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• Investor interest in Detroit bonds so strong they could have been sold 20x over
• City leverages intense interest to achieve low 3.36% interest rate
• Sale comes on the heels of S&P boosting Detroit’s rating outlook to “Stable”

The City of Detroit’s ambitious project to rehab 8,000 vacant homes and demolish another 8,000 got its first infusion of funds today as the City of Detroit sold the first $175 million in bonds of a planned $250 million neighborhood improvement effort. In November, more than 70% of Detroit voters approved letting the city sell the bonds.   

The bond funds will allow the city to begin the process of stabilizing and securing thousands of vacant Land Bank properties until they can be sold for rehab and demolishing houses that can’t be saved. The city plans to go to the market again next year to sell additional Prop N bonds.   

Interest among investors was so strong in this series of Detroit Prop N bonds that they could have been sold 20 times over. Specifically, for this $175 million bond sale, there were over $3.4 billion in orders.  

“The incredibly strong interest in these bonds is a direct reflection of investor’s confidence in Detroit’s strong financial management and that starts with our Office of Chief Financial Officer,” said Mayor Mike Duggan. “CFO Jay Rising, Chief Deputy CFOs Tanya Stoudemire and John Naglick, and their entire team have done a tremendous job managing the city’s finances to put us in a strong position, now and for the future.”    

Currently, contracts for the first 1,380 demolition properties are before City Council awaiting approval.  All seven companies selected through the city’s procurement process to perform the work are Detroit headquartered and five of those companies are black owned.  More than 51% of the employees doing the demolition work for all seven companies will be verified residents of the city of Detroit.    

Strong demand means lower interest rate

The City issued a mix of taxable and tax-exempt bonds that will be immediately spent as the first installment on Proposal N programs.  More than 60 institutional investors placed orders on the bonds on Thursday, many of which were repeat investors that purchased the City’s 2020 and 2018 bonds demonstrating their continued support and interest in the City, according to CFO Rising.   

That overwhelming level of interest allowed the City to achieve a much lower interest rate than it had initially expected and will translate to much lower repayment costs over time for Detroit taxpayers.   

“Investors took notice of Detroit’s steady progress in building financial strength and swiftly responding to the pandemic driven revenue shortfalls. They saw that while the COVID-19 crisis may have slowed this positive trend, it did not reverse it,” said Rising. 

The strong market and demand for Detroit bonds allowed the City to secure a 3.36% interest rate, significantly less than city officials had initially anticipated and 1.28 percentage points less than the interest rate received by the City on its last general obligation bond issue in October, 2020.  Detroit marketed these bonds with the “Social Bond” designation to attract Environmental, Social, and Governance (ESG) focused investors that are interested in financing socially beneficial projects. 

Recent S&P Upgrade set the stage

In bringing Detroit’s outlook to “Stable” two weeks ago, Standard & Poors referenced the City’s strong fiscal management and the vision behind Proposal N:  “We view the passage [of the $250 million Proposal N] as significant in that it will further a key component of the administration's long-term vision for strengthening the tax base and do so with a dedicated debt millage as opposed to funding through reserves or the operating budget.”  

This is the third time since 2018 that Detroit sold municipal bonds backed solely on the City’s ability to repay. During the prior 20 years, the City could only sell bonds that were either backed by the state of Michigan or with insurance to the bondholder, which greatly added to the cost for the City.

• Moody’s rating outlook revised from stable to positive
• Moody’s credited Detroit for its robust reserves, strong financial planning practice, and its ability to meet and exceed its budget demands

Moody’s has raised the City of Detroit’s credit outlook to ‘positive’ in a report issued today, a move the ratings agency said reflects the improving and strengthening of the city’s financial position.

Detroit last saw an upgrade from Moody’s in 2018, when Detroit was upgraded to Ba3 with an outlook of ‘stable’. Today, the new outlook of ‘positive’, represents that the City has continued moving in the right direction towards financial stability.

“The city's conservative budgeting practices, growing revenues and reduced fixed costs achieved through bankruptcy have led to a rapid rise in financial reserves,” The Moody’s report said, while noting that “social considerations are also material. The city has been able to improve its provision of basic city services to a population that is primarily low income.”

