201112 crc legacy costs and indebtedness of the city of detroit rpt373

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Citizens ResearCitizens ResearCitizens ResearCitizens ResearCitizens Research Cch Cch Cch Cch Councilouncilouncilouncilouncilof Michiganof Michiganof Michiganof Michiganof Michigan

Board of DirectorsChair Vice Chair Treasurer

Jeffrey D. Bergeron Terence M. Donnelly Aleksandra A. Miziolek

John J. GasparovicBorgWarner Inc.

Ingrid A. GreggEarhart Foundation

Marybeth S. HoweWells Fargo Bank

Nick A. KhouriDTE Energy Company

Daniel T. LisKelly Services, Inc.

Sarah L. McClellandJPMorgan Chase & Co.

Michael P. McGeeMiller, Canfield, Paddock and Stone PLC

Aleksandra A. MiziolekDykema Gossett PLLC

Jim MurrayAT&T Michigan

Jeffrey D. BergeronErnst & Young LLP

Michael G. BickersPNC Financial Services Group

Beth ChappellDetroit Economic Club

Mark A. DavidoffDeloitte LLP

Terence M. DonnellyDickinson Wright PLLC

Randall W. EbertsW. E. Upjohn Institute

David O. EgnerHudson-Webber FoundationNew Economy Initiative

Laura FournierCompuware

Eugene A. Gargaro, Jr.Manoogian Foundation

Cathy NashCitizens Bank

Paul R. ObermeyerComerica Bank

Kevin ProkopRockbridge Growth Equity, LLC

Lynda RossiBlue Cross Blue Shield of Michigan

Jerry E. RushMeritor, Inc.

Michael A. SemancoHennessey Capital LLC

Terence A. Thomas, Sr.Thomas Group Consulting, Inc.

Kent J. VanaVarnum

Theodore J. VogelCMS Energy Corporation

Advisory DirectorLouis Betanzos

Board of TrusteesChair

Eugene A. Gargaro, Jr.

Terence E. AdderleyKelly Services, Inc.

Jeffrey D. BergeronErnst & Young LLP

Stephanie W. BergeronWalsh College

David P. BoylePNC

Beth ChappellDetroit Economic Club

Mary Sue ColemanUniversity of Michigan

Matthew P. CullenRock Ventures LLC

Tarik DaoudLong Family Service Center

Stephen R. D’ArcyDetroit Medical Center

John M. DunnWestern Michigan University

David O. EgnerHudson-Webber Foundation

New Economy Initiative

David L. EislerFerris State University

David G. FreyFrey Foundation

Mark T. GaffneyEugene A. Gargaro, Jr.Manoogian Foundation

Ralph J. GersonGuardian Industries Corporation

Eric R. GilbertsonSaginaw Valley State University

Allan D. GilmourWayne State University

Alfred R. Glancy IIIUnico Investment Group LLC

Thomas J. HaasGrand Valley State University

James S. HilboldtThe Connable Office, Inc.

Paul C. HillegondsDTE Energy Company

Daniel J. KellyDeloitte. Retired

David B. KennedyEarhart Foundation

Mary KramerCrain Communications, Inc.

Gordon KraterPlante & Moran PLLC

David LeitchFord Motor Company

Edward C. Levy, Jr.Edw. C. Levy Co.

Daniel LittleUniversity of Michigan-Dearborn

Sam LoganMichigan Chronicle

Alphonse S. LucarelliErnst & Young LLP, Retired

Sarah L. McClellandJPMorgan Chase & Co.

Paul W. McCrackenUniversity of Michigan, Emeritus

Patrick M. McQueenMcQueen Financial Advisors

Robert MilewskiBlue Cross Blue Shield of Michigan

Glenn D. MrozMichigan Technological University

Mark A. MurrayMeijer Inc.

Cathy H. NashCitizens Bank

James M. NicholsonPVS Chemicals

Donald R. ParfetApjohn Group LLC

Sandra E. PierceCharter One

Philip H. PowerThe Center for Michigan

Keith A. PrettyNorthwood University

John Rakolta Jr.Walbridge

Douglas B. RobertsIPPSR- Michigan State University

Milt RohwerFrey Foundation

Irving RoseEdward Rose & Sons

George E. RossCentral Michigan University

Gary D. RussiOakland University

Nancy M. SchlichtingHenry Ford Health System

John M. SchreuderFirst National Bank of Michigan

Lloyd A. SempleUniversity of Detroit Mercy School of LawLou Anna K. SimonMichigan State University

S. Martin TaylorAmanda Van DusenMiller, Canfield, Paddock and Stone PLC

Kent J. VanaVarnum

Theodore J. VogelCMS Energy Corporation

Gail L. WardenHenry Ford Health System,Emeritus

Jeffrey K. WillemainDeloitte.

Leslie E. WongNorthern Michigan University

Citizens Research Council of Michigan is a tax deductible 501(c)(3) organization

C I T I Z E N S R E S E A R C H C O U N C I L O F M I C H I G A N

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C i t i z e n s R e s e a r c h C o u n c i l o f M i c h i g a n iii

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Contents

Overview ..................................................................................................................... 1Pension Obligations and Other Post Employment Benefit Obligations, Defined ................... 2Indebtedness ............................................................................................................... 5

Bonded Debt Defined .............................................................................................. 5

Future Costs Associated with Employees ................................................................... 7City of Detroit Retirement Systems ................................................................................. 7

The General Retirement System ............................................................................... 8The Police and Fire Retirement System ..................................................................... 9Pension Obligation Certificates ............................................................................... 10

Other Post Employment Benefits .................................................................................. 13

Bonded Debt Service ................................................................................................. 16Bond Ratings .............................................................................................................. 16Detroit Bonded Debt ................................................................................................... 19

Other Future Obligations .......................................................................................... 22Conclusions ............................................................................................................... 22Addendum ................................................................................................................. 23

CRC Report

C i t i z e n s R e s e a r c h C o u n c i l o f M i c h i g a niv


Tables

Table 1 City of Detroit Legacy Costs and Other Liabilities, June 30, 2010 ............................ 1

Table 2 Investment Returns ............................................................................................ 4

Table 3 City of Detroit Appropriations for Personal Services, 2011-12.................................. 7

Table 4 General Retirement System, Required Employer Contributionas a Percent of Payroll Valuation of June 30, 2010 ................................................. 8

Table 5 Service Payments on 2005 and 2006 Certificates of Participation .......................... 11

Table 6 Pension Obligation Certificates Outstanding Debt June 30, 2010 ........................... 11

Table 7 Detroit Retirement Systems, June 30, 2010......................................................... 12

Table 8 Health and Life Insurance Benefit Plan, FY 2009-10 ............................................. 13

Table 9 Other Post Employment Benefits, June 30, 2010 ................................................. 14

Table 10 Changes in Long-Term Obligation for Accrued Other Post Employment Benefits ..... 14

Table 11 Long Term Bond Ratings ................................................................................... 16

Table 12 Bond Ratings for Select City Governments, 2010 ................................................. 17

Table 13 City of Detroit General Obligation Debt Ratings ................................................... 18

Table 14 City Government Expenditures and Outstanding Debt for the Largest Cities, 2006 .. 18

Table 15 Debt Service Requirements 2011-2040 ............................................................... 19

Table 16 City of Detroit Limited Tax General Obligation Debt Service Schedule .................... 20

Table 17 Michigan Cities: Debt Service Rates, FY2010 ...................................................... 21

Table 18 City of Detroit Budget Overview, FY2012 ............................................................ 23

C i t i z e n s R e s e a r c h C o u n c i l o f M i c h i g a n 1


Overview

million of unfunded actuarial accrued liability (UAAL)in the General Retirement System, $134.2 of UAALin the Police and Fire Retirement System. Becausepension obligation certificates were used to fund thepension systems, the General Retirement System was87.1 percent funded and the Police and Fire Retire-ment System was 96.6 percent funded on June 30,2010 (the General system was 65.8 percent fundedand the Police and Fire system was 79.5 percentfunded if the value of the pension obligation certifi-cates was excluded).

