Moody’s Investors Service raised Detroit’s general obligation rating to the highest speculative grade, moving it one notch away from a return to investment grade as it continues its slog back from bankruptcy.

Thursday’s one-notch upgrade puts the city’s GO and issuer rating at Ba1 and Moody’s sent another positive sign by continuing to maintain a positive outlook.

Detroit GO debt hasn’t carried an investment-grade rating since 2009, when both Moody’s and S&P Global Ratings sent the city to speculative grade amid fiscal problems that culminated in its 2013 bankruptcy filing.

“Going from bankruptcy and state financial oversight to being within striking distance of an investment grade rating in less than 10 years is a tremendous accomplishment,” Mayor Mike Duggan said in a statement.

S&P rates Detroit’s general obligation debt BB with a positive outlook. The city has about $2.9 billion of total debt including $1.6 billion of GOs.  

The issuer rating and unlimited tax GO was upgraded to Ba1 “because the city is well positioned to manage its rising pension contributions for at least the next few years,” Moody’s said. “The city’s solid budget management and robust revenue growth have enabled it to accumulate resources in an irrevocable trust and increase its available fund balance to levels that are strong compared to peers.”
“The city’s rating is likely to move upward if the economy is resilient if there is an economic slowdown, and the city is able to continue to make progress in absorbing pension contributions and inflationary cost growth into its budget without adversely impacting its financial operations,” Moody’s said.

The city’s economic development progress is “likely to continue given the pipeline of downtown development projects and the substantial investments made by automakers in battery and electric vehicle manufacturing in both the city and region,” the report said.

Deep-rooted strains remain for the city of 640,000.

“While the city’s pension ramp is currently manageable, costs will spike if assets materially underperform, and the city must also contend with other rising cost pressures related to wages and inflation. The city’s leverage and fixed-costs ratios are in line with other big cities,” Moody’s said.

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The city filed for Chapter 9 bankruptcy in July 2013 and exited in December 2014.

“Our goal remains to have an investment grade restored,” said Chief Financial Officer Jay Rising. 

The city last sold debt in 2021 when it tapped $175 million of $250 million of voter-approved bonding authorization for blight removal in a financing that did not carry any state enhancements. The city has $75 million of remaining authorization but has not yet decided when to use it.

Duggan’s proposed fiscal 2024 budget and four-year financial plan would tackle the city’s post-Chapter 9 pension funding cliff, offers some property tax relief and moves the city closer to fully shedding state oversight.

Resumption of contribution to the city’s pension funds has long loomed large over the city’s budget and drove the decision six years ago to set up the Retiree Protection Fund and funnel annual and supplemental payments into it. It now holds $473 million.

The city’s two pension plans were frozen in bankruptcy and replaced for new hires with hybrid plans that combine elements of both defined benefit and defined contribution plans.

The city is fighting in court with the police and fire fund, which threw a wrench in the planning when it approved moving to a 20-year amortization schedule from the existing 30 years, which would drive up the annual payment.

Duggan argued the city can’t afford the change and it’s not permitted under the exit plan. Last August the city asked the federal bankruptcy court to intervene and block the change. Oral arguments were heard last month and a decision is pending.

The mayor’s overall budget proposal would mark Detroit’s 10th balanced spending plan and if the city stays on track with its four-year financial plan that runs through fiscal 2027 it would fully exit state Financial Review Commission oversight.

Active oversight ended in 2017 after the city met balanced budget and other targets, but the review commission remains in place for a decade after that.

The council will vote on the budget package this month and it then heads to the review commission, which will vote in late spring or early summer on whether to waive state oversight for a sixth year.

Detroit’s revenue estimating conference in February lifted recurring revenues expected in the current fiscal year by $39.1 million to $1.23 billion.