 I enjoy the opportunity to return to Ann Arbor and I want to thank especially Deborah Horner in making this date happen. I know that this went back and forth and back and forth and it you know like getting pregnant it's never the right time but okay we made it happen and I want to thank to all of the University of Michigan scholars at the Ford School at the Ross School in the Economics Department at the RSQE and other parts of the University for the help that they've extended to me since I joined Mayor Duggan's administration two years ago. I've made a number of new friends, some of them I see around and I've been able to reconnect with others which has been great. All of you have willingly helped when I reached out and I've had terrific efforts for more than 10 interns working for me and several of them are in the audience. I've received policy presentations on several property tax issues from two separate groups of students who've come through Professor Gerber and Professor Durer and I am shamelessly exploiting for another year master's accounting students who are coming to me from Professor Shakespeare and I'll say a little more about that later. So from my point of view my alma mater has not disappointed and on the behalf of Detroit's taxpayers I thank you all. My comments are in three parts and I want to leave plenty of time for questions and I can probably stay a little longer to do that. First I want to talk about the fiscal federalism context within which Detroit's future is going to be determined. Second the challenge to Detroit in achieving fiscal sustainability in its recovery and third in broadly presenting the mayor's vision for where the city is headed I present a challenge to all of you particularly those embarking on a career to focus on the exciting public policy laboratory that's just down the road from here. Okay federalism in the municipal context as you all know we have a system of dual sovereignty in this country the responsibilities not expressly designated to the federal government by the Constitution belong to the states and the state government's constitutional roles are to ensure that public services are provided fairly efficiently and equitably across jurisdictions. Over time through home rule arrangements the states devolved responsibilities to slews of local governments, counties, cities, school districts and so on. I'm going to use local government cities municipalities interchangeably today. The division of responsibilities the services mandated and the taxes allowed to these local governments are determined by the states and they vary widely across the country. So the states make the rules that's the great variety that's American federal structure well so much for the civics I'm an economist so let's look at the economics that's a system that we call fiscal federalism where bluntly cities like Detroit are at the bottom of the food chain even with the sustained economic recovery and lower unemployment the federal government and most states face serious structural funding gaps into the foreseeable future presenting a major risk for local governments because fiscal stress runs downhill from the heights of Capitol Hill down to state capitals and down to city halls counties and school districts so Detroit is not alone in experiencing fiscal distress even if it's unique as the largest municipality ever filing for chapter 9 bankruptcy. So let's start at the top in this food chain and excuse me my nose is running another memory of Ann Arbor the charming weather starting at the top the federal government is in retrenchment just a quick walk down memory lane for you the great recession had a devastating impact on the federal budget revenues plunged federal spending rows to provide unemployment compensation and other assistance these automatic stabilizers were helped along by tax cuts and a large stimulus package without the fiscal stimulus the great recession would have been far worse and many including myself and I suspect some in this room believe that further stimulus was required at the time but the result of the greatest recession was that from fiscal year 2007 to fiscal year 2009 the federal budget deficit climbed from 1% of GDP to 10% of GDP but now with improved economic and budget outlooks the federal deficit has fallen it's hovering in the range of about 3% of GDP but as two national commissions have made clear even with normal economic growth the federal budget is on an unsustainable path over the long term debt will rise faster than the economy can grow and there's wide agreement that failure to take corrective action will eventually have serious consequences for the country but the actions are unpopular although the proposals of both national commissions differed in some details really the basic arithmetic drove them to similar solutions there's only so many ways to cut this down slow the growth of the health care entitlements get social security into long-term balance use tax reform to get more revenue by broadening the base and lowering the rates and cap the growth of discretionary federal spending both commissions back loaded the changes to avoid derailing a fragile economy at the time but washington's political gridlock has prevented action on a grand bargain to implement them so instead we got cuts and freezes in just in the discretionary programs and those with the hardest hit and sequestration another walk down memory lane sequestration in 2013 levied more than five billion dollars of cuts on to the states which most of them passed down to the localities since these were largely federal safety net programs whatever track the federal government takes to address its own long-term fiscal problems it's going to intensify the funding problems of states and their local governments states and cities will feel intense pressure to fill the spending gaps and if