Detroit’s journey from Junk Bonds to Investment Grade complete with S&P double-notch rating upgrade, the second such rating in less than a month
- S&P follows Moody’s and delivers Detroit’s second double-notch increase to investment grade capping a remarkable financial turnaround since exiting bankruptcy
- S&P upgrades Detroit Unlimited Tax General Obligation debt to BBB from BB+ and upgrades Priority-Lien debt rating to A- from BBB
- The “structural imbalance” adjustment, which depressed and limited Detroit’s rating is removed
- The upgrade reflects Detroit’s ongoing efforts toward building financial resiliency, as well as its commitment to robust financial planning and budgetary management
- This marks S&P’s third rating upgrade in three years and follows an equivalent upgrade earlier this month from Moody’s to Baa2 with a positive outlook, highlighting Detroit’s strong trajectory
In ten years, Detroit has completed a remarkable financial turnaround on the journey from junk bond status to investment grade after receiving a double-notch rating increase from Standard and Poor’s Global Ratings on today, less than a month after Moody’s double-notch upgrade.
S&P has raised Detroit’s General Obligation (GO) debt to a BBB rating, noting the City’s strong fiscal management, positive financial results and improvements to reserves and liquidity. 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 A- from BBB.
S&P wrote: “Ten years on from its bankruptcy filing, Detroit's financial position and economic condition are the strongest they've been in decades. Liquidity and reserves are at record levels, the debt burden is manageable, population decline is flattening, the stock of blighted and vacant properties is down considerably thanks to extensive city-managed programs, assessed property values have increased in five consecutive years [...], and taxable wages continue to grow.”
Mayor Duggan again praised the City’s Chief Financial Officers over the last decade: John Hill, Dave Massaron, Jay Rising, as well as Chief Deputy CFOs Tanya Stoudemire and John Naglick. The double-notch upgrade from both rating agencies stems from the hard choices, discipline and sound financial management they’ve made over the years,” Duggan said. “No one in 2014 would have predicted Detroit returning to investment grade with both rating agencies in less than a decade.”
Double-Double: Two notch increases from two rating agencies
S&P’s credit action follows an equivalent rating upgrade to Baa2 from Ba1 issued by Moody’s last month. Neither agency has rated Detroit investment grade since the beginning of 2009, and the back-to-back announcements highlight the incredible progress since the City exited bankruptcy just under 10 years ago.
They noted “In our view, concerted management action and institutional support to not only recover from bankruptcy, but also to revitalize Detroit’s economy and finances, enabled the city to capitalize on its situation.”
S&P also remarked that, “The rating action reflects Detroit’s strengthened financial position and our increased confidence in the city’s ability to sustain balance within the construct of its latest pension funding framework. Despite the pressures it faces, we feel the city is now well positioned to sustain a financial profile supportive of the ‘BBB’ rating given significant flexibility in the form of operating reserves, the Retiree Protection Fund (RPF), and stimulus funds, as well as a commitment to maintaining balanced operations. A very active management team with disciplined planning and budget oversight, a robust pipeline of ongoing economic development, and what we consider an achievable pension funding strategy further support the rating.”
Marked return to structural balance
Importantly, S&P notes that they have removed their “structural imbalance” adjustment, which depressed and limited Detroit’s rating. S&P has considered the City structurally imbalanced for years due to the pending fiscal cliff from paused legacy pension payments.
Now with the City poised to comfortably resume legacy pension payments with support from the RPF, S&P reports, “We feel the path ahead is well-defined and that the city can likely remain in line with the funding plan, so we removed our consideration of this [structural imbalance] adjustment.”
Moreover, S&P views the City’s acceleration of pension payments by switching from a level dollar to a level principal amortization as a credit positive: “Detroit shifted its pension funding policy this year, to a level principal amortization, instead of level dollar, which will result in higher contributions in the near-to-medium term. These will be funded with increased draws on the RPF and do not alter expected payments from the operating budget. We do not view the higher draws on the RPF, compared to previous expectations, as an indication of increased budget pressure, rather, this approach should reduce long-term risks by better funding the pension plans sooner, while still preserving flexibility with the RPF. We also view this as a reflection of an improved financial position, whereby the city can take on more volatility risks from higher contributions to increase long-term stability of the plan.”
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.
Detroit Chief Financial Officer Jay Rising noted:
“It is a remarkable testament to the City’s efforts that both Moody’s and S&P now rate Detroit as an investment grade credit, made even more significant by the ‘double’-double-notch upgrades. This historic accomplishment belongs not only to the City’s leaders –the mayor, his staff and, City Council but to all the residents, businesses, philanthropic partners and other organizations who kept their faith and investment in Detroit. Most importantly, these upgrades are a validation that residents can be assured that their City is fiscally stable and able to preserve and maintain city services.”
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