In 2011, around a third of all U.S. cities were cutting their losses with layoffs and public service closures in the face of budgetary crises—Detroit notwithstanding. In fact, Michigan’s biggest city ultimately fell subject to a state-ordered commission that possessed veto power over all of the city’s budgeting and capital improvement contracts in light of the city’s $18 billion deficit.
The largest city in the U.S. to ever declare bankruptcy, Detroit successfully rebounded this year to become independent from state directives enacted in 2014, but it is still under oversight status by the what is now referred to as a dormant commission, ready to spring back into action should Detroit’s finances again fall through the bottom. Regardless, Detroit will be regarded as a credit risk for the near term, at least in the vein of attaining municipal bonds.
A Sign of Things to Come?
So, is Detroit a harbinger of things to come in the nation’s largest cities? You must look at the recent statistics, according to one observer, Michael Burwell, who spent part of his 31 years with another firm as a partner centered in the Detroit transaction business.
According to Burwell, the number of local governments claiming bankruptcy in the U.S. remains extremely low. Only nine, including Detroit, have filed since 2010 and four of these were dismissed. Stockton in California and Harrisburg in Pennsylvania rank among the largest to file outside of Detroit.
Still, Burwell, now Chief Financial Officer at Willis Towers Watson, offers some words of caution.
Last year, the Mercatus Center at George Mason University released a study examining the fiscal behaviors of 300 city and county governments in California, Michigan, and Pennsylvania between 2007 and 2012.
According to an article in U.S. News, about a third of the sampling experienced fiscal distress during the period covered by the Mercatus Center.
Of course, one asks, “What is fiscal distress?” Burwell acknowledges that this is a good question.
Some of the study’s criteria for defining fiscal distress includes worker layoffs or furloughs, failing to perform service obligations, defaulting on debts, deferring pensions, or increasing taxes and fees to cover foreseen budget deficits.
Burwell and others are worried that because such filings and defaults are on the rise, they risk becoming accepted as a norm.
However, such financial plummets are always the result or void of decisions by these governments, according to Burwell.
Identify the Causes to Find Answers
Burwell says that governments can avoid backing into the corner of bankruptcy by identifying the current forces commonly crippling local governments—and identifying them “well before they reach the status of fiscally distressed.”
First, he notes, one must pay attention to the time frame in which these clusters of local governments fell into their financial woes.
The Mercatus study chose 2007 as a starting point for a reason. It is when the real estate and subsequent mortgage crash started. Local governments are still reeling from depreciated land values that dent vital property tax revenues. These governments were drafting five-year plans and revenue projections based on the real estate boom that peaked by 2007 and crumbled within the same year.
On top of this, some states enacted laws to restrict the ability of local governments to increase property taxes. California’s Proposition 13 stands as the most recognizable example. A Colorado Taxpayer Bill of Rights wrought similar restraints on not only local governments’ authority to raise revenue through more taxes or fees, but on how much they can allocate to their reserve funds.
Finally, lower-wage jobs cut into state income tax collections from which some local-government revenues are derived. Exacerbating this revenue stream, state budgets are reeling from fewer federal revenues for many programs, a void that trickles to the municipal and county levels.
Governments Are Behooved to Seek Alternatives
Michael Burwell says by identifying those revenue streams that are dwindling, local governments can begin to court alternative revenue sources while prudently reducing some spending on programs that might potentially find other funding sources.
Unfortunately, much of the onus is being delegated to local governments, Burwell says, as Congress remains reluctant to budge when it comes to ceding more aid to states and cities. Its rejection of President Obama’s initiative to increase infrastructure spending and provide more aid back in 2011 and 2012 stand as examples.
With a Republican administration and Congress, cities and counties cannot count on the scenario changing in the near future, unless a tidal-wave turnover during the coming elections occurs.
Burwell says local governments are left with a perplexing burden, to say the least. However, by finding ways to initiate local development projects and raise wages, cities and taxing districts can begin to recover some of the lost revenue.
Once more jobs, higher wages, and their effect on tax collection start to displace the recent dives in revenues, these governments can begin to rebound before such a crisis as that in Detroit unfolds.
More about Michael Burwell
A celebrated Michigan State University alumnus and certified public accountant, Michael Burwell matriculated through business advisory services and a partnership while working for an agency, later to become Chief Financial and Operating Officer for the company. In 2012, he became the vice chairman for Global and U.S. Transformation where he helped to build and expand their internal shared services before moving on to Willis Towers Watson as CFO there.
Before joining Willis Towers Watson, Mike spent 31 years at a leading firm in the industry. During his time there, he served 11 years in the assurance practice working on business advisory services. In 1997, he was elected partner and moved into the Detroit transaction business. Mike was asked to take over leadership of their central U.S. transaction business following his success in Detroit. In 2009, he was appointed Chief Financial Officer and Chief Operating Officer across the U.S. business. In 2012, he became the Vice Chairman Global and U.S. Transformation where he helped to build and expand the internal shared services.
Burwell has a bachelor’s degree in business administration from Michigan State University and is a certified public accountant. In 2010, he was named Michigan State University’s Alumnus of the year.