any serious federal if there's any serious federal tax base broadening especially if it eliminates the deductions for state and local taxes it's going to make it more difficult for the states to increase revenues and state and local governments by the way are in even worse shape and that's where the bulk of government activity occurs in this country about 15 percent of our economy roughly two and a half trillion dollars of output employing about 19 million people state and local government it's where we educate our kids where we maintain public safety and health and where we implement the social safety net states today are more vulnerable to the business cycles but unlike the federal government states have mandatory balanced budget requirements making their actions pro cyclical in bad times state governments and local governments cut spending and raise taxes and in good times they do the reverse they increase spending and cut taxes the great recession led to deep cuts in state and local government jobs much deeper than any recession in the last five decades that's teaching you a little history folks this was a much deeper recession at the state and local level than anything that had happened post world war two even with the federal stimulus states and cities budgets acted as a headwind against economic recovery and they're continuing to do so private employment which fell immediately and sharply in the recession about eight percent in two years has recovered as you well know as you hear it in the headlines private employers added 15.3 million dollar million jobs since February 2010 that's on average about 194,000 a month but total employment in this country has lagged behind because of cuts in public payrolls more than eight years after the great recession state and local government employment still has not recovered at the end of September last month September 2016 state and local government employment was 2.2 percent below where it had been at the peak this is unprecedented and it represents eight years of lost public services by teachers librarians cops firefighters social workers while the country's population and our needs continue to grow slow economic growth low global energy prices and stock market volatility have delayed real recovery and tax revenues needed to hire those state and local workers state receipts fell off the cliff during the financial crisis about 150 billion in real dollars in 2009 and revival has been slow and patchy depending very much on the particular state and locality wasn't really until the end of fiscal 2013 that inflation adjusted state tax revenues surpassed the level they had reached five years earlier and that was due largely largely to temporary tax hikes the great recession didn't create the structural budget problems of state and local governments but it sure did reveal them and there is perhaps no better example than Detroit unless perhaps you're from Illinois during the recession it was my privilege to work closely with the state budget crisis task force which was chaired by Paul Volcker the former chairman of the Federal Reserve and Richard ravage the former lieutenant governor of New York the task force concluded unambiguously that the existing trajectory of state fiscal practice spending taxation and budgeting can't be sustained states are sacrificing for the future they're sacrificing the future for today for example mandated dollars going to Medicaid and pension crowds out spending on education state aid for K to 12 schools has been declining as a share of state spending since 2008 significant cuts to higher education with access quality and student performance are at risk and I think that's the world in which you know very well the capital needs for critical infrastructure to repair and replace aging pipes roads and bridges have been postponed due to immediate spending pressures and the ability to borrow for long-term capital needs and short-term cash flow has been threatened by improper borrowing for current operations this state of affairs is enabled by weak rules and learned bad fiscal behavior so here I want to tell you a little story the task force demonstrated the gimmicks that states use to present an illusion of balance to meet their constitutionally required balanced budgets for most states a balanced budget is measured by whether there's any cash left in the general fund in the last day of the fiscal year that's it that simple we examined six big states California Illinois New Jersey New York Texas and Virginia spanning a wide variety all six used whatever it took to meet that goal of having cash in the till on the last day of the fiscal year some stops funding pensions some sold assets some issued official debt some levied temporary quote-unquote taxes that's a big one for Illinois they all informally borrowed by not paying their bills that is stiffing their vendors and their employees by robbing dedicated accounts for transportation the environment charities of the arts and transferring that cash to the general fund by cutting and delaying payments to local governments and to schools and universities for a number of them this behavior wasn't new and it continues into today are you listening Illinois and New Jersey in particular and I suspect Texas reliance on these gimmicks indicates growing fiscal stress it may also lead voters to believe that they can continue to have the necessary services they expect without higher taxes you can find the reports at www.statebudgetcrisis.org and since the this task force ended the pew the Pew Foundation's been following up on this work and you can find their ongoing efforts at pewtruss.org all of this work is pertinent to Detroit and to Michigan so let me go on to Detroit this is the environment that I've just described the much broader picture in which Detroit has to survive since exiting bankruptcy