Detroit also had $5.0 billion of UAAL for other postemployment benefits, but the city continues to paythese liabilities on a pay-as-you-go basis. If the cityhad made the annual required contribution to fundOPEBs on an actuarial basis in fiscal 2009-10, it wouldhave allocated $313.9 million, rather than the $149.7million actual payment; an additional $164.2 millionwould have been paid from city accounts to fundfuture liabilities, reducing the amount available forcurrent operations. Nonetheless, the city govern-ment’s future liability for non-pension benefits prom-ised to city retirees is about $7,000 per resident (SeeTable 1).

As City of Detroit officials struggle to reduce the citygovernment’s deficit and provide essential services,a key fiscal consideration concerns the city’s liabilityfor future payments. These costs include legacy costsfor unfunded pension and other post employmentbenefits (OPEBs) for city government employees; theannual cost of pension obligation certificates; theprincipal, interest, hedging and other costs associ-ated with bonded debt; and other contractual obli-gations of the city.

At June 30, 2010, all funds of the City of Detroit had$6.4 billion of outstanding bonded debt, including$5.2 billion attributable to the Water and Seweragesystem, and over $600 million of other future obli-gations. Included in the $6.4 billion of outstandingbonded debt was $1.0 billion of general obligationdebt, which equates to debt of about $1,400 perresident of the city. There will be $467.7 million ofinterest due on this $1.0 billion of principal; includ-ing principal and interest on general obligation debtequates to more than $2,000 per resident.

The city had $1.5 billion of outstanding pension ob-ligation certificates and other unfunded costs asso-ciated with personnel totaling $5.6 billion: $481.5

Table 1City of DetroitLegacy Costs and Other Liabilities, June 30, 2010(Dollars in Millions)

Type of Debt, Obligation, or Liability AmountNon General Obligation Bonded Debt $5,413.0Other Post Employment Benefits UAAL 4,971.2Pension Certificates of Participation 1,479.7General Obligation Bonded Debt 1,010.3General Retirement System UAAL 481.5Police and Fire Retirement System UAAL 134.2Other Obligations 618.5 Total $14,108.4

Source: 2010 CAFR, Pension System Financial Reports.

CRC Report

C i t i z e n s R e s e a r c h C o u n c i l o f M i c h i g a n2

The amounts listed in Table 1 for bonded debt andcertificates represent the principal outstanding; asnoted, the amounts that will be paid on those liabil-ities will also include interest and could include oth-er costs as well. Payments on the vast majority ofthe debt will be spread out decades into the future.Nonetheless, payments on limited tax, general obli-gation debt contributes to the city’s cash flow prob-lems, and further issuance of such debt will makecash flow that much more precarious. Payments forpensions and retiree benefits are also stressing thecity’s cash flow, even though the payments are in-sufficient to reduce the unfunded actuarial accruedliabilities.

Just as the kinds of future liability differ, the conse-quences of failing to pay these obligations when theybecome due also differ.

In the city’s current (fiscal year 2011-12) budget,the accumulated prior years’ deficit is recorded as$208.9 million. This is 13.2 percent of the total ap-propriations for general city agencies; it is slightlymore than the net amount expected to be receivedfrom the city’s property tax; and it is equal to about$300 per resident of the city. The budget defers$153.7 of the accumulated prior years’ deficit to fu-ture periods, leaving a current appropriation of $55.2million to satisfy the deficit. The operating deficit isan addition to the bonded debt, legacy costs, andother obligations described above.

Any credible deficit elimination plan must incorpo-rate a means to resolve the city’s future liabilities.

Any discussion of shifting responsibility for provid-ing services, whether to a regional transportationentity or a regional water and sewerage authority,or of controlling the growth of future costs, mustalso consider the obligated future costs that are as-sociated with the services that are now provided bythe City of Detroit.

Detroit’s mayor, Michigan’s governor, and a host ofcommentators have raised the possibility of stateappointment of an emergency manager for the cashstrapped city. This report notes the authority a fi-nancial manager would have relative to the city’svarious kinds of debt and liabilities.1

Detroit municipal income tax revenues declined from$278.3 million in 2006-07 to $212.7 million in 2009-10; current year property tax revenues for generaloperations declined from $183.7 million in 2006-07to $168.0 million in 2009-10. With local tax reve-nue reductions exacerbated by reductions in staterevenue sharing payments, the city’s strategy of fi-nancing current operations with future revenues isnot sustainable. Without major structural changes,limited tax debt, pensions, and other post employ-ment benefits will continue to absorb increasingamounts of the general fund, leaving less and lessfor essential public services.

Pension Obligations and Other PostEmployment Benefit Obligations, Defined

Pension plans are established to hold the assets thatwill be needed to pay the pensions that have beenpromised to qualified employees when those pensions

Report Sources

This report includes information from the June 30, 2010 City of Detroit Comprehensive Annual FinancialReport (CAFR), annual reports from the boards of trustees of the retirement systems for the fiscal yearending June 30, 2010 and financial reports for the two retirement systems, the city’s 2011-12 budget,the prospectus for the distributable state aid general obligation Series 2010 limited tax bonds, and othersources. The CAFR and other reports separate city government activities into general governmentalactivities and business-type activities which include Water, Sewerage, Transportation, and Parking.

1 For a more complete description of the Local Governmentand School District Fiscal Accountability Act, PA 4 of 2011, pleasesee Citizens Research Council Report 368, April, 2011www.crcmich.org/PUBLICAT/2010s/2011/rpt368.html.

2 June 30, 2010 City of Detroit Comprehensive Annual Finan-cial Report, page 29.

LEGACY COSTS AND INDEBTEDNESS OF THE CITY OF DETROIT


are due. If the city receives labor services from anemployee and a pension is part of that employee’scompensation, the city must deposit sufficient fundsto pay that future obligation in a trust fund.

Pension obligations derive from contractual agree-ments between the city government and city em-ployee unions. The Michigan Constitution (ArticleIX, Section 24) provides that “The accrued financialbenefits of each pension plan andretirement system of the state andits political subdivisions shall be acontractual obligation thereofwhich shall not be diminished orimpaired thereby.” This does notmean that the state insures orguarantees payment from localgovernments, but that individualswho have earned a pension froma public employer have the rightto sue to have the contractual ob-ligation met by that employer.

The Michigan Constitution also pro-vides that “Financial benefits aris-ing on account of service rendered in each fiscalyear shall be funded during that year and such fund-ing shall not be used for financing unfunded accruedliabilities.” “Normal costs” are the costs associatedwith the service rendered in that fiscal year. Normalcosts can be reduced if the government negotiateslower pension benefits going forward, switches to adefined contribution plan, or closes the defined ben-efit system. If the city were to close the definedbenefit plan, the obligations to past employees wouldremain and the city would be required to continuefunding those liabilities. Closing the defined benefitplan could result in annual city contributions increas-ing in the near term.

“Unfunded actuarial accrued liabilities” (UAAL) is thedifference between the value of assets in the pen-sion fund and the present value of all of the futurepension payments that have been earned by em-ployees. Employers (and employees in systemswhere they participate in funding) are supposed topay all of the “normal cost” and pay enough of theunfunded actuarial accrued liabilities to retire thatobligation over not more than 30 years (some sys-tems have adopted shorter amortization periods).

Unfunded accrued actuarial liabilities may exist for anumber of reasons: not enough was paid into thefund annually; the assets in the fund lost value due tostock market losses or other losses; the assumptionsabout future earnings or longevity or inflation or otherfactors were incorrect; or other reasons. Most definedbenefit retirement systems (those are systems thatpromise a defined pension payment based on years of

service and other factors) have someunfunded actuarial accrued liability,and experts consider 80 percentfunding to be acceptable for publicsystems that are expected to existin perpetuity. Failure to make re-quired annual payments into thepension fund may result in higherrequired contributions in future yearsto make up the difference, but if thevalue of system assets such asstocks, bonds, and real estate in-crease above the assumed rate, thefuture payments will decrease ormay even be unnecessary.

