It hardly required a federal bankruptcy court’s pronouncement to know Detroit was broke in 2013. At the end of Fiscal Year (FY) 2013, the city had $3.7 million in General Fund cash on hand—a minor amount relative to the $791.3 million it spent that year.
The city ended the last fiscal year with $544.3 million in cash on hand—quite the turnaround. And this past week, Moody’s Investor Service bumped the City of Detroit’s credit rating up to Ba1 with a positive outlook from Ba2. Part of the bump was attributed to “Very strong cash and available fund balance ratios compared to peers.”
Why is cash important? On payday, city employees want cash. Bondholders that loaned the city money want repayment in cash. Likewise, private contractors want cash for services rendered. And an inability to “pay [bills] as they become due” is the definition of bankruptcy. So often the city’s financial fortunes are described in terms of debt and revenue, surpluses and deficits, but cash is what is needed to pay bills on time and in full.
In the bad years before bankruptcy, city resources were consumed by payments to bondholders and pension payments to retirees. There was hardly any money remaining to pay for public services. Services deteriorated further. More people left. Fewer taxpayers meant fewer tax receipts—the main source of cash for the city. And on and on the downward spiral went.
The city declaring bankruptcy was merely formal admonition of what city residents already knew. In bankruptcy, the city broke its contractual promises to bondholders and retirees to free up cash flow. Ten years later, the city’s decision to restructure its debts appears to have been a success.
Since bankruptcy, Detroit has had more cash on hand than at any point in recent history. Based on the approved FY2024 budget, the city will have stashed $150 million away in a budget reserve for a rainy day, and another $455 million in a special trust – the Retiree Protection Fund (RFP) – specifically to address pension liabilities that were restructured in bankruptcy.
Under state law the city is required to maintain a minimum budget reserve of five percent of projected General Fund expenditures. At its current level, the balance of the budget reserve is 11 percent of General Fund expenditures, over twice what is required by state law. In effect, the city has insured itself from recession, man-made and natural disasters, and simple miscalculations of revenues and expenditures. Should any of these occur to disrupt tax receipts, or tax receipts come in lower than anticipated, the city may withdraw money from the budget reserve. Likewise, the city has insured itself from volatility associated with required future pension contributions.
Contractual liabilities attached to Detroit’s pension promises were curtailed, but not eliminated, in bankruptcy. The city’s two pension funds (General Retirement System and Police and Fire Retirement System) were closed, benefits to retirees were cut, and the city received a ten-year respite from payments toward those promises. In part, that is how the city has been able to amass cash since bankruptcy, it hasn’t had to make a pension payment.
But those payments resume in FY 2024. The city owes $148.9 million in a combined payment to its two closed pension plans next fiscal year. Of that amount, $18.7 million will be paid by private donors (as a part of the city’s bankruptcy settlement), $73 million will be paid from the General Fund, and $57 million will be withdrawn from the RPF. Absent the RPF, the city would have faced a steep “pension cliff.”
Assets in the RPF will lessen the burden of pension contributions for the next 15 years. Based on the city’s long-term financial projections, the RPF will be exhausted in FY 2040. But this end date could be hastened by recession and market turbulence. If the city’s pension fund investments underperform, more money from the city – either from the RPF or the General Fund – will be needed to make up the difference. If pension contributions increase in the short-term, the city must either cut spending on other priorities to free up money for pension payments, or further draw down the RPF and thereby sacrifice future assistance from the special trust.
For these reasons, it is incumbent on elected officials and citizens to monitor the city’s cash on hand as closely and carefully as other financial metrics. Cash is what is needed to pay bills on time and in full, a basic financial function that the city has previously failed to do. Its basic failure in this area spoke to not merely a failure to fulfill financial contracts but the social contract as well, and that failure cannot happen a second time.
James Tatum is director of the Detroit Bureau of the Citizens Research Council of Michigan