Charting Detroit’s Fiscal Future: Challenges and Opportunities

 

RICK MATTOON: Good morning. I'm Rick Mattoon, Vice President and Regional Executive at the Detroit branch of the Federal Reserve Bank of Chicago. I'd like to welcome you today to today's Project Hometown panel, Charting Detroit's Fiscal Future-- Challenges and Opportunities.

Today's event is another installment in the Chicago Fed's Project Hometown initiative. Started last year, Project Hometown is dedicated to identifying the strengths and challenges facing the many hometowns in our Federal Reserve district. Recovering from the pandemic will require extraordinary effort. And there's a need to identify strategies that promote inclusive economic growth as we recover.

Project Hometown is designed to bring together civic leaders, expert researchers, Chicago Fed staff, and concerned residents to discuss key issues. Through these diverse perspectives, we'll examine how our hometowns can recover from the pandemic, overcome longstanding inequities, grow stronger, and provide all people the opportunity to thrive.

This morning's program will look at the critical issue facing the financing of local governments. Local governments were in the front line of fighting the pandemic. Local revenue sources came under pressure as economic activity was locked down in many locations. At the same time, demand for many government services, particularly health services, spiked during the height of the pandemic.

In this context, Detroit provides a particularly important example and case study of the issues facing local governments, both during COVID and adjusting to a new post-COVID environment. In particular, as we will hear, Detroit has a somewhat unique revenue structure they will face some specific challenges. However, all is not bad news. The panel will also discuss the more than $800 million that Detroit will receive in federal revenue through the American Rescue Plan. A key question is, how should that money be used?

To investigate these important issues, we've assembled an all-star panel of experts. This includes Evan Cunningham, who is a senior economist in the Office of the Chief Financial Officer of the City of Detroit, Steven Watson, who serves as Detroit's Deputy Chief Financial Officer, Nathan Anderson, a Senior Economist with the Federal Reserve Bank of Chicago, and Anika Goss, the CEO of Detroit Future City. Complete bios of the panelists are listed on our website.

To start our program, I'm going to turn things over to Taylor Griffin. Taylor is a research analyst with the Chicago Fed in our Community Development and Policy Studies areas. Among her many talents, Taylor has a research interest in state and local public finance. Taylor will give us an overview of Detroit's fiscal structure and describe some of the issues facing the city as kind of a way to level-set our discussion. So with that, Taylor, please take it away. And welcome to our program.

Well, while we figure out what Taylor's problems are with the her bandwidth issues and the ability to join us, maybe we'll just skip ahead and actually go to Evan Cunningham, and then circle back to Taylor.

So one of the things that we had asked Evan to do is-- Evan is a senior economist in chief financial officer's office-- is to talk about some of the economic conditions that Detroit faced, both during the pandemic and what is happening sort of post-pandemic. So Evan, welcome to the program. And why don't we go ahead and have you discuss sort of where Detroit's economy stands right now.

EVAN CUNNINGHAM: All right, excellent. I'd be happy to. And thank you for the introduction as well. So let me go ahead and share my screen.

All right, and can everybody see that OK? All right, excellent. So to start out, I'm just going to be hitting on some high-level points in regards to the City of Detroit's economic conditions, currently, using the most recent available data. And we'll be comparing that to the forecasts that have driven our revenue estimates on the budget with our February revenue conference that was put together through the Detroit Economic University Partnership, which involves the three universities being University of Michigan, Michigan State University, and Wayne State University, which all contributed to the forecast.

So to start out, let's talk about the employment situation. And I wanted to kick that off by focusing on a measure that everyone is familiar with, being the unemployment rate. You'll notice the green line at the top, representing Detroit, where the solid portions of the line are what we observed, and the dashed portions of the line being the forecast. The bottom line that is that orangish-yellow is Michigan's forecast. And again, this was prepared using data that was available as of February 2021.

You'll also notice that the teal dot represents the data that we have through 2021. So it would be an average of the unemployment rate that we've experienced from January through May, where the gray dot represents that same measure for Michigan.

And you'll notice there's quite a stark difference between what was forecast and what we're currently experiencing, where the unemployment rate is 9.8% for Detroit, again, that average being from our average experience from January to May. And that puts us at a level close to what we expected to experience in 2023. You'll notice the same for Michigan, where the unemployment rate that we've experienced thus far in 2021 is, on average, 5.2%.

Now, again, that's a very positive sign for labor demand, where we're down from the highs that we saw in Detroit when we were looking at about 20% in 2020. And again, on average, throughout the entire year. Now, that being said, there is a little bit of context here that is missing with the unemployment rate that does remind us that there is still work that needs to be done before we're back to where we were pre-pandemic. Because the unemployment rate is a rate relative to the labor force size. And there has been changes in labor force that has prevented us from returning to pre-pandemic levels, and some of that being due to either choice or in circumstances outside of people's control that may be COVID related-- or that we are certain that's COVID related-- that will prevent them from returning to the labor force, some being child care, child care needs, the illness itself, again, those that we've lost to the pandemic. There are so many other factors that have affected labor force levels that keep us from returning to those pre-pandemic levels.