in December 2014 it was a quick process only 17 months after filing for bankruptcy and that may be give some the impression that things can now return to business as usual but it's not that simple there are strict reporting budgeting and oversight standards that have been written both into state law and into the bankruptcies plan of adjustment which is formally what a bankrupt bankruptcy court imposes at the end that are going to govern Detroit's fiscal reality and behavior in the next 40 years and very strictly until 2024 virtually nothing about Detroit's financing and budgeting will be the same as before and folks that's a really good outcome bankruptcy opened up a world of opportunity although at a considerable cost to city workers and retirees it cut 7.2 billion dollars of ongoing costs from the city's budget of which 5.5 billion was unfunded pensions and retiree health benefits it provided 1.4 billion in capital for investment in infrastructure and revitalization initiatives through fiscal 2023 it preserved the Detroit Institute of Arts and Bell Isle key civic attractions it set up a new CFO and chief financial officer and chief information officer to bring state of the art technology and systems improvements to city government much needed and fifth it established a financial review commission to provide otherwise known as a control board to provide ongoing financial supervision and strategic guidance to the city now these last two governance and institutional changes make Detroit's fiscal recovery much more focused on the long term and on structural changes than city government has ever been around here for example the budget is now part of a multi-year financial plan and that utility is already evident post bankruptcy the city has budgeted and managed rigorously to generate annual budget surpluses to fund new spending needs that include capital investment and pension payments with this behavior the city's produced two years of audited surpluses that is better than balanced budgets the city will generate these budget surpluses into the future by continuing to use conservative revenue estimates and to control expenditure growth the revenue estimating process is supported by semi-annual consensus revenue meeting forecasting meetings in place by law since 2014 where outside experts including the University of Michigan's George Fulton who's sitting right here have validated the conservative approach the city's taking the city has not been budgeting the annual surpluses it's been generating in the same year that they're realized but rather waiting until the surpluses recognized in the annual audit treating it as an unallocated fund balance to be allocated to the competing one-time spending needs for example the city already has set aside surpluses to support capital projects and blight removal in this fiscal year we're in 2017 and to increase support for its long-term pension obligations the city also has a general fund reserve greater than the 5% requirement that's in law now in fiscal 2017 which is what the city's in the city has budgeted another surplus after the audited results following the close of the year on June 30th 2017 Detroit should achieve the goal of three years of consecutive budget balance which will send the state oversight board into dormancy this has been a prime political objective you can imagine for Detroit's elected officials governance to has entered a new era not only having this control board on top of it but there is a revised city charter and a new city council that's now elected by districts and that's made a difference before I accepted the job this job working for the mayor the council invited me to work with them and join them at a port Huron retreat they had in mid 2014 where they were educating themselves and preparing for what life was going to be post bankruptcy post emergency manager Detroit has a strong mayor form of government that probably means a lot more to you than it might mean to some other people those of you who are in political science and the mayor and the council now seem to have a pretty good working relationship some of that's been formed by necessity right and it necessities drives a lot of a lot of good things actually but until this year Detroit was operating under budgets put in place by the emergency manager remember him Kevin or in January the city began a new that what I would call the new normal of what their budgeting is going to be under the new mayor under the new newly formed different city council the mayor proposed the budget the council held hearings like they're supposed to and they passed a balanced multi-year financial plan the process worked yeah it worked and the control board was watching and they all knew budget politics is always challenging they're always going to be jockeying and we're headed into 2017 which is a budget year so who knows what may happen but so far this is a very different relationship Detroiters tell me I'm not from Detroit but Detroiters tell me it's a very different relationship right now between the council and the mayor and may it be that way fiscal sustainability for Detroit ultimately requires being able to budget for necessary ongoing expenses with the confidence that there's a stream of revenue to support that spending let me take you through some rough figures folks Detroit collects a bit over a billion dollars annually in general revenue that's the size of the budget the single largest tax revenue is the income tax at about 250 million state revenue sharing delivers just under 200 million casino taxes provide just under 170 million and the property taxes the caboose prior to a new appraisal system coming in at about 100 to 115 million all of Detroit's tax rates are at their maximum so that option isn't available for a city of 677 thousand residents roughly with a 40% poverty rate the city