Post-Bankruptcy Multi-Year Government Budget Evaluation
Abstract
In the past sixty years, Detroit has traded all its titles, including a motor city with tags such as Zombie City and Broken City. However, with the financial doom incurred with the bankruptcy filing, the city has slowly picked itself up and developed strategies that are slowly gaining to aid in preventing bankruptcy filing again. This paper investigates the events before the bankruptcy filing, the contemporary situation, and lastly, recommends ways to prepare for economic uncertainties.
Post-Bankruptcy Multi-Year Government Budget Evaluation
Introduction
Detroit was the center of attention in 2013 when it filed for bankruptcy conformable to chapter 9. There have been claims across the board with the common ground suggesting that the city was its architecture, preparing for its downfall (Bomey, 2017). For a city that has lost over sixty percent of its population and another twenty-five years in the decade preceding the last census, population decrease was a significant contributing issue to the bankruptcy filing (Bomey, 2017). This discourse shall discuss the background of events leading to the filing of bankruptcy by Detroit, compare and contrast the bankruptcy patterns of Detroit with that of the national debts and deficits. It will also look into the appropriations and expenditures of the three most recent years and analyze the goals and the priorities. Lastly, it will recommend budget stabilization measures as well as alternative funding options
Background of Events leading to Detroit Bankruptcy Filing
There are standing claims that Detroit went broke owing to an eighteen billion dollars in long terms debt, which was significantly caused by health benefits as well as pensions. However, a report that was written by Wallace Tubervile revealed that the eighteen billion dollars were in no way related to the bankruptcy. It is prudent to note that pursuant to Chapter 9 of the United States Bankruptcy code, Detroit needed to look into the shortage of cash flow (Bomey & Gallagher, 2013). According to the report, it was the city manager’s report that claimed that Detroit’s government bankruptcy was caused by the eighteen million and additionally, this same report projected that the funds needed to offset the debts and set the city off the bankruptcy trail, would amount to one hundred and ninety-eight million dollars (Peck & Whiteside, 2016). Tuberville reports that this fund was also an aggressive assumption of trends in the economy.
The main reasons that caused the bankruptcy, therefore, include higher taxes, Reconsideration of Coleman Young, Late downsizing, increasing skyrocketing benefits, gifting of bonuses to the tune of one billion dollars, failure to address issues when opportunities arise, incessant borrowing, and lastly the last straw was a Gamble by the city mayor (Bomey & Gallagher, 2013). Firstly, the increased taxes were a bid by the leaders of the city to try and reverse the sliding revenue by way of introducing new taxes. It is prudent to note that there was a new income tax rolled out in the year 1972, as well as a new utility tax rolled out in 1991, new casino revenue tax in 1999 as well as other numerous tax increases (Phinney, 2018). However, despite all these taxes, the revenue as measured with the 2103 dollar signaled a forty-percent fall from the year 1962 to the year 2012 (Ransom; Wiesen, 2014). Additionally, while the increase in tax rates aided in pushing residents to the suburbs, it detrimentally drove businesses away.
Secondly, Coleman Young was Detroit’s mayor serving between the years 1974 and 1994. Notably, he has been lauded as the most ascetic mayor the city has had since the end of the Cold War. Among the accomplishments achieved by Coleman include cutting down on the workforce, the department appropriations as well as the debt in a time when the country was hit by a federal recession in the 1980s (Bomey & Gallagher, 2013). The tenure of Coleman was characterized by an increase in tax for purposes of funding the services of the government. Thirdly, the downsizing of the City’s budget was too little, too late. The total value of the assessed property in Detroit suffered a surprising seventy-seven percent in the last fifty years preceding its bankruptcy filing (Phinney, 2018; Desan, 2014). However, it is prudent to note that in the year 2004, the country downsized its workforce by an average of twenty-eight percent despite the fact that the salary reserves could not sustain the salary for the remaining workforce. In this regard, it was not up until the start of the last decade did the City lay off half of its workers. Additionally, the city also failed to exploit the advantages of efficiencies; for example, technological advancements to aid colossal production (Dawson, 2014).
