S&P Upgrades Detroit’s Credit. What Does It Mean?
While Detroit’s overall credit is up, analysts at Standard and Poor’s say the city operates “within a very limited revenue-raising framework,” which could cause rating issues in the future.
Analysts at Standard and Poor’s are increasing Detroit’s credit to BB-. That’s up a notch from the city’s previous rating. The report from S&P says the outlook on new Detroit bond ratings is “stable,” though ratings dipped for debt secured by the city’s income tax and user utility tax. Still, the credit ratings agency says it’s a step towards stronger financial footing in the years after Detroit exited bankruptcy. S&P Senior Director and Sector Leader Jane Ridley spoke with WDET’s Eli Newman about what the change means for the city.
Interview Highlights
Why is Detroit’s overall credit being upgraded?
“We have seen a lot of improvements in the city over the past several years, specifically since they exited bankruptcy in late-2014. They put a lot of changes in place, some stemming from the plan of adjustment from the bankruptcy, but a lot of them on their own accord. Improving their financial practices, their financial policies and really putting a lot into economic development and the economic opportunities for the city. We’ve seen some traction from that.
The ability to continue to access the capital markets. Detroit did sell bonds late in [2018] without any enhancements and that’s a big leap for anyone coming out of bankruptcy. Enhancements can be from insurance, from some sort of backstop from the state. It can come from a variety of things.”
How S&P determines credit ratings
“Our market is primarily for investors to look into how Detroit compares to other cities. What we’re looking at is: is the city bringing more revenues than it has expenditures? When they see a shortfall, how are they addressing it? What kinds of practices do they use to meet those challenges and stay structurally balanced?
If you have credit, you can sell bonds and you can have credit in the marketplace. You can do a lot more capital improvements, so there are things you don’t have to fund out of your day to day budget anymore.”
Detroit’s credit limitations
“Generally, it’s very difficult for a lot of large, especially urban areas to receive an AAA-rating because there are a lot of demands on those kinds of governments.
[Detroit] has a very large pension obligation that they need to keep growing to be able to fund annually. I’m sure those listening are familiar with the Grand Bargain and the support that [the city] received from charitable institutions to support those pensions. When that money runs out, the city will have to be able to make the full payments as required.
One of the things that we’ll be looking for is the ability for the economy to continue to grow and to diversify. That’s a hallmark of a strong city.”
