Oct 13 (Reuters) - Detroit's improved finances earned it a one-notch rating upgrade on Friday from Moody's Investors Service that still leaves the post-bankruptcy city's credit in junk territory.
The rating boost to B1 with a positive outlook, from B2 previously, reflects improvements in the city's fund balance and liquidity and a pension funding plan that eases a future contribution spike, Moody's said.
"The rating also considers the very conservative fiscal approach of Detroit's current administration as well as the city's current economic performance, which is strong considering its historic contraction," the credit rating agency said in a statement.
Detroit's rating, which had tumbled deep into junk at Caa3 as the city defaulted on bonds and headed for bankruptcy court in 2013, is now four notches below the low-investment grade level of Baa3.
Michigan's biggest city exited 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.
Moody's said another upgrade is possible if the city's current economic and financial trends continue, enhancing its capacity to fund its long-term obligations.
Detroit Mayor Mike Duggan said the upgrade gives the city its highest Moody's rating since March 2012.
We have been very conservative in our projections, and were executing a plan to address our legacy pension obligations and produce surpluses each year to reinvest in vital city services and our neighborhoods, he said in a statement.
Earlier this year, the city created a special trust fund to cover higher-than-expected pension payments that start in fiscal 2024. Detroit also moved closer to ending state oversight of its finances by completing two-straight fiscal years with balanced budgets.
Duggan last week proposed selling $125 million of bonds backed solely by Detroit's share of gasoline taxes and vehicle registration fees to spruce up neighborhood commercial corridors.
This week the city issued a request for proposals from underwriters for a plan to repurchase or refinance about $720 million of notes it issued in 2014 as part of its court-approved debt restructuring plan.
Detroit is rated B with a stable outlook by S&P Global Ratings. (Reporting by Karen Pierog; Editing by Tom Brown)