CHICAGO Detroit’s significantly lighter debt burden is one of several credit advantages the city won in bankruptcy, but serious challenges remain to avoid a similar cash crisis or even bankruptcy in the future, Moody’s Investors Service said in a report this week.
“Despite the momentum behind the city as it exits Chapter 9 and implements key credit improvements, structural challenges loom large and may limit the extent of its overall recovery,” Moody’s analyst Genevieve Nolan wrote in the March 11 report, “Detroit Emerges from Bankruptcy Stronger, But Economic Hurdles Persist.”
“The city’s challenges are largely ones that bankruptcy could not immediately fix and will continue to weigh on credit quality over the next five to 10 years,” she wrote.
Detroit exited the largest-ever municipal bankruptcy in December, after an intense 18 months of negotiations with its creditors. The city now enters what Moody’s calls a pivotal time, as it emerges with “notable improvements to its credit fundamentals” and struggles to hold on to them.
The city sliced its net direct general fund debt to $1.8 billion from $2.5 billion during the court process, due chiefly to its hard-won deal to shed $1.45 billion of certificates of participation.
But its long-term bond debt remains high for a city of its size, Nolan said.
In June 2013, a month ahead of its bankruptcy filing, the city had gross direct bond debt of $8.5 billion. The largest chunk was $5.86 billion of water and sewer bonds supported by the city’s enterprise system. Post-bankruptcy, in December 2014, the city’s bond debt totaled $7.6 billion, a $900 million decline tied largely to shedding the COPs.
The city added $560 million of limited-tax general obligation bonds, shed $100 million of unlimited-tax general obligation bonds, and added $275 million of income-tax revenue bonds, according to Moody’s.
The largest liability the city shed in Chapter 9 was $4.3 billion of other post-employment liabilities. The city also won the right to stop making pension payments for the next 10 years under the so-called “grand bargain” central to the city’s recovery plan.
Prior to bankruptcy, Detroit’s annual fixed debt costs for everything from bonds to retiree health care to pensions totaled 31.5% of its operating revenues. That number drops to 12.4% in 2015, grows slightly to 17.3% in 2021 and declines to 15.2% in 2023, according to Moody’s. After 2023, the city is set to resume making pension payments.
“These savings will help the city stabilize operations and increase investments to improve services and rebuild long-neglected city infrastructure,” Nolan wrote. “These investments are necessary to support sustainable revenues for the city going forward.”
On the revenue side, the city is walking a cash-flow tightrope in terms of the revenue expectations built into its recovery plan, Moody’s said.
The 10-year recovery plan assumes property taxes will continue to decline slightly over the near term, but its projections for growth in income and casino revenues will require an economic recovery that could be difficult given the city’s high unemployment rate, continued population decline, and weakening tax base valuations, said Moody’s.
“The city’s revenue assumptions are based primarily on very recent trends in 2012 and 2013 and an improved economic outlook,” Nolan said. “If this trend is sustained, the city’s projections for its largest general fund revenue source could be reasonable, but any future dips would change the forecast significantly. However, any negative variance could stress Detroit’s already narrow liquidity, resulting in a similar cash crisis that preceded the city’s bankruptcy filing.”
Another key success for the city has been a new management team that, with support from the state, is working to grow the city’s population and keep the recovery on track.
The team, led by Mayor Mike Duggan, has its work cut out for it.
“The city’s unprecedented economic decline in terms of scope and magnitude has created an urban revitalization task that has never been seen in the U.S.,” Nolan wrote. “Detroit must combat and correct a multitude of long-standing drivers that resulted in severe population losses while still facing headwinds from significant taxable valuation declines.”