The report also highlights the City’s strengthening job growth and its positive impact on the City’s thriving economy. “The employment trajectory of Detroit is fundamentally improved,” the report noted. “Even before the 2007-09 recession, both Detroit and the State of Michigan continued to lose jobs while the rest of the nation expanded. The story has been different during the current economic expansion, with Detroit and Michigan initially growing jobs at faster paces than the nation.”

Some factors that led to the rating improvement, according to Moody’s:

• Very strong financial planning practices include annual revenue setting conference, long-range financial planning and conservative budgetary assumptions
• A favorable trend in job growth and its impact on the city’s tax base and tax collections
• Improvements in the City’s budget to finance service improvements, capital investments and accommodate a large spike in pension contributions
• Robust operating performance has resulted in the accumulation of very healthy reserves while also enhancing the capacity of the city to provide services and prepare for rising fixed costs

The Moody’s report also cited the City’s recurring expenses in comparison to revenue over the next six years. “The city projects that recurring expenses will begin to exceed recurring revenue in fiscal 2026. However, we recognize that long-range forecasts typically produce budget gaps and we expect the city can close these gaps with moderate budgetary adjustments,” the report noted.

“It’s gratifying to see Moody’s recognize the fiscal responsibility of City Council and the administration,” said Chief Financial Officer David Massaron. “While we’re making extensive progress, we have to continue to plan for financial contractions and set-aside funds for our pension obligations while making investments that improve quality of life in the City.”

As referenced in the report, “Continuation of positive revenue trends and maintenance of ample reserves will be critical in improving the city's capacity to absorb a scheduled spike in pension contributions in fiscal 2024 and to finance needed capital investments.”

Moody’s rating is based upon economic and demographics 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.

On February 19, 2020, the voting principals of the City’s Revenue Estimating Conference approved economic and revenue forecasts for the remainder of fiscal year 2020 and for fiscal year 2021 through fiscal year 2024. State law requires the City to hold independent revenue conferences in September and February each fiscal year to set the total amount available to be budgeted for the next four years.

The Revenue Conference reports recurring General Fund revenue projected at $1.073 billion for the fiscal year ending June 30, up $15 million (1.4%) from the FY 2020 Adopted Budget. The increase is driven by a larger than expected Income Tax base following the final FY 2019 results and by increases in State Revenue Sharing.

Recurring General Fund revenue for FY 2021, which begins July 1, is now forecasted at $1.085 billion, an increase of $12 million (1.1%) over FY 2020. The Income Tax forecast, which accounts for most of the increase, assumes national economic growth slows in FY 2021 and FY 2022, consistent with independent economic forecasts. Overall, modest increases are projected from FY 2021 through FY 2024 across the City’s major taxes and other revenues.

Earlier this month, the City of Detroit, in partnership with the University of Michigan, released its first economic forecast for Detroit, which showed ongoing gains in household income, employment, and labor force participation through 2024.

The Detroit economic outlook is strong and property values are rising. Income Taxes are showing growth, but other major taxes are more restrained. Property Taxes are limited by the State Constitution, which protects homeowners by capping increases at inflation. Detroit’s State Revenue Sharing is largely set by the annual State Budget. Wagering Taxes show steady but only modest annual growth.

The conservative revenue estimates approved require the City to focus on controlling costs over the next four years to keep the four-year plan balanced and fund legacy pension contributions that resume in FY 2024.

“While it’s great that the economy continues to grow over the next four years, the City has to do more with less,” says Chief Financial Officer David Massaron. “Economic growth in the City does not directly translate to growth in City revenues. Our relatively flat revenue growth means that the Mayor and City Council must budget responsibly to ensure a balanced four year plan.”

“Now that revenues have been determined, I look forward to working with the Administration and City Council on the approval of our budget and four year financial plan,” says Deputy Chief Financial Officer and Budget Director Tanya Stoudemire.

The estimates approved set the revenues for the City’s FY 2021 Budget and FY 2021 through FY 2024 Four-Year Financial Plan. The voting conference principals included David Massaron, City’s Chief Financial Officer; Eric Bussis, Chief Economist, Michigan Department of Treasury; and George Fulton, PhD, Director Emeritus, Research Seminar in Quantitative Economics, University of Michigan.

As with any economic and revenue forecasts, there are potential risks to the estimates agreed to today, including national economic trends, international economic issues, and significant changes in federal and state policy.