Fourthly, The leaders of the city, at a time when other city heads were pushing their workers into plans that cost less, allowed the legacy costs to spring beyond control (Bomey & Gallagher, 2013). The resulting consequence was that significant stress was placed on the budget, which subsequently led to a diversion of funds from other services, for example, public safety. In numerical explanation, the spending of the city towards the healthcare for the retiree, despite the fact there was a twenty percent decrease in the general fund revenue (Desan, 2014; Doucet, 2017). Another factor is the gifting of one billion dollars to the city’s two pension funds as bonuses between the years 1985 and 2008. Saving these funds could have provided the city with $1.9billion in the 2013 dollar. Another thing is a contradiction of the myth that the city has been on a downfall. There were moments, for example, in 1990, when the city was able to balance the budget due to lag in the population decline as well as an increase in the income tax-revenue (Doucet, 2017; Gallagher, 2017; Desan, 2014). It is prudent to note that in the event that the government had taken advantage of this time and reform the government through a reduction of expenses, then the bankruptcy could have been avoided.
Lastly, the city of Detroit went on a borrowing spree from the year 2000, in order to seal the holes existing in its budgets to the point that the City’s debt had double to eight billion dollars by 2012. Important to note is the fact that under the leadership of Archer as mayor, the city sold its sewer and water ponds (Bomey & Gallgher, 2013). During the tenure of Kilpatrick from 2002, borrowing was used as an answer to every budget issue that arose. Additionally, Kilpatrick’s successor to the office managed to incur over two hundred and fifty million in debts. It is subject to these factors that the City of Detroit was declared bankrupt in 2013.
Comparison and Contrast of Detroit Bankruptcy Patterns to Those of National Debt/Deficit
The Detroit history with Bankruptcy can be a comparison and contrast aid in aligning the patterns leading to filing for bankruptcy with the National Debts and Deficits. By the close of the Fiscal Year 2019, the federal debt was amounting to $22.7 trillion (Thia, 2020). It is prudent to note that the national debt a decade ago was half this amount. President Barrack Obama’s tenure started with a total national debt amounting to $10.6trillion, but at the end of the tenure, the nation owed a total of $19.9 trillion, which translates to an average tab amounting to $1.16 trillion a year (Thia, 2020). President Donald Trump has also raked its share of debts with an average of nine hundred and ninety-one billion per year. This can be likened to the situation in Detroit, where the increase in borrowing was one of the significant factors leading to the national debts/ deficits.
It would be prudent to understand that a percentage of the debt in light of the gross domestic product is an important measure in the determination of the ability of the government to pay the debt as well as determines how much the debt has helped grow the economy. The GDP ratio after the borrowing that was intended to finance two wars saw the debt amounting to 77.3 percent (Thia, 2020). This was the debt level when President Obama came into office, and it rose to 103 percent at the end of the presidency. Similarly, the situation is similar to the borrowing habits of the city of Detroit, as evidenced by the fact that the succeeding President leaves a greater debt than the antecedent debt (Walker et al. 2020).
Thirdly, the debt owed by Detroit City in a conventional unsecured bond was only $1.1 billion. The bulk of the debt owed by the city amounting to nearly ten times the past debt was owed to the retirees in the form of debts to the unfunded pensions, obligations to provide healthcare to the retirees as well as pension bonds (. This situation is similar to the current state of the national debts. As of April 2020, the United States debts amounted to $24.1trillion. It has been presumed that the significant part of these debts is owed to foreign lenders, but such is not the case. The government debt is divided into two parts, which are intragovernmental holdings and debt held by the public. The intragovernmental debt is the debt owed by the treasury to other federal agencies. This amounted to 24.9percent of the total debt owed by the government or an amount of six trillion dollars (Thia, 2020).