If the pension fund is unable tomake required payments to retirees, retirees maysue to force payment. This could trigger state inter-vention under PA 4 of 2011. In some instances whereretirees have sued, a judge has ordered the imposi-tion of a judgment levy to fund pensions. Imposi-tion of a judgment levy without the prior approval ofthe local governing body is one of the events thatcan trigger a preliminary review under PA 4.

Some governments, including Detroit, have optedto fund their pension systems with the proceeds fromthe sale of bonds or certificates of indebtedness.This strategy is a bit of a gamble that could work tothe government’s advantage if the arbitrage that isthe basis of the concept works as expected (arbi-trage involves borrowing at a lower rate, usuallybecause it is tax free, and investing the proceeds ata higher rate of return). However, if the costs ofborrowing exceed the return on invested proceeds,this strategy can both increase costs and increasethe consequences associated with nonpayment. Forexample, in 2005, Detroit issued $640 million in pen-sion funding certificates with interest rates rangingbetween 4.00 and 4.95 percent; more certificates

“The accrued financial ben-efits of each pension planand retirement system ofthe state and its politicalsubdivisions shall be a con-tractual obligation thereofwhich shall not be dimin-ished or impaired thereby.”Michigan Constitution (Ar-ticle IX, Section 24)

CRC Report


were issued in 2006. Proceeds were invested in thecity’s pension funds where the assumed actuarialrate of return was just under 8 percent. If the pen-sion plan assets grew at the assumed rate, the in-vested bond proceeds would have investment earn-ings sufficient to cover the debt service, with earningsleft over to support the plan. The risk associatedwith the arbitrage strategy is that the debt servicepayments are fixed, while the earn-ings on the invested proceeds de-pend on the earnings of the over-all pension plan, which fluctuatewith market conditions. It is pos-sible that the pension returns couldexceed the actuarial assumption,in which case the bonds wouldprove to be a good investment, orthe investment returns could fallshort of the actuarially assumedrate of return. In fact, the stockmarket has been extremely vola-tile in the years since the city soldpension certificates of participation:the S&P 500 stock market returnswere +11.6 percent in 2007; +1.9percent in 2008; -32.3 percent in 2009; and +12.4percent in 2010. Both of Detroit’s retirement sys-tems suffered negative composite returns in 2008and 2009 (See Table 2).

As will be described later in this report, other com-plexities can arise as well. “Other post employmentbenefits” (OPEBs) may include health, dental, vision,and life insurance promised to qualified employeeswhen they retire. Traditionally, OPEBs were paid ona pay-as-you-go basis; no reserves were built up, asfor pensions. In the case of Studier v. Michigan PublicSchool Employees’ Retirement Board, 698 N.W.2d

350 (MI Supreme Court 2005), thestate Supreme Court found that“health care benefits are not ‘ac-crued financial benefits’ and, thus,are not protected by Const 1963,art 9, S 24.”

In July 2004, the GovernmentalAccounting Standards Board(GASB) issued Statement No. 43and Statement No. 45 which es-tablished accounting and financialreporting standards for publicemployers that have defined ben-efit OPEBs. The standards wereintended to ensure that govern-ments account for the annual cost

of OPEB and for the unfunded actuarial accrued lia-bilities for those financial obligations. In essence,GASB requires that governments account for OPEBsjust as they account for pensions. There is no pen-alty for continuing to finance these obligations on apay-as-you-go basis, but the full amount of the un-

In the case of Studier v.Michigan Public School Em-ployees’ Retirement Board,698 N.W.2d 350 (MI Su-preme Court 2005), thestate Supreme Court foundthat “health care benefitsare not ‘accrued financialbenefits’ and, thus, are notprotected by Const 1963,art 9, S 24.”

Table 2Investment Returns

Total Fund Composite ReturnS&P 500 Stock General Police and FireMarket Returns System System

2010 12.4% 8.0% 16.9%2009 -32.3 -18.8 -14.82008 1.9 -4.3 -6.32007 11.6 18.9 17.42006 8.2 11.3 11.52005 7.6 8.3 8.2

Source: S&P 500 Stock Market Returns from www.economy.com/freelunch, CRC calculations of the annual growthfor July to June time periods; June 30, 2010 Financial Report: Police and Fire Retirement System of the City ofDetroit; June 30, 2010 Financial Report: Pension Plan of the General Retirement System of the City of Detroit.



funded future liability must appear in the annual fi-nancial reports of the government.

Since adoption of the GASB standards in 2004,prefunding of OPEB obligations has taken on great-er importance. Some governments (including Oak-land County) have borrowed to fund OPEB obliga-tions with the intent of reducingannual contributions. The risksassociated with this debt are thesame as those for pension fundingbonds with the added complexitythat, while pensions are constitu-tionally protected, OPEBs are not.Sale of OPEB funding bonds or cer-tificates locks the local governmentinto a liability which it would nototherwise have and which it couldpotentially avoid or reduce (to thedetriment of retirees).

Indebtedness

Governments incur other future li-abilities resulting from contractualand legal obligations. The CityDetroit has various kinds of debtand other future obligations, andthe penalties and consequencesassociated with the different kindsof liabilities vary from inconsequen-tial to very substantial. On June 30, 2010, the cityhad $5.7 billion of bonded debt outstanding, of which$1.0 billion was general obligation bonds backed bythe full faith and credit of the city. In addition, thecity’s governmental activities had debt of $2.0 bil-lion for• pension obligation certificates ($1.2 billion),• notes payable ($89.5 million),• loans payable ($37.9 million),• other post employment benefits ($360.6 million),• and other obligations ($314.4 million).2

Detroit general government debt totaling over $3.0billion equates to a debt of $4,230 per capita for the713,777 residents reported in the 2010 census.There was, in addition, other debt associated with

enterprise (business type) activities of the city, pri-marily water and sewerage.

Bonded Debt Defined

“Bonded debt” occurs when the city sells bonds toinvestors: the city receives the payment for the bonds

and promises to repay the princi-pal amount borrowed plus inter-est over a period of years. Thesource of the repayment deter-mines whether the bonds are “gen-eral obligation” (also referred to as“full faith and credit”) or “revenue”bonds.

States place limits on the amountof debt a local government mayhave outstanding at any one timein order to ensure that the localgovernment has the resources nec-essary to meet obligations whendue. The Home Rule Cities Act (PA279 of 1909) generally limits theamount of some kinds of munici-pal debt outstanding to ten per-cent of the assessed value of realand personal property in the city.As of June 30, 2010, Detroit’s debtlimit was $1.2 billion and the cityhad $919.6 million of debt appli-

cable to the limit, leaving a legal debt margin of$299.1 million (about 25 percent). Most of the city’s$6.4 billion of bonded debt is not subject to the stat-utory debt limit (including $5.2 billion in revenuebonds guaranteed by the water and sewerage sys-tem).

General obligation bonds are backed by the fulltaxing and borrowing power of the city, not by anycollateral. The city’s below investment grade bondrating has increased the cost of interest that mustbe paid on general obligation bonds. General obli-gation bonds are either “limited tax” bonds or “un-limited tax” bonds.

Limited tax bonds do not require voter approvaland are repaid from the general operating revenuesof the city. Some of Detroit’s limited tax debt has

Some of Detroit’s limited taxdebt has been secured byspecific general fund reve-nues such as distributablestate aid. This is essential-ly money borrowed for op-erations that has an annualcost that is paid out of thegeneral fund. Debt serviceon limited tax debt wouldotherwise be available forservices including policeand fire protection, publichealth, public lighting, parksand recreation, and otherservices to citizens.

CRC Report


are secured by specified revenues from a particularsource, such as customer payments to the watersystem. The holders of revenue bonds have noclaims on the general tax or other revenues of the

government; they have a claimonly on the particular revenue thatwas pledged for the bonds. Reve-nue bonds that are guaranteed bysources of revenue that are out-side the city’s general fund do notaffect the city’s ability to providebasic services. In the case of De-troit, for example, water and sew-er bonded debt does not affect thegeneral city’s operating budget atall.

