimination of annual cost-of-living increases.

To implement the Grand Bargain funding, a new nonprofit affiliate of the Community Foundation for Southeast Michigan was set up called the Foundation for Detroit's Future.

"The idea in the Grand Bargain was there were going to be financial controls and oversight to make sure the city did not fall into the same bad habits that got them there,"said DougBernstein, a bankruptcy attorney at Plunkett Cooney in Bloomfield Hills who is counsel for the new foundation.

Collage of former Detroit Emergency Manager Kevyn Orr (left), Michigan Gov. Rick Snyder (center) and Judge Bernard Rosen (right), who negotiated the Grand Bargain as Detroit moved to exit bankruptcy.(Photo: DFP)

Upon exiting bankruptcy, the city was placed under oversight of anine-member Detroit Financial Review Commission, chaired by the state treasurer, that initially oversawall city budgets, borrowing andlarge city-issued contracts.

After the city delivered three consecutive years of balanced budgets, the commission released Detroit in April 2018 from direct oversight. The commission continues to monitor Detroit's financial situation and can comeback if the budget falls out of balance.

On the budget front,startingabout2026, the city'sexpenditures areforecast to begin exceeding revenues. Avoiding that problem will require"more economic growth and development," according to the forecast.

Detroit did a debt restructuring last yearto preventa $25-million debt spike in themid-2020s. That maneuver ultimately saved some money, but pushed forward some higher debt paymentsinto the following decade.

"It is incumbent upon the mayor and city council to work together through upcoming budgets to ensure we continue on a fiscally sustainable path,"Massaron, the city's CFO, said in an email about the forecasted budget imbalance.

Yet another big challenge arrivesin 2034-2035 budget year, whenthe Grand Bargain expires. The city's pension payments from its general fund will then jumpto about $181 million per year.

Massaron said Detroit remains on pace to achieve its $1.7 billion spending goal forcity servicesby the 10-year anniversary of exiting bankruptcy. Some of the investments so far include:

An estimated 40% of Detroit's streetlights weren't working at the time of the bankruptcy. In 2016, Detroit became the largest U.S. city to haveall light-emitting diode (LED) streetlights. That three-year, $185-million projectwas financed througha public authority separate from city governmentand wasset in motion by former Mayor Dave Bing.

Massaron said he doesn't considerthe city in anydanger of a secondbankruptcy.

Right now, I would say the answer is no," he said. "And I would say the answer is no in large part because we have alignment among policymakers around making fiscally responsible decisions."

Rosen, the former bankruptcy mediator, said he gives city officials "an A+" for their management of Detroitsince leaving bankruptcy.

"I think the measure of the success is the rebound the city is experiencing now," he said.

Contact JC Reindlat 313-222-6631 or jcreindl@freepress.com. Follow him on Twitter@jcreindl. Read more on business and sign up for our business newsletter.

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5 years out of bankruptcy, can Detroit avoid another one? - Detroit Free Press