Detroit gets credit rating upgrade

Detroit — Giving a nod to the city's improving financial reserves, Moody's Investors Service on Tuesday announced an upgrade in Detroit's issuer rating and its outlook.

The rating comes just weeks after the city emerged from the strict financial oversight put in place as it exited bankruptcy in 2014. The city regained local control over its budgeting and contracts with a projected $36 million surplus in fiscal year 2018, increasing property tax revenues and plans that will earmark $335 million by 2024 to deal with payments that will come due to its two pension funds.

Besides upgrading the city's issuer rating, Moody's also revised its outlook to stable from positive. The upgrade does not apply to any of the city's $1.9 billion in outstanding debt.

Moody's said its upgrade reflects an improvement in the city's financial reserves, which have allowed Detroit to implement a funding strategy for its looming pension obligations "that will lessen the budgetary impact of a future spike in required contributions."

Under the terms of the debt-cutting bankruptcy plan, the city must pay $20 million annually through the 2019 fiscal year to its two pension funds. Its contributions will increase significantly beginning in 2024.

"The stable outlook is based on the city's strong preparation for challenges ahead including the need to make capital investments and absorb pending spikes to fixed costs," Moody's wrote. "Underperformance of pension assets and revenue volatility remain notable budgetary risks, but the city has amassed a large reserve cushion and adopted conservative budgetary assumptions that provide breathing room to respond to adverse developments."

Detroit's Chief Financial Officer John Hill celebrated the positive action on Tuesday, noting the city's hard work to get its financial house in order.

“A second rating upgrade in just seven months from Moody’s shows that we have created the financial management infrastructure necessary to continue to meet our obligations and enhance our fiscal position,” Hill said in a released statement. “Working with the mayor and City Council, our team has made a variety of improvements to financial management practices and our financial planning and budgeting practices are strong, as reaffirmed by Moody’s in their report.”

The upgrade, Moody's added, also factors in "ongoing economic recovery that is starting to show real dividends to tax collections."

Further growth in the city's reserves and tax base growth to fund capital projects for either the city or its school district could lead to additional upgrades. A downgrade could be spurred by slowed or stalled economic recovery, depletion of financial reserves or growth in the city's debt or pension burden, fixed costs, or capital needs, Moody's warns.