CHICAGO - Detroit lost one of its two investment-grade ratings yesterday, when Moddy's Investors Service downgraded the city's general obligation rating to Ba 1 from Baa, citing concerns over the city's ability to maintain balanced fiscal operations.
The rating move affects $272 million of the city's outstanding GO unlimited tax debt. On June 4 Standard & Poor's Corp. affirmed a BBB rating with a negative outlook for $276 million of the city's GO debt.
However, Moody's assigned a Baa rating to the approximately $110 million of deficit funding bonds Detroit is planning to price the week of Aug. 3 in a deal headed by Merrill Lynch & Co.
Moody's said the GO rating downgrade was the result of "weak credit fundamentals, which detract from long-term credit quality, despite the city's history of continued efforts to maintain control over its budgetary operations."
Paul Devine, a vice president and manager of the Great Lakes region at Moody's, said yesterday that given credit fundamentals, such as Detroit's "fairly substantial" amount of debt and "weak" economic base, "we don't feel an investment-grade rating is still warranted."
"We see that the [fiscal] 1993 budget has a reasonable change of being balanced," he said. "But actions necessary to to so, such as wage freezes and salary cuts and massive employee reductions, don't give us comfort that the budget can be balanced on an ongoing and sustained basis."
The city's $2.12 billion budget for fiscal 1992, which began July 1, includes cost-saving measures such an employee pay freezes and roll-back and debt refundings to eliminate a $248 million deficit over fiscal 1992 and 1993. The deficit funding bonds are also a key element of the budget.
Last November, Moody's had warned that Detroit could face a downgrade unless it came up with "a credible and achievable plan" in 1992 a bring its budget into balance.
Edward Rago, Detroit's budget director, said he was "extremely upset" with the downgrade.
"I think we've got a budget plan that's extremely difficult to get in place, but we're doing it," he said. "They're simply not giving us a change to pull it all together."
Mr. Devine said the deficit funding bonds were given an investment-grade rating because the bonds would be backed with "a sufficient amount" of distributable state aid and because the deal is structured to include a debt service reserve fund equal to six months of interest.
Last month, the Michigan Administrative Board approved the bond issue, although state Treasurer Doug Roberts, who is a member of the board, warned that more steps needed to be taken for the city to reduce its fiscal imbalance.
Nick Khouri, the state's chief deputy treasurer, said yesterday that Detroit had not yet applied for approval by the treasurer for the use of state aid revenued to back the bonds, as well as for the city's plan to use an interest rate swap from a fixed rate to a variable rate for the five-year bonds.
In its affirmation of Detroit's BBB GO rating last month, Standard & Poor's said the continued negative outlook reflects the city's weak economic base, "significantly deteriorated" financial position, ongoing budget problems, and "structurally imbalanced" general fund operations. The agency said the negative outlook was due to uncertainty over whether the city would be able to fully implement the deficit reduction measures contained in its fiscal 1993 budget.
On July 7, the agency assigned a BBB-plus rating to Detroit's deficit bond issue. An agency official said the rating was higher than the city's GO rating because the bonds would backed by "less volatile" stated aid revenues as opposed to the city's revenues.
The state aid, consisting of state sales, income, and other taxes, will flow through an intercept mechanisms that will divert the city's share of state aid directly to the bond trustee until the total annual debt service on the bonds is fully funded.
