Financial crisis faces Detroit’s next mayor
Economic downturn, fallout from Sept. 11 wallop city’s budget
Photos by David Coates / The Detroit News
The nation’s economic downturn is likely to lower values of homes like this one for sale at 1469 Cavalry in Detroit. If property values drop, an already strapped city will collect less in property taxes and face more budget cuts.
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By Cameron McWhirter / The Detroit News
DETROIT — The Motor City is lurching toward a financial crisis the likes of which it has not seen since Coleman Young was mayor.
That means that whoever is elected mayor Nov. 6 will have an immediate financial crisis on his hands.
The city budget, like budgets of governments across the nation, is being severely hurt by the recession and uncertainty following the terrorist attacks of Sept. 11. From city investments to income taxes to how much the city has to pay to borrow money, Detroit’s budget — currently at more than $3.3 billion — is being walloped. Mayor Dennis Archer recently imposed $60 million in emergency spending cuts — including a 5-percent reduction in all department budgets.
“People are working less because of reductions in overtime, layoffs and downsizing,” Archer told the City Council Oct. 10, when he announced the $60-million emergency cutbacks to the current budget. “The effect on the amount of money coming into the city’s accounts via income tax withholding revenue is immediate and profound.”
The shortfall is expected to hit several sources of city revenue, including:
* Municipal income taxes. The income tax is the city’s largest source of revenue. In the 2001-02 budget, officials estimated the tax would bring in $384.8 million from a percentage taken by the city on incomes earned by Detroiters and suburbanites who work in the city.
But layoffs in the auto industry, severe cutbacks in overtime in all industries and disruptions in the local economy caused by the terrorist attacks have thrown estimates off track. The recession will have a direct and immediate impact on how much money the city gets.
In addition, the city had promised to reduce, and eventually eliminate, the income tax in exchange for an agreement by the state government to hold the city’s state revenue-sharing percentage steady. Those tax-reduction plans may have to be put on hold.
* Sale of bonds. This fiscal year, the city had budgeted $400 million in bond sales, $40 million for city services and $360 million for federally mandated improvements to the city’s Water and Sewerage Department.
Under Archer, the city’s bond rating has improved dramatically, though it still ranks below that of many other major cities. The city’s bond rating is important because it sets the price at which a city can borrow money for major projects. But with the economy slipping, Wall Street’s bond-rating agencies are likely to revise Detroit’s rating downward.
From 1979-86, Detroit did not issue general obligation bonds because Wall Street’s rating services declared Detroit bonds below “investment grade.” In 1987, the city sold its first bonds in eight years, $51 million worth. But by 1992, in the midst of the last recession, major rating firms were issuing warnings about the city.
* State revenue-sharing. The city is guaranteed at $332 million this year under the program. With the entire state in recession, sales-tax revenue and income-tax revenue are plummeting. According to Louis Schimmel, currently the emergency financial manager of Hamtramck who is former director at the Municipal Advisory Council of Michigan, Detroit “will be lucky” if its cut of state revenue holds steady.
* Property tax and debt service. The city expects to bring in more than $225.5 million this fiscal year from property taxes. But the recession is likely to drive down home values. If property values drop, new assessments will result in reduced property taxes.
* Earnings on investments. The city estimated that it would earn more than $18.5 million on investments this fiscal year. With the stock market hitting lows not seen in years, that figure inevitably will be revised downward.
Some major sources of revenue won’t be affected. Federal and state transportation funds, this year set at $61.9 million, or 1.8 percent of the total budget, are expected to hold steady. Also the city’s wagering tax, garnered from gambling at the three casinos, is expected to hover around the budget estimate of $95.8 million, according to Archer.
Clyde Mitchell-Weaver, an urban affairs professor at the University of Pittsburgh and an expert on regional governments, said that beyond the current economic downturn, big city governments like Detroit face a difficult future with less tax revenue and more demands for services.
Political platitudes about bringing large cities like Detroit back to what they were in the 1950s and 1960s are pipe dreams, he said. His forecast was gloomy.
“I think we’re going to let our cities continue to decay,” he said. “Nobody is riding to the rescue. It’s just there is no magic bullet. We are just not going to rebuild all these things.”
But Christopher Leo, an urban affairs professor at the University of Winnipeg, was much less pessimistic about the future of Detroit and other cities in North America.
He said cities like Detroit need to shrink their governments and increase efficiency in basic services: police, fire, garbage pickup, lighting, street repair. If they adjust their planning to the fact that they are smaller, things might improve, he said.
Leo described the North American obsession with bigger and bigger cities as “a mug’s game” that a city must inevitably lose.
He said city governments have to become much smarter in how they deal with broad social trends like white flight and urban poverty. To show what happens if they don’t, Leo said, he hands his Canadian students pictures taken on a visit to Detroit.
“I’ve been using them with my students for years,” he said. “I tell them, ‘This is what’s going to happen to us if we don’t do something.’ ”
You can reach Cameron McWhirter at (313) 222-2072 or cmcwhirter@detnews.com
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