Additionally, it is pertinent to note that this debt is funds that are invested into the treasury by agencies that collect much revenue from taxes than its necessary for their use. The agencies owed the highest debts include the Social Security Trust Fund, The Military Retirement Fund, Medicare, Retirement funds as well as the office of Personnel Management Retirement. The public debt, on the other hand, is owned by foreign governments and the United States investors and banks (Thia, 2020). It can be noted that similar to the case in Detroit, the federal government debt is also owed to retirees in the form of funds. However, contrary to the fact that the retirees were the largest holders of the city’s debt, the foreign governments and mutual funds own the largest share of the national debt and deficits.
However, according to the Statements of Social Insurance, of the United States Treasury Department in 2014the United States government has promised a staggering $41.9 trillion in social security, Medicare as well as other benefits meant for retired employees. It is without a doubt that the government cannot be able to pay these monies under the present-day revenue projections. If this is then combined with the current debt, then the actual national debt is $61 trillion. This is more than three times the Gross Domestic Product of the United States. This further translates to a nineteen to one debt-to-income ratio. In comparison to Detroit city, the debt-to-income ratio was eighteen to one (Bomey, 2017). It is agreeable that such a huge debt cannot be offset at once, but the trend that is evidenced by the current national leadership exudes a similar trend like the one in Detroit. It is fortunate enough that the United States has time as well as the fiscal wherewithal through its considerable tax base to remedy the debt problem before the situation gets to the Detroit point.
Interpretation of the Most Recent Three-Year Budget Trend of the Detroit Sub-National Government
This section of the paper shall provide an interpretation of the trends in the budget of the most recent three years in Detroit. The specific budget years shall be the Fiscal Years 2016-2017, 2017-2018, 2018-2019. In light of these, it shall provide both the goals of these years, the priorities as well as the internal and external challenges.
The Fiscal Year 2016-2017
To begin with, According to the Message from the Mayor of Detroit, Mike Dugan as contained in the Detroit City’ s2016-2017 Budget in Brief, ” the city’s recovery is fueled by a renewed spirit of unity as well as a commitment to creating a comeback that will include all Detroiters (FY 2017 Budget in Brief, 2017). The financial plan of that year, therefore, was intended to edge the city close to the goal by providing the required funds which could be invested in the improvement of the services as well as create opportunities through which the city’s revenue could be increased.
The priorities were determined by a study into the appropriations depending on services provided by category. In this regard, the top three prioritized categories in terms of appropriations were the Department of Public Health and Safety. This department includes the police, the firefighters, the health providers, as well as the board of police commissioners. A total of $463,875,643 was appropriated to this category. The second category was the Water and sewer, which was provided with $383,797,752 (FY 2017 Budget in Brief, 2017). The third category was the Non-Departmental which provides services in the areas of pension payments, debt payments, the board of ethics, communication services as well as general fund contributions. The total sum directed to this category was $348,953,528 (FY 2017 Budget in Brief, 2017).
The Fiscal Year 2017-2018
It is prudent to note that the City’s Four Year Financial plan starting this Fiscal Year was focused on aspects of neighborhood revitalization, public safety as well as the development of the workforce. Elementally, the beautification efforts of the city in this financial year were being directed towards the upgrading of neighborhood parks around the city (FY 2018 Budget in Brief, 2018). This budget also sought to fund the workforce training, which will boost the skills level of the Detroit people in fields such as information technology, transportation as well as healthcare. Notably, through the four-year financial plan, the city sought to fortify its fiscal governance by implementing financial structures that will ensure the sustainability of the financial structures over a long period.
The priorities of these years were similar to the priorities in the previous financial year and the same order. This year, the first priority has appropriated a sum of $477,005,455, which translates to twenty-five percent of the total expenditures. The waters and sewers as the second priority received a total of $398,479,428 in budgetary allocations, which is twenty-one percent of the total expenditures. Lastly, the non-departmental cut of the budgetary expenditures was a sum of $339,625,767 that amounts to eighteen percent of the total expenditures. Additionally, the budget categories from these departments evidenced the salaries and wages receiving the highest budgeted amount, while other expenses and employee benefits had nearly the same amount of budgetary allocations (FY 2018 Budget in Brief, 2018).