So that being said, labor force still isn't where it needs to be. And also, employment is still lower from what we saw pre-pandemic. And again, that's a phenomenon that not only the state has experienced but also the city of Detroit as well.

So moving on, the other side to it is wages. And again, this experience is where we deviate from the state a little bit in terms of not only what was forecasted but also the current experience. Now, before we dive into these points, there are few distinctions that I need to make in terms of data sources.

So the green line, representing Detroit, represents a specific measure of wages, those belonging to Detroit establishments. So you'll notice, in the legend, where we talk about jobs in Detroit, that specifically mentions wages paid by Detroit establishments which employ nonresidents that work in the city, along with residents that work in the city. The gray line, which you'll notice, in the legend, represents Detroit residents, specifically covers wages earned by residents working inside of the city and outside of the city. In terms of data sources, we're using the Quarterly Census of Employment and Wages, which is a BLS program, to capture that measure of wages for nonresidents and residents working in the city, while the gray line uses the American Community Survey through the census program, which again captures specifically Detroit residents.

There's also a frequency difference here, where with the QCW data, we do have a dot showing the data that we have now, which actually is really 2020. There is about a two-quarter lag, so we're still waiting to get the full year. But we do have newer data that wasn't available at the time of the forecast, which is where we're getting an average annual wage of the $71,700, which again is on forecast.

We do use a similar measure for the state of Michigan, where we do look at that quarterly census data, which I refer to as QCW data, when looking at wage movements. And that's where we're getting that $56,700 number, which is still slightly below forecast, but not too far off.

Now, I will say that Detroit does have the benefit of not only having a higher concentration of higher-paying industries in the city relative to the state, one of those key ones being management of corporations and enterprises, which you would think of as your headquarters, but also a higher concentration of jobs that can be done remotely. So that has buoyed wages somewhat, and also has kept us on forecast.

That being said, when looking at the Detroit resident line, I did mention that that is sourced from the American Community Survey, which is a one-year survey released every September. So we don't have an up-to-date number for that. And we are waiting for those survey results. But I also wanted to show the stark difference between the two in terms of the wage rates we have seen and forecasted, since that will be an important point to keep in mind visually as we continue with the conversation today as well.

Lastly, a new story that has really taken focus here is inflation in terms of price changes. And here I wanted to break out, specifically for the Detroit-Warren-Dearborn MSA, which I'll refer to as the Metro Detroit area, looking at price changes in core goods, which excludes food and lodging, and then also specifically looking at food prices and motor fuel, which will be on the next slide.

So again, while it does look volatile, you can see, on the scaling, it's awfully not that much movement, oscillating between that 1% and 3%, which has historically been that experience until we started getting towards April.

Even with food prices, you'll notice that, previously, it really didn't move around a lot. We stayed close to 0% range year over year-- these are year over year measurements-- to where, even in October, prices shrunk. October '18 relative to October 2017, prices shrunk.

So in moving from an environment pre-pandemic where we've seen food prices not move around that much, to where now we're starting to see 5% changes year over year, it does look extreme and feels extreme. And even relative to some of the other times where we did hit, say, 3% inflation, say, towards the end of 2019, you'll see that it isn't as drastic of a movement, but still noticeable and still one that bears worth watching.

Core goods, not so much. It's a little bit more stable since there are so many more pieces in the aggregate that, again, haven't moved around a lot relative to others. But I still wanted to show that, as we're looking at core goods, we're still more so on familiar territory and haven't seen that volatility that we've seen in food prices.

Now, in terms of volatility, that's where we really see it in motor fuel. And again, either anecdotally or otherwise, everybody's felt that switching between gas prices dropping in the early stages of the pandemic to the most recent upswing, where you can see the trough being around a 40% year-over-year change in motor fuel prices, going to April 2020 from April 2019, to where, again, the more recent data point in April, approaching 70% to 80%.

So again, another area that is worth watching and also does have an impact on the region in terms of travel and really just people returning to normal, returning to normal spending patterns, either downtown or otherwise. And one of the unfortunate things about putting together graphs is that there was actually recent data released. I think yesterday we did receive an update in regards to CPI. Which again, unfortunate timing. But that being said, we are still seeing a continuation of these price increases, more so for motor fuel and food, not so much for core goods.

So while we can't say that a new trend is establishing or that we can say, oh, this is a new trend that we have to adjust to since we've only had a few data points that's shown this recent acceleration of prices, this is one where it's just worth watching in regards to how it impacts Detroit residents and also just our overall conditions as we begin to recover. And with that, that is all I have.

RICK MATTOON: Great. Thanks very much, Evan. That was terrific understanding of some of the dynamics affecting Detroit's economy. I particularly appreciate having all that sort of Detroit-specific data. Often that's missing in a lot of the analysis that people are putting out there. So that was really wonderful.

