The Commercial Appeal
Memphis struggling, but ‘we’re not Detroit’
Motor City’s financial problems left untended
It’s an old river town that ran up debts and pension obligations in better times.
Today, school woes, middle-class out-migration, falling family incomes, home foreclosures and job losses have riddled the tax base. Say hello to Detroit. Now run by a bankruptcy lawyer appointed by the state of Michigan as the emergency city manager, Detroit is mulling Chapter 9 bankruptcy to handle more than $4.6 billion in debts.
When it comes to municipal f inance, Memphis is no Detroit. But the problems rocking Detroit
also rake Memphis. Analysts say Motown, a city of about 700,000 once populated by 1.8 million people, is a reminder to America of what can happen when problems go untended. Municipal finances implode.
“We’re not going to be the next Detroit,” said University of Memphis economist John Gnuschke. “There’s not going to be another Detroit. They had the perfect storm. But that doesn’t mean we don’t have problems.”
Just last week, the Memphis City Council balanced the budget by voting for a 29-cent increase in the tax rate to $3.40. Still looming is an unfunded pension liability.
City pension funds are short by $624 million. Borrowed cash could fill the funds. But total Memphis municipal debt already has reached 7 percent of taxable assessed valuation — a rate considered high by credit-rating analysts.
That puts Memphis squarely where Detroit stood two decades ago, when the leadership of a declining city soldiered on rather than solve visible pension and budget issues.
“We’re not Detroit,” said Jim Strickland, a Memphis city councilman who chairs the budget committee. “I’m an optimist. I think we have so many great things going for us in Memphis. But there are trends that are concerning. The number one problem Memphis faces is population loss.”
Annexing neighborhoods such as South Cordova has helped Memphis maintain population. It is currently about 645,000. But annexation masked the departure of some 50,000 residents in the 2000 decade, Strickland said. During the same span, household incomes dropped almost 12 percent in the city to $37,273 on average, and 1,300 employers closed in Memphis and Shelby County, according to private and government studies.
Fewer jobs and people puts a growing burden on the remaining taxpayers. This was underscored on Tuesday when the City Council raised the tax rate, largely to cover the drop in assessed valuation in the wake of rampant foreclosures.
The council acted after Tennessee State Comptroller Justin Wilson admonished the city this spring to repair its $622 million operating budget, which faced a shortfall in cash.
“This budget may well be Memphis’s last clear chance to determine its own future,” Wilson warned.
While the tax increase, 50 layoffs and elimination of 250 vacant positions will keep Memphis afloat, the city still must rebuild its finances to fend off the kind of issues that face Detroit. Strickland, a Memphis lawyer, predicts three tasks.
“We have finished a 5-year strategic plan. Now we need to get that and review it and implement it over the next year,” Strickland said. “We also need fewer employees. We did just take a step in that direction. Third, we do have to address our pension system. It is underfunded.”
Although the general operating fund that pays for everything from parks to police showed surpluses in 2007, 2008, 2009 and 2011, the unfunded pension liabilities deepened each of those years, suggesting city leaders put the pension issue on hold and focused on daily business.
“One red flag that tends to grab our attention is if funding isn’t being ... contributed on an annual basis,” said Michael Rinaldi, senior credit analyst at Fitch Ratings, a business in New York which advises investors on the ability of borrowers to repay debts.
Fitch has graded Memphis general obligation bonds a solid AA- and assigned the city a stable outlook. Both measures assure investors they are very likely to be repaid on the city bonds they buy. Investors in turn accept lower interest rates.
Fitch, however, hasn’t weighed in for a year on Memphis’ credit rating. Credit analysts monitor news reports — like the coverage of Wilson’s missive to Memphis. And if the city hasn’t taken steps to address the pension issue, the credit rating could fall
lthough the unfunded liabilities — the $624 million — can be replenished over the coming decades, the cash would most likely have to come from a tax increase or carving the money out of the city operating budget and getting rid of other services.
Compared to the tax burden in other big cities, Memphis isn’t considered tapped out. A Memphis family earning $50,000 in 2010 paid $3,054 in city property and sales taxes and vehicle fees, or 6.1 percent of income. This ranked Memphis 44th in tax burden among 51 cities nationwide, according to a tax study.
But in an era when incomes have fallen, a tax increase is politically unpopular. Gnuschke, the U of M economist, figures that what makes the most sense is a tax cut and providing for the pension fund through a massive reordering of city services on the scale of Memphis City Schools relinquishing its charter. That decision opened way for Shelby County to take control of public education in the state’s largest city.
“We’re going to have to find another way, a better way of delivering services,” Gnuschke said. “We have a problem. Taxes are higher in the city than in surrounding areas. The higher the tax burden is on business and people in the city, the more outmigration we’re going to see. We have to have a lower tax rate in the city.”
How can the city lower the rate and fund pensions? Shift tax burdens to the county, Gnuschke said.
“The school issue was the first step,” Gnuschke said, “but there are going to have to be other activities shifted to the county as well.”
A likely candidate, Gnuschke said: city police, whose $223 million budget accounts for a third of the general operating fund.
Strickland insists the tax burden, crime and the notion of poorly performing city schools largely fuels the outmigration from Memphis. That leaves remaining city residents to carry a larger load. Total debt per person, including bond issues by the Memphis Light, Gas and Water Division, amounts to $4,007 per capita in Memphis, compared to $6,073 in Detroit.
Over t he coming months, Strickland said, city leaders must grapple with municipal reform.
“You have to realistically look at what is going on,” said Strickland, noting MLGW has reported fewer accounts each year since 2009.
Similar issues confronted Detroit. Tough state annexation laws long have penned in Detroit at about 139 square miles, nearly the same size as Memphis in 1960. Yet, even as suburban flight pulled the city population below 1 million, Detroit maintained a municipal workforce of nearly 12,000 — compared to Memphis’ 7,300 — and borrowed heavily to pay its bills.
“Detroit has suffered from years of mismanagement,” said Beth Foos, municipal credit analyst in Chicago at financial analyst Morningstar. “The city had revenues that were declining and expenditures they couldn’t cut fast enough and didn’t cut fast enough because of political struggles between the mayor’s office and the city council. For months they were distracted by legal problems of (convicted ex-mayor) Kwame Kilpatrick. And the unions are very prevalent. They had bargaining agreements they had to adhere to and these prevented them from making changes swiftly.”
Credit analysts view Detroit as far worse off than Memphis, a reason Detroit scores a lowly CC.
“What happened to Detroit is a combination of all kinds of things,” said retired city planner Edward Hustoles, 87, who worked 39 years in Detroit municipal government. “There was the loss of industry, the loss of wealthier people, the bigotry, the leadership, its cronyism, the overseas competition. It wasn’t one thing. It was everything.”
By 2009, Detroit’s general fund was overspent by $331 million while borrowing had increased. Facing heavy debts the city’s new emergency manager, Kevyn Orr, has considered literally selling the city’s jewels held in the cityowned Detroit Institute of Arts.
“This is completely unprecedented. We just don’t know how this is going to play out,” Annmarie Erickson, DIA chief operating officer told a newspaper. “The museum will not sell art unless compelled to do so.”
But it’s getting to be that time in Detroit.