by Scott McClallen
Over 10 years, the city of Detroit went from the nation’s largest municipal bankruptcy to investment-grade status.
Moody’s Investors Services gave Detroit a rare two-notch bond rating increase from Ba1 to Baa2 with a positive outlook, returning Motor City to investment-grade status for the first time since 2009.
Moody’s said, in a report explaining the improved outlook, “The city’s financial ratios are robust after a decade of solid financial performance. City management has adhered to strong governance practices and Moody’s expectation is that such momentum will continue.”
Mayor Mike Duggan praised the city officials.
“It has been 10 years of hard choices and sound financial management by these great leaders,” Duggan said. “No one in 2014 would have predicted Detroit returning to investment grade in less than a decade.
In 2014, all the analysts were predicting a financial crisis in 2023 when Detroit hit the ‘pension cliff’ and had to start making $150 million a year in payments to the pension fund. City Council’s strong support to establish a $479 million Retiree Protection Fund over the last decade was key to our current success.”
Many large investors such as pension funds, mutual funds, and insurance companies that purchase municipal bonds will only purchase investment-grade bonds.
Detroit might be able to tap lower interest rates because of the financial improvement for spending on infrastructure improvements, neighborhood revitalization, and public services.
Detroit ended 2013 with a budget deficit and no funds to pay pensions. Nine consecutive years of budget surpluses later, the city built up a $1.2 billion General Fund balance including $479 million in the Retiree Protection Fund to support the legacy pension payments.
The city will draw on the fund to offset pension payments beginning this year.
The Moody’s report said, “Detroit’s economy has markedly improved in recent years and will continue to recover given preliminary tax base growth, improved services, reduced blight and a pipeline of development projects, including major investments in new downtown hotels, retail, condos and apartments.”
Moody’s estimated that appreciation of residential values in Detroit’s tax base will provide another boost in fiscal 2025.
Moody’s estimated that 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.
Moody’s wrote, “Projected fiscal 2024 general fund revenues are up roughly $73 million compared to the adopted budget, based on year-to-date performance. The city plans to redirect that money back into services such as blight remediation, capital and public safety, and will end with roughly balanced operations.”
The positive outlook assigned with the credit rating is due to an increasing tax base and revenue growth.
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Scott McClallen is a staff writer covering Michigan and Minnesota for The Center Square. A graduate of Hillsdale College, his work has appeared on Forbes.com and FEE.org. Previously, he worked as a financial analyst at Pepsi. In 2021, he published a book on technology and privacy. He co-hosts the weekly Michigan in Focus podcast.