So now we will try and see whether or not we can go back to Taylor Griffin. So we sort of reorganized our program. So actually this will work just fine. Because Taylor is going to talk to us about some of the baseline issues in terms of what Detroit's revenue structure is and maybe some of those challenges. And she's put together some slides that to illustrate that. And that'll tee off much of the rest of our discussion.

So Taylor, welcome back. And hope you've got your connectivity problem solved.

TAYLOR GRIFFIN: Yes, thank you. Good morning and good morning, everyone. I feel like we've all experienced it. So I appreciate you working with me.

And yes, I will share. Here we go. So good morning, everyone. I am Taylor Griffin. And I'm so excited to be speaking with you about Detroit's municipal finances and the city's General Fund in general.

Detroit is very diversified, and it's diversified to fulfill its responsibilities to its residents. Given the COVID-19 pandemic, as we are all talking about today, we're looking at how COVID-19, the pandemic, was likely to impact those revenue sources.

From the beginning, property taxes and state shared revenue have been a longtime core of tax revenue of Detroit. But as we see, municipal income tax and eventually utility and wagering taxes, casino taxes, were added to help diversify the revenue structure. As we've been talking about and my colleagues will suggest, we are exploring the primary sources of the general fund revenue. And we want to understand their implications for Detroit's fiscal health. As we see, there is trends here that indicate that municipal income tax and wagering taxes represent large portions. In fact, municipal income tax is the largest revenue source of the tax structure. And that indicates a dependence that might be impacted by COVID-19.

Property taxes are the oldest and are Detroit's fourth-largest revenue source. They have been affected by the pandemic, but lightly, only about 2%, as we see over property taxes. Property tax revenue may be affected, however, by population loss and different things like that as we move forward.

Next, the second-largest source of revenue for the city of Detroit is state shared revenue. State shared revenue is the second-highest-level source. It's collected by sales tax at the state, and distributed back to cities and villages and towns. The constitutional formula is on a fixed base, and the statutory formula can be changed given the state. We know that the state collects a 6% sales tax.

And Detroit's municipal income tax, like I mentioned before, is the largest source of revenue. Detroit actually levies the highest income tax of any cities in Michigan. But we know that there is a 2.4% resident income tax, 1.2% non-resident and for corporations. What's most interesting to me about this is that athletes and entertainers and their staff also experience non-resident income tax moving forward, and contribute a lot to the city.

Wagering tax, which is really exciting-- Detroit, in January 2021, officially launched online sports betting and also online gambling tables as a source of revenue. I know it was particularly impacted by COVID-19, as casinos closed between mid-March to August, and then were reopened with limited capacity, and closed again from November to December in 2020. So now that they're open again, but still with limited capacity, we expect to see great things moving forward.

And lastly, as most of my colleagues will talk about as we move on, some of the real questions we have are about how COVID-19 might impact Detroit's revenue structure. We know that income tax laws in Detroit clash with remote work and the reality of remote work that we've had. We know that the largest income source is municipal income tax. And we want to know what that means for non-residents, commuters, and what that might use their consumer behavior. We know that they're only taxed, nonresidents, when they are actually working physically in the city. And if COVID-19 restrictions, as we move forward with work, demand more telework, what will that mean for the future of nonresident income tax in Detroit? And I'm excited to see what some more of my colleagues have to say about that.

RICK MATTOON: Thanks very much, Taylor. That was a terrific explanation of Detroit's revenue structure and some of the issues that we're facing. And I also applaud you for your grace under pressure as you were trying frantically to reconnect during this period of time.

So next we're turning to Steve Watson, the deputy CFO, who obviously is a very busy guy at this point. So Steve is going to talk to us about some of the policy measures that Detroit took to sort of navigate the pandemic, and then also talk about sort of the prospects to look for.

A particularly important aspect of his work recently has been sort of charting a path for how Detroit will be spending the American Recovery Plan funds. So with that, Steve, welcome to our conversation and thanks for joining us.

STEVEN WATSON: Thanks, Rick. So you know, Detroit is really fortunate to have this diverse range of revenue sources that Taylor just went over. And as she also mentioned, some of those were highly sensitive to the pandemic. We've seen about $400 million in revenue losses for just our fiscal year 2020 and 2021.

And for context, our general fund budget is only about a billion dollars a year. And those losses were led by the income tax and the wagering tax, specifically driven by nonresidents working remotely and the casino closures and capacity limits that were put in place to protect public health during the pandemic.

And so those peak revenue losses, while unique to the pandemic, are going to reveal some ongoing challenges for the city, especially, again, from this issue of nonresidents working remotely. And so one of the things we're certainly looking at very closely is what will that look like in the future. A lot of our top employers right now are starting to return to offices this summer. Some are still holding off a little while. Many are talking about hybrid work plans. I'm in Detroit, but I'm also at home right now too, as many other folks on this call are. So that's kind of giving you some indication.

