Before you read on, will you consider supporting BridgeDetroit? Our reporters show up in neighborhoods across Detroit — listening to residents, hosting community conversations, and reporting on the issues that shape life in this city.
Detroit Mayor Mary Sheffield talks with Detroit employees at a press conference announcing an anticipated summer wage boost for about 900 employees. Credit: City of Detroit Flickr
Editor’s note: This story first appeared in Stephen Henderson’s “I Have Questions” Substack. Henderson is the founder and executive advisor for BridgeDetroit.
Mayor Mary Sheffield presented her first budget proposal to city council March 9, and it’s filled with promising investment and innovations — a strong opening offer to the city’s legislative branch.
But her proposal also arrived with an under-reported good-news/bad-news dissonance about the city’s debt.
The good news is that the massive borrowing that drove the city to the largest municipal bankruptcy in U.S. history is steadily declining. Each year, Detroit sends less money to bondholders than it did the year before. That was unimaginable just 15 years ago.
The bad news: The city’s contribution to debt of a different kind — the cost of pension promises from the past — continues to rise. And the tax system that Detroit uses, which is fueled by an unorthodox mix of sin and income taxes, remains one of the most burdensome in the entire country. It leaves few good options to solve the long-term financial issues.
The truth? This is about as good as we might expect, given how low the city sunk before bankruptcy. Things are generally headed in the right way — the books are balanced (for the 13th year in a row), borrowing has been kept to a reasonable minimum, and the mayor is talking tax cuts, not increases.
But the strain of long-ago promises is bowing the fiscal infrastructure, and unless something drastic is done to actually increase revenue, it will be the middle of the century before Detroit sees a reasonable overall burden from its liabilities.
Three observations from Mayor Sheffield’s budget presentation:
Detroit’s bonded debt is falling
The city issues two kinds of bonds to get cash that’s used mostly for public infrastructure and facilities. It also sold bonds a few years ago to finance demolition of tens of thousands of abandoned homes.
Unlimited Tax bonds are paid with direct taxes that residents agree to levy on themselves. At the beginning of the bankruptcy, Detroiters had borrowed about $370 million in these kinds of bonds. But over the next 10 years, the city will see that liability drop from around $53 million per year to $36 million, and then to just about $16 million by 2044.
Limited Tax bonds are paid out of the city’s general fund, which means money spent on this borrowing comes from the same source that provides city services, like police, fire, parks and garbage. At the beginning of the bankruptcy, Detroit owed more than $600 million from this kind of borrowing. But over the next 10 years, this debt will drop from around $89 million to $75 million, and then to $57 million by 2044.
These drops reflect the last 10 years of limited borrowing and fiscal discipline, which has put Sheffield in a strong position to make some changes. As debt rolls off the books, it clears tax obligations for residents and makes room for city government to invest in more or different services.
Sheffield’s first budget includes a tax cut — these numbers help make that move possible, and responsible.
Pension costs are rising
The key word there is “costs.”
Because in truth, the city’s overall pension burden is going down, just like the rest of the debt. But because of the way pension payments were structured after the bankruptcy, the city’s contribution to legacy costs is actually going up — and will continue to go up for the next 10 years. The $73 million Mayor Sheffield allocates in her 2027 budget for pension contributions grows to $124 million per year by 2036, and doesn’t go back below $75 million until 2050.
Ouch.
There’s some good news in this part of the budget, to be sure. The overall decrease in pension obligations is one — before the bankruptcy, Detroit’s unfunded pension gap was $3.5 billion.
The other is the “easing” of the burden on the funds the city uses for services. After the bankruptcy, Detroit got 10 years to skip pension payments before resuming them in 2024. In that time the city was able to build up a pension protection fund that is nearly matching the city’s general fund contribution right now. Combined with money from the grand bargain (about $800 million contributed by foundations and some other institutions to help Detroit exit the bankruptcy), that means Detroit gets to grow into making the full payments from the general fund.