The Fiscal Year 2018-2019
This financial year marked the year when the City of Detroit came from under the oversight of the Financial Review Commission (FRC). The resulting consequence was that in as much as the FRC did stop its oversight role in the fiscal plans of the city, it still had the mandate to review the city’s finances contrary to the authority that it previously had (FY 2019 Budget in Brief, 2019). In this year, the city intended to convert twelve schools were to be converted to be after school fun centers. Additionally, the city intended to provide an employment readiness program for the high school graduates, which will run all through the year.
Akin to the previous financial years, the three priorities, as well as categorical budgetary expenditures, were prioritized in this financial year. The public health and safety services received a total of $490,400,000 or twenty-four percent of the total expenditures. The second priority, water and sewers, received $443,200,000 or twenty-one percent, and lastly, Non-Departmental funds amounted to $337,700,000 or sixteen percent. The categorical expenditures included a total of $586.7million being directed towards salaries and wages. Employee benefits received a total of $249.6 million, while other expenditures were allocated $572.7miliion (FY 2017 Budget in Brief, 2017).
Three-Year Appropriations, Distributions and Expenses Data
As can be noted from the representation above, the funds directed towards non-departmental expenses do not show many inconsistencies as it can be seen in the increase in budgetary appropriation towards water and sewer in 2018-2019. The non-departmental budgetary allocations include Debt payments, pension payment, and insurance premiums. It is prudent to note that these are near exact remittances, which explain the fact that they do not have a significant increase or decrease. Additionally, all these expenditures do not show much deviation from each other, and this cements the premise that these three are the three fundamental priorities of Detroit town.
Synthesis of Current Budget Potential or Deficiencies
The end of the financial year 2017-2018 saw the city of Detroit ending with an additional $53.8 million in surplus. This financial year marked the third year in a row that the government has closed a financial year with a balanced budget. It is prudent to note that the benefit of this was that it placed the government at a position that allowed the Federal Review Commission, which was obligated to have oversight over the city’s financials, to lift its oversight. Despite the FRC having handed power over the financials back to the city, the FRC still reviews contracts entered by the city, which for which the negotiated amount is over $750,000 as well as those who contracted period id of two years or more. The current budget potential for the city includes the fact that they have started a four-year budget plan running from 2018 through to 2022. This program provides the city with an opportunity to align its goals with its relevant tax impositions as well as other developmental plans.
However, with the recent outbreak of COVID-19, the government of Detroit City is looking at a year ending with deficits. In a budgetary plan that was reported on the 21st of April 2020, budgetary cuts were made in a bid to prevent the city from plummeting back to bankruptcy. It is prudent to note that while the FRC may have lifted its oversight over the city finances, it is still mandated to continue monitoring a city for ten years after lifting its oversight. This, therefore, implies that in the event that Detroit City finishes this year with a considerable deficit, they will be placed under the oversight of the FRC again (Boskin, 2020). Among the major changes that have been made will affect over nine thousand employees employed by the city. Notable among the projected loss includes the fact that the city is looking at a budget deficit of $100million this year and another $200 million in the next year as a result of the health crisis.
Recommendations of Alternative Financing Options, Budget Stabilization Measures, or Rainy Day Funds
Alternative Financing Options
Numerous elected officials have, in the past, grappled with the need to source for additional revenue. The critical needs of the community arise in numerous cases; for example, the COVID-19 pandemic has raised concerns over revenues, which may affect the delivery of critical services by the government. The history of Detroit has numerous sources of alternative funding, but the elected individuals have, in the past, been reluctant to accept these fundings (Stone, 2015). Firstly, there are Opportunity Zones, which are programs that have initiated to allow the private sector to invest in public projects (Dawson, 2014). This program was implemented as a means of generating funds in the underserved areas. The program has been successful in the areas that it has been rolled out with the private investors pushing in funds into several projects such as water resources as well as healthcare (Dawson, 2014). Given the priorities of Detroit City, this will be a good way to raise the required funds, especially when seeking investors who are on the lookout for tax exemption returns.
