Detroit could see its bond rating inch closer to investment grade if it can maintain the financial progress of the past five years, since exiting its landmark Chapter 9 bankruptcy.
Moody’s Investors Service on Tuesday affirmed the Ba3 rating on the city’s $135 outstanding general obligation bonds and revised its outlook to positive from stable. The rating is three notches away from investment-grade territory. Moody’s last upgraded the city in May 2018.
“While this outlook change does not impact the rating — which remains three notches below investment grade — it does mean the city’s finances are pointing in a positive direction and there is a higher chance the city will be upgraded in the next 12-24 months," Moody’s said.
S&P Global Ratings rates the city's bonds BB-minus — also three notches away from investment grade — with a stable outlook.
Moody’s outlook revision reflects the improving capacity of the city's budget to finance service improvements and capital investments. The outlook also considers a favorable trend in job growth and its impact on the city's tax base and tax collections.
The city has taken steps to prepare for a potential downturn: establishing an irrevocable trust to help pay for a coming jump in its pension contributions, developing a capital improvement plan that identifies a variety of sources to finance capital investments, and continuing to increase its already strong reserves, the rating agency said.
“The rating could move upward if the city continues to make progress towards being fully prepared for a large, planned increase in costs four years from now,” the ratings agency said.
Beginning in 2023, Detroit must start making full yearly contributions toward two city retirees' pension funds. Rating agencies and municipal analysts have said this scheduled spike in pension payments is the city's most material credit pressure.
The city's 2014 plan of adjustment that paved the way for its bankruptcy exit froze the city's legacy pension plans and provided an initial funding infusion from the so-called "grand bargain," funded with help from the state and private entities. The city received a funding holiday, but payments resume in 2024.
The city is putting aside money in a Retiree Protection Fund to meet the increase, which is $100 million more than initial post-bankruptcy estimates. That fund is on track to grow to over $335 million by 2024 and will provide a buffer to the increased contributions.
Detroit expects $15 million or 1.4% more in recurring general fund revenue this fiscal year than in the budget it adopted last year, according to revenue estimates released last week.
Fiscal 2021 revenue is projected at $1.085 billion, a 1.1% increase from the previous year. Detroit's fiscal year runs July 1-June 30.
The estimates are used for both the coming fiscal year's budget and four-year financial planning.
Higher income tax revenues and increased state revenue sharing contributed to the increased projections. But Detroit still needs to "focus on controlling costs over the next four years to keep the four-year plan balanced and deal with pension contributions that start back up after a 10-year holiday in fiscal 2024,” the city said in a press release.
"While it's great that the economy continues to grow over the next four years, the city has to do more with less," Chief Financial Officer David Massaron said in the release. "Economic growth in the city does not directly translate to growth in city revenues. Our relatively flat revenue growth means that the mayor and city council must budget responsibly to ensure a balanced four-year plan."
Moody’s outlook upgrade came ahead of Detroit Mayor Mike Duggan’s delivery of the state of the city address later Tuesday during which he touched on future plans to develop the city’s shopping districts, affordable housing and equity for longtime Detroit residents to attain jobs.
“We’re at a different point in the city’s history,” he said. “When you have growth, it brings a whole different set of problems.”
Duggan also briefly discussed efforts to develop a plan for blight removal in the city — a necessary precursor to increasing taxable values in outlying neighborhoods — after his $250 million bond-funded proposal failed to gain city council approval last year.
Duggan did not offer specifics on exactly how he would raise money but Massaron has said the city is planning to work with the council on a larger blight-elimination and neighborhood-rebuilding ballot question for debt at some point this summer.
