(The Center Square) – S&P Global Ratings raised its long-term rating two notches to ‘BBB’ from ‘BB+’ on Detroit’s unlimited-tax general obligation debt outstanding.
The bump follows about 10 years after Detroit’s 2013 bankruptcy when it faced a budget deficit and was too broke to pay pensions. The analysis cited Detroit’s strengthened financial position thanks to $479 million in the Retiree Protection Fund to support the legacy pension payments.
“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,” S&P Global Ratings credit analyst John Sauter said in a statement. “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, 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.”
The upgrade means cheaper borrowing costs for Detroit.
S&P Global Ratings also raised its long-term ratings two notches to ‘A-‘ from ‘BBB’ on Detroit’s municipal income tax and utility user tax-secured debt.
The two-notch rating distinction reflects the possibility the pledged revenue and the flow of funds are sufficiently removed from the city’s control to mitigate operating risk. Both ratings are limited from going higher by our view of Detroit’s creditworthiness, but the ‘A-‘ rating on the UUT-secured bonds is now also in line with our view of the stand-alone pledge, which means a higher rating would only be possible if our view of the UUT pledge improved in addition to a higher rating on Detroit’s GO.
The report notes Detroit faces uncertainties including projected slowing wage growth, budget, and RPF implications should pension plan trends fail to match assumptions, and the magnitude and pace of planned spend-down of reserves.
“The stable outlook reflects our view that Detroit’s strong fiscal discipline, robust planning efforts, and substantial cash and reserve position give it resiliency to respond to and absorb pressures that may come from a slowing economy or market volatility–or its many other inherent risks given the weaker revenue framework and tax base–and sustain a credit profile in line with the rating,” Sauter said.
The report recommends reducing long-term pension plan risk and increasing the operating budget’s share of these costs within the burn rate of the RPF and continued budget balance.
In March, Moody’s raised Detroit’s bond rating.