Overall, our current revenue outlook is that city general fund revenues won't recover to our 2019 levels until 2024. And I mean, that's a conservative forecast. But again, there is this huge amount of uncertainty around what the future of work in the city looks like and our tax base from it.

But at the beginning of the pandemic a little over a year ago, and thanks to great work Evan and our team were doing then and continuing to do today, we were able to estimate our revenue losses from the pandemic quite accurately and very early in the pandemic. And that allowed the city to act swiftly to rebalance both last year's budget, when we only had three months left in the fiscal year, as well as the budget that the mayor had just proposed a year ago. We were swift to amend that to rebalance it for the subsequent year.

And some of the strategies we deployed to do that, which were probably common among a lot of cities, is we suspended some of our blight removal and capital programs, except for those that were a life-safety matter. We delayed many new initiatives that had been proposed in the budget, we renegotiated contracts, and a really big source of savings was we reduced over 2,000 employees' hours through a combination of furloughs and the state workshare program.

Through that action, employees maintained all their health coverage and were able to access those supplemental unemployment benefits that were enacted through the CARES Act last year and extended multiple times over this past year. And that was a huge safety net not only for our city employees, but allowed the city to save on those wages as well as we navigated the pandemic. We also spent down some reserves that we had built up prior to the pandemic, which were certainly crucial.

And overall, with those actions and thanks to the relief provided by the federal CARES Act last year, we were able to end 2020 with a $100 million surplus. And that has helped us get through the pandemic as it has dragged on through our fiscal year 2021. Over a year ago, we were talking things like, well, if the pandemic lasts, you know, six months, what will that look like? If it's another month after that? I mean, we didn't realize we'd only just now starting to return to offices this summer when we were looking at this over a year ago.

And so with the relief the federal government's provided, we've been able to successfully navigate the pandemic as it has evolved through to its point today and our budget starting the fiscal year that just started this month. And now the latest news, as everyone's aware, is in March, the federal government passed the American Rescue Plan Act among several crucial provisions to support individuals through stimulus payments, unemployment, child tax credits and the like, the act also provided direct assistance to state and local governments. The state of Michigan is receiving $6 and 1/2 billion, county governments are getting hundreds of millions of dollars, the school district is getting over $800 million. And the city of Detroit directly is receiving $826 million. And more to follow, hopefully soon, for transit, infrastructure, there's the bill the governor just signed around expansions of pre-K programs and early childhood programs. So a lot going on to say the least.

So with the city's funding, we're taking one kind of guiding principle to this. And that's all this federal relief we've been receiving, it's one-time money. It's a lot, don't get me wrong. But we can't use it to build up recurring costs that we can't sustain after a few years.

And so our plan, which the city council approved, on June 29, an overall spending plan structure for the $826 million. A lot of projects and program details still being developed and rolled out. So there's more to follow.

But the broad brushstrokes of it is that we're planning to use about $400 million of the funds to stabilize our budget in the near term and follow through on some of those deferred needs from during the pandemic, some of the capital infrastructure, blight removal programs that were temporarily suspended. And we're going to use the remaining $426 million for what we're calling the Detroit Future Fund. And the idea there is to do a one-time surge investing in Detroiters and our community in ways that will not only of course support Detroiters but will also drive continued improvements in our tax base and the city's fiscal future.

And so, really high level, that includes things like neighborhood improvements, neighborhood cleanup programs, expansion of our community health corps, recreation centers and park improvements, and substantial investment in employment opportunities and skills training. Again, looking back to Evan's slides, looking at opportunities to improve the income of Detroit residents to help begin closing that gap between that Detroit-resident line and that jobs-in-Detroit line.

We're investing in home repair grants to improve the housing stock and the wealth-building for Detroiters, more for affordable housing and homeownership opportunities, investments in public safety and closing the digital divide, and also programs to support our small businesses in Detroit who were affected not only by the pandemic but recent events as well. And so with all of that, happy to hand it off to our next panelist. And looking forward to questions at the end.

RICK MATTOON: Thanks very much, Steve. That was an amazingly comprehensive description of how Detroit has handled the various issues around the pandemic and sort of how it plans to deal with the American Rescue Plan money.

So our next panelist is Nathan Anderson, who is a senior economist in our Community Development and Policy Studies group at the Chicago Fed. I should warn you Nate is a dual threat, he's both a lawyer and an economist.

And one of the topics that we've sort of cued up here is a particular challenge for Detroit is how are they going to deal with this taxation of nonresidents when it comes to the income tax base. Nate has a lot of experience in tax law. So he's going to tell us both what the options are and what is happening in other cities. And so relying heavily on non-resident income taxes for making their budget work.

So Nate, thanks for joining us. And I'll turn things over to you.

NATHAN ANDERSON: All right, thank you very much, Rick. So as we discussed, Detroit imposes an income tax on residents and on nonresidents. And the law here is widely understood to be that residents pay the income tax to Detroit regardless of where they work, whereas nonresidents paying income tax on work they perform while physically in Detroit.

