Moody’s sees continued improvement in Detroit finances
The City of Detroit plans to pay off $52.3 million of principal and $2 million of accrued interest remaining on 2014 bonds, and that’s seen by a bond credit-rating company as an example of continued signs of improvement in the city’s finances.
The move is being done with cash on hand, but will not put a significant dent in the city’s “robust liquidity,” according to a report released Thursday by Moody’s. As a result the city will save $9 million.
“While not a game-changer, the move is the latest example of management’s efforts to strengthen the city’s financial operations and position in preparation for a significant $140 million increase in pension contributions in fiscal 2024,” analysts said in the report.
Moody’s bond-rating of B1 positive for Detroit remains unchanged from October, when it was upgraded from B2. A B1 rating is considered highly speculative.
The city’s general-obligation limited-tax Series 2014C financial recovery bonds were one of three series of debt issued to finance bankruptcy settlements with creditors in late 2014.
John Hill, the city’s chief financial officer, said Thursday that Moody’s analysis shows that the city is going in the right direction.
“This is a credit positive move helping to deal with an issue that would be even larger if we didn’t deal with it now...” he said. “This can help assure some that the city can weather some of our financial challenges in the future.”
The report was released one day after a study showed that the city should be able to make good on its employee and retiree pension promises if its investments meet their projected targets.
Moody’s notes that city management is putting aside funds in an irrevocable trust to prepare for a fiscal 2024 pension contribution spike of $140 million, which is equal to 14 percent of the city’s fiscal 2017 operating revenue.
The city’s bankruptcy plan of adjustment requires a $20 million annual contribution from its general fund into the pension system through fiscal 2019. No additional contributions are required until fiscal 2024, according to Moody’s.
The analysis notes that Detroit’s strong financial operations have allowed the city to set aside funds above the requirements.
“The city has made additional contributions of $105 million to date with the goal of amassing at least $335 million in assets in the irrevocable trust by 2023,” the analysis states. “With the monies accumulated in the irrevocable trust, Detroit will increase its recurring general fund contribution by $5 million to $10 million per year between fiscals 2024-34, rather than increasing contributions from $0 to $140 million all at once.”
Moody’s attributes the city’s positive outlook to its dramatically reduced leverage post bankruptcy and rising income tax revenue. The city grew its general fund by $85 million in fiscal 2017, increasing its liquidity to $647 million.