Detroit’s credit rating is upgraded by Moody’s, citing City’s strong management of challenges

Detroit’s credit rating is upgraded by Moody’s citing City’s strong management of challenges

  • Moody’s upgrades Detroit to Ba2 from Ba3 with a positive outlook
  • Moody’s noted Detroit’s healthy financial position supported by strong management that has successfully navigated challenges through the pandemic
  • The positive outlook reflects the likelihood that the rating will move upward if financial operations and reserves continue to strengthen, positioning the city well to address growing pension costs and future revenue downturns

Moody’s Investors Service has upgraded the City of Detroit’s credit rating to Ba2 with a “positive” outlook in a report issued Wednesday, a move the ratings agency said reflects the improving and strengthening of the city’s financial position. The announcement comes days after Mayor Mike Duggan presented his recommended 8th consecutive balanced budget to City Council. Detroit last saw an upgrade from Moody’s in May 2018. This is the first time since 2009 that the City has received a Ba2 rating. 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 capital improvements.

“Detroit's revenue base was exposed to the pandemic driven economic disruptions. Income taxes dropped because of nonresidents working remotely and wagering taxes were halted as casinos closed,” the Moody’s report said. “Despite those pressures, Detroit posted its sixth consecutive operating surplus in fiscal 2021 and is on pace for another strong year in fiscal 2022.”

The report also highlights the City’s diversifying economic base and strengthening job growth. “Detroit is poised to further expand its employment base with General Motors Company, Ford Motor Company, Stellantis N.V., and a number of auto suppliers making major investments in the city that are creating thousands of jobs. Detroit is also a logistics hub, a position that will be bolstered by a second international crossing that is being constructed, the Gordie Howe International Bridge. Huntington Bank, which recently absorbed Chemical Bank and TCF bank, is making Detroit its commercial banking headquarters with a new 20-story building that is under construction.”

Moody’s indicated several key factors that led to the rating upgrade:

  • Despite disruptions, the trajectory of the city’s job base and income tax receipts is positive
  • Reserve position is quite healthy and growing
  • Very strong financial planning practices include an annual conference to estimate revenues, long-range financial planning, and conservative budgetary assumptions

The Moody’s report also cited the City’s early management response that mitigated pandemic losses and Detroit’s favorable revenue trajectory, noting that, “The city is well poised to further strengthen its finances over the next two fiscal years.”

Moody’s indicated that factors that could lead to a future upgrade include:

  • Robust revenue growth that makes rising fixed costs easier to accommodate
  • Strengthening of full value per capita, median family income, and population trends
  • Accumulation of additional resources in an irrevocable trust to reduce budgetary risk of rising pension costs

City of Detroit Chief Financial Officer, Jay Rising says “Moody’s upgrade is an acknowledgment of the hard work done to restore the City from bankruptcy.”  “We know we have more work ahead of us and we are confident we will overcome the challenges to the City’s credit posed by risks with future pension funding,” said Rising.

Moody’s rating is based on economic and demographic measures, as well as possible notching factors as defined by the US Local Government General Obligation Debt methodology. The full report can be found below.

Rating Action - Moodys upgrades

Credit Opinion - City of Detroit