has a limited and for the moment weak tax base Detroit is a small open economy business takes place throughout the region including inside the city's boundaries outside the city limits some companies have city locations some do not more but more residents work outside the city limits than inside actually almost two-thirds of Detroiters commute out this raises huge problems when trying to collect taxes based on business activity within the city limits the city of Detroit collects in business income tax only about 25 million dollars a year that that should shock you it shocked me when I saw it and I have to say it shocked professors professor Shakespeare the accounting genius the tax rate was doubled about three or four years ago and the revenue barely increased a pretty clear indicator of rampant tax evasion and I want to thank professor Shakespeare she hears Kathy Shakespeare here said she might be if she's not okay I can understand it from the Ross business school for being shocked when I gave her this information and then for helping us in trying to do something about it last year her she had a team of masters accounting students as to estimated the size of this tax gap that exists in Detroit and helped to strategize on how to tackle it and she's preparing another group next term to help our auditors by investigating the typical accounting ploys that different types of businesses have been using to evade Detroit's business income tax so if we're only collecting 25 million from businesses and we've got a hundred sorry 250 million in income tax collections the rest might be coming must be coming from some place else folks it's coming from people right workers the bulk of our income tax from working individuals and unregretably for years both resident and non-resident workers have blatantly evaded the tax as well and the city has been unfortunately not very effective in enforcing compliance but as of last January the city income tax this city went into partnership with the state and the city income tax is being collected by the state which brings electronic filing quicker processing a larger much larger enforcement staff and more sophisticated techniques in every way but that's not going to be enough because Michigan's municipal income tax is seriously outdated the law as it now stands and it was enacted in 1964 only requires employee withholding by businesses with establishments and I quote within the city in 1964 85% of Detroit residents worked in Detroit today only 37% of them do and that's the difference the largest source of personal income tax revenue that we are missing today is from Detroit residents who by the way have a tax rate of 2.4 percent as opposed to the non-residents at 1.2 percent because these folks are working outside the city their employers are not required by law to withhold so Detroit doesn't get our rightful tax revenue their employers by the way withhold for federal and state taxes but not for Detroit taxes I have to say I've never heard of anything like this I I come from New York and I we collect everywhere everyone withholds for everything withholding some major collection tool for income tax everywhere it's universally required everywhere why it's not here beats me this year tells you a story with e-filing there were about a hundred thousand more is a great number a hundred thousand more Detroit personal income tax filers for 2015 than there were for 2014 is that great news right great news unfortunately it hasn't been matched by a lot more revenue well the bulk of Detroit's personal income tax revenue does come through employer withholding that's largely from city-based businesses whose employees are mostly non-residents paying at 1.2 percent and not from the residents commuting out as I just told you the mayor has strongly supported a bill in Lansing for universal withholding by employers all the cities around the state are supporting it so far it hasn't passed if universal withholding had been in place for 2015 we would already have collected an additional 10 to 25 million dollars instead the state is running around chasing after people to get the money by sending letters until city income tax withholding is modernized to match the reality of where people work the city-state income tax partnership that we've signed on to with the state in which the state really wants and views as a way of helping Detroit that partnership is going to be held hostage to collecting from residents who when they're notified they owe tax face a sticker shock of coming up with a lump sum payment in addition to being unfair to workers the ex and expensive and inefficient for the tax collector this outmoded tax means that our income tax revenue is not likely to reflect the city's improved economy over the long term and that's what worries me and that's what this discussion about fiscal stability is about this is our largest revenue all right and it's really weak and one of the reasons it's weak is this bluntly speaking the largest risks I see to destroy to do that to Detroit's fiscal sustainability are in Lansing the state of Michigan is critical to Detroit's long-term fiscal viability universal withholding which I just talked about would fix our largest revenue source that's not the only fix we need from Lansing revenue sharing is our second largest revenue and it faces its own risks and is completely outside the city's control the state has decimated the funding diverting it into balancing the state's general fund you'll notice that several other states do the same thing or many states do the same thing according to the census Michigan was one of only four states where there was a decline in municipal revenues from state sources over the period 2002 to 2012 so I can't opine on how or whether the legislature and governor are going to address this are they going to increase local sharing