So if you are a nonresident, and you earn $40,000, and you work from home half the time, Detroit can tax only 50% of your income, only $20,000. And of course the problem is that, during the pandemic, more people worked from home and they did not commute to Detroit anymore.

And so then people started to ask, wait a minute, are we sure that Detroit can't tax income when people work from home? And the Michigan Department of Treasury released some guidance on frequently asked questions. And they said, no, there's no provision in the law that permits cities to tax wages earned outside of the city.

And then, further, state law prevents Detroit from increasing its income tax rate for residents or for nonresidents. So they've reached their maximum amount.

So where does this leave Detroit? Well, this depends on two things, one of which we've touched on already. And that is how many nonresidents will work from home, and how often will they do so. We already know, from the previous slides, that nonresidents tend to make a lot more money than residents do, on average. And so their revenues are really important to Detroit.

So how often will they work from home in the future? And then, second, what power does Detroit have to tax nonresidents when they're working from home? So on the first question, it is really difficult, of course, to predict how common work-from-home arrangements are going to be. One thing that's going to affect us are employer decisions to offer work-from-home. And factors that influence that there are-- there are many, but they include the price of commercial real estate, the relative productivity of people who work from home versus work in person, and also whether employers think that allowing people to work from home helps them attract better workers and more reliable workers or allows them to retain those same workers. We don't the answers to a lot of those questions yet.

And then the second big thing, of course, is on the employee side. What decisions will employees make about demanding the ability to work from home, or if they have the option, to use that option? And a lot of this comes down to employees' tastes-- like do they like working from home? Do they not? And the other, really, is convenience or constraints is another way to think about it. Like is child care easier or more affordable near the home, outside of Detroit, than it is in Detroit? Are commuting costs large? If you did take public transportation, which is relatively less important in Detroit, how do you feel about that with COVID or without COVID in the future?

And of course I'm assuming that the pandemic, at some point, ends, or we continue life without it. But obviously that could influence things.

And then I think the last thing is, will local income tax affect decisions? So if the law remains that you can't tax income from people who work from home, are more people are going to make the decision, hey, I want to work from home, because my city doesn't tax my income, or it only taxes it at 1%. And the rate in Detroit is much higher. So why would I subject my income to that?

So then the next question is, well, what can Detroit do with these facts? And they actually have more power than you think to tax nonresidents. But likely the state of Michigan would have to give its blessing for this to happen, at least in some fashion.

And so the bedrock of the law here is that Detroit only has taxing power to the extent that Michigan provides it with such power. And Michigan did so in the City Income Tax Act. And what they say is that you can tax nonresidents only on compensation for services rendered as an employee for work done or services performed in Detroit.

So that seems pretty clear. All right, they got to be in Detroit. But at the same time, there are other cities that rely on nonresident income taxes that have that exact same language in the law but interpret it very differently in their state. So Philadelphia, for example, the Pennsylvania law says Philadelphia can only tax nonresident compensation for work done or services performed or rendered in Philadelphia. However, the rule, the way this is applied in Philadelphia is that if an employee is not required to work from home, the employee's entire compensation is subject to Philadelphia income tax.

And so Philadelphia has explained this saying, well, if you choose to work from home because child care is more convenient, Philadelphia still taxes you and your full income, even though you never set foot in Philadelphia because you always work from home because child care is more convenient there.

During the pandemic, though, in Philadelphia, workers were generally treated as being required to work from home under stay-at-home orders or states of emergency. And so Philadelphia did not tax their income. So during the pandemic, it was similar to Detroit how it worked.

Now, in Columbus, Ohio, they have the same statutory language-- "compensation for work done or services performed or activities conducted in Columbus" are the only things that's taxable. However, the rule there is that if you work from home for fewer than 20 days, Columbus can still tax all your income. And then, during the pandemic, the Ohio legislature suspended this rule and passed another rule that was temporary, saying wherever you worked, basically, in March or February of 2020, that determines who gets to tax your income. So everyone who worked from home, let's say, for all of the rest of 2020 after the pandemic started, Columbus still got to tax all their income, even though they never set foot in Columbus and certainly didn't work there.

So it does seem that cities in general do have a lot of power to tax nonresident income, although not necessarily in Detroit because of the interpretation of the Treasury Department. But is there any limit on this power to tax nonresident? So yes, but it's not clear how strong it is.

So for example, a state can always prevent it. A state can always say, you can't tax nonresident income. But absent that, the Due Process Clause of the Michigan Constitution and of the US Constitution might limit this power. And the Supreme Court has defined the limits of this power and the Due Process Clause in the context of state taxation of nonresidents. And what they've said there is that you can't tax a nonresident unless that person has some definitive link, a minimum connection to the state, and so that you don't offend, quote, "traditional notions of fair play and substantial justice." I don't think anyone knows exactly what that means, but everyone has some idea of what fair play is.

