Witnessing a financial revival, the City of Detroit has been upgraded to an investment grade status by Moody’s Investors Service, marking a significant milestone in the city’s recovery from the largest municipal bankruptcy in U.S. history in 2014. This upgrade, announced by Moody’s on Friday, elevates Detroit’s bond rating two levels from Ba1 to Baa2, accompanied by a positive outlook for the future.
But the real question is, what does that mean?
This monumental upgrade, which Mayor Mike Duggan announced today, signifies the first return to investment grade for Detroit since 2009, less than a decade after the city declared bankruptcy. Moody’s attributed this remarkable turnaround to “a decade of solid financial performance” and “strong governance practices,” underscoring a consistent track record of financial resilience and operational efficiency within the city’s administration.
The report issued by Moody’s on March 22, 2024, commends Detroit for its impressive financial management and governance over the past decade, stating, “The upgrade…reflects Moody’s expectation that the city will continue to bolster its financial resiliency and maintain the track record of solid operating performance.” Furthermore, the report highlights the doubling of Detroit’s tax base valuation in the past five years and anticipates additional fiscal growth in 2025 due to ongoing development and rising residential values.
Mayor Duggan extended his gratitude towards the City’s Chief Financial Officers – John Hill, Dave Massaron, Jay Rising – and Deputy CFOs Tanya Stoudemire and John Naglick for their pivotal roles in steering Detroit through a decade of stringent financial choices towards this achievement. Duggan reflected on the skepticism in 2014 about Detroit’s potential for such a rapid recovery to investment grade status.
In the wake of its bankruptcy, Detroit committed to a Plan of Adjustment (POA) aimed at rejuvenating essential services, amidst widespread skepticism about the city’s capacity to achieve more than just basic functionality. The POA’s feasibility study modestly posited that transitioning from a failure in essential services to providing adequate and reasonable service would constitute success for Detroit, without aspiring to set new benchmarks in municipal governance.
Contrary to these cautious expectations, Detroit has remarkably outperformed the key forecasts outlined in the Plan of Adjustment:
- Contrary to predictions of a 0.4% annual decline in resident employment, which would have resulted in a loss of 8,000 jobs from 2014 to 2024, Detroit witnessed an average annual job growth rate of 1.1%, leading to the creation of 24,000 jobs for its residents.
- Despite anticipations of a continuous dip in property values, the city saw a significant turnaround starting in 2018, with property values now standing 94% higher than they were a decade ago.
- The city was tasked with achieving a 2% annual growth in income tax revenues to ensure financial viability—a goal many considered unattainable. Surprisingly, Detroit’s income tax revenues have surged by 5% annually, amassing nearly $400 million more than initially projected over the last decade.
- Ending 2013 with a budget deficit and devoid of funds to cover pension payments, Detroit managed to record nine successive years of budget surpluses. This fiscal prudence has culminated in a $1.2 billion General Fund Balance, inclusive of $479 million earmarked in the Retiree Protection Fund to sustain legacy pension disbursements.
Detroit’s journey post-bankruptcy is a testament to its resilience and ability to exceed expectations, marking a significant chapter in the city’s ongoing revival narrative.
The journey from a Caa3 rating in June 2013 to the current Baa2 rating encapsulates a series of 10 credit upgrades, defying the expectations set following the city’s emergence from bankruptcy. The latest double-notch upgrade is particularly significant as it marks Detroit’s first multi-notch upgrade since Moody’s introduced its current rating scale.
The optimism surrounding Detroit’s fiscal future was echoed by Jay Rising, who emphasized the positive outlook from Moody’s as a harbinger of potential further upgrades in 2025. Mayor Duggan also praised the Detroit City Council for its role in making prudent budget decisions, especially in establishing a $479 million Retiree Protection Fund to address potential financial crises, such as the anticipated “pension cliff.”
Achieving investment grade status opens Detroit to new investment opportunities, enabling the city to access a broader market of large investors, such as pension funds and insurance companies, that require investment-grade bonds. This expansion into new markets is expected to lower borrowing costs, allowing for reallocation of funds towards essential city services and infrastructure projects.
The Moody’s report underscores Detroit’s economic and tax base improvements, driven by significant investments in downtown developments and an overall enhancement of city services. The city’s robust financial ratios and governance practices have set a strong foundation for continued growth and stability.
Detroit’s financial team, led by Jay Rising, has been instrumental in achieving this milestone, demonstrating an unwavering commitment to fiscal responsibility and setting a precedent for municipal governance. “This achievement reflects the dedication and hard work of countless individuals. Our team, alongside leaders across all departments, have been instrumental in driving this positive change,” said Rising. “We are committed to maintaining this fiscal responsibility for the benefit of all Detroiters.”
Moody’s also recognized Detroit’s fiscal management as comparable to higher-rated cities, indicating a stable future driven by moderate revenue growth and sophisticated budget management practices. “Detroit’s available fund balance ratio will likely remain around 35%, which is the Aaa-scorecard threshold, because moderate revenue growth will offset rising expenditure pressures. Additionally, the city’s budget management practices – including a sophisticated revenue-setting process – will provide it with tools to respond to possible adverse developments, such as an economic downturn.”
This historic upgrade reflects Detroit’s success in not only meeting but exceeding the major benchmarks set forth in the Plan of Adjustment post-bankruptcy, with significant improvements in job growth, property values, and income tax revenues. The city’s strategic financial planning and resilience have paved the way for this historic milestone, marking a new chapter in Detroit’s remarkable comeback story.
Detroit’s journey from its 2013 bankruptcy, the most significant of its kind in U.S. history, to its current state of recovery presents a complex narrative that merits a closer examination. While the city has undeniably made strides in restructuring its finances and revitalizing certain areas, one must ponder the depth and sustainability of this recovery. The touted economic resurgence, characterized by job creation and rising property values, prompts questions about the inclusivity and distribution of these gains. Are all neighborhoods and communities within Detroit benefiting equally from this revival, or are the improvements predominantly concentrated in specific areas?
Moreover, the narrative of a revitalized Detroit, with its enhanced public services and infrastructure, raises inquiries about the long-term strategies in place to maintain this momentum. Given the city’s historical challenges, skepticism arises regarding the durability of these changes. Will Detroit be able to sustain its fiscal health and continue attracting investment when faced with future economic downturns or shifts in the national economy? The story of Detroit’s comeback is undoubtedly inspiring, but it invites a deeper analysis to understand the complexities and challenges that lie beneath the surface, ensuring that the city’s revival is not just a temporary phenomenon but a lasting transformation.
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