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Government

Detroit faces massive layoffs in 2005

City coffers run dry as tax revenue can’t keep up with expenses

“Wall street is watching Detroit and waiting for the other show to drop.”
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Published 12/22/2004

With the City of Detroit facing a financial crisis of staggering proportions, Mayor Kwame Kilpatrick is preparing for massive layoffs in the new year to plug a deficit that could surpass $360 million in the next six months.

But it might not take six months for the ax to swing.

If the City Council fails to pass a crucial bond measure when it returns from holiday break, the city would have to lay off as many as 2,000 workers, according to Detroit Auditor General Joe Harris.

And the bond issue is only one of the financial problems facing the city.

The mayor and his financial staff have warned of the need to reduce the workforce for more than a year, and things are only getting worse. Population losses and the economic downturn have aggravated ever-declining tax revenues, and health care costs continue to skyrocket, creating an acute situation.

The mayor has repeatedly promised not to cut police, fire and EMS workers. That leaves a pool of about 7,600 employees who could see their ranks cut by more than 25 percent. Cutting 2,000 of these water and sewerage, lighting, and building and engineering workers will have a devastating impact on city services.

“We’re heading toward a real crisis,” says City Councilwoman Sheila Cockrel. “I don’t think it’s ever been this bad, and I don’t think people have any idea how serious the situation is.”

Chief auditor Harris says layoffs are unavoidable. “We averted layoffs this year and last year by borrowing money,” Harris says, “and we’ve backed ourselves into a corner.”

City Finance Director Sean Werdlow is neither confirming nor denying projected layoff figures produced by City Council’s Fiscal Analysis Division, saying only that the city is preparing for all options, including early outs. But in a deficit reduction plan submitted to the state of Michigan last summer, Werdlow’s department said it would balance the budget by cutting up to 2,000 employees in 2005.

And that figure did not include jobs that may need to be eliminated if the City Council doesn’t agree to sell bonds related to the city’s pension system.

“We’ve said all along that we must reduce the size of our workforce,” Werdlow says. The city must “rightsize” the number of employees to meet its reduced population, he says. During the 1990s, Mayor Dennis Archer increased the workforce. From 1994 to 2002, the number of city employees — including police, fire and EMS officers — increased from 17,797 to 20,990, says mayoral spokesman Howard Hughey. Kilpatrick has cut the size of the force to 18,705.

Before any additional paychecks stop, the city must give union officials a 30-day notice. Union leaders say they’ve not been notified of layoffs but are expecting them.

“We’ll challenge any layoffs to protect our membership,” says Jimmy Hearns, lead negotiator for American Federation of State, County and Municipal Employees Local 207, which represents 5,500 Detroit employees.

With such dire possibilities in the offing, City Council President Maryann Mahaffey and councilmembers Kenneth Cockrel, Barbara- Rose Collins, Sharon McPhail and JoAnn Watson submitted a formal request to Kilpatrick on Friday for a special meeting to discuss the city’s “grave fiscal position.”

Mahaffey, who has long opposed layoffs, says the council has been asking the mayor for a deficit reduction plan for months. She says he should look at cutting spending before considering firing workers.

“I think the question is what do we do, how do we handle this to avert layoffs and to keep the city financially sound,” Mahaffey says.

The numbers

The city’s cash supplies — its so-called “rainy day” fund — started running dry in 2000, despite six straight years of budget surpluses. Most governments keep such an account, and Detroit’s was as fat as $76 million in 1989. But in 2002, the account was emptied and the city was left with $69 million in unpaid expenses.

Last year the city sold $65 million in bonds to pay off the overdue bills. Government agencies commonly sell bonds to Wall Street investors to pay for major projects and debts. The investors give the government cash, and in return expect payments with interest over a period of time, usually 15 or 30 years.

This year, the city passed a balanced budget in June, but early estimates show at least a $30 million deficit, fueled by lower-than-expected tax revenues, according to City Council Fiscal Analyst Irvin Corley. And in the fiscal year beginning July 1, 2005, the city is looking at a $214 million deficit, a hole it will have to fill to balance the budget.

Corley, in a recent report to City Council, explains that several factors play into the continuing budget gap, including:

• A $9.2 million cost overrun in the Police Department budget, which Corley says may arise because of the cost of overtime payments in 2004 to keep officers on 12-hour shifts due to understaffing.

• A $22.8 million reduction in revenue sharing by the state.

• A $21 million drop in income tax collection last year.

In addition, the city finance department reported to the state that property tax collections declined by $21 million in 2002-03. And in the last two years, pension plan costs grew by $97 million, now comprising 11 percent of the city budget.

“We’re going to hell in a handbasket,” says Auditor General Harris, who’s warned City Council for years that layoffs were needed because of Detroit’s shrinking income sources and increasing benefit costs.

Harris criticizes the mayor for negotiating a 2 percent to 5 percent pay raise for city workers in this climate. The raise went into effect in 2003 and is costing the city $26 million this year.

“Wall Street is watching Detroit and waiting for the other shoe to drop,” he says. “We’re there.”

Harris is also critical of councilmembers who’ve opposed layoffs.

