City of Detroit receives its second credit rating upgrade

City of Detroit receives its second credit rating upgrade in less than three years and its highest since March 2012
Detroit’s underlying credit rating took another major step forward today as Moody’s Investors Service upgraded the City’s rating a full level. The rating agency also assigned a positive outlook for further upward movement in the coming years amid signs of strong management of the City’s finances.
The rating upgrade indicates stronger confidence in the City’s financial outlook since it emerged from bankruptcy nearly three years ago, and it comes as Detroit prepares to place $125 million in financing as part of a $317 million project to revitalize neighborhood commercial corridors throughout the City along with extensive road and sidewalk repairs.
“When we exited bankruptcy, many questioned whether Detroit would be able to manage its finances going forward,” Mayor Mike Duggan said. “Two credit rating upgrades in less than three years and a positive outlook from Moody’s show just how fast our financial turnaround is succeeding.”
The B1 rating is the City’s highest by Moody’s since March 2012. Moody’s raised Detroit’s rating on its general obligation unlimited tax pledge to B1 from B2, up from Caa3 in 2013.
“We have been very conservative in our projections, and we’re executing a plan to address our legacy pension obligations and produce surpluses each year to reinvest in vital City services and our neighborhoods,” Duggan said. “Job growth is well under way and the City’s economic performance is strong.”
Moody’s noted as much, citing Detroit’s efforts to revitalize neighborhoods as a sign of strength in the City’s financial outlook. According to Moody’s, “the upgrade to B1 reflects improved fund balance and liquidity coupled with adoption of a pension funding strategy that will lessen the budgetary impact of a future spike in required contributions. The rating also considers the very conservative fiscal approach of Detroit’s current administration as well as the city’s current economic performance, which is strong considering its historic contraction.”
Moody’s report stated that Detroit has the following credit strengths:
• Very healthy fund balance and liquidity provide resources to invest in economic development or absorb a short-lived budgetary shock
• Job growth is fueling rising income taxes, positioning the city for operating surpluses in the coming years
• Very conservative fiscal management is intent on keeping general operating expenses below the current revenue intake in order to address long-term pension funding needs
• Increased road funding from the State of Michigan (Aa1 stable) will support Detroit’s neighborhood revitalization initiative
“Working with the Mayor and the City Council, we have implemented a number of financial reforms that have helped us get to where we are today,” said John W. Hill, the City’s Chief Financial Officer. “Moody’s report illustrates that we have strengthened the City’s financial position, have strong financial planning and budgeting practices, and are making the right decisions to ensure the City’s short- and long-term fiscal sustainability. Moody’s and the City both agree that we have the potential for further rating upgrades should the current economic and financial trends continue,” Hill added.
The improved rating comes as Detroit prepares to place $125 million in financing for a major revitalization project that targets improvements to commercial business corridors such as Livernois, West Vernor and East Warren avenues, including road repairs, sidewalk upgrades and redesigned streetscapes to encourage reinvestment and walkability for residents. The financing is part of $317 million infrastructure project that will include improvements to 300 miles of roads and hundreds of thousands of broken sidewalk segments across the City.
The financing will not require money from the City’s general fund. It will be repaid with money the City will receive from the increase in the state’s gas tax and vehicle registration fees.