S&P upgrades Detroit’s rating, marking the second upgrade in a week and highlighting strengthening credit

S&P upgrades Detroit Unlimited Tax General Obligation debt to BB from BB- and upgrades Priority-Lien debt rating to BBB- from BB+, both with positive outlooks
The upgrade reflects Detroit’s growing revenues and improved budget position, sustained reserves, and overall increasing flexibility with substantial federal funds and a bolstered retiree protection fund (RPF)
The S&P rating upgrade follows last week’s equivalent upgrade from Moody’s to Ba2 with a positive outlook, highlighting Detroit’s strong trajectory

S&P Global Ratings has raised Detroit’s General Obligation (GO) debt to a BB rating, noting the City’s improving economic outlook and strong fiscal management. At the same time, S&P upgraded its rating on Detroit’s Public Lighting Authority and Income Tax backed debt issued through the Michigan Finance Authority (considered Priority-Lien debt because of their pledge of specific tax revenues) to BBB- from BB+, marking a return to investment grade on certain bonds secured by pledged revenues.

Additionally, S&P assigned a positive outlook to both GO and Priority-Lien debt: “Detroit remains, in our view, on a trajectory to meet increasing pension costs in the near and long term within a balanced budget framework, and if it does so, we could raise the rating. We feel the city has fiscal discipline and flexibility that can keep it on track should it experience economic slowdowns or higher-than-forecasted pension increases.”

S&P’s credit action follows an equivalent rating upgrade to Ba2 from Ba3 issued by Moody’s last Wednesday, also with a positive outlook. The back-to-back announcements highlight not only strong fiscal management and budgetary performance, but also the rating agencies’ positive assessment of the administration’s strategy for Detroit. Both S&P and Moody’s indicated that the reasoning behind rating upgrades included the City’s investments in workforce training, economic development, blight removal, and beautification.

The S&P credit opinion emphasizes improving fundamentals in Detroit’s economy. The report notes, “Successes to date are reflected in increasing property values, improved public safety metrics, and reduced poverty rates; and substantial new job creation within the city likely reflects the private sector’s recognition of an increasingly skilled labor force.”

The City’s strategic use of American Rescue Plan Act (ARPA) stimulus will bolster future growth, in S&P’s opinion. Their report states, “Detroit continues to prioritize investing in its residents and ARPA funds will accelerate this. The focus is on continued blight and abandoned building removal, streetscaping, and beautification projects, all of which have proven to increase home values and public safety, along with people projects such as paying for job training and degree attainment, improving internet access, and facilitating record expungements, which help better position residents for jobs.”

S&P further indicated the potential upside scenario for Detroit: “We could raise the rating over the next one-to-two years if the city sustains budgetary balance, including increasing pension contributions and not relying on reserves, and if we feel it is likely to continue to do so without deferring expenses or depleting the RPF at a rate that puts future budgets at increased risk.”

Detroit last saw an upgrade on its GO debt from S&P in February 2019, when the rating agency raised the City to a BB- from a B+. The last time Detroit held a rating as high as BB from S&P was a decade ago in March 2012. 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 Chief Financial Officer Jay Rising noted that “this S&P upgrade is a double dose of good news; affirming the efforts taken to improve the City’s general obligation credit and returning an important segment of our portfolio to investment grade. The upgrade is the product of the strategy of rebuilding the City’s credit through creating economic opportunities, improving security and restoring the beauty of the City for Detroiters.”

The Priority-Lien rating relates to the 2014 Income Tax Bonds which are secured by municipal income taxes, and the 2014 Public Lighting Authority (PLA) bonds which are secured by utility users taxes (UUT).