Detroit closed the books on fiscal 2017 with a $53 million surplus, marking its third consecutive year of positive budget results since exiting Chapter 9, according to newly published audited results.

The surplus ticks another box off on the list of gains that must be accomplished to exit state oversight. Detroit must record three consecutive years of deficit-free budgets to win release from oversight by the Detroit Financial Review Commission under terms established as part of its exit from its historic Chapter 9 case in December 2014.

“As you know we are in the third year of balanced budgets and it does trigger the potential for the Financial Review Commission to decide to waive its oversight for the next year, and then each year for the next ten years and then we will be completely free from FRC oversight,” the city's chief financial officer, John Hill, said in a press conference call.

Children play in the sand at Campus Martius park in downtown Detroit, Michigan, U.S., on Monday, Oct. 5, 2015.
Detroit closed the books on fiscal 2017 with a $53 million surplus. Bloomberg News

Release from state oversight – which could come as soon as March or April -- would allow for the local council and mayor run all city operations on a day-to-day basis.

The city's surplus was down from the $62.9 million reported in fiscal 2016. Detroit’s total general fund balance is now $592.8 million, up from $500.6 million in 2016. The city’s accumulated unassigned fund balance was $169 million up from $143 million at the end of fiscal 2016.

The city also reports improvements in its management of $100 million in federal grants with no questioned costs resulting from audits, for the second year in a row. In 2016 the city had federal funding for blight demolition funding suspended for two months due to procedural errors.

Detroit will present the results of the latest audit at the next FRC meeting scheduled for Feb. 26.

Hill said there will most likely be a memorandum of understanding between the city and FRC related to future information that the FRC would get.

“They still can at any time decide to change the waiver, although we hope and will make sure that doesn’t happen,” said Hill.

The FRC must decide every year for the next decade following the city’s release whether it will continue with the waiver. Within that time-frame the city will have a large pension payment coming up in 2024 as well as a debt restructuring that comes in 2025.

“I am sure that the FRC, as well as the city because we are dealing with those issues, will be looking at those two items to make sure that plans are in place, money has been put aside and the budget is able to absorb the additional costs that will come in those years,” Hill said.

The city is facing amortizing debt payments on roughly $630 million of B notes that would see payments jump from $60 million to $120 million in 2025. The notes were issued as part of the implementation of Detroit’s plan of adjustment to exit Chapter 9 bankruptcy. The notes are unsecured and were used to pay off various creditors. Issued as term bonds, the debt has a 30-year maturity, and bears interest at 4% for the first 20 years and 6% for the last 10 years. Payments are interest-only for the first 10 years and start amortizing principal in year 11.

“What we are doing now is working on strategy to use some of our funding in cash to take out some of that debt now,” Hill said.

The city currently has a proposal pending before the city council to use $50 million from the city coffers to pay begin paying off the debt. Hill said that the strategy going forward would use a combination of restructuring some of the debt as well as paying it off.

The plan to address pension obligations is aimed at shoring up the city’s long-term fiscal health. Detroit developed a long-term funding model with the help of actuarial consultant Cheiron, obtained City Council approval for changes to the pension funding ordinance that established the Retiree Protection Trust Fund, and deposited $105 million -- $90 million from amounts reserved in fiscal 2016 and fiscal 2017 plus $15 million appropriated in Fiscal 2018 -- to the fund in September 2017.

The fiscal 2018-2021 four-year financial plan includes depositing an additional $115 million in the fund from Fiscal 2019 through Fiscal 2021, and the city's funding strategy contemplates another $115 million from fiscal 2022 through fiscal 2023.

The city remains deep in junk territory. On Dec. 21, S&P Global Ratings upgraded the city’s issuer credit rating to B-plus. The outlook is stable. Moody’s Investors Service upgraded Detroit to B1 from B2 in October.

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