Bond agency: Detroit’s local control ‘credit positive’
Days after Detroit left state oversight, Moody’s Investors Service officials say the city is better equipped to face issues affecting its ability to borrow money despite facing significant credit challenges.
“The action reflects the credit-positive strengthening of Detroit’s financial operations and position in preparation for challenges ahead, including critical improvements to city services and infrastructure, potential revenue volatility and a significant $140 million increase in pension contributions starting in fiscal 2024,” the bond rating agency said in a weekly credit outlook released this week.
On Monday, a nine-member financial review commission voted unanimously to release Detroit from state oversight. Since 2014, the commission has had the final say on all city budgets, collective bargaining agreements and contracts greater than $750,000.
The restoration of local control comes as Detroit touts stabilized finances, with a projected $36 million surplus in fiscal year 2018, increasing property tax revenues and a plan to have $335 million set aside by 2024 when the city resumes pension payments.
In its analysis issued Wednesday, Moody’s declared the move as a “credit positive,” which doesn’t reflect a bond rating or outlook change but indicates “the impact of a distinct event or development as one of many credit factors affecting the issuer,” a representative said.
The agency acknowledged gains the city made while under oversight, including “substantial improvements in financial practices, including a revenue-estimating conference, use of four-year operating forecasts and conservative budgeting of revenue and expenses.” It also noted financial operations paving the way for Detroit to boost its general reserves “to healthy levels,” and that officials expect strong management to continue in city leadership.
But not all is well, the report found.
“Despite positive momentum, Detroit has significant credit challenges, including a weak tax base and economic profile,” the authors wrote. “The city’s long-term liabilities were drastically lowered in bankruptcy, but remain high. The city and Detroit Public Schools … have substantial capital needs that will need to be addressed in the next few years. The city does not control the schools, but the school system’s performance affects the city’s ability to grow its tax base.”