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Seven Years After Bankruptcy, City of Detroit Faces a New Crisis

Seven Years After Bankruptcy, City of Detroit Faces a New Crisis

(Bloomberg Businessweek) -- The late Coleman Young, who was Detroit mayor from 1974 to 1994, said that when the nation gets a cold, Detroit gets pneumonia. That’s sadly held true during the coronavirus pandemic: The city had recorded 7,904 cases of Covid-19 and 716 deaths from the disease as of April 21, making it a national hot spot and putting Wayne County, Mich., among the U.S. counties with the most deaths from the virus so far.

A majority-black city of 670,000, Detroit is bracing for a recession as stay-at-home orders decimate businesses and the virus overwhelms medical and social resources. Casinos, which generate 17% of municipal revenue, are shuttered indefinitely. A quarter of all Michigan residents are already out of work. “While we have a health crisis, we have the biggest budget crisis this city has seen in seven years, and we have to solve it at the same time,” Mayor Mike Duggan said at an April 14 briefing.

The pandemic is a major financial test for cities across America. In a recent survey conducted by the National League of Cities, more than 2,100 municipalities of all sizes said they were expecting budget shortfalls. But Detroit is in an unusually precarious position. The crisis has hit five years after the city emerged from the largest-ever municipal bankruptcy and two years after it shed state financial oversight.

Seven Years After Bankruptcy, City of Detroit Faces a New Crisis

Looming over the city is the very real threat of a budget deficit triggering a state takeover. Duggan estimates Detroit will have to make up a $348 million shortfall over the next 16 months. The Michigan law that brought it out of bankruptcy sets the trigger at a deficit of 5% of city revenue, or about $54 million currently. If the state does take over, it will have oversight for at least three years.

To stave that off, Duggan is going to need every dime he’s saved, and then some. The mayor says he can cover $298 million in part by tapping budget surpluses and the rainy day fund, and diverting money from a program that encourages new investment and demolishes the thousands of blighted buildings that have tarnished the city’s image.

He can’t count on more outside help. State and local officials have pleaded for more federal aid to deal with the virus’s toll, so far to no avail. Michigan hasn’t yet determined just how big the shortfall for the state and Detroit will end up being because of the virus, but federal money is going to be key for the recovery, Garlin Gilchrist, Michigan’s lieutenant governor, said in an interview on Bloomberg TV. He said he has had 15 friends die from Covid-19 so far.

“That is why we need to advocate fiercely for more resources for state and local government from the federal government, because we have to balance our budgets and they don’t,” Gilchrist said. “We need to make sure money is not being put in front of people’s survival.”

The CARES Act, the relief bill Congress passed last month, helps cities cover the cost of responding to the virus, but not their lost revenue. That means city employees will have to bear the other $50 million of Detroit’s deficit. Two hundred part-time, seasonal, and temporary employees will be laid off, while the hours and wages of 2,300 of the 7,800 remaining employees will be reduced.

Seven Years After Bankruptcy, City of Detroit Faces a New Crisis

“These are painful cuts,” Duggan said at the April 14 briefing. “If we do not handle this deficit ourselves, the state of Michigan is going to be running the city again.” There could be more cuts to Detroit’s workforce and services if the downturn persists, Duggan noted.

The city may struggle to make $166 million in annual pension payments that were delayed by the bankruptcy and begin in 2024. Of the 25 largest cities in the U.S., Detroit was among the most susceptible to a downturn because of its reliance on volatile revenue streams like its casino and income taxes, Moody’s Investors Service said in December. With this crisis, it’s not just the immediate blow of the shutdown, but also the deferments of tax and mortgage payments and other allowances for the pandemic that will persist as a drag on city finances, says Eric Scorsone, an associate professor and director of the Center for Local Government at Michigan State University. (Scorsone is also a financial adviser to the city of Flint, Mich., and is part of a group that assists Detroit in setting economic forecasts.)

However, Detroit is better positioned than in the past to navigate a crisis, thanks to the savings-conscious budgets of its popular two-term mayor. The former chief executive officer of the Detroit Medical Center, Duggan, a Democrat, has kept finances out of the red during his tenure and built up surpluses and reserve funds. Moody’s in February gave the city a positive outlook. “They have a clear plan, a strategy; they really seem to know what they’re doing, whereas I would say in the past that was not as true,” Scorsone says. “I’m not going to say they’re as strong as other big cities, but they’re way better off than they would have been anytime in the last 20 or 30 years.”

Seven Years After Bankruptcy, City of Detroit Faces a New Crisis

Detroit is more than 75% black, and its poverty rate is about three times the national average. The coronavirus has disproportionately harmed black Americans: They account for 34% of Covid-19-related deaths in the 26 states reporting statistics by race, despite representing just 13% of the population in those states, according to Johns Hopkins University data. Over decades, Detroit has suffered from institutionalized racism, white flight to the suburbs, and the loss of manufacturing jobs. The population peaked at 1.85 million in 1950 and has declined in every subsequent census count.

One plug for the city’s deficit will be $72 million from blight removal funds. That means Detroit could go a year without demolitions—just when it felt like it was getting ahead of the problem, says John George, founder of Detroit Blight Busters, a volunteer group that helps rehabilitate or raze abandoned buildings in Brightmoor, one of the poorest neighborhoods. George estimates the city has demolished roughly 20,000 structures since Duggan was elected and has about another 20,000 left to fix up or tear down. Once it’s safe to go out again, volunteers will need to pick up the slack, he says.

Detroit has shifted from the poster child for Rust Belt decay to a symbol of rebirth in recent years—especially in the 7-square-mile core of its downtown business district, where billionaire Dan Gilbert, founder and chairman of Quicken Loans Inc., has invested heavily in real estate. Neighborhoods such as Downtown and Midtown sprouted boutiques and pricey condos.

Seven Years After Bankruptcy, City of Detroit Faces a New Crisis

Brightmoor is one of the areas outside of downtown that were starting to see investment as Duggan got the financial situation under control. There are now emerging business hubs in nearly every quadrant of the city—but many of those businesses, particularly those run by women of color, are shut down and financially distressed, says Kevin Ryan, program officer for cities and states at the Ford Foundation.

At the same time, the pandemic is making it physically impossible for community groups to provide aid and support, says Luther Keith, executive director of Arise Detroit, an umbrella organization for Detroit neighborhood groups. Keith expects that an annual community service day in August, when hundreds of groups take on projects across the city, will be canceled. A longer-term recovery will hinge on whether it can bring the entire city along. “That’s the dynamic that Detroit has been struggling with even before the virus hit,” Keith says. “How do we make everybody part of this idea of a comeback?”

Detroit’s challenges were daunting before the virus, so cooperation among private, nonprofit, and public entities is even more important if anything is going to change, says Henry Ford III, a Ford Foundation trustee and great-great-grandson of Henry Ford, the founder of Ford Motor Co. “If there is going to be some kind of silver lining that comes out of this terrible pandemic, maybe this will be the sort of wake-up call that we need to address a lot of the structural and long-seated issues that we have to deal with as a country,” Ford says. “It’s a gruesome thing to think about, but when people start dying at accelerated rates, that causes people to pay closer attention, as sad as that is.”

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