Akin to the Opportunity Zone Program is the New Market Tax Credit program. This program will allow tax credits for the investments that have been made in projects that are either public or private. However, this program demands that a justification that an investor has created jobs will be required before tax credits are granted. Additionally, there is an aspect of tax-exempt financing, which is often referred to as 63-20 funding (Dawson, 2014). This type of alternative funding is more common and works in a manner that allows public administrators to come up with a non-profit vehicle that will sanction tax-exempt bonds for facility developments on behalf of the city that formed it.
Budget Stabilization Measures and Rainy Day Funds
Budget Stabilization Funds (BSF) also known as Rainy Day Funds is the employment of a mechanism that allows the states to put aside some revenue in order to protect the state during the times when their revenue unexpectedly falls short or in the event of deficits (Wu & Shi, 2020). It is prudent to note that these funds have been widely adopted as a means of mitigating the volatility of revenues. Different states have different laws with regard to when to remit funds into the account and also how much should be remitted (Wu & Shi, 2020). As of 2017, over twenty states in the United States required that all funds in surplus after the close of a fiscal year should flow to the budget stabilization funds.
There are different measures or rules that can be taken with regard to budget stabilization. Firstly, a state or city, in our case, can decide that they allow all or some of the end of year surplus to flow to the BSF. For example, Pennsylvania follows the rule that it has to deposit twenty-five percent of its general funds at the end of a fiscal year into the Budget Stabilization Fund. Secondly, the city can decide to set aside an agreed-upon amount into the budget stabilization fund until a certain cap is reached (Wu & Shi, 2020). This measure also extends to provide that the required amount to be deposited will be dependent on the revenue collected. Take the case of Florida, where the BSF balance should always be not less than five percent of the net revenue collections (Walker et al. 2020). Additionally, the city can also decide to deposit funds from a specific source into the BSF, like Alaska, which deposits all the entire proceeds emanating from lawsuits in oil and gas litigations and settlement disputes.
Thirdly, another measure will be to require payments that will replenish the funds at the discretion of the legislature. An example of such a case is Arkansas, which has a Long Term Reserve Fund whose funding emanates entirely from the legislature discretion by way of an appropriation process carried yearly (Wu & Shi, 2020). These measures can be used singly, or they can be combined depending on the state as well as the revenue collected.
Having established measures necessary for the funding of the BSF, it would be imperative to provide guidelines on how the funds contained in the BSF could be used. One such example of a state that nearly exhausted its entire funds in Texas, in the year 2005, where the state cleared its rainy day funds to provide for the school projects (Wu & Shi, 2020). The rules for the use of the funds are threefold, and they can be used singly or jointly. They include firstly, these funds can only be used at the discretion of the legislature or mayor, and it will have to be after a regular vote, or the due process of appropriation has been followed (Wu & Shi, 2020). Secondly, they can be sued in the event that an economic emergency has been declared or in other circumstances that are most likely to cause slow economic growth. Lastly, through a supermajority, which can either be three-fifths or two thirds, the legislature can decide to make a transfer.
Conclusion
It has been established that Bankruptcy filing is not an event but rather a process. In the case that a state or a city files for bankruptcy, then there are certain key indicators that could have been identified early and acted upon to prevent economic downfalls, as evidenced in Detroit. In the case of Detroit, a combination of administration errors, extreme borrowing as well as failure to act on time led to the city being affected by the deficits. The city did, however, manage to pick itself and seven years later has been able to record three consecutive years with an end-year balanced budget. In light of the looming pandemic, as it is, the economic strength of Detroit City is yet to be tested, with the mayor announcing a plan that will affect over nine thousand city employees. Through the development and implementation of budget stabilization measures, the city can be able to protect itself from economic uncertainties like the one presented by COVID-19 pandemic.
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