But the Supreme Court has said, for example, that even if a company has never set foot in a state, it has no property there, a state can require them to collect sales taxes. This is like the Wayfair case, but applies to Amazon as well. And then other states like New York have said-- there was a case there where they had an employee who worked in Tennessee 75% of the time for a New York employer, and only traveled to New York and 25% of their workdays. And New York, the court there said, we can tax all of that income and it doesn't violate someone's due process rights. It's totally fair.

But the question is, do any of these due process rights really apply to cities that are taxing residents of Michigan that are not residents of those cities? And I think the answer there is, probably, in some capacity. But there's not, I don't think, a wide agreement on the extent to which they allow protection. Because courts give the state legislature a lot of power to say how a city can tax residents or nonresident.

And lastly, in conclusion, one of the reasons I bring this up is because there have been challenges, in court, to these city income tax laws. And the most recent one is in Ohio, where you had employees who started to work from home. And Columbus said, hey, the state just passed this law I told you about earlier. And we're still going to tax your income even though you're not setting foot in Columbus.

And the plaintiffs alleged, that violates our due process rights. It's just not fair. I'm not even in Columbus. How can you tax me? But the court said, hey, regardless of where you do your work, the income you receive comes from the fact that the work you do benefits your employer, who's located in Columbus. So that's fair. And also the legislature says this is OK. And states have the power to tax their residents and localities.

So in conclusion, it's difficult to predict how many employees will work from home. But this remains a serious threat to Detroit tax revenues. Some other states allow cities to tax nonresidents for at least some of the income attributable to days worked from home. But the state of Michigan does not currently interpret its laws as allowing Detroit to do that. But it could do that, or at least consider doing it in part, allowing some of that revenue to be taxable to Detroit, subject to these state and federal constitutional limits. Thank you.

RICK MATTOON: Thanks, Nate. That was a master class in understanding the complexities of nonresident income taxes. So we really appreciate that.

So the last thing we're going to do is we're going to pivot a little. So our last speaker is Anita Goss, who is the CEO of Detroit Future City. About a couple of months ago, Detroit Future City released what I consider sort of a must-read report that looked at sort of the conditions facing particularly Detroit neighborhoods. It had a number of unique and interesting policy options for how you sort of include and increase growth within the neighborhoods and spread economic growth really across all of Detroit.

So I thought Anika could give us a unique perspective both on how she would ideally have liked to see the American Recovery Plan money being spent in Detroit, and then just also discuss this notion of how do we improve inclusive growth outcomes within Detroit. So with that, we're very pleased to have Anika. Thanks for joining us.

ANIKA GOSS: Thanks for having me, Rick. This has been a fascinating conversation. I really appreciate it. And I feel like my modest comments are just are not worthy of the rest of all of you.

I think what's really important from our perspective at Detroit Future City is if you go back to Evan's original graph about the difference between Detroit residents and jobs in Detroit and the gap that was $35,000 to $71,000. And we have been looking at the same thing. And I think the State of the Economic Equity report that we issued in May at Detroit Future City was actually pre-pandemic numbers. And I think we're seeing the same trend. So even if '21 ACS numbers look better, they're not going to close that immediate gap about $35,000 between the two.

And I think it required for us at Detroit Future City to look at all of these issues that can end up impacting how Detroit grows in comparison to the region, and how Detroiters can actually begin to benefit and prosper equitably, and the role that the city plays in that, which is a really critical one. And so for us, really thinking about not only employment and employable Detroiters-- and in the report, we really talk about both unemployment, employment, and then not even in the workforce at all. And there's a substantial amount of Detroiters that are not even in the unemployment category, which means they're not even looking for work. They're completely out of the loop on that.

And if you are really trying to develop a strategy to grow your city, you have to really be able to think about all of these issues, and furthermore, how all of these issues impact the majority of the demographic in Detroit, which are African-Americans. And so the inequities that we're talking about also follow along racial lines as well. And the outcomes for African-Americans and the outcomes for Latinos in Detroit are staggering in comparison to both whites in Detroit and whites outside of Detroit. And we're seeing that in lending practices, we're seeing that in housing values, and we're seeing that in employment outcomes and wages and small business growth. So across the line we're really concerned about how all of these factors can impact Detroit's future.

And so one of the ways that I think is going to be really, really important for us to be able to focus on is-- and I'm going to share one quick slide-- the way that we're really thinking about this in terms of Detroit is that we want, especially if we have this opportunity-- I hope everybody can see that OK-- if we have this opportunity to really think about ARPA resources, we have this one-time shot to really think about how we can make these investments to improve the conditions of Detroiters and leverage other investment that's going to follow that one shot of what looks like will end up being over a billion dollars into Detroit, in totality, between the state and the school district as well as Detroit.

And so as we continue to track this data in all of these economic areas, we really need to look at where are their opportunities to make investments that create equity. And what is equal? Which means that we're lifting up Detroiters to try to close-- to at least bring them up higher than where they were. And that's what we really think about how do we make sure that we're providing opportunities that are equal to everyone else.

