Moody’s Investors Service has upgraded Detroit’s issuer rating from B1 to Baa3 citing strong, conservative financial management and rapid improvement in its financial health.
That amounts to one full notch. The general obligation bond rating improved to Ba3, a significant rise from Detroit’s low of Caa3, deep into what’s known on Wall Street as junk bond territory, as the city defaulted on bonds as it headed toward Chapter 9 bankruptcy in 2013. It is the third credit upgrade in less than three years.
The rating improvement comes just weeks after the city emerged from active state oversight by the state’s Financial Review Commission, which was created to monitor Detroit’s financial health after the city’s bankruptcy ended more than three years ago.
Moody’s previously said the end of state oversight reflected “credit-positive strengthening of Detroit’s financial operations and position in preparation for challenges ahead.” Those challenges include improving city services and infrastructure, shoring up long-term pension funding and the potential for revenue volatility.
“This credit rating upgrade is another step forward for Detroit and a validation from Moody’s of our strong financial management,” Mayor Mike Duggan says. “This is what happens when you have a mayor, chief financial officer and city council that are all committed to fiscal responsibility.”
Since Detroit exited Chapter 9, the city has posted three consecutive years of balanced budgets, with surpluses. That was a key threshold the city had to meet in order for the FRC to go dormant so long as Detroit’s budgets are balanced. The nine-member commission voted unanimously April 30 to end active oversight.
Detroit’s rating improvement is “the result of reduced fixed costs and recent growth in key revenue sources driven by an improving local labor market trend coinciding with the resurgence of the city’s urban core,” Moody’s sayds in its report.
“Also contributing to the improvement, was the current administration’s conservative approach to budgeting. The recent strides position the city to address challenges ahead, which include critical improvements to city services and infrastructure, revenue volatility and a significant $140 million increase in pension contributions starting in fiscal 2024,” the report says.
Moody’s report stated that Detroit has the following credit strengths:
- Recent operating performance has been robust and enhanced the city’s capacity to expand services and absorb rising fixed costs.
- The current administration has implemented strong financial policies, conservative budgeting practices and developed a detailed strategy to address large unfunded pension liabilities
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