How The City's Budget Works

About the only thing most residents know about the City of Detroit's budget is that part of it comes out of their pockets.

However, a closer look at the city's financial workings might help explain such things as why Mayor Coleman A. Young is asking the state legislature for a hike in city income tax, why Detroit is not in the same position as New York City, and why Detroit faces a whopping $45-$55 million deficit for the fiscal year ending June 30, 1976.

It might also help explain why those tax dollars contributed to the city each year don't seem to be stretching as far as they used to.

WHERE DOES THE MONEY COME FROM?

Detroit, which this year has a $808 million-plus budget, gets its revenue from four basic sources: local residents and business; the state; the federal government; and borrowing.

Property tax is the biggest single local source. Under state law, the city can levy up to 20 mills (the current rate) on the state equalized value of real estate and personal property in the city.

This means that a home-owner with a house valued at $20,000 will pay $400 in property tax. The 20-mill rate represents $20 per $1,000 of value.

Under state law, homes are assessed at 50 per cent of market value. After the assessments, the state steps in to make sure that similar property in different parts of the state is being assessed at the same rate and so "equalizes" the values. The total equalized assessment values of all the real and personal property in Detroit is known as the city's "state equalized valuation" or SEV. Detroit's current SEV is nearly $5.8 billion, and the 20 mill tax on that amount this year will bring almost $116 million to the city's coffers.

Detroiters have to dig still further into their pockets, however, to meet four additional levies: debt service, which pays interest on money the city borrows (7.252 mills); Building Authority lease payments, for the new Detroit General Hospital (0.562 mills); drainage district, for sewer maintenance and improvement (0.058 mills); and library (0.640 mills).

This year, the city will realize over $165 million from these five tax levies. The figure does not include millage for the Detroit school district or Wayne County.

City Budget Director Walter Stecher notes ironically that Detroit's tax rate (exclusive of income tax) is 2.7 times the state average, although the millage rate for the Board of Education is comparatively low.

But the local taxpayer's burden does not end with the tax levies- there is still city income tax to pay.

At present, Detroit residents pay two per cent of their earnings to the city, compared to one-half per cent for non-residents who work in Detroit.

These are the maximum rates allowable under state law, and the Young administration thinks they are inadequate. Detroit's mayor has proposed that the resident rate be upped to three per cent and the non resident rate to one and one-half per cent.

Says Stecher, "We're aware of no other city in the country where the resident pays four times what the non-resident pays." He terms the situation a "political reality" stemming from the influence of state legislators from the "suburban ring."

The city expects to realize some $110 million from the income tax this year, about $14 million of which will come from non-residents.

Detroit residents also pay a five per cent utility tax - again, the maximum allowable under state law-on their telephone, gas and electric usage. This year, that tax will bring the city about $23 million.

Another major source of local revenue is the sale of goods and services by the city. The largest single item in this category is the sale of water and sewage services, from which the city expects about $83 million this year. Another $39 million will come from hospital fees and charges, $33.6 million from transportation services, and $16.7 million from the sale of electricity and public lighting services.

Detroit also expects to earn some $29 million from its various investments, mostly short-term. Some $10 million will be generated by fines and penalties, largely traffic tickets in Recorder's Court, and a like amount is realized from various licenses, permits, and inspection charges.

STATE AND FEDERAL SOURCES

From state sources, Detroit gets a portion of the state-levied sales tax, income tax and intangibles tax (levied on large bank accounts, stocks and bond holdings), and will soon start receiving part of the single business tax (levied on manufacturers' inventories). Sales tax returns from the state add some $25 million to the city purse, while income tax from the state brings another $25 million, and the intangibles tax, about $1.3 million. The single business tax will produce about $16.4 million for the city.

An additional $24 million in gas taxes and weight taxes (from vehicle registrations) comes from the state, but it must be used only on streets, highways and related purposes. The other state-shared revenue is not earmarked.

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How the City's Budget Works

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At present, money from federal grants is not included in the city's budget, but policy may be changed in the future so that the budget reflects funds anticipated under ongoing federal programs.

What is included is federal revenue-sharing funds-not grants- which this year amount to about $35.9 trillion. However, Stecher is displeased with the manner in which the feds dole out the money.

