Detroit returns to investment grade with Moody’s upgrade
4 min read
Moody’s Ratings on Friday raised Detroit’s issuer and general obligation unlimited tax bond ratings to Baa2 from Ba1, a major milestone for the city, which has waited 15 years to return to investment-grade status.
It’s been just over a decade since Detroit filed for bankruptcy and
“This is a historic moment for us,” said Detroit Chief Financial Officer Jay Rising. “I think there was a skepticism that Detroit would ever get out of this cycle.”
But the upgrade shows the city is “just like every other major economic area, with the same financial performance,” he added.
Moody’s Vice President and Senior Analyst David Strungis suggested Detroit has set a good example for other cities looking to raise their ratings.
“Detroit has bolstered its financial resiliency by adhering to strong budgeting and governance practices over the past decade,” he said. “These include semi-annual revenue-estimating conferences and multi-year budgeting. Detroit has developed a decadelong track record of solid financial performance, even during the pandemic. It has accrued and maintained consistently strong reserve levels. … [It] has also made significant strides toward bolstering its services and remediating blight, and after many years of stagnation and decline, the tax base has started to grow.”
The city has stockpiled its prior-year surpluses in a “retiree protection fund” to manage pension contributions, he added.
“Obviously, we’re pleased,” Rising said. “You think you know where you’re going, and that you’re making progress. … It feels validating to have the rating agencies understand what you’re trying to do and recognize that. We had the same strategy every year. And that’s really that we build the city’s fiscal strength by the projects that we’ve undertaken as we’ve come out of bankruptcy.”
Among other things, he said, the city invested in IT, built up economic revenues and enabled the growth of the property tax base, basically everything the bankruptcy court said they’d need to do.
“On every one of those things, we beat what they thought we’d be able to do,” he said. “So, it was a virtuous circle in a way. We knew that if we did the stuff the city needed, it would produce the growth and tax base and jobs, and the stronger financial stability, that was needed. And we met all our deadlines. … So, I think the stability that we tried to show the rating agencies eventually paid off.”
In its rating rationale, Moody’s noted Detroit’s tax base valuation doubled in the past five years, and residential values continue to appreciate. It also pointed to strong governance practices, “robust” financial ratios and comparatively healthy leverage ratios. It praised the city’s “modest” debt plans and actuarially recommended pension contributions.
Rising said his team hopes to go to the City Council in the next few weeks to seek $31 million of unlimited tax GO bonds that voters already approved to finance public safety improvements, recreation and parks and street lighting upgrades, “the basic governmental functions that really make the city a more beautiful place to go.”
Strungis said the city’s comparatively low total leverage ratio will remain between 200% and 350%. The city has $146 million of authorized but unissued debt. It has told Moody’s it is considering floating $47 million of unlimited tax bonds and $55 million of limited-tax installment purchase bonds over the next year to year and a half.
“It is also currently studying the possibility of using federal tax credits to partially offset the issuance of $100 million for solar power fields on vacant land,” Strungis said.
Rising said the rating agencies “have been pretty consistent” in telling them what they need to do.
“We took our ARPA [American Rescue Plan Act] money,” he said, and “we spent them on projects that we thought would enhance our tax base. … Now it’s just really spending [those funds], developing the capital projects and delivering the programs. We tried to invest in things that would make people want to live here.”
This year, he added, the city came off a 10-year hiatus of paying into the pension funds and created a pension reserve. The city plans to slowly increase the portion of payments from the general fund, “but we want it to be a glide path rather than a cliff, so that our general fund doesn’t take the whole hit,” he said.
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