As noted, there are different con-sequences for failing to pay differ-

ent kinds of obligations. Failure to pay debt serviceon bonds is termed “default” and may result in re-structuring the payments and/or in state interven-tion under the Local Government and School Dis-trict Fiscal Accountability Act (PA 4 of 2011). Adefault situation would seriously affect a city’s creditrating, access to future credit, and the cost of futureborrowings.

been secured by specific general fund revenues suchas distributable state aid. This is essentially moneyborrowed for operations (such as deficit reduction)that has an annual cost that is paid out of the gen-eral fund. Debt service on limitedtax debt would otherwise be avail-able for services including policeand fire protection, public health,public lighting, parks and recre-ation, and other services to citi-zens.

Unlimited tax bonds must beapproved by the voters and are re-paid from a special property taxlevy (the debt service levy). Un-limited tax bonds do not put pres-sure on the city’s operating bud-get, but do increase the burden onthe city’s tax payers. The debt service levy does notcount toward the statutory limit of 20 mills whichmay be levied for general operations. The debt ser-vice millage rate is set at a level that is sufficient torepay the principal and interest due on the outstand-ing bonds in that year.

Revenue bonds do not require voter approval and

Failure to pay debt serviceon bonds is termed “de-fault” and may result in re-structuring the paymentsand/or in state interventionunder the Local Govern-ment and School DistrictFiscal Accountability Act (PA4 of 2011).



Table 3City of Detroit Appropriations for Personal Services, 2011-12(Dollars in Millions)

General City EnterpriseAgencies Agencies Total

Salaries and Wages $437.8 $169.3 $607.1

Payments to Pensions Funds* $147.2 $44.5 $191.8

Fringe Benefits for Retirees Hospitalization $117.4 $30.7 $148.1 Other (Dental and Eye Care) 7.3 1.9 9.2 Total OPEBs $124.7 $32.6 $157.3

Fringe Benefits for Active Employees Hospitalization $75.7 $34.8 $110.5 Other 48.2 23.1 71.3 Total Active Fringes $123.9 $57.9 $181.8

Total Fringe Benefits $395.8 $135.0 $530.8

Total Personal Services $833.6 $304.3 $1,137.9

Total Operating Budget** $1,426.8 $1,070.5 $2,497.3

*Including pension obligation certificates

**Excludes bonded capital and debt service

Source: City of Detroit Budget, 2011-12

Future Costs Associated with Employees

In 2010, the City of Detroit government was thesecond largest employer in Detroit, and the finan-cial circumstances that affect the 12,300 city em-ployees and 20,000 retirees (approximate numbersas of June 30, 2010) have a significant effect on theeconomy of the city. At the same time, the costsassociated with current and retired employees are apart of the city’s ongoing financial challenge. Table3 shows the current costs associated with active andretired employees from the city’s FY2012 budget.

In the current fiscal year, contributions to the city’sGeneral Retirement System and Police and Fire Re-tirement System will cost general city agencies $147.2million, or 10.3 percent of the general city operatingbudget. Fringe benefits for retirees are expected tocost general city agencies $124.7 million, or 8.7 per-cent of the general city operating budget. In com-

parison, total appropriations for the Department ofPublic Works are $114.4 million (8.0 percent of thegeneral city operating budget); the Department ofHealth and Wellness budget is $77.4 million (5.4percent); the Public Lighting Department budget is$53.9 million (3.8 percent). The total budgeted pri-or years’ deficit is $208.9 million.

City of Detroit Retirement Systems

The Michigan Constitution makes pension benefitsthat have been earned by state and local govern-ment employees a contractual obligation of the publicemployer, although benefits that have not yet beenearned may be renegotiated. In addition to the con-stitutional guarantee, the City of Detroit is obligatedunder the city charter and union contracts to paypensions earned by city government employees.

CRC Report


These costs include retirement, disability and survi-vor benefits paid from two pension funds, a GeneralRetirement System for civilian employees and a Po-lice and Fire Retirement System for uniformed em-ployees. These are very large funds, with $2.2 bil-lion of net assets in the General Retirement Systemand $3.0 billion of net assets in the Police and FireRetirement System. 3 Each fund includes a definedbenefit plan funded by the city and a defined contri-bution (annuity) plan funded by employees. And inspite of the sale of $1.6 billion of pension fundingcertificates in 2005 and 2006, each fund has an un-funded actuarial accrued liability (the most recentreports from the pension systems indicated com-bined UAAL of $615.7 million). In Fiscal Year 2011-12 (FY2012), the city appropriated $191.8 millionfor payments to the pension funds.

The General Retirement System

On June 30, 2010, there were 8,072 active mem-bers and 11,539 retirees and beneficiaries in thegeneral system. Active employees had average payof $41,420 and 15.3 years of service (both average

age and length of service are increasing due to lay-offs based on seniority, which ends employment foryounger workers with fewer years of service). Em-ployees earn pension benefits based on years ofservice and average final compensation; annuity dis-tributions are based on the employee’s contributions.

Employee contributions to the annuity savings fundare voluntary and may be 0 percent, 3 percent, 5percent, or 7 percent of gross pay. After 25 years ofservice, an active employee may chose to withdrawhis or her accumulated contributions plus any in-vestment earnings. On retirement, an employee mayelect to purchase an annuity with some or all of themoney in his or her annuity savings account, result-ing in a larger monthly retirement benefit. Anyremainder in the account is paid to the employee.

Retirees and beneficiaries of the General RetirementSystem received an average annual payment of$17,587.

The city’s costs for employee pensions are calculat-ed and budgeted on a percent of payroll basis. Oneconsequence of this approach is that reductions inthe number of active employees can result in in-creasing percentages because the cost of the un-funded actuarial accrued liability (UAAL) is spread

Table 4General Retirement System,Required Employer Contribution as a Percent of PayrollValuation of June 30, 2010*

Percentage PointNormal Increase from

Cost UAAL Total Prior YearGeneral City 11.22% 4.04% 15.26% 1.89%DOT 10.04 10.22 20.26 4.92Water/Sewerage 11.00 14.82 25.82 6.19Library 10.88 11.27 22.15 4.92 Total 10.97% 8.14% 19.11% 3.73%

*The valuation of June 30, 2010 determines contributions on a percent of payroll basis for FY 2012.

Source: Annual Report of the Board of Trustees for the Year Ending June 30, 2010, General RetirementSystem, page 14.




over a smaller number of employees. Voluntaryemployee contributions are also on a percent of pay-roll basis. According to the 2010 Annual Report ofthe Board of Trustees of the General RetirementSystem, required employer contribution rates foreach of the component units of the General Retire-ment System (General City, Department of Trans-portation, Water and Sewerage, and the Detroit Pub-lic Library) will increase in FY2012. For example,the percent of payroll required forgeneral city employees increasedfrom 13.37 in FY2009 to 15.26 inFY2010; the percent of payroll re-quired to fund pensions for Trans-portation employees increasedfrom 15.34 in FY2009 to 20.26 inFY2010 (See Table 4).

Current assets, future needs, andvarious assumptions are used todetermine how much the cityshould contribute to the pensionsystem each year. In FY2010, thecity government contribution to theGeneral Retirement System was$37.3 million and employee con-tributions to the annuity fund were$19.0 million ($56.3 million in to-tal); the system paid $211.3 mil-lion in benefits plus $104.7 millionin lump sum defined contributionplan benefits ($316.0 million intotal). The most recent CAFR re-ported total net assets in the Gen-eral Retirement System of $2,246.5million. The unfunded actuarial accrued liabilities inthe General system were $481.5 million at June 30,2010 (up from $276.7 million at June 30, 2009),and were 144.0 percent of covered payroll. Thesystem was 87.1 percent funded, inclusive of theproceeds of pension obligation certificates.4 This iswell in excess of the 80 percent funding thresholdfor public defined benefit plans, but the debt arisingfrom the certificates, normal costs, and UAAL re-mains a substantial burden for the city government.