This year, Detroit's allocation was cut by some $7.1 million because the federal government relied on federal income tax returns, rather than the 1970 Census, to determine Detroit's population. Stecher thinks the government's method was inaccurate, since many poor and transient residents don't get counted by the IRS.

He also takes exception to the federal regulation which stipulates that no city will get funds amounting to more than 145 per cent of the state average (total funds divided by number of cities). By Stecher's count, Detroit loses some $7 to $8 million because of that rule.

Moreover, the Budget Director is uneasy with Congressional rumblings over whether the five-year appropriation of federal funds, which expires in December of next year, will be renewed.

The last major source of revenue for the city is borrowing, which takes two forms: bonds and tax anticipation notes.

WHAT ARE MUNICIPAL BONDS?

Bonds work this way: The city will embark on a capital improvement project amounting to, say, $20 million, and will solicit bids for bonds to pay tor the project. Bonds are interest-bearing certificates indicating the city's indebtedness.

Bids are received from different financial institutions showing the amount of interest the city will have to pay on the bonds if the bid is accepted. A recent interest figure was 9.96 per cent.

Once a bid is accepted, bonds are sold to other parties, including banks and individuals, and the certificates are later redeemable, with interest, according to an established schedule. Bonds usually mature in 12 to 14 years, under current practices.

Because the bonds are tax-backed, meaning the residents are obligated for them, state law strictly controls their sale.

Under the law, Detroit can sell bonds equal to one-half of one percent of the city's SEV without a vote of the people. The city is now near its limit, with $29,210,000 in outstanding bonds.

The state also prohibits the city from selling bonds at an interest rate of greater than 10 percent, even though the New York City situation is pushing interest rates up. "I don't know if Detroit could sell bonds today at under 10 percent," Stecher says.

Tax anticipation notes are a means of borrowing on a short -term basis to compensate for the city's "cash flow" problem. This means that it takes a while tor the city to collect money owing to it, and the tax anticipation notes are a means of tiding the city over until the funds are in hand.

The notes are always pad off within a few months.

Both tax anticipation notes and bond must be approved by the state municipal finance commission.

WHERE DOES THE MONEY GO?

What happens to all the money collected from local, state and federal sources and from borrowing?

According to Detroit's 1975-76 budget manual, the bulk of the funds-over 60 percent -go for personal services, including wages and fringe benefits. General fund expenditures, amounting to over $533 million, run the "executive agencies" (city departments) and provide operating money for legislative and judicial agencies, including Recorder's Court; the Auditor General; the City Clerk, Council Planning Commission and Election Commission; ombudsman functions; and the Zoning Appeals Board.

An additional $45.5 million goes for debt retirement (paying back principal and interest on money borrowed by the city), while such tax-subsidized operations as the hospital, library and D.O.T. (Department of Transportation) eat up almost $118 million.

Airport, housing, municipal parking, and water and sewage - largely self-supporting-receive $111.5 million in city funds, but contribute revenue in return.

Although the new City Charter mandates a balanced budget, Stecher says the city may come up some $50 million short this year. He notes that this year's budget instructions to department heads called for each department to absorb inflation costs and bargaining agreement settlements, resulting in across-the-board budget cuts of about 12 per cent, including lay-offs of one out of every eight or nine city employees.

"We're hoping there's something that's going to reduce the $45 to $55 million, but we recognize the fact that we're going end up with a deficit," Stecher says. "This is just too big. We don't know how to handle it.."

(Pie Chart) City Income

Water & Sewage Sales 10.4%

Property Tax 14.5%

Income Tax 13.7%

Other Local Taxes 10.9%

Federal Revenue Sharing 4.5%

State Grants 4%

State Taxes 11.5%

Misc. 15.6%

Other Sales & Charges 15%

(Pie Chart) City Expenses

Includes Airport, Housing, Parking, Water, & Sewage (Self-supporting Services 13.9%)

Includes Hospital, D.O.T., Library (Tax-subsidized Services 14.6%)

Debt Retirement 5.6%

City Departments, Legislative & Judicial Agencies (Including Wages & Salaries) 66%