Detroit returns to bond market with state oversight waiver in hand

Detroit plans to return to the market as soon as next month with a $100 million offering of voter-authorized general obligation bonds to speed up blight removal and fund parks and transportation projects.

The Detroit Financial Review Commission, put in place by the state to provide oversight of city finances and monitor compliance with its plan of adjustment after exiting Chapter 9 bankruptcy in late 2014, put its seal of approval on a $25 million piece of the borrowing at a meeting Monday. The other $75 million was previously approved.

The city heads into the market on the tailwinds of a sixth consecutive waiver from direct oversight granted by the commission Monday and a .

The 2021 sale carried a social bond label and the city reported to investors that as of December 31, 2022, the proceeds had funded 3,058 demolitions and 1,265 stabilizations with about $81.4 million of bond proceeds having been spent.

BofA Securities will be senior manager with Siebert Williams Shank & Co. LLC as co-senior manager. Huntington Capital Markets is a co-manager.

“The size, timing, and structure of the anticipated transaction remain subject to market conditions, and the city reserves the right to change or modify its plans as it deems appropriate,” the notice says.

The city reported 47,000 vacant houses and houses with demolition orders in 2014.

Detroit has since demolished 24,000 properties and rehabbed 16,000 with 7,000 remaining. The upcoming bond sale will finance work on another 2,500 with the general fund then being tapped to complete the task.

“We’ve combatted blight faster than anyone imagined,” the city said in its commission presentation.

The $13 million for transportation will provide ongoing funding for a new transit center at the state fair grounds.

The other $12 million from the C series will fund the fiscal 2024 phase of the city’s Parks & Recreation Improvement Plan that includes enhancements to parks in every council district as well as improvements at city recreation centers.

Waiver
The City Council has signed off on Mayor Mike Duggan’s budget for fiscal 2024, which begins July 1, and four-year financial plan that tackles the city’s post-Chapter 9 pension funding cliff and offers some property tax relief. That helped secure the commission’s waiver.

To win the waiver, the city must show it’s adhering to statutory targets that require: adoption of a deficit-free budget and a four-year financial plan, maintenance of a budget reserve equal to 5% of general fund expenses, and demonstrated ability to access the municipal market to meet its capital needs.

“The city’s borrowing capacity remains significant. Its general-purpose debt margin is $1.4 billion and its financial recovery bonds margin is $2.9 billion,” commission reports say.

The city issued unlimited tax general obligation bonds on its own credit twice in fiscal year 2021, once in October 2020 when it sold $80 million to finance capital needs and again in February 2021 when it sold $175 million under its Proposal N authorization.

“The city’s credit rating is more evidence of the city’s ability to borrow in the capital market,” the commission report said, noting upgrades.

In April, Moody’s Investors Service raised the city’s rating to Ba1 from Ba2 and S&P Global Ratings upgraded the city to BB-plus from BB. Both assign positive outlooks.

In tandem with the GO upgrade, S&P raised to BBB from BBB-minus the city’s financial recovery income tax revenue and refunding local project bonds issues through the Michigan Financial Authority’s Local Government Loan Program that hold a first lien on income taxes, and the city’s public lighting authority debt also issued through the MFA and secured by the city’s utility user tax.

Detroit GO debt hasn’t carried an investment-grade rating since 2009, when both Moody’s and S&P sent the city to speculative grade amid fiscal problems that culminated in its 2013 bankruptcy filing. The city has about $2.9 billion of total debt including $1.6 billion of GOs.  

The city’s budget reserve is projected to grow to $150 million in fiscal 2024, equal to about 11% of expenditures, from $143 million this year. The city’s longer-term goal is to reach 15%.

Pension funding looms as a source of budget pressure with payments aimed at eliminating legacy unfunded liabilities resuming in fiscal 2024 after a 10-year holiday. But commission reports note the city’s accumulation of $473 million in a special account known as the Retiree Protection Fund that will cushion the general fund impact until fiscal 2040.

The fiscal 2024 $2.6 billion budget funds a $149 million contribution, although that’s based on a 20-year amortization of the Police and Fire Retirement System’s unfunded liabilities and 30-year term for the General Retirement System.

A bankruptcy court judge on Monday sided with Detroit in its argument that plan of adjustment dictates a 30-year term and the police and fire fund lacked authority to approve a shift to a 20-year term in 2021. The retirement system is weighing its next legal step.

To limit pension cuts in the bankruptcy plan of adjustment, the city struck what was labeled the Grand Bargain: an $816 million fund with contributions from the state, the Detroit Institute of Arts, and various charities. Pension contributions were funded exclusively from the Grand Bargain giving the city a 10-year payment break.

The two plans were frozen in bankruptcy and closed to new entrants. Those hired since then get hybrid plans that combine elements of defined benefit and defined contribution plans.

The bankruptcy court ruling on the amortization term provides some breathing room for the city as the price tag for the 20-year term was estimated at $12 million with the potential for an additional burden as the General Retirement System could have followed the police and fire system depending on the court ruling.

The city is also hoping to receive a state grant of $23 million. The state set aside grants for weakly funded pension systems in its latest budget.

The city’s request was based on the GRS system’s funded ratio on December 31, 2021. The city’s general retirement system carries $909 million of unfunded liabilities and is 62.7% funded while the police and fire fund carries an $820 million unfunded tab and is 74.9% funded.

Deficit spending or any other violations of the statutory rules would trigger a return to direct oversight, setting back city efforts to fully shed commission oversight which occurs if direct oversight is waved for 10 consecutive years.  

Year-to-date revenues are tracking more favorable to projections but “remain subject to material change from final activity recorded through year-end close,” the city’s fiscal update reported.

The city’s February forecast showed revenues trending more positively due to healthier income and utility tax prospects.

Modest revenue growth of about 2% is projected through 2027 in a four-year fiscal forecast the city must compile and submit to the review commission under state law. Revenue estimating conferences are held in February and September.