The financial health of Detroit, the largest American city to restructure in municipal bankruptcy, continues to improve.

Moody's Investor Service revised its rating outlook on Detroit to positive from stable Wednesday, citing "robust operating performance" producing "very healthy reserves" as as well as an "improved job base" fueling "rising income tax receipts."

"Detroit's recovery is real," Moody's said, "but so too are serious lingering economic challenges. An influx of affluent residents and a return of employers downtown has led to a surge in income taxes, an important revenue source for the city. However, citywide income levels remain very weak and poverty remains high compared to other large cities."

The Moody's upgrade comes as Mayor Mike Duggan used his annual State of the City this week to tout the city's continuing reinvention, pivoting from emphasizing basic services to managing growth and extending the city's economic recovery to more Detroiters and their neighborhoods — realities Moody's appears to recognize:

"To expand economic development more widely, officials are targeting neighborhood investments and incorporating economic development incentive requirements in local hiring by firms," the agency said. "The city's conservative budgeting practices, growing revenues and reduced fixed costs achieved through bankruptcy have led to a rapid rise in financial reserves."

But challenges loom, Moody's says. They include a socioeconomic profile that is among the weakest of large U.S. cities; an economy still heavily skewed to auto manufacturing, despite a burgeoning tech sector; "substantial challenges" facing the Detroit Public Schools Community District; and risks to the budget from pending increases in pension contributions once the 10-year moratorium coming out of the city's bankruptcy ends.

“It’s gratifying to see Moody’s recognize the fiscal responsibility of City Council and the administration,” the city's chief financial officer, David Massaron, said in a statement. “While we’re making extensive progress, we have to continue to plan for financial contractions and set-aside funds for our pension obligations while making investments that improve quality of life in the City.”

Added Moody's: "Continuation of positive revenue trends and maintenance of ample reserves will be critical in improving the city's capacity to absorb a scheduled spike in pension contributions in fiscal 2024 and to finance needed capital investments. The rating could move upward if the city continues to make progress towards being fully prepared for a large increase in costs four years from now."

daniel.howes@detroitnews.com