In the FY2012 budget, the city appropriated $51.9million for payments to the General Retirement Sys-tem for civilians in general city agencies and $44.5million for payments to the General Retirement Sys-tem for employees in enterprise agencies, a total of$96.4 million for civilian pension contributions.

The Police and Fire Retirement System

In FY2010, there were 8,356 retired members ofthe Detroit Police and Fire Retire-ment System (DPFRS) and theyreceived an average annual allow-ance of $29,163. There were3,992 active members of the sys-tem (2,927 Police and 1,065 Fire);the number of active members hasbeen declining (there were 5,585active members in 2001). In 2010,the average Police member was41.8 years old, with 15.1 years ofservice and annual pay of $56,217.The average Fire member was 43.7years old with 17.7 years of ser-vice and annual pay of $60,359.

Uniformed employees in ranks ofsergeant and above are eligible toretire after 25 years of service;members of the Detroit Police Of-ficers Association and their Fireequivalents are eligible to retireafter 20 years of service regard-less of age. Employees earn pen-sion benefits based on their years

of service and average final compensation; benefitsdiffer for “pre 1969 members” and “1969 plan mem-bers.” For members in the “1969 plan,” the annualpension amount is 2.5 percent of the average finalcompensation times the first 25 years of service plus2.1 percent of average final compensation times eachof the next ten years of service. Members may electto withdraw their accumulated contribution amountin a lump sum, and if they do, the defined benefit isreduced by the actuarial equivalent of the amountwithdrawn. In FY2010, payments of benefits to re-tirees and beneficiaries in the DPFRS totaled $251.7million and $27.3 million was paid in lump sum de-fined contribution plan benefits.

In the FY2012 budget, thecity appropriated $51.9 mil-lion for payments to theGeneral Retirement Systemfor civilians in general cityagencies and $44.5 millionfor payments to the Gener-al Retirement System foremployees in enterpriseagencies, a total of $96.4million for civilian pensioncontributions. The city alsoappropriated $95.3 millionfor payments to the Policeand Fire Retirement Systemfor a total FY2012 cost of$191.7 million.

4 Annual Report of the Board of Trustees for the Year EndingJune 30, 2010, General Retirement System

CRC Report


The DPFRS system was overfunded in 2006 through2008 as a result of the city’s sale of pension obliga-tion certificates in 2005 and 2006. However, thevalue of assets in the system declined from nearly$5.0 billion at June 30, 2008 to less than $3.5 billionat June 30, 2010 due to losses in the stock marketand real estate market. The most recent CAFR re-ported total net assets in the Police and Fire Retire-ment System of $3,017.9 million. In FY2009, theunfunded actuarial accrued liability in the Police andFire Retirement System was$276.1 million. In FY2010, theUAAL was reported to be $134.2million (58.7 percent of coveredpayroll) and the system was 96.6percent funded, including the pro-ceeds from the pension fundingbonds. However, the funding val-ue of assets in the system exceed-ed the market value by $835 mil-l ion, and unless the marketrecovered quickly, another largeincrease in the required employercontribution was predicted.5

In April, 2011, arbitrator ThomasW. Brookover found that Police andFire pension obligations threat-ened Detroit’s fiscal viability andruled that the city could reducepensions earned in the future bythe members of the Police Ser-geants and Lieutenants Associa-tion. In August, 2011, the city andthe Detroit Police Officers Associ-ation reached their first voluntary,consensual settlement achievedthrough collective bargaining in 32years (outside of the PA 312 of 1969 binding arbi-tration system). The DPOA ratified a one-year agree-ment that not only froze wages, but also reducedpensions for current officers by reducing the multi-plier for benefits earned after September 1, 2011from 2.5 to 2.1 percent of average final compensa-tion and eliminating cost of living increases on pen-

sions earned after that date. Additionally, officershired after July 1, 2012 would join a defined contri-bution plan, to which the city would contribute anamount equal to ten percent of the employee’s sal-ary. Over the long term, these changes should re-duce employer contributions to the Police and FireRetirement System.

The employer contribution for FY2010 was $57.8million, less a negotiated $25.0 million overfunding

credit, for a city payment of $32.8million. The employee contributionto the annuity plan was $10.8 mil-lion. The employer contributionrate for FY2012 was calculated tobe 27.81 percent of payroll, or28.90 percent if paid at year end.In the FY2012 budget, the city ap-propriated $95.3 million for pay-ments to the Police and Fire Re-tirement System, a much largeramount than the $51.9 million ap-propriated for payments to theGeneral Retirement System for ci-vilians in general city agencies andapproximately equal to the $96.4million appropriated for all pay-ments, including water and sewer-age payments, to the General Re-tirement System.

Pension Obligation Certificates

In 2005 and 2006, the city sold $1.6billion of variable rate pension cer-tificates of participation (COPs) tofully fund both retirement systems,transforming pension funding obli-

gations into contractual obligations to pay the prin-cipal and interest on the certificates (and possiblyincreasing the severity of consequences for nonpay-ment).

The issuance of pension funding bonds or certifi-cates can produce savings if the interest rate paid

The DPOA ratified a one-year agreement that notonly froze wages, but alsoreduced pensions for cur-rent officers by reducing themultiplier for benefitsearned after September 1,2011 from 2.5 to 2.1 per-cent of average final com-pensation and eliminatingcost of living increases onpensions earned after thatdate. Additionally, officershired after July 1, 2012would join a defined contri-bution plan, to which the citywould contribute an amountequal to ten percent of theemployee’s salary.

5 Annual Report of the Board of Trustees for the Year EndingJune 30, 2010, Detroit Police and Fire Retirement System.

6 GFOA Advisory, Evaluating the Use of Pension Obligation Bonds(1997 and 2005), March 2005.



on the bonds is less than the rate of return earnedon proceeds placed in the pension fund.6 The cityentered into eight swap agreements to establish afixed rate on the pension certificates, and these swapagreements included a number of provisions to pro-tect the rights of the participants. Specifically, theagreements provided that a “termination event”would occur if the credit rating on the COPs waswithdrawn or downgraded to below a certain level(Baa3) and if the bond insurers’ credit rating fellbelow a certain level (A3). In January, 2009 the citywas informed that events had occurred that wouldconstitute a termination event and in June the par-ties entered into a collateral agreement that increasedthe amount of payments, required the city to de-posit daily casino wagering tax revenues with a trust-ee to ensure payments due under the swap agree-ments, and established new conditions.

The debt for the certificates of participation is inaddition to the $615.7 million UAAL for the two pen-sion systems, and is in addition to the bonded debtdiscussed in a later section of this report. However,the appropriation for actuarial pensions in the FY2012city budget includes the payment on the pensionobligation certificates. (See Table 5.)

As of June 30, 2010, the date of the most recentCAFR, the principal outstanding on the certificateswas $1.5 billion, but the total amount of future pay-ments (principal and interest) associated with thosebonds was $2.9 billion and the debt by governmentactivity is shown in Table 6.

Table 5Service Payments on 2005 and 2006Certificates of Participation,(Dollars in Millions)

Year EndingJune 30 Total Payment

2011 $96.12012 101.62013 107.12014 112.62015 114.82016 117.02017 119.22018 121.52019 119.82020 119.72021 119.72022 119.72023 119.72024 119.72025 119.72026 119.72027 119.62028 119.62029 119.52030 119.42031 119.32032 119.32033 119.22034 119.12035 119.0

Source: Prospectus for Distributable State AidGeneral Obligation Bonds, Series 2010, page A-51.

Table 6Pension Obligation Certificates Outstanding Debt June 30, 2010(Dollars in Millions)

Principal Interest Other* TotalGeneral Govt. Activities $1,202.9 $482.8 $689.2 $2,375.0Transportation Fund 105.9 42.5 60.7 209.1Sewerage Fund 90.8 36.4 52.0 179.2Water Fund 80.1 32.2 45.9 158.2 Total $1,479.7 $594.0 $847.9 $2,921.6

*Hedging, derivatives, etc.