I don't know will a recent lawsuit that's been brought by a number of local governments generate legislative action before the court mandates it will the courts mandate it I don't know but my experience from the fiscal crises I have participated in and solutions I have participated in in New York City in Washington DC tell me that the state of Michigan is going to have to step up with more at some point so let me get to a brighter side foundations and private donors have committed almost four hundred and fifty million dollars over twenty years as part of the bankruptcy plan of adjustment along with the state to minimize the pension cuts to city government retirees and to safeguard the artwork at the Detroit Institute of Arts that was Michigan's version of the grand bargain and that grand bargain happened chief judge Rosen who mediated this at the time called the city quote service delivery and solvent which is a phrase I'd never heard before but I thought was poetic service delivery and solven only a judge could say that I think maybe an economist would come up with that and the ten-year plan of adjustment to 2023 sets aside some funds for a number of projects and improvements in basic services in Detroit like police and fire in a way formally recognizing that the deterioration in basic public administration was one of the reasons for the bankruptcy and since the exit from bankruptcy foundations have invested a further eighty million dollars into joint initiatives with the city of Detroit so where is that stuff going well it's going according to the mayor's vision and the mayor's strategy for sustainable recovery focuses on attracting and retaining residents creating new jobs and employing more Detroiters so let me take you through a little bit of the residential strategy and the neighborhood revitalization neighborhoods are being stabilized Detroit has the nation's most aggressive blight removal program there are 80,000 potentially blighted structures we've determined that 40,000 can be salvaged 10,000 have already been demolished and 8300 are slated are slated for demolition in the next two years at the same time more than 650 homes have been or are now being rehabbed this makes a dramatic difference folks in both the appearance and the morale in neighborhoods there is two now regular garbage collection don't laugh but there wasn't there's regular garbage collection there are park cleanups and graffiti removal the streets are lit with the installation of 65,000 new LED state-of-the-art fixtures and there's a lot more buses with new drivers and they're operating at full schedule for the first time in 10 years in Detroit and that deserves an applause let me tell you you may never you may never ride a Detroit bus but if you do it's going to be a lot better than than you ever imagined the city's huge it's 136 square miles but it's missing people so the strategy is to rebuild density in areas by investing to support the existing population and attract new residents and businesses into what can be thriving neighborhoods that can't be everywhere you have to start where there are cores of really good structures and and active active communities building off of existing blight initiatives strong community involvement in these neighborhoods is going to identify areas that could be converted into greenways linking together commercial and residential areas beautifying the living spaces and making them more practical for a growing community and a big focus of this is what new housing there's going to be and what the new housing is going to look like because there's going to be mixed income and affordable housing throughout the city ensuring that the recovery will be inclusive and that those who have remained in Detroit benefit from the resurgence the commitment to protect what is affordable now and in new developments speaks not only to having a lot of pricing variety around the city but also to a commitment to social justice housing development will fill in vacant neighborhood spaces by restoring what is structurally sound in the inventory of housing that the land bank has and then filling in the spaces around that with newly built apartment buildings some of them duplexes some of them anchor townhouses some of them courtyard and garden type apartments a whole lot of variety this is called making a mixed community work the city's capital strategy which is going to be submitted to the city council tomorrow that's where I go from here to make sure that's working it's going to support these efforts with housing funds but also new and restored parks and recreation areas repaired streets and sidewalks improved water pipes and drainage systems environmental green infrastructure and landscaped commercial strips for local businesses plan transportation investments are going to include new bike paths and expanded public bus routes the new light rail queue line which opens in 2017 which is going up and down woodward and the dequinder cut a pedestrian path for hiking and walk just general walking between the riverfront and eastern market in addition to this kind of development there are also issues of job creation private sector job opportunities of course are being encouraged while downtown and midtown are well on their way to recovery the recovery has to include the Detroiters who live in neighborhoods largely left untouched by downtown by the downtown and midtown boom active economic development programs are targeting specific industries and sectors Detroit has of course a locational advantage of being in this region which is an auto industry focused region and we can combine that with the ability to amass large parcels of land for industrial use so much of that that's one strategy it's focused on auto industry largely software and small manufacturing for support into that industry because people can locate plants