“I don’t blame council,” he says. “But you’ve got some councilmembers that believe the city has the responsibility to continue to employ workers even when it can’t afford to.”

In June, Mayor Kilpatrick proposed cutting more than 300 city workers as part of his executive city budget, but the council fought the move. A handful of employees were laid off under the final budget, but many were called back to work, says Councilwoman Cockrel, who’s facing a recall effort she says came because she backed the mayor’s proposed layoffs.

Twice during the Young administration the council sued to prevent layoffs, but lost; the state Supreme Court has been clear that it’s the mayor’s prerogative to cut workers when there’s a financial need to do so.

January: D-Day

The city faces a major vote in January that could prompt an immediate layoff of as many as 2,000 workers and create an additional $112 million hole in the city’s budget, already gushing red ink. The City Council will decide whether to sell $1.2 billion in bonds to pay off the city’s pension account debt.

The bond sale would generate $112 million for the city this year — money needed to pay a looming bill owed to the pension account. Income from the sale was included in this year’s budget adopted in June, and is necessary for the city to balance this year’s accounts.

In normal circumstances, the city makes payments to its pension account every year — this year the city owes $112 million. But because the city doesn’t have $112 million to pay off the pension debt this year, it hopes, essentially, to borrow money from Wall Street to pay off the entire $1.2 billion.

The bond sale would allow the city to reduce interest payments on the $1.2 billion debt from 7.8 percent to 5.8 percent for a total savings of $277 million over the 15 years, says Werdlow, the mayor’s finance director.

The administration’s plan is to take 40 percent of the savings — the $112 million — this year.

If the council votes down the measure — as it did in November — there will be immediate layoffs and cuts in city services, the administration says in its bond proposal.

The only alternative to layoffs, should the bond measure fail, is for the city to sell another type of bond, a move that would have to be approved by the state. Such a move would hurt the city’s financial standing and might not be approved anyway, according to the city’s bond documents.

Last month, City Council turned down the bond sale by a 4-4 vote. A daily newspaper reported that councilmember Kay Everett missed a medical treatment related to her kidney disease to cast her vote. It was her last council meeting; she died nine days later. Councilmember Lonnie Bates, who was expected to vote in favor of the sale, missed the vote, telling a newspaper reporter he “got mixed up” about the time of the meeting.

This time around, without Everett in the picture, the administration will have to win a vote from the opposing group — McPhail, Mahaffey, Watson and Collins — who usually vote in a bloc.

Mahaffey says she voted against the measure because the administration was “five months late” in providing information about the deal. Instead, the administration pressured council to adopt the measure in a matter of days before the body went on its winter recess.

“We are not here to rubber stamp the mayor’s proposals,” Mahaffey says.

Meanwhile, only one of the city’s two retirement boards backs the proposed bond sale. The General Retirement Systems voted in favor of the deal, saying it wanted to prevent layoffs, while the Policemen and Firemen Retirement System voted against it, but is reconsidering. While the boards have no say in the matter, insiders say they carry great weight with councilmembers.

Councilmember Sharon McPhail, who last week announced her candidacy for mayor, sits on the police and fire pension board. She says she won’t vote for the measure as it’s written, even if not adopting it creates a $112 million deficit for the city.

“They’re going to lay off people anyway,” McPhail says of the administration. She was present during a presentation by the finance department and the city’s bond counsel last week to the police and fire pension board. She says she was not swayed. The people giving the presentation either work for the city or will be paid if the bond issue gets adopted; therefore, their opinions are suspect, she says.

“I’m not going to listen to those people’s advice. They’re good people, but this is their business. We have to look long-term at whether this is a good thing to do, and I don’t think it is,” McPhail says.

She says other cities, such as Philadelphia, have had problems with pension bonds. If the stock market tanks, the city will be obligated to pay off the Wall Street pension bond holders in addition to making payments to its pension account to make up for stock losses — creating a double payment situation. Such a situation would occur if the pension’s stock market holdings earned less than 5.8 percent in a year.

Harris, considered a neutral party, has a different take. He says the pension bonds are a no-brainer.

“It’s almost ludicrous for this to be denied,” Harris says. “There’s almost no risk.”

McPhail and Mahaffey say they want to see cost-saving measures implemented by the mayor, who they blame for wasting money. The administration, on the other hand, claims it has reduced spending by every department, including the mayor’s office. The council was the only department that increased its budget.

Still, selling a $1.2 billion bond is not a safe option, McPhail says: “There’s so much doublespeak, so much misinformation. It’s not a responsible way to manage the city’s finances. If they’d stop spending money, they wouldn’t have to lay off as many people.”

Mahaffey says Detroit is not alone in its predicament.

“Detroit is in financial trouble like every city in the state,” she says. “Detroit is not as bad off as Melvindale, which is laying off five of its 15 police officers. We are not as bad off as Highland Park.”

In such a climate, one must hope for miracles, big and small.

 

Check out Sharing the Pain and Crunching Numbers

Lisa M. Collins is a Metro Times staff writer. Send comments to lcollins@metrotimes.com.

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