However, there's also an opportunity to look at where we can specifically close gaps. And we describe that as being just. So if we're able to create new opportunities in any of those categories, whether it's small business lending or whether it's employment opportunities, making sure that we are being intentional about what kinds of investments are considered just.

And then the final one, which pushes, I think, all of this a bit harder, is to think about where are there opportunities to make investments that could be considered reparative and offset problems and inequities and poor investment decisions that have been historically made and that have created historical harm in Detroit in the past. We can think about that for infrastructure investment and how we actually invest in neighborhoods that are traditionally low-income and highly blighted, making new investment around infrastructure in those places, and actually being really intentional about the outcomes that you want to see in neighborhoods that are not necessarily economic engines on their own. That's the kind of intentional investment that we're talking about. Or even closing those gaps around lending practices, which we know is a challenge. It's a challenge for Detroit. It's evidence-based that the small business lending in Detroit is significantly lower than it is for the region as well as housing values being significantly lower in Detroit than they are in the region.

And so now is the time, coming out of the pandemic and coming out of an economic closure, where we can be really intentional about the intentional investment and the outcome that we really want to be able to see. We can stop sharing.

RICK MATTOON: Thanks very much, Anika. That's a really useful framework for thinking about how to use kind of one-time money in particular to change maybe some of the dynamics that we're seeing on the ground in Detroit. So really appreciate your perspective.

So we do have time for questions. And there's many, many that come to mind, and also some that were submitted in advance. And one that I'd be remiss if I didn't get to-- and this is for Steve, just to give you a warning. And this probably came from somebody from Illinois. So in Illinois, we're somewhat obsessed with underfunded pensions. And so one of the issues that I think has come to the fore is, as many people know, Detroit hadn't been required to make pension payments for a period of time as part of the grand bargain coming out of the bankruptcy.

So the issue at this point is, so how is Detroit going to incorporate now having to make pension payments into this sort of new fiscal dynamics they're facing, and sort of like what are the plans for doing that?

STEVEN WATSON: Yes, and thank you for that question. So that's absolutely right. Under the terms of the city's bankruptcy case, we have been spending the first 10 years since the bankruptcy reinvesting in city services and infrastructure. And we'll resume making payments on the legacy pension plans that were closed and frozen during the bankruptcy starting in 2024.

The pandemic also derailed some of those reinvestment activities. And so what I mentioned earlier about how we were using some of the ARPA funds to stabilize our budget and follow through on some of those city service and infrastructure investment commitments, that's part of making up for that.

But to pension specifically, yeah, we go from having a zero contribution in 2023 to a full contribution in 2024. Estimates are as much as around $200 million, or about 20% of the General Fund budget. Obviously that estimate can kind of go up and down based on the performance of the pension plans.

But what we've put together, going back to 2017, is something we call the Retiree Protection Fund. So this is a trust fund we've set up at the city where we've been depositing surplus city dollars and budgeting recurring contributions every year in our budget to build up not only a pot of funds to help us make those pension contributions, but to really help grow the general fund budget into making those payments as an ordinary recurring expense.

So for instance, in the budget year that just started, we out of our billion-dollar budget, we're budgeting $85 million into that trust as well as contributions in the years that follow, which is giving us a gradual ramp-up to those full contributions. Basically it takes what we had as an initial 10-year break from pensions, and we're working on building a "10-year or so" ramp-up to those full contributions, making increasing payments every year from the General Fund.

Right now, our strategy is, in addition to identifying additional funds for that trust, continuing to, like we talked earlier today, identify strategies to grow our tax base, be more efficient in reducing expenses so that we can fit those contributions into our ordinary budget

RICK MATTOON: Thanks very much, Steve. That's a very complete explanation. And it does sound like you have a clear strategy in mind.

So my next question goes to Anika. And I think one of the things you highlighted and also was highlighted that in Evan's slides is this disparity between income made by some of the nonresidents versus the residents of Detroit. So one of the things I'm interested in is what are the strategies for improving the employment opportunities for Detroit residents to get them more on par with what the nonresidents are experiencing?

ANIKA GOSS: Well, we think that one of the issues that's happening is-- some of it is just hiring practices. Many of these companies that have come in to Detroit our new companies to Detroit. And so they have brought their own talent with them. It's a very traditional economic development approach, where it's a new company, you're dealing with some local recruiter, they have very specific talent requirements, and if they don't think that Detroiters can meet those talent requirements, they're bringing much more of their own team from their place where they came from or they're recruiting from outside of the city.

So I think that's one thing. But the other thing is that we also know that Detroit does really fall behind on some key indicators. Only 14% of Detroiters have an associate's degree or higher. So that higher education gap is a real, real problem.

And so we really think it's important to not only talk about the trades and boosting trades in Detroit and skilled-trades education in Detroit, but also boosting higher education in Detroit so that they can qualify for those jobs. But furthermore, I also feel like we end up accepting-- when companies are coming into town, we need to begin to set a higher benchmark, a higher grade, for how much we really want our Detroiters to make. We really need to be at a baseline of $18 an hour in order to begin to really think about how to increase those wages for Detroit residents.