on this new land the Detroit economic growth corporation has a wonderful program called Motor City Match which is funded by federal dollars which links small business owners and building owners to develop neighborhood business most of which is minority and women owned they really they take an entrepreneur who's got an idea and they find a landlord who's got the space and they marry those two hand in hand with this kind of economic development though is a focus on workforce development because this is about employing people who live in the city of Detroit and the city estimates that there are almost 200,000 Detroiters with a basic skills and support gap skills and support gap that prevents them from participating in regular work that gap runs the gamut of these people don't have any job experience they have literacy problems they may have a criminal record they have no degree or no certification for a specific job or skill they have no access to transportation many of them they have no available child or elder care that's the whole gamut of problems that have been assessed and the city is focusing on closing that gap whatever it takes including getting employers focused on how they can help improve the workforce skills of Detroit or so they most closely match the needs of today's economy and improve the rate of hiring in these specific companies much of what I've just run through other places of course take for granted but it does provide a realistic starting point for growth in Detroit but it doesn't guarantee that recovery is going to be sustainable unless I be seen as painting an overly rosy picture let me be the first to say that still there are too many homicides and gun crimes insurance and other costs are high in Detroit compared to the rest of the region and the school system is a national disgrace here I do not let Lansing off the hook either having said all that cities and their economies populated by people are by definition organic they evolve at the end of the day cities are social organizations where outcomes are determined by human behavior and one element that conditions that human behavior is our mindset many including the mayor have a growth mindset I don't know if you've ever seen Mayor Duggan but he's kind of a Detroit version of the Energizer bunny the guy does not stop and he's everywhere everywhere around Detroit he knows every block he's been everywhere and he goes to New York and talks to the bankers and he goes to Washington and gets after federal money this guy is on a mission and he's a man with a mission who is very accountability driven and that's how he runs the administration and he has a growth mindset he ran for election saying he was going to grow the population of the city of Detroit no one believes it it's going to happen slowly it's happening you can see the changes around you just can't measure it quite yet most of the capital that's flowing in and the developers who are placing their stakes offer that new mindset the challenge now is to have the future mindset focused on educating the kids training the workers and choosing the types and quality of city services that the citizens need in a real economy well I'm going to end on a further positive note as you all know one of the hottest areas in economics these days is behavioral economics we've actually drawn on some of its insights in designing part of a tax compliance strategy thanks to Ben Meiselman's doing as one of his economics PhD thesis essays on that may you get the job of your life out of it Ben anyone who has watched the ways in which neighborhood groups and community organizations have pitched in to fill the gaps left by inadequate government services in Detroit will recognize that there has been a palpable change in Detroiters mindset since the onset of the crisis and based on what the audience brings up when the mayor holds his neighborhood meetings now expectations and involvement in Detroit have really risen and I take that to be a major change in the mindset I came to as an outsider to Detroit a little more than two years ago and I'll soon be gone back to New York I wasn't part of the failure here and I wasn't part of the bankruptcy for a short time I've had a small part in the recovery and that has been exhilarating for me exhausting yes but exhilarating look let's face it this is going to take time Detroit suffered a multi-generational decline and full recovery is going to take multiple generations it's also going to require folks the continued application of intelligent public policy sound familiar is that why you're here intelligent public policy and this place the University of Michigan has the opportunity to introduce state-of-the-art practices in almost any field of public policy and down the road is a fallow field for you led street lighting mobile health units smartphone based on street parking meters and internet-based bus arrival times have been implemented in the last two years and that's just the tip of the iceberg there's a lot more work to be done and a lot of room for great ideas not least with the school system which I haven't been able to talk about in which the city has not yet taken on but knows it's going to have to at the moment Detroit is one of the most happening places in the country I have evidence of that at least the number of people I've run into in New York and here who have forsaken Williamsburg for Detroit you can be part of that Detroit offers you the opportunity to face what may be the best challenge of your life particularly those of you embarking on a career to focus on the rich laboratory public policy laboratory that's just down the road I hope some of you do I did such a thing when I came to New York in 1975 at the depths of New York City's fiscal crisis I have no regrets and I wish it for some of you I hope so thank you seize the moment and thank you