Detroit financial reserves earn city credit boost by Standard & Poor's
Detroit — The city's strong financial reserves and recent return to the bond markets for capital investment have earned it a credit rating boost, according to a Thursday report from Standard & Poor's.
The credit-rating agency bumped up the city's underlying credit rating to BB- from B+, saying Detroit is positioned to absorb increasing pension commitments and debt service payments as well as possible revenue setbacks while sustaining a balanced budget and funding reserves, noted S&P Global Ratings credit analyst John Sauter.
The report also cites the city's December return to the markets for capital borrowing as a "significant stabilizing factor" in its financial trajectory.
"Detroit is demonstrating ability to meet its budget demands, while also providing a strong reserve cushion against unexpected events or stagnating revenues," the report notes. "The city is experiencing good economic growth (though mostly centered in the downtown area) and population declines are moderating. At the same time, it continues to post budget surpluses, grow reserves, and meet objectives as defined in the (bankruptcy) Plan of Adjustment and subsequent planning documents."
Detroit Mayor Mike Duggan said the improved rating is a reflection of the city's strategies to improve quality of life in the city.
“Detroit can provide effective public services to its residents only if city government operates in smart, financially sound ways, and that has been our mission from day one,” Duggan said in a released statement.
The city emerged last spring from strict financial oversight put in place as it exited bankruptcy in 2014. The city regained local control over its budgeting and contracts, amid increasing property tax revenues and plans to amass $335 million by 2024 to deal with payments that will come due to its two pension funds.
The Thursday report cautions, however, that Detroit still faces "substantial credit pressures" in the near and longer terms.
"It operates within a very limited revenue-raising framework that is intricately tied to economic activity. Therefore, continued stabilization of the population and tax base will be key to future budgetary performance and long-term viability," the report says. "To support this stabilization, the city must continue investing in public infrastructure and economic development initiatives, while also managing increasing annual pension and debt service burdens."
Beyond the two-year outlook, S&P's notes, the city's "very large unfunded pension obligation will continue to grow, and there remains risk that projected
funding requirements, starting in fiscal 2024, could be larger than anticipated."
S&P last upgraded Detroit’s credit rating in December 2017. Moody’s Investors Service also upgraded Detroit's credit rating in October 2017 and May.
“Given our strong liquidity and positive budget results, it’s important we consider increasing our budget reserve, while also continuing to invest in infrastructure and economic development to help grow our local economy,” said Dave Massaron, the city's acting Chief Financial Officer. “It’s essential that we take actions like these today in order to help support our long-term financial and economic outlook. I look forward to working with the City Council to consider these efforts.”
Councilwoman Janee Ayers, who chairs the council's Budget, Finance and Audit subcommittee, added the credit upgrade is "another sign that the city is on the right path."
S&P on Thursday also noted a change in its rating methodology for all priority-lien tax revenue debt.
For Detroit, it resulted in the lowering of ratings to BB+ from A on Michigan Finance Authority's Local Government Loan Program bonds issued on behalf of the city of Detroit that are secured by a first lien on the city's municipal income taxes.
The agency also lowered its rating for the city to BB+ from A- on the Authority's Local Government Loan Program bonds issued for the Detroit Public Lighting Authority, which are secured by Detroit's Utility User Tax.
The priority-lien rating on both the income tax and utility user tax-secured debt based on its limited view of the city's creditworthiness, the report notes. Neither the income taxes nor utility tax revenues are collected by the city.