On April 21, City of Detroit officials approved a budget for Fiscal Year (FY)2023 that begins July 1. The overall $2.5 billion budget is balanced, with $1.2 billion coming from the discretionary General Fund. This marks a nearly five percent increase compared to the current-year budget and has been lauded as a “return to normal” spending plan as the economic impacts of the pandemic wind down. It makes targeted investments in key areas of the city such as beautification, transit, city reserves, and pension funds.
The city’s FY2023 General Fund budget restores the pre-pandemic status quo by managing fiscal risks and providing moderate spending increases. Notably, the plan calls for increased savings. The city’s strong financial standing is bolstered by recovering income tax and casino wagering tax revenues.
The city does not plan to use any of its $826 million allotment of one-time federal American Rescue Plan Act (ARPA) funds to support ongoing spending, which is a good thing for the long-term health of the budget. Instead, these resources will add stability to the city’s budget and financial standing by accelerating projects aimed at improving the tax base and community well-being while preserving reserves and resources that would have otherwise been used to fund improvements and shortfalls.
While all good news, the city faces a few risks related to the long-term sustainability of its baseline economic forecast. Here are four main takeaways that Detroiters should know about the FY2023 budget.
First, while it is possible the city will gain tax revenue from development projects that are underway, the risk of failing to reach revenue targets is more significant. These risks include economic impacts from changing workplaces, additional COVID-19 related economic disruptions, and an unplanned recession.
Second, the city must remain proactive to maintain balanced budgets in the near future. Detroit’s long-term baseline spending pressures outpace forecasted revenue growth. Without corrective actions, this will create a minor, but sustained, budget imbalance starting in FY2027. Those baseline spending pressures were identified before the recent increase in inflation caused by the war in Ukraine and continued supply chain issues. The city has exhausted most revenue enhancement options, so this will require spending reductions.
The city’s reliance on one-time revenues is a third takeaway. Much of the spending related to improvements in infrastructure, neighborhood beautification, and addressing equity issues rightly use one-time contributions. However, other programs, like the Right to Counsel ordinance passed on May 10 and the Property Tax Over Assessments Program for legacy Detroiters, rely on one-time resources for programs that are intended to span many years. The Right to Counsel ordinance provides $6 million in federal COVID relief funds and relies on philanthropic partners to fund the program’s first year. This week, the Rocket Community Fund committed $12 million over three years to support the program, but as of now, there are no plans to sustain Right to Counsel long term.
Other programs use one-time revenue sources to fund services with needs that may extend beyond available resources. Examples of these include $2 million that is allocated to create a Property Tax Over Assessments Program for legacy Detroiters, $16.4 million for blight remediation and neighborhood beautification programs, and $20.7 million for maintaining buildings, parks and infrastructure. While this spending may be necessary for the city’s growth, it may prove to be unsustainable in the long run because the city’s baseline revenues don’t grow sufficiently to support the additional planned investments.
A final takeaway focuses on the city’s annual pension contributions that are set to resume in 2024. The city has been setting aside savings to confront future pension obligations. The city began depositing hundreds of millions of dollars into a Retiree Protection Fund established in 2018 to function as a savings account to help cushion the blow of the upcoming pension cliff. However, the savings only go so far. Eventually, the General Fund will be responsible for financing pensions promised to former city employees.
Overall, the city is in a good place fiscally. The FY2023 budget is balanced and much of that can be credited to the city’s fiscal practices and favorable revenue adjustments.
There is little reason for the Financial Review Commission, which monitors city budgets as a post-bankruptcy fiscal monitoring, to reject the city’s budget. However, structural budget problems must be monitored and considered for the city’s long-term financial health to remain solid. Pension contribution payments and the use of one-time contributions to fund new departments and services present real risks to the city’s long-term fiscal health. The city has to continue attracting development to grow its tax base and increase city revenues to sustain new, acquired expenditures or use more restraint when considering new expenditures to live within realistically expected revenues.
You can find CRC’s full analysis of Detroit’s FY2023 city budget here.