Source June 30, 2010 City of Detroit Comprehensive Annual Financial Report, page 108-109.

CRC Report


In spite of asset losses since the sale of COPs, thecity’s pension funds appear to be adequately fundedwhen the value of the pension obligation certificatesis included in fund balances. There are, however, ques-tions about the value of some pension assets. Inde-pendent auditors’ reports by Plante & Moran datedJune 30, 2010 noted that they were unable to obtainsufficient audit evidence supporting $103.0 million ofalternative investments in the Police and Fire Systemand $113.0 million in the General System, and thatfinancial statements include investments valued at$835.0 million in the Police and Fire System and $710.0million in the General System “whose fair values havebeen estimated by management in the absence ofreadily determinable fair values.”

It should be noted, however, that PA 4 of 2011 al-lows a state-appointed emergency manager to re-

move one or more of the trustees of a local pensionboard, and allows the state treasurer to appoint theemergency manager as the sole trustee of a localpension board, if the pension fund is not actuariallyfunded at 80 percent or more, excluding the net valueof pension bonds or evidence of indebtedness.7 (SeeTable 7.)

Without the value of pension obligation certificates,neither of Detroit’s two pension system meets the80 percent funding threshold established in PA 4;both would be subject to takeover by an emergencymanager.

Table 7Detroit Retirement Systems, June 30, 2010(Dollars in Millions)

General Police and FireRetirement Retirement

System SystemTotal Actuarial Accrued Liability $3,719.6 $3,987.5Total Value of Assets $3,238.1 $3,853.3Unfunded Actuarial Accrued Liability $481.5 $134.2Total Assets / Total Liability 87.1% 96.6%

Pension Obligation Certificate (POC) $789.7 $680.9Total Value of Assets – POC $2,448.4 $3,172.4Net Assets / Total Liability 65.8% 79.5%

Source: 2010 Annual Reports of the Board of Trustees, CRC calculations

7 PA 4 of 2011, Sec. 19 (1)(m).



Other Post Employment Benefits

In addition to pensions, the city has negotiated withemployee unions the payment of other post employ-ment benefits (OPEBs) including health insurance.These benefits for retirees have been funded on a“pay as you go” basis, which means that the cost ofbenefits billed in each year were paid that year, butno amount was set aside to pay for future benefitsthat had already been earned. The increasing num-ber of retirees and the increasing cost of health careresult in increasingly expensive OPEB costs.

The city’s Health and Life Insurance Benefit Planprovides hospitalization, dental care, vision care, andlife insurance to eligible retirees. (In addition to thisplan, the city maintains a supplemental death bene-fit plan which had an unfunded actuarial accruedliability of $5.6 million.) According to the 2010 CAFR,the city pays for full health care coverage, exceptfor master medical coverage, for general city em-ployees who retired before January 1, 1984. Thecity pays up to 90 percent of coverage for generalcity retirees who retired after January 1, 1984 andfor Police and Fire retirees. The city also pays forhealth care for the retiree’s spouse as long as thespouse continues to receive a city pension (the citydoes not pay for health care coverage for a newnon-city retiree spouse). The city pays for dentaland vision coverage for the retiree and spouse inboth systems. The city does not pay for health carecoverage for employees who take early retirement.Complementary health care coverage is provided toretirees who are Medicare eligible.

As noted previously, GASB now requires that thefuture liability for promised post employment bene-fits be included in financial reports, just as the UAALfor pensions is reported. As of the June 30, 2009actuarial valuation, the unfunded actuarial accruedliability for OPEBs for all Detroit city employees wasapproximately $5 billion ($4,971.2 million), none ofwhich was funded. The covered payroll of the citywas $591.2 million, and the ratio of the UAAL topayroll was 841 percent.8 The OPEB UAAL debt perresident of Detroit was approximately $7,000, thoughamounts for the water and sewerage system will bepaid by customers of that system. (The Detroit Wa-ter and Sewerage Department provides water andsewerage services for Detroit and for approximatelythree million people in 126 other communities in eightcounties.) There is no expectation that funding forsuch a large total liability would be made availablein the near term, but rather that prudent financialmanagement would seek to fully fund the liabilityover a period of 30 years or less.

Retirees are generally required to pay 10 or 20 per-cent of health insurance premiums. In FY2010, theamount paid by all funds of the city for OPEBs was$149.7 million, which was the “pay-as-you-go”amount. (See Table 8.)

Table 8Health and Life Insurance Benefit Plan, FY 2009-10(Dollars in Millions)

Benefit City Payment Retiree Payment TotalHospitalization $140.4 $23.7 $164.1Dental 7.8 1.3 9.1Vision 1.3 - 1.3Life Insurance 0.2 - 0.3 Total $149.7 $25.0 $174.7

Source: June 30, 2010 City of Detroit Comprehensive Annual Financial Report, page 119.


CRC Report


The city’s FY2010 payment was less than half of theamount needed to fund OPEBs on an actuarial ba-sis. For FY2010, a city contribution of $313.9 mil-lion (the “annual required contribution” or ARC) wasrequired both to cover the normal cost of OPEBsand to amortize the unfunded actuarial accrued lia-bility over not more than 30 years. This annual re-quired contribution by fund, and the amount actual-ly paid by fund, is shown in Table 9.

Since the ARC was not fully funded in FY2010, theamount due to meet this liability increased from June

30, 2009 to June 30, 2010. The change in this lia-bility by fund is shown in Table 10.

In the current year budget, the city has appropriat-ed $157.3 million to pay for retiree hospitalization,dental benefits, and eye care. That is 6.3 percentof the city’s total operating budget (including enter-prise agencies), but is insufficient to actuarially fundOPEBs.

Oakland County, Michigan has approached the issueof other post employment benefits in a different fash-

Table 9Other Post Employment Benefits, June 30, 2010(Dollars in Millions)

Annual RequiredContribution City Payment

Governmental activities $246.8 $122.6Transportation Fund 26.1 10.4Sewage Disposal Fund 20.8 8.3Water Fund 19.3 8.0Automobile Parking Fund 0.7 0.2Non-major Proprietary Fund 0.2 0.1 Total $313.9 $149.7

Source: June 30, 2010 City of Detroit Comprehensive Annual Financial Report, page 120.

Table 10Changes in Long-Term Obligation for Accrued Other Post Employment Benefits(Dollars in Millions)

IncreaseJune 30, 2009 June 30, 2010 2009 to 2010

Governmental Activities $236.3 $360.6 $124.3Transportation Fund 28.9 44.7 15.8Sewage Disposal Fund 17.9 30.5 12.6Water Fund 16.6 27.9 11.3Automobile Parking Fund 0.4 0.9 0.5Other Proprietary Funds 0.1 0.2 0.1 Total $300.2 $464.8 $164.6

Source: June 30, 2010 City of Detroit Comprehensive Annual Financial Report, pages 92-96.



ion. The county began actuarially funding OPEBs in1987 and in 2007 the county issued certificates ofparticipation to fully fund its existing health careobligation for current and future retirees.

While state and local government pensions that havebeen earned are protected in the state Constitution,future pensions and other post employment bene-fits do not have the same protection and can berenegotiated to reduce future costs to the city. An-nual increases in the cost of health care, increasedlongevity, declining tax base, reduced state aid, andother factors combine to make it increasingly un-likely that the city government can afford to main-

tain the level of current and future benefits city work-ers have negotiated. If the city’s administration andunions are unable to renegotiate future benefits toreduce costs, PA 4 of 2011 provides for a differentapproach whereby an emergency manager is grant-ed power to reject, modify or terminate contractsand to reject, modify, or terminate collective bar-gaining agreements under specified conditions.

In spite of the conclusion reached by the Michi-gan Supreme Court in the Studier case, it is highlyprobable that retirees would litigate the issue ifhealth care coverage for retirees were reduced oreliminated.

CRC Report


All large cities use debt to fund capital improvements,major maintenance, and for other purposes, underlimits established in state laws. In 2009, accordingto the U.S. Census Bureau, there was a total $1.6trillion of U.S. local government debt outstanding(the total amount of state and local government debtoutstanding was $2.6 trillion).

