Detroit receives credit rating upgrade from Standard & Poor’s
- Detroit’s issuer rating raised to BB- from B+
- S&P noted Detroit’s ability to meet its budget demands, strong reserves, good economic growth
- City’s return to capital markets on its own credit in December 2018 was a ‘significant stabilizing factor for the city’s financial trajectory’
Standard & Poor’s has raised the City of Detroit’s underlying credit rating to BB- from B+ in a report issued today, a move the ratings agency said shows continued strengthening of the City’s financial position.
S&P last upgraded Detroit’s credit rating in December 2017. Moody’s Investors Service also upgraded the City’s credit rating in October 2017 and May 2018. Improved bond ratings are indicative of a city’s finances and financial profile, and higher ratings mean lower costs for governments when they borrow funds to pay for various investments and upgrades.
“Detroit is demonstrating the ability to meet its budget demands, while also providing a strong reserve cushion against unexpected events or stagnating revenues,” the S&P report said, while noting that Detroit “must continue investing in public infrastructure and economic development initiatives” to help stabilize its population and tax base.
“We believe an improved credit rating is a strong reflection that our strategies to improve the quality of life in Detroit are working,” said Mayor Mike Duggan. “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,” he added.
Some factors that led to the rating improvement, according to S&P:
- A stabilizing financial position leaves Detroit well-situated to absorb increasing pension commitments and scheduled increases in debt service in the coming years.
- A recent unlimited-tax GO issuance demonstrated Detroit’s ability to access capital markets at competitive borrowing rates. Market access is a significant stabilizing factor for Detroit’s financial trajectory.
- The City has demonstrated an ability to meet budget demands while also providing a strong reserve cushion against unexpected events or stagnating revenues.
- Detroit has shown strong budgetary flexibility, with an available fund balance in fiscal year 2018 of 42% of operating expenditures.
- Detroit has very strong liquidity, with total government available cash at 72% of total governmental fund expenditures and eight times governmental debt service, along with improved access to external liquidity.
The S&P report also cited rising property values across the city. "We note that much of the
increases are reported outside of the downtown area, indicating that growth is beginning to spread into neighborhoods outside of the downtown core, which is a positive development," the report said.
“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.”
“This is another sign that we are on the right financial path,” said Councilwoman Janeé Ayers, chairwoman of the City Council’s Budget, Finance and Audit Committee, who participated in meetings with bond investors last December. “My Committee and I plan to continue to work collaboratively with the Administration to ensure that we stay on this positive financial path moving forward.”
S&P also changed its rating methodology for all priority-lien tax revenue debt, impacting approximately 1,300 ratings. Based on S&P’s testing and assumptions, up to 85% of those ratings may receive a revised rating. The change in rating for Detroit-related priority-lien tax revenue debt is driven by the change in S&P’s rating methodology.
The following ratings were changed for Detroit-related issuances:
- Michigan Finance Authority's Local Government Loan Program bonds (City of Detroit Financial Recovery Income Tax Revenue and Refunding Local Project Bonds), series 2014F-1 and F-2, was changed to BB+ from A.
Michigan Finance Authority's Local Government Loan Program bonds (Detroit Public Lighting Authority [PLA] Local Project Bonds), series 2014B, was changed to BB+ from A-.