And right now, Detroit residents are averaging around $12 an hour. So I mean, that's a big jump to go from $12 to $16. But if your base is at $12 an hour, if that's where we're starting from because we're like, oh, we just want to get Detroiters employed-- and we do. We do just want to get Detroiters employed. But we have to be able to set some much higher standards since we have this opportunity right now.

RICK MATTOON: Great. Thanks so much, Anika. That was a very articulate description. So I have a question, actually, for Evan. And this is kind of like the standard economist question, which is, Evan, when you're doing your forecasting at this point, are there any sort of obvious either upside or downside risks you're looking at this point that are specific to Detroit as you think about what recovery's going to look like?

EVAN CUNNINGHAM: Yes. And a lot of those risks, again, are based on uncertainty. So it's really looking at, well, what are the largest sources of uncertainty in the forecast?

And two, particularly when we look at-- and I'll talk a little bit more towards revenue forecasting when we're looking at wagering taxes and income taxes, although income is the most economically sensitive. That's where, again, the entire conversation about remote work, that remains our most uncertain area, where we're not exactly sure-- there's no trend.

And also that comes with a challenge in terms of forecasting during a recession. All the previous trends are broken in terms of increase in remote work, how it's going to continue, and then even the more deeper questions about, well, what occupations-- and what are their wages-- that are likely to continue to promote work versus those that aren't.

Even looking at some of the things that can't be quantified as it relates to wagering taxes, even as Taylor is mentioning where we're looking at, say, online gaming and things like that. Are the same patterns that we saw in terms of people going to the casino or playing online? When looking at their own spending choices, are they going to spend in the same way that they did before COVID happened? Are we still going to see those consumption patterns that have supported jobs downtown, particularly when we think about the hardest-hit sector being the service sector. How is that going to impact employment and income taxes? So all of those factors are uncertainty that creates risks within the forecast.

Now, I will say all of that is more downside. But it also could be upside. Where we're trying to think conservatively based off of prior trends, and also any-- depending on what you call it. You can call it qualitative, you can call it anecdotal. [CHUCKLES] But some of those pieces that aren't tangible or measured that help guide us in terms of how we adjust our assumptions.

But I would say that, in terms of just ongoing discussion and trying to piece out those areas of uncertainty and what makes the most sense based off of what we're seeing either in the news, from people that actually live those situations, and trying to be in their shoes and understand some of the decisions that they have to make, is really how we try to customize the forecast for this recession and better quantify those upside and downside risks.

RICK MATTOON: Thanks, Evan. I think you're absolutely right. I mean, this notion of uncertainty-- and certainly this is a time for humility for economists. Because as you said, most of the trends, simply we don't have any trends to go by. So it's refreshing to hear your perspective on that.

We're coming up to the end of time. I do have one final question for Steve. And this is not to put you on the spot, Steve. But I'm curious to hear, do you think that, in putting together the mayor's proposals for the ARPA money, do you think it fulfills some of the challenges that Anika suggested in terms of making those reinvestments in neighborhoods and sort of trying to repair some of this more sort of systemic damage that we've seen within Detroit?

STEVEN WATSON: Yes. I mean, I think it does. So again, a big theme in this is how do we ensure these new invested dollars go to Detroiters, folks who've been in the community for generations, how does it give folks a leg up in job opportunities and skills training, how does it help them build wealth through homeownership and other targeted programs. And we really did cast a wide net, a range of needs, folks who need direct assistance through our Community Health Corps, folks who are just looking to do some upskilling, whether it be getting a skilled trade certification or the like, and just need that opportunity where--

One of our programs specifically that's launching soon is something we call the Skills for Life program. So that's where the city will employ someone for five days a week and pay them their wages for it. But for two of those days a week, they won't be doing city work, they'll be in a training course, so getting their GED, or getting a new certification, or whatever new credential or skill meets not only their goals but also their needs.

And so a major theme of what we're trying to do with these funds is how do we give that boost to Detroiters and how do we improve also the physical landscape of the city and our environment as well.

RICK MATTOON: Thanks very much, Steve. Well, unfortunately we've come to the top of the hour. And this is our allotted time for this discussion. If we were in person, I'd be leading the audience in wild applause for all of our panelists who did just a terrific job covering a lot of material, much of which is very complex, and I think just did a wonderful job of explaining some of the challenges and opportunities that are facing fiscal conditions, not just in Detroit, but really for many cities throughout America.

So with that, this is an issue we'll continue to follow at the Chicago Fed. We think this is an important part of our Project Hometown effort. And I want to thank everyone again for taking the time to have such great presentations. And we'll hopefully get back to you at some time in the near future. So good luck with the rest of your day. Thanks very much.

STEVEN WATSON: Thank you.

ANIKA GOSS: Bye.

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Last Updated: 08/02/21

Charting Detroit’s Fiscal Future: Challenges and Opportunities

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