But overall, this is a stiff burden for a long time — and there’s no ethical way out of it. Detroit promised retirees this money, and the final settlement of the bankruptcy confirmed they should be paid, though there were adjustments to health care costs and some cost-of-living adjustments.
The tax jumble
Detroit’s unusual and burdensome tax structure is the wild dynamic that makes the debt picture more ominous, and harder to solve.
Let’s start with the overall rate, which is higher by at least half than other major cities like Chicago, Houston and Atlanta. (See the national property-tax study done by the Lincoln Institute of Land Policy.)
Tax structure is a problem, too. The property tax rate is sky high, but it only yields around $200 million per year. Meanwhile, casino taxes (which now include internet gaming taxes) yield more than 50% more, at $337 million. In most cities, property tax rates are lower, and the yield places them at the top of the revenue pyramid.
The city’s income tax has grown over time, and provides the largest yield. But it’s less reliable, over time, than a property tax should be.
It’s an upside-down revenue structure, with high rates and low yields, which makes it difficult for any leader to make smart decisions about reform.
Lower the property tax? Ok. Former Mayor Mike Duggan began that trend, and Sheffield proposes to continue it. But that means less money to attack the swelling pension obligations. And you can’t lower it too much, or there won’t be sufficient money for infrastructure or services or other civic investment.
Eliminate the wagering tax? No way. The city’s too dependent on it. The loss of revenue would instantly unbalance the books and likely send the city back to bankruptcy — an unstructured default that would be much worse than the last insolvency, which was managed by the state.
The income tax? It’s the state’s highest, but it too is critical to the city’s financial survival.
Detroit needs MORE money, really, to tame the growing pension obligations and retire them earlier.
Detroiters want — many people would see NEED — to pay fewer taxes, but that relief comes at the cost of not being able to reframe pension obligations.
No way out. Few ways up.
The challenge to city leadership presses harder with each passing year.
Henderson is a native Detroiter who has nearly 30 years of journalism experience as a writer and editor, and a deep-rooted connection with the city that birthed him.
A winner of the Pulitzer Prize,...
More by Stephen Henderson
Good debt, bad debt: Detroit is paying down its bonds — but pension costs are rising
Share this:
Editor’s note: This story first appeared in Stephen Henderson’s “I Have Questions” Substack. Henderson is the founder and executive advisor for BridgeDetroit.
Mayor Mary Sheffield presented her first budget proposal to city council March 9, and it’s filled with promising investment and innovations — a strong opening offer to the city’s legislative branch.
But her proposal also arrived with an under-reported good-news/bad-news dissonance about the city’s debt.
The good news is that the massive borrowing that drove the city to the largest municipal bankruptcy in U.S. history is steadily declining. Each year, Detroit sends less money to bondholders than it did the year before. That was unimaginable just 15 years ago.
The bad news: The city’s contribution to debt of a different kind — the cost of pension promises from the past — continues to rise. And the tax system that Detroit uses, which is fueled by an unorthodox mix of sin and income taxes, remains one of the most burdensome in the entire country. It leaves few good options to solve the long-term financial issues.
The truth? This is about as good as we might expect, given how low the city sunk before bankruptcy. Things are generally headed in the right way — the books are balanced (for the 13th year in a row), borrowing has been kept to a reasonable minimum, and the mayor is talking tax cuts, not increases.
But the strain of long-ago promises is bowing the fiscal infrastructure, and unless something drastic is done to actually increase revenue, it will be the middle of the century before Detroit sees a reasonable overall burden from its liabilities.
Three observations from Mayor Sheffield’s budget presentation:
Detroit’s bonded debt is falling
The city issues two kinds of bonds to get cash that’s used mostly for public infrastructure and facilities. It also sold bonds a few years ago to finance demolition of tens of thousands of abandoned homes.
Unlimited Tax bonds are paid with direct taxes that residents agree to levy on themselves. At the beginning of the bankruptcy, Detroiters had borrowed about $370 million in these kinds of bonds. But over the next 10 years, the city will see that liability drop from around $53 million per year to $36 million, and then to just about $16 million by 2044.
