Ten years after: Detroit’s decade after leaving Chapter 9

Wednesday marks the 10-year anniversary of Detroit’s exit from bankruptcy. Its Chapter 9 declaration in July 2013 was the largest municipal bankruptcy in U.S. history, and Detroit’s comeback saga has been just as dramatic.

The city emerged from Chapter 9 on Dec. 11, 2014, a day after closing four privately placed bond deals whose proceeds paid off creditors and helped to finance the city’s restructuring plan.

Its journey out from under state oversight offers some lessons for other struggling municipalities, including that bankruptcy — which ultimately cost Detroit taxpayers $170 million in fees — should be a tool of last resort, but need not leave lasting stigma, and that state oversight can work if it happens in tandem with a comprehensive, long-term operating plan. 

Detroit’s first post-bankruptcy borrowing came in August 2015, in a deal underpinned by state intercept guarantees, but the city did not return to the market on its own standalone credit until December 2018, when it issued $135 million in unlimited tax general obligation debt. 

Like other cities, Detroit struggled when COVID-19 hit, with its pandemic recovery driven by federal relief funds and increasing gambling revenues. But by 2023, the local economy was seeing steady growth in jobs and wages.

In March, Detroit returned to investment-grade status for the first time in about 15 years with an upgrade from Moody’s Ratings to Baa2 from Ba1. In April, S&P Global Ratings followed suit, upgrading Detroit to investment grade BBB from BB-plus.

“Detroit’s financial resilience has significantly improved since it first emerged from bankruptcy,” said David Strungis, vice president and senior analyst at Moody’s. “Detroit’s property tax base doubled over the past five years, and ongoing development and appreciation of residential values will provide another boost in fiscal 2025.” 

Strungis added the city’s financial ratios are now robust following ten years of solid performance, and management has demonstrated strong governance practices, which Moody’s expects to continue. The city’s financial and leverage ratios, which have been bolstered by steady revenue growth and operations, are in line with its peers, and Detroit has resumed actuarially determined pension contributions. And Strungis said the city’s future debt plans are modest.

“The city’s commitment to semi-annual revenue-estimating conferences and multi-year budgeting have contributed to strong finances and steady operations over the past decade,” Strungis said. “Also, the funding of a retiree protection fund helped the city successfully resume its pension payments once its contribution holiday ended.”

John Naglick, Jr., Detroit’s chief deputy CFO and finance director, told The Bond Buyer the bankruptcy led to better financial organization for the city through the restructured Office of the CFO, or OCFO.

Other new best practices were embedded in state law, like biannual revenue estimating conferences. Naglick also credited having a four-year financial plan that has to be certified by the CFO, the creation of the retiree protection fund, and effective use of the debt markets with improving Detroit’s credit profile.

Having a balanced budget and being relieved of the burden of certain legacy costs allowed them to invest heavily in city services, he said, including public safety, the street lighting grid and parks and recreation.

“And then those things kind of create a virtuous cycle,” Naglick said. “Because it’s a better place to live and visit, property values have gone up significantly.”

In addition to CFO Jay Rising, Naglick credited Mayor Mike Duggan with helping to turn the city around financially. Duggan stressed economic development and drawing employers back to the city, Naglick said, pointing to Ford Motor Company’s renovation of the city’s Michigan Central Station and bringing in companies like Amazon.

Naglick said the city’s current debt plans are modest. Over the last several years, the city has issued UTGO debt backed by its debt millage, and has used up its voter authorization, he said.

“We refinanced the remaining exit financing a few months ago in October, for good savings,” he added. “So over the last ten years, we’ve really tuned up our debt portfolio to be what it can be, and we’re pretty happy with it.”

At the time of Detroit’s bankruptcy filing, conventional wisdom in the municipal market dictated that a Chapter 9 filing would slam shut the door on market access, said Eve Lando, portfolio manager at Thornburg Investment Management, which owns Detroit paper.

But Detroit proved that to be false by regaining market access, first with state-backed pledges and then fully under its own name.

The level of comfort that investors eventually reached with Detroit is illustrated in the city’s $100 million GO financing in July 2023, said Lando. The city saw nearly $3 billion of orders, roughly 30 times oversubscribed.

The deal received so much interest that the team bumped the yield more than 40 basis points between price talk and final pricing, said Lando.

“It’s a level that’s quite phenomenal,” she said. “I think, in terms of saying how Detroit is post-bankruptcy 10 years out, we can cite those levels and say everyone is quite happy with the way things are.”

As of Monday, a chunk of Detroit paper due in 2027 was trading with a spread of 90 basis points over the AAA, Lando noted. In comparison, the AA-rated city of Grand Rapids, Michigan, was trading at a spread of 20 bp over the AAA.

“So, 70 basis points [difference] for a BBB name that came out of bankruptcy,” Lando said. “I think the market has found its happy place with Detroit. It is trading at a premium but it is not at a premium one would think.”

The city’s bankruptcy and recovery has helped normalize Chapter 9 in the market, she said.

“We’re still far, far away from numbers posted in the corporate market in terms of bankruptcy, and we’ll take that,” Lando said. “But the stigma of municipal bankruptcy is not as dire as it was ten years ago.”

The buyside learned a few hard lessons from the city’s bankruptcy, and other milestone municipal bankruptcies of that era in Stockton, Vallejo and San Bernardino, California: chiefly that employee pensions will be prioritized over bonds and that unlimited-tax general obligation bonds are not the gold standard that many had assumed they were.

Detroit’s move to treat its ULTGOs as unsecured stunned the municipal market at the time.

“Although the bankruptcy wasn’t a surprise — something had to happen — the actions taken by the debtor were more extreme than experienced in the municipal market before,” said Jim Lyman, senior vice president at Belle Haven Investments.

“That was a good learning experience for analysts in the municipal market and I have become more sensitive to the risk of bankruptcy in municipal credit,” he said.

“Whenever there is financial risk, you should be concerned,” Lyman added. “I don’t want to overstate the risk because it’s not as high as it would be for corporate credits, but you should never take financial distress for granted.”

Detroit’s rebound represents another lesson for the market, Lyman said.

“The city’s recovery and what was achieved has been amazing,” he said. “It shows that municipalities that are having financial issues can change their ways, and it’s a combination of improving their internal management systems and/or rebuilding their economy.”

Detroit has some room for improvement, however. Strungis of Moody’s said Detroit’s economy still lags its peers. And the city’s limited ability to raise revenue to offset rising expenditures from inflation remains a weakness. 

“[The city’s] recent improvements are balanced against its regional concentration in auto manufacturing and elevated exposure to economic and social challenges, including high unemployment, high poverty and negative long-term population trends,” he said. 

“The city’s strong track record and governance practices point to a diminished likelihood of backsliding,” Strungis said.

Detroit’s Naglick said his city’s experience should teach other municipalities above all the importance of honestly estimating your own revenues and then ordering your spending to ensure a balanced budget.

“You have to be very diligent about maintaining a balanced budget that lives within your means,” he said.