Detroit expects to end state oversight this spring

(Reuters) - Detroit expects to emerge soon from three years of state supervision of its post-bankruptcy finances after the city ended its last fiscal year with a budget surplus, a city official said on Thursday.

FILE PHOTO: A Detroit billboard is seen along Woodward Avenue at the location where a new hockey and entertainment district will be built near downtown Detroit, Michigan, November 7, 2014. REUTERS/Rebecca Cook

The city ended what was then the biggest-ever U.S. municipal bankruptcy in December 2014 after shedding about $7 billion of its $18 billion of debt and obligations. One element of the city’s federal court-approved bankruptcy exit plan was the creation of a state oversight board.

John Hill, Detroit’s chief financial officer, said a comprehensive annual financial report for fiscal 2017 released on Wednesday “shows improvements across the board in the city’s financial health.”

The annual audit’s findings that the city ended the fiscal year on June 30 with a $53.8 million operating surplus in its $1.3 billion general fund budget mark a third balanced budget in a row. That milestone allows a financial review commission created by the state of Michigan to end its monthly oversight of Detroit’s budget and contracts, according to Hill.

“We have very little doubt the (commission) will vote to waive (oversight) because we believe the city met all the criteria for the waiver,” he told reporters on a conference call.

The commission is expected to vote in March or April and would subsequently vote on the oversight waiver annually for 10 years, Hill added.

The city’s fiscal 2017 surplus was down from $62.9 million in fiscal 2016, but its cumulative unassigned surplus grew to $169 million from $143 million in the prior year, Detroit Chief Deputy CFO John Naglick said.

Detroit must confront funding challenges in the future. Last year, the city created a special fund to cover higher-than-expected pension payments starting in 2024. In 2025, debt service on outstanding bonds will increase to $120 million from $60 million currently as principal payments on some of the debt kick in, according to Hill.

The city is looking at restructuring or paying off some debt, Hill said. The city council could vote next week on using up to $55 million in surplus funds to repurchase bonds.

Detroit’s credit ratings, while still junk, were upgraded last year. Moody’s Investors Service in October raised the rating to B1 with a positive outlook from B2. S&P Global Ratings boosted Detroit to B-plus from B in December.

The ratings fell deep into junk after the city defaulted on some of its debt and filed for Chapter 9 municipal bankruptcy in July 2013.

Reporting by Karen Pierog in Chicago; Editing by Matthew Lewis