Even after bankruptcy, Detroit is in debt

The city of Detroit owes more than it has available to pay its bills – $1,600 per taxpayer, according to a national watchdog group. The news comes more than a decade after the city entered federal bankruptcy court.

The Financial State of the Cities, published in late February by Truth in Accounting, reports that the nation’s 75 of the nation’s largest cities had $300.7 billion in debt. Public officials in 53 cities “have not included the full cost of government in their budget calculations,” said the Illinois-based nonprofit focused on public information about governmental finances.

Detroit had $4.8 billion in bills but only $4.4 billion available at the end of the 2024 fiscal year, leaving a shortfall of $381.8 million, or $1,600 per taxpayer, the report said.

Detroit is $1.6 billion short of the money it needs to pay its pension obligations and $1.4 million short of what it needs to pay its retirees’ health insurance expenses, according to Truth in Accounting. The report does not amortize any gains or losses in market value in its calculations. “This provides a clearer picture of the true financial condition, without smoothing out or deferring the effects of market fluctuations,” it said.

The city of Detroit also owes $2.4 billion on bonds and $2.6 billion on what the report calls “other liabilities.” It has $4.4 billion of “assets available to pay bills.”

Truth in Accounting used Annual Comprehensive Financial Reports as well as reports on the cities’ retirement systems. It calculated unfunded pension and health insurance liabilities “by comparing the estimated future benefit payments, adjusted to today’s dollars, with the market value of the plan investments.” Too many cities, it said, make unrealistic assumptions.

“Detroit’s experience serves as a stark reminder of the long-term consequences of failing to fund these obligations properly,” Truth in Accounting said.

The city entered federal bankruptcy proceedings in 2013, which reduced its pension obligations by $1.3 billion. Pensioners in the general city retirement system who had received an average payout of $20,922 before the bankruptcy received an average of $19,981 in fiscal year 2022, according to the Citizens Research Council of Michigan, which cited city numbers. Had pensioners received inflation-based adjustments, they would have received $28,377 in fiscal year 2022, the council noted.

Many cities have made their former employees significant creditors, said James Hohman, a director of fiscal policy at the Mackinac Center for Public Policy who was not involved in the report.

“Local governments in Michigan are not supposed to get in financial trouble,” Hohman told Michigan Capitol Confidential in an email. “They are supposed to balance their budgets and ask their voters if they want to go into debt. But city officials have turned their own workforces into the government’s largest creditors by underfunding pensions. This is bad for both retirees and the city’s taxpayers.”

Detroit has $4.4 billion worth of assets it can use to pay its bills, which total $4.8 billion, according to the report. Half of its total revenues (50.4%) came from taxes it collected. Its own taxes delivered $1.08 billion to the treasury, which was $174.5 more than in fiscal year 2022. Most of that increase ($135.6 million) came from “updated data on tax collections.”

The Truth in Accounting report argues that good governance depends on a comprehensive and timely accounting of government’s obligations and financial practices. “Since all levels of government derive their powers from the consent of the governed, government officials are responsible for reporting their actions and results to the electorate in truthful and understandable ways,” it said.

City finances can be weakened by poor management of a city’s obligations to its retirees for work they did years or even decades ago. The report cites insufficient transparency and accountability in both pension plans and retiree health benefits, which leads to understated obligations. This was one of many “accounting tricks” by which city governments appear to meet balanced-budget requirements while not doing so, the report said.