Detroit Will Issue $100M in GO Bonds to Fund Neighborhood Improvement Plan, Transportation and Recreation Projects; Legacy Pension Payments Resume in FY’24

Preliminary Offering Memorandum

The city of Detroit is issuing an aggregate amount of $100 million in unlimited tax general obligation, or UTGO, bonds to fund public improvement projects. The offering is split into three series: $52.5 million in tax-exempt Series 2023A bonds, $22.5 million in taxable Series 2023B bonds and $25 million in tax-exempt Series 2023C bonds.

The city is designating the Series 2023 bonds as social bonds based on the use of proceeds to finance blight removal purposes by rehabilitating or demolishing vacant houses throughout the city. The bonds are rated Ba1 by Moody’s and BB+ by S&P Global Ratings with a positive outlook.

BofA Securities, Siebert Williams Shank and Huntington Capital Markets are underwriting the deal. Miller, Canfield, Paddock and Stone PLC is bond counsel. Pricing is expected July 18. Closing is expected Aug. 1.

In November 2020, the majority of Detroit voters approved issuance of $250 million in UTGO bonds to fund the city’s Neighborhood Improvement Plan, or NIP, which involves the preservation of homes through roof repair, secured windows and doors, and the demolition of nearby, unsalvageable vacant houses. The NIP endeavors to reduce residential blight and raise property values before these homes are sold.

The city issued $175 million of bonds in 2021 to fund the first phase of the NIP, and intends to issue the remaining $75 million across the Series 2023A and Series 2023B bonds. Its $38.405 million 5% tax-exempt Series 2021 UTGO bonds due April 2050 last traded on April 11 with $2 million in volume at 99.125 to yield 5.06%, well below the issue price of 123.577 to yield 2.37% in February 2021, according to secondary trading data on EMMA.

The city also has $71.3 million of previously authorized but unissued bonds in addition to the NIP bonds. Proceeds of the Series 2023C bonds will fund transportation and recreation projects.

At the time of writing, the city has a total of $457.97 million in UTGO debt outstanding, according to the investors’ road show:

The Resolution and Act 34 obligated the city to levy sufficient debt millage annually to pay debt service on all UTGO bonds. Debt millage revenue may only be used to pay UTGO bonds under Act 34 and the Michigan Constitution. The city covenants to deposit 100% of its debt millage revenue with the debt millage escrow trustee for as long as any UTGO bonds remain outstanding.

The city’s revenue comes from income tax, property tax, state revenue sharing, wagering tax from casinos and utility users’ tax, which make up roughly 80% of the general fund revenue. The rest of the revenue comes from departmental fees, fines and other miscellaneous revenue. Fiscal-year 2022 marks the eighth consecutive year that the city ended with a surplus and an unassigned fund balance of $230 million since its exit from bankruptcy in December 2014.

Total revenue is projected to reach $1.22 billion in fiscal 2023, up from $1.21 billion in 2022 and $1 billion in 2021. Total expenditures are projected at $1.16 billion in fiscal 2023, up from $981 million in 2022 and $876 million in 2021.

Expenditures are anticipated to exceed revenue for the fiscal 2024-2027 period, with an excess of $57 million in 2024, $54 million in 2025, $51 million in 2026 and $48 million in 2027.

In 2017, the city created the Retiree Protection Trust Fund Balance, or RPTF, to prepare for the resumption of legacy pension payments in fiscal 2024. The RPTF grew to $456.8 million in fiscal 2023 from $103.3 million in 2018, with annual deposits into the fund starting in 2019. Contributions to the legacy pension payments would come from both the RPTF and the general fund, which has a projected ending balance of $1.096 billion for fiscal 2023. This ending balance is estimated to drop to $1.039 billion in fiscal 2024, $985.5 million in 2025, $934.3 million in 2026 and $886.1 million in 2027.

--Hoa P. Nguyen