Bond Ratings

Credit rating agencies rate city governments andother public and private entities on a number of

criteria designed to measure their ability to repaybonded debt, and assign alphanumeric ratings thatindicate the risk associated with the outstandingdebt. The “big three” rating agencies are Standardand Poor’s, Moody’s, and Fitch Ratings, each ofwhich has its own system for rating borrowers (SeeTable 11).

Lower bond ratings indicate higher risk and justifyinvestors’ demands for higher interest rates on thosebonds.

Bonded Debt Service

Table 11Long Term Bond Ratings

StandardDefinition & Poor’s Moody’s FitchMaximum safety AAA Aaa AAAHigh quality AA+,AA,AA- Aa1,Aa2,Aa3 AA+,AA,AA-Upper medium grade A+,A,A- A1,A2,A3 A+,A,A-Lower medium grade BBB+,BBB,BBB- Baa1,Baa2,Baa3 BBB+,BBB,BBB-Non investment grade BB+ Ba1 BB+Speculative BB,BB- Ba2,Ba3 BB,BB-Highly speculative B+,B,B- B1,B2,B3 B+,B,B-



Detroit has thelowest bond ratingamong the largestU.S. cities. Thecity’s general obli-gations are rated“non investmentgrade.” (See Table12.)

Table 12Bond Ratings for Select City Governments, 2010

StandardCity & Poor’s Moody’s FitchPhoenix, AZ AAA Aa1 (NA)San Antonio, TX AAA Aa1 AAAColumbus, OH AAA Aaa AAAMinneapolis, MN AAA Aa1 AAADallas, TX AA+ Aa1 (NA)

New York, NY AA Aa3 AAHouston, TX AA Aa3 AAIndianapolis, IN AA Aa1 (NA)Milwaukee, WI AA Aa2 AA+Los Angeles, CA AA- Aa2 AA-

Baltimore, MD AA- Aa3 (WD)Chicago, IL A+ Aa3 AA-Washington, DC A+ A1 AA-St. Louis, MO A+ A2 (NA)San Diego, CA A A2 AA-

Cleveland, OH A (lease) A2 AA-Philadelphia, PA BBB Baa1 A-New Orleans, LA BBB Baa3 A-Pittsburgh, PA BBB Baa1 A

Detroit, MI BB Ba3 BB

NA not available WD withdrawn

Source: U.S. Census Bureau, Statistical Abstract of the United States: 2012, Table 446.

CRC Report


According to the city’s website, Moody’s and Fitchrate Detroit’s unlimited tax bonds slightly higher thanlimited tax bonds (See Table 13).

Comparisons of debt loads among cities present chal-lenges, however, because different cities are respon-

sible for different combi-nations of services: theallocation of responsibil-ities between cities,counties, and states dif-fers; some city govern-ments include schools;and the use of specialauthorities for major ser-vices and infrastructurevaries as well. None-theless, it is possible tocompare the debt out-standing of the largestcities using the most re-cent data available from

the U.S. Census Bureau (the comparison data arefrom 2006). (See Table 14.)

Table 13City of Detroit General Obligation Debt Ratings

Unlimited LimitedTax Bonds Tax Bonds

Moody’s Ba2 Ba3Standard and Poor’s BB BBFitch BB BB-

Source: City of Detroit Website, Finance Department, Debt Management Division(www.detroitmi.gov/DepartmentsandAgencies/Finance/DebtManagementDivision.aspx)

Table 14City Government Expenditures and Outstanding Debt for the Largest Cities, 2006

Total Outstanding Debt as a Estimated DebtExpenditures Debt Percent of Population Per

City in Millions in Millions Expenditures in Thousands CapitaJacksonville, FL $3,474 $11,022 317.3% 795 $13,872San Francisco, CA 6,908 8,738 126.5 744 11,744New York, NY 82,454 85,234 103.4 8,214 10,376Detroit, MI 3,349 7,515 224.4 871 8,627Dallas, TX 2,713 8,557 315.4 1,233 6,940Chicago, IL 7,622 15,862 208.1 2,833 5,598Houston, TX 3,982 11,403 286.4 2,144 5,317Indianapolis, IN 3,412 4,125 120.9 786 5,251Phoenix, AZ 3,362 7,373 219.3 1,513 4,873San Jose, CA 1,894 4,368 230.6 930 4,697San Antonio, TX 3,625 6,055 167.0 1,297 4,670Los Angeles, CA 12,315 15,723 127.7 3,849 4,085Philadelphia, PA 6,745 5,825 86.4 1,448 4,022Columbus, OH 1,152 1,703 147.8 733 2,323San Diego, CA 2,431 2,795 115.0 1,257 2,224

Source: 2012 Statistical Abstract of the United States, Table 458; CRC calculations



Detroit Bonded Debt

The City of Detroit has borrowed money for a num-ber of purposes, including to provide cash for oper-ations, to construct and maintaininfrastructure, and, as noted pre-viously, to fund pensions. “Limit-ed tax” bonds are repaid from theGeneral Fund’s general operatingrevenues; “unlimited tax” bondsare repaid from unlimited propertytax levies (the debt service levy forunlimited tax bonds grew from8.9157 mills in FY2010 to 9.5558mills in FY2012), and “revenue”bonds are repaid from dedicatedrevenues such as water or sewer-age charges.

The total amount of Detroit prima-ry government debt (including pension obligationcertificates and water and sewerage debt) outstand-ing at June 30, 2010 was $7.7 billion, or about$10,800 per capita using the 2010 population of713,777. This compares with total primary govern-ment debt of $3.3 billion at June 30, 2001; $7.2billion at June 30, 2005 after the sale of pension

obligation certificates9; and $7.5 billion in the 2006data in the table above (the difference in the 2006estimated Detroit population of 871,121 and the 2010census number of 713,777 accounts for the per capita

differences).10 Compared to oth-er large U.S. cities, Detroit’s debtper capita is very high.

Table 15 shows that at June 30,2010, debt service requirementsexcluding the $1.5 billion of out-standing pension obligation debtthat was described previously.

Excluding pension obligation cer-tificates, general obligation debtbacked by the full faith and creditof the city totaled $1.0 billion(about $1,400 per capita) with in-terest obligations of $469.3 mil-

Table 15Debt Service Requirements 2011-2040(Dollars in Millions)

Principal Interest Other* TotalGovernmental Activities General Obligation Debt $1,010.3 $467.7 $1,478.0 Revenue Bonds and Other 127.4 39.4 166.8Business Activities Sewage Disposal $2,987.5 $2,075.4 $274.0 $5,336.9 Water Fund 2,252.7 1,944.0 0.5 4,197.2 Transportation (G.O.) 6.3 1.6 7.9 Automobile Parking 39.1 7.3 24.1 70.5Grand Total $6,423.3 $4,535.4 $298.6 $11,257.3

* Hedging, derivatives, Net

Source: June 30, 2010 City of Detroit Comprehensive Annual Financial Report, pages 106-107



The total amount of Detroitprimary government debt(including pension obliga-tion certificates and waterand sewerage debt) out-standing at June 30, 2010was $7.7 billion, or about$10,800 per capita usingthe 2010 population of713,777.

CRC Report


lion. Revenue bonds of the city’s business enter-prises totaled $5.3 billion. Sewerage bonds are pay-able solely from the net revenues of the sewer sys-tem; water bonds are payable solely from the netrevenues of the water system.

As noted, limited tax debt paid from the operatingrevenues of the General Fund reduces the fundingavailable for other municipal services. In 2010, De-troit sold $249.8 million of limited tax bonds pay-able from distributable state aid (revenues received

from the state) to fund a portion of the accumulatedand projected deficit. Table 16 shows the city’slimited tax debt service requirements, according tothe prospectus for those bonds.