Limited Tax bonds are paid out of the city’s general fund, which means money spent on this borrowing comes from the same source that provides city services, like police, fire, parks and garbage. At the beginning of the bankruptcy, Detroit owed more than $600 million from this kind of borrowing. But over the next 10 years, this debt will drop from around $89 million to $75 million, and then to $57 million by 2044.
These drops reflect the last 10 years of limited borrowing and fiscal discipline, which has put Sheffield in a strong position to make some changes. As debt rolls off the books, it clears tax obligations for residents and makes room for city government to invest in more or different services.
Sheffield’s first budget includes a tax cut — these numbers help make that move possible, and responsible.
Pension costs are rising
The key word there is “costs.”
Because in truth, the city’s overall pension burden is going down, just like the rest of the debt. But because of the way pension payments were structured after the bankruptcy, the city’s contribution to legacy costs is actually going up — and will continue to go up for the next 10 years. The $73 million Mayor Sheffield allocates in her 2027 budget for pension contributions grows to $124 million per year by 2036, and doesn’t go back below $75 million until 2050.
Ouch.
There’s some good news in this part of the budget, to be sure. The overall decrease in pension obligations is one — before the bankruptcy, Detroit’s unfunded pension gap was $3.5 billion.
The other is the “easing” of the burden on the funds the city uses for services. After the bankruptcy, Detroit got 10 years to skip pension payments before resuming them in 2024. In that time the city was able to build up a pension protection fund that is nearly matching the city’s general fund contribution right now. Combined with money from the grand bargain (about $800 million contributed by foundations and some other institutions to help Detroit exit the bankruptcy), that means Detroit gets to grow into making the full payments from the general fund.
But overall, this is a stiff burden for a long time — and there’s no ethical way out of it. Detroit promised retirees this money, and the final settlement of the bankruptcy confirmed they should be paid, though there were adjustments to health care costs and some cost-of-living adjustments.
The tax jumble
Detroit’s unusual and burdensome tax structure is the wild dynamic that makes the debt picture more ominous, and harder to solve.
Let’s start with the overall rate, which is higher by at least half than other major cities like Chicago, Houston and Atlanta. (See the national property-tax study done by the Lincoln Institute of Land Policy.)
Tax structure is a problem, too. The property tax rate is sky high, but it only yields around $200 million per year. Meanwhile, casino taxes (which now include internet gaming taxes) yield more than 50% more, at $337 million. In most cities, property tax rates are lower, and the yield places them at the top of the revenue pyramid.
The city’s income tax has grown over time, and provides the largest yield. But it’s less reliable, over time, than a property tax should be.
It’s an upside-down revenue structure, with high rates and low yields, which makes it difficult for any leader to make smart decisions about reform.
Lower the property tax? Ok. Former Mayor Mike Duggan began that trend, and Sheffield proposes to continue it. But that means less money to attack the swelling pension obligations. And you can’t lower it too much, or there won’t be sufficient money for infrastructure or services or other civic investment.
Eliminate the wagering tax? No way. The city’s too dependent on it. The loss of revenue would instantly unbalance the books and likely send the city back to bankruptcy — an unstructured default that would be much worse than the last insolvency, which was managed by the state.
The income tax? It’s the state’s highest, but it too is critical to the city’s financial survival.
Detroit needs MORE money, really, to tame the growing pension obligations and retire them earlier.
Detroiters want — many people would see NEED — to pay fewer taxes, but that relief comes at the cost of not being able to reframe pension obligations.
No way out. Few ways up.
The challenge to city leadership presses harder with each passing year.
Related
Stephen Henderson
Henderson is a native Detroiter who has nearly 30 years of journalism experience as a writer and editor, and a deep-rooted connection with the city that birthed him. A winner of the Pulitzer Prize,... More by Stephen Henderson