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Historic Milestone: Moody’s raises Detroit to investment grade credit rating for first time since 2009 with rare double-upgrade

2024
  • 10th credit rating upgrade takes Detroit from bankruptcy to investment grade in less than 10 years
  • Moody’s upgrades Detroit bond rating two notches from Ba1 to Baa2 with positive outlook
  • Moody’s cites “a decade of solid financial performance” and “strong governance practices” in assigning this historic increase.

 

Detroit, MI -- The City of Detroit has capped off a remarkable financial turnaround, going from the nation’s largest municipal bankruptcy in 2014 to achieving investment grade status in just 10 years, Mayor Mike Duggan said today. The comments come after Moody’s Investors Services on Friday gave Detroit a rare two-notch bond rating increase from Ba1 to Baa2 with a positive outlook. 


The new rating returns Detroit to investment grade status for the first time since 2009.  In a report issued Friday March 22, 2024 Moody’s praised Detroit’s strong financial performance over the last decade as a key reason for the growing confidence:


The upgrade of the issuer and GOULT ratings to Baa2 reflects Moody's expectation that the city will continue to bolster its financial resiliency and maintain the track record of solid operating performance that has been seen over the past several years.”
 

“Despite those credit pressures, Detroit's tax base valuation doubled over the past five years and ongoing development and appreciation of residential values will provide another boost in fiscal 2025.”


“The city's financial ratios are robust after a decade of solid financial performance. City management has adhered to strong governance practices and Moody's expectation is that such momentum will continue.” 


Mayor Duggan gave special praise to the City’s Chief Financial Officers over the last decade:  John Hill, Dave Massaron, Jay Rising, as well as Deputy CFOs Tanya Stoudemire and John Naglick.  “It has been 10 years of hard choices and sound financial management by these great leaders,” Duggan said.  “No one in 2014 would have predicted Detroit returning to investment grade in less than a decade.

Since the City’s bond rating was dropped to an all-time low of Caa3 in June 2013, it has earned 10 step increases, a rise few would have expected following its exit from bankruptcy less than a decade ago. Even a single-step increase to Baa3 would have brought Detroit back to investment grade.    


“Even more encouraging is Moody’s rating of Detroit’s outlook for the future as positive,” Jay Rising said.  “That is a strong indication that if we stay on track, Detroit could well see another upgrade in 2025.”


Mayor Duggan also credited a decade of sound budget decisions by Detroit City Council as a major contributor to Detroit’s success.  “In 2014, all the analysts were predicting a financial crisis in 2023 when Detroit hit the “pension cliff” and had to start making $150 million a year in payments to the pension fund.  City Council’s strong support to establish a $479 million Retiree Protection Fund over the last decade was key to our current success.”


Detroit’s double-notch upgrade also is the City’s first multi-notch upgrade since Moody’s adopted its current rating scale. The rating maintains the City’s positive outlook, citing resilience, solid financial performance and improving tax base as reasons to expect a continued upward trajectory.


Investment Grade status opens Detroit to new markets  
This third consecutive year of upgrades from Moody’s is the most consequential. Many large investors (such as pension funds, mutual funds, and insurance companies) that purchase municipal bonds will only purchase investment-grade bonds. Breaking the barrier into investment-grade opens the City's bonds to a much wider market, in turn lowering interest rates. Lower borrowing rates also allow the City to reprioritize taxpayer money that would have otherwise been allocated towards paying interest. It also allows for greater investment in critical areas like infrastructure improvements, neighborhood revitalization, and public services. 


Overcoming Doubts of Detroit’s Resilience
Prior to exiting Bankruptcy, a Plan of Adjustment (POA) was agreed upon that would put the City on track to restore basic services, though many doubted whether anything beyond “adequate” could be achieved. A feasibility study of the POA stated, “I do not need to envision that Detroit will become a best in class municipality to determine that the POA is feasible. For Detroit, emerging from essential services failure to adequate and reasonable service delivery will be a success.”

However, the City has exceeded every major expectation of the Plan of Adjustment:

  • It was expected that resident employment would decline 0.4% annually, resulting in 8,000 jobs lost from 2014 to 2024. Instead, annual resident job growth has averaged 1.1% and Detroiters have gained 24,000 jobs.
  •  The POA expected that property values would continue to decline. Instead, property values began rebounding in 2018 and are now 94% higher than 10 years ago.
  • The City had to meet a target of 2% growth in income tax revenues annually in order to achieve feasibility, a level that many feared was out of reach. In fact, Detroit’s income taxes have grown 5% annually and cumulatively generated nearly $400 million more than projected over the past 10 years.
  • Detroit ended 2013 with a budget deficit and no funds to pay pensions. Nine consecutive years of budget surpluses later, the City built up a $1.2 billion General Fund Balance including $479 million in the Retiree Protection Fund to support the legacy pension payments.

From Bankruptcy to Investment Grade
The improved bond rating is indicative of the City’s improving economy and tax base, according to the Moody’s report: “Detroit’s economy has markedly improved in recent years and will continue to recover given preliminary tax base growth, improved services, reduced blight and a pipeline of development projects, including major investments in new downtown hotels, retail, condos and apartments.”
Moody’s further noted, “Despite credit pressures, Detroit’s tax base valuation doubled over the past five years and ongoing development and appreciation of residential values will provide another boost in fiscal 2025. The city’s financial ratios are robust after a decade of solid financial performance. City management has adhered to strong governance practices and Moody’s expectation is that such momentum will continue." 

Jay Rising thanked all the Detroit staff who worked so hard over the last decade: “This achievement reflects the dedication and hard work of countless individuals. Our team, alongside leaders across all departments, have been instrumental in driving this positive change. We are committed to maintaining this fiscal responsibility for the benefit of all Detroiters."

Moody’s also acknowledged fiscal management as key areas of strength which place Detroit on par with even higher rated cities in the single-A and above categories.  “Detroit's available fund balance ratio will likely remain around 35%, which is the Aaa-scorecard threshold, because moderate revenue growth will offset rising expenditure pressures. Additionally, the city's budget management practices – including a sophisticated revenue-setting process – will provide it with tools to respond to possible adverse developments, such as an economic downturn."

In previous years, Moody’s stated that Detroit needed to demonstrate structural balance. For the past decade, the pending pension cliff had impacted Detroit’s credit rating. To address that risk and protect retiree pension funding, in 2017 the City established and began building reserves in the Retiree Protection Fund (RPF). The RPF balance reached $479 million in assets as of December 2023.  
The City will draw on the RPF to offset pension payments beginning this year, successfully easing the “cliff” into a manageable ramp and clearly demonstrating structural balance.  Moody’s confirmed the importance of this commitment in commenting that: “The city has modest future debt plans and it has resumed its actuarially determined pension contributions with little challenge.” 
 

Momentum Likely to Continue
Moody’s commended the City’s strong leadership in financial management, citing a solid track record of balanced budgets and general fund operations since the bankruptcy exit in November 2014: “Projected fiscal 2024 general fund revenues are up roughly $73 million compared to the adopted budget, based on year-to-date performance. The city plans to redirect that money back into services such as blight remediation, capital and public safety, and will end with roughly balanced operations.”
The positive outlook assigned with the credit rating is due to an increasing tax base and revenue growth. The City could experience a future upgrade if these trends continue, along with its strong management practices and continued maintenance of its fund balance and long-term liabilities.   

Read Moody's Investor Services opinion