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• 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).

• 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 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 which 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 acknowledgement 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 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.

• UM continues to predict a faster economic recovery for Detroit than the State overall 
• City-led efforts to bring good-paying jobs to Detroiters are driving economic recovery and growth 
• City’s revenue outlook continues to improve in line with the economy and led by growing income taxes

On February 18, as part of the City of Detroit’s regular biannual Revenue Estimating Conference process, the City and its partners presented an update on the Detroit Economic Outlook for 2021-2026 and revised economic and revenue forecasts for the remainder of fiscal year 2022 and for fiscal year 2023 through fiscal year 2026. 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. Following today’s presentations, the Revenue Estimating Conference will convene next Friday, February 25, for discussion and action on the proposed forecast. 

Detroit Economic Recovery Faster than the State Overall 

The Detroit Economic Outlook for 2021-2026, reports that “Detroit’s economy continues to recover from the COVID-19 recession despite the resurgence in new caseloads.” The forecast predicts a faster recovery for Detroit than the State overall. Resident employment will recover to pre-pandemic levels by the end of 2022. Meanwhile, jobs at establishments within the city boundaries will recover by early 2023. The City’s economy continues to grow through 2026 with blue-collar jobs leading the way. These job gains are driven by major City-led projects, such as the Stellantis and General Motors automotive plant expansions and Amazon’s new distribution center. The forecast is prepared by the City of Detroit University Economic Analysis Partnership, which is a collaboration of economic researchers at the City, Wayne State University, Michigan State University, and the Research Seminar in Quantitative Economics (RSQE) at the University of Michigan.  

Revenue Outlook Continues to Improve 

The City’s revenue outlook continues to improve following two challenging fiscal years of revenue losses driven by the pandemic. Recurring City revenues are forecasted to exceed pre-pandemic levels in the current fiscal year ending June 30, primarily due to stronger income tax collections and the implementation of internet gaming and sports betting last year. Income taxes continue to drive revenue growth in future years, in line with the City’s economic recovery and despite an ongoing loss from nonresidents expected to continue working remotely through hybrid work models. All other revenues are expected to see stable but more modest growth.  

The ongoing pandemic and supply chain issues remain substantial risks to the economic and revenue forecasts presented today. Future gaming behavior, and potential substitution effects, remain a risk as well. However, the City’s ongoing efforts to attract major employers and provide Detroiters with opportunities for good-paying jobs provide potential revenue upside to the forecast. Proposed increases in State Revenue Sharing and other funding in the State Budget provide potential upside as well. 

“Our economy is continuing to recover from job losses related to the pandemic as we’ve seen 80% of resident employment return in 2021 with steady growth projected and we’re beginning to see more fruit from economic development in the City of Detroit.  Blue collar jobs are leading the recovery and in fact, exceeding pre-pandemic levels as we see growth in all jobs particularly related to development efforts by Amazon, GM’s Factory Zero and Stellantis’ Mack Assembly complex. Still, as we anticipate modest revenue growth in future years, we will maintain fiscal responsibility in our budget to ensure we achieve a balanced four-year financial plan,” said City of Detroit Chief Financial Officer, Jay Rising.

 
Revenue Estimating Conference Results 

The City presented FY2022 General Fund recurring revenues projected at $1.087 billion for the current fiscal year ending June 30, up $23.8 million (2.2%) from the previous conference estimate in September 2021. The increase is driven by stronger income tax collections and State Revenue Sharing from sales taxes. New internet gaming and sports betting taxes were already added to the forecast in September 2021. In addition, the City is projecting nearly $50 million in non-recurring revenues this year.  General Fund recurring revenues for FY2023, which begins July 1, are now forecasted at $1.147 billion, an increase of $60 million (5.5%) over the revised FY2022 estimates. The projected increase is driven by income and wagering taxes, as the local economy continues to recover and as on-site gaming activity returns to pre-pandemic levels. The conservative General Fund revenue forecasts for FY2024 through FY2026 show continued, but modest, revenue growth of around 2% per year on average.  Once approved next week, the estimates presented today will set the revenues for the City’s FY2023 Budget and FY2023 through FY2026 Four-Year Financial Plan. The voting conference principals are Jay B. Rising, the City’s Chief Financial Officer; Eric Bussis, Chief Economist, Director, Office of Revenue and Tax Analysis, Michigan Department of Treasury; and George A. Fulton, PhD, Director Emeritus, Research Professor Emeritus, Research Seminar in Quantitative Economics (RSQE), Department of Economics, University of Michigan. 

https://news.umich.edu/u-m-forecast-detroit-economy-showing-resilience-in-face-of-pandemic-downturn-though-challenges-persist/

Please see link of the recorded Revenue Estimating Conference and PDFs of slide presentations below.

https://cityofdetroit.zoom.us/rec/share/VjE-5kW3xmgbEYqR5KzRgZ1OFZvtMtiXk5HyRJo5kK4m5PYE6RF4rF_oiiO_9qaM.UTAg1MI7JSnF3ZjX?startTime=1645200510000