In FY2012, the $58.7 million in principal and inter-est due on this limited tax debt is 3.7 percent of the$1.6 billion total appropriations for general city agen-cies. It is more than the $53.9 million appropriatedfor the Public Lighting Department or the $53.9 mil-

Table 16City of Detroit Limited Tax General Obligation Debt Service Schedule(Dollars in Millions)

Fiscal Year Debt Service Other LimitedEnding June 30 2010 Series Bonds Tax Debt Service Total

2011 $14.1 $46.1 $60.22012 12.6 46.1 58.72013 12.6 52.5 65.12014 12.6 52.1 64.72015 18.9 32.6 51.52016 18.8 32.6 51.42017 18.8 9.3 28.12018 18.8 9.3 28.12019 18.8 9.3 28.12020 18.8 9.3 28.12021 18.9 9.7 28.62022 18.8 8.0 26.82023 18.8 7.9 26.72024 18.8 8.0 26.82025 18.8 8.0 26.82026 18.8 18.82027 18.8 18.82028 18.8 18.82029 18.8 18.82030 18.8 18.82031 18.8 18.82032 18.8 18.82033 18.8 18.82034 18.8 18.82035 18.8 18.82036 18.8 18.8 Total $466.4 $387.1 $853.5

Source: Prospectus, Series 2010 Bonds, pages 7, A-44.



lion appropriated for the Detroit Workforce Devel-opment Department.

Voters must approve the sale of unlimited tax debt.This type of debt does not compete with generalcity services such as police and fire protection be-cause it is repaid from the proceeds of a propertytax levy that is set at a millage rate that is recalcu-lated annually to generate sufficient cash to repaythe principal and interest due that year. For FY2010,Detroit levied a debt service millage rate of 8.9157,which was in addition to the 19.952 operating mill-age rate. This was not the highest debt service rateimposed by a city in Michigan, but the River Rougeand Ecorse (Ecorse is operating under a state-ap-pointed emergency manager) rates included judg-ment levies (See Table 17).

In FY2012, Detroit’s debt service tax rate had in-creased to 9.5558 mills, reflecting in part the de-cline in taxable value.

Michigan’s Home Rule Cities Act generally limits thenet indebtedness of cities to ten percent of the as-sessed value of real and personal property in the

city. At June 30, 2010, the city’s debt limit was $1.2billion and the outstanding net general obligationdebt that was applicable to the limit was $919.7million (75.46 percent of the legal limit). The city’slegal debt margin, the amount of new debt that couldbe issued, was $299.1 million.11 On December 16,2010, the city issued $100.0 million of unlimited taxgeneral obligation bonds for various capital projects.Those bonds begin to mature in 2014 and will fullymature in 2035.

As Detroit’s fiscal situation deteriorates, questions mayarise as to the city’s ability to service its debt. Asnoted, a relatively small share of the city’s bondeddebt is backed by the full faith and credit of the city,while the great majority is guaranteed by designat-ed, dedicated revenues. If all parties agree, debt canbe renegotiated, which is what usually happens in adefault situation. Under PA 4 of 2011, an emergencymanager has the authority to “Enter into agreementswith creditors or other persons or entities to restruc-ture debt on terms, at rates of interest, and with se-curity as shall be agreed among the parties, subjectto approval by the state treasurer.” Another possibleremedy for inability to meet debt obligations is bank-ruptcy, in which municipalities can restructure andreorganize assets and debts. Under PA 4, the stateappointed financial manager would be required toobtain permission from the governor for the localgovernment to file under Chapter 9, Title 11 of theUnited States Code and would act on the local gov-ernment’s behalf in bankruptcy proceedings.

Table 17Michigan Cities: Debt Service Rates, FY2010

Debt ServiceCity Millage RateRiver Rouge 18.97Ecorse 10.69Inkster 10.33Detroit 8.92Flint 6.71Sylvan Lake 5.97Huntington Woods 5.21Clarkston 4.94Ypsilanti 4.39Orchard Lake 4.72Center Line 4.91Eaton Rapids 4.40Cheboygan 4.10

Source: Michigan Department of Treasury 11 June 30, 2010 City of Detroit Comprehensive Annual Finan-cial Report, page 204.

CRC Report


While the various debts and future obligations of allfunds of the city government total considerably morethan $19,000 for every resident of the city, a largeproportion of the outstanding debt will be paid bynonresident customers served by the Detroit Waterand Sewer Department (the Sewage Disposal Fundretired $34.8 million of revenue bonds in FY2010;the Water Fund retired $33.6 million of revenuebonds that year). Furthermore, the total future lia-bility includes a substantial amount that is fundedon a pay-as-you-go basis, for which there is no pen-alty for having an UAAL, and which may be renego-tiated or otherwise reduced. The City of Detroit hasso far managed to either meet minimum obligationswhen those obligations were due, or to renegotiatethe obligation to enable the debt to be sustained.

The General Fund subsidizes the Transportation De-partment, and the relatively small amount of Trans-portation bonded debt is the general obligation ofthe city. The $209.1 million of principal and intereston pension funding certificates attributable to theTransportation Fund, the growing UAAL in the pen-sion fund, and the considerable amount of UAAL for

Conclusions

other post employment benefits associated withTransportation Fund employees present substantialimpediments to the realignment of that system.

Detroit, like other local governments in Michigan, isstruggling to provide essential services with declin-ing revenues. The general city’s below investmentgrade bond rating and a certain unease with munic-ipal debt in the markets may well increase the costof borrowing at the same time that the general city’scash flow problems are increasing. Detroit issued$249.8 million of limited tax fiscal stabilization bondsin March, 2010, enabling the city to reduce shortterm borrowing, but predictions are that cash flowwill again be severely stressed early in 2012. (May-or Dave Bing has stated that the city will run out ofcash in April if union concessions and other cost sav-ings measures are not implemented.) It remains tobe seen whether city officials, unions, contractorsand other affected entities can develop and imple-ment a strategy to restore the financial viability ofthe city, or whether the state, acting under PA 4 of2011 or other authority, will be forced to intervene.

The city estimates that its long-term liabilities in-clude accrued compensated absences for employ-ees ($123.0 million), accrued worker’s compensa-tion ($66.2 million), claims and judgments ($93.0million), and accrued pollution remediation (0.4 mil-lion).12 Detroit has used Section 108 loans from thefederal government for revitalization projects; thecity has pledged $89.5 million of future Block Grantfunds to repay these loans. Several other loans, in-cluding one to the DDA, total $37.9 million. The city

has commitments for future construction activity thattotaled $78.2 million at June 30, 2010. Future com-mitments for operating leases for equipment totaled$130.3 million at June 30, 2010.13 All of these obliga-tions total $618.5 million.

As noted, under PA 4 of 2011 an emergency man-ager may reject, modify, or terminate one or moreterms and conditions of an existing contract.

Other Future Obligations





Addendum

The following information from the City of Detroit’s $3.1 billion budget for FY2012 is provided to help put thenumbers in this report in perspective.

Taxable value of all real and personal property on the ad valorem tax roll: $8.3 billion.

Table 18City of Detroit Budget Overview, FY2012(Dollars in Millions)

Budgeted AppropriationsPolice Department $414.8Fire Department 183.4Department of Public Works 114.4Prior Years Deficit 55.2All Other General City Departments 814.7 Total General City Agencies $1,582.5

General City Debt Service 77.7

Water Fund $686.0Sewerage Fund 518.7Transportation Department 149.4Other Enterprise Agencies 94.0 Total Enterprise Agencies 1,448.1

Total Appropriations $3,108.3

Budgeted Major RevenuesMunicipal Income Tax $250.0Net Property Tax 204.8Casino Wagering Tax 174.8Other Casino Payments 40.1Utility Users’ Excise Tax 42.0Solid Waste Fees 47.9Sale of Electricity and Steam 60.7State Revenue Sharing (General Fund) 165.6Other State Grants 140.2Federal Grants 267.0Revenue from Enterprise Agency Operations 983.6Sale of Water Revenue Bonds 300.0All Other Revenues 431.6

Total Revenues $3,108.3

201112 crc legacy costs and indebtedness of the city of detroit rpt373

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