S&P puts chunk of Michigan's TIF debt on CreditWatch in light of state tax cuts.

CHICAGO -- Standard & Poor's Corp. late last week placed nearly $92 million of tax increment finance district debt in Michigan on CreditWatch with negative implications due to the state's repeal of school operating property taxes.

The action affects $85.8 million of TIF bonds issued in 1989 by the Detroit Downtown Development Authority and $6 million of 1992 TIF revenue bonds issued by the Lapeer Tax Increment Financing Authority.

The Detroit authority's bonds are rated A-minus, while the Lapeer authority debt is rated BBB-minus.

Michael Forrester, an associate director at Standard & Poor's, said yesterday that the Lapeer issue is the only one the rating agency rates based solely on the TIF revenue stream.

Forrester said the Detroit issue is secured by the city's general obligation pledge, but is rated higher than the city's rating of BBB with a negative outlook, due to the strength of the TIF district. With the loss of the school revenue, the debt could face a downgrade to the city's level, he said.

The placement of the debt on CreditWatch marks the first action by a rating agency in the wake of a recently passed law in Michigan that eliminates more than $6 billion of property taxes for school operating purposes as of July 1, 1994. Schools' property tax levies for unlimited tax general obligation debt are not affected by the law.

Both Standard & Poor's and Moody's Investors Services have raised concerns about the impact of the revenue loss on the outstanding debt of schools and other local governments.

Forrester said the debt issued by the two authorities faces the potential of having insufficient revenue for debt service due to next year's elimination of the school property tax. In yesterday's edition of Credit Week Municipal, Standard & Poor's said that because school districts account for 50% to 60% of total property taxes, the elimination of the school tax "will severely reduce tax increment revenue."

Paul Boucher, director of financial services for the city of Lapeer, said the city has "no control" over the action taken by the Michigan Legislature last summer to eliminate the school property tax. Boucher said that he hoped lawmakers would ultimately hold the TIF districts harmless under the financing plan they ultimately approve.

Art Papapanos, the Detroit authority's director of commercial development, said his agency is also watching to see what unfolds in the state capital. The authority is "hoping and striving" to maintain debt service on its bonds so that a downgrade will not be warranted, Papapanos said.

Under a plan proposed by Gov. John Engler, cities, counties, townships, and villages would be able to levy two to six mills in property taxes to make up for any shortfall on TIF obligations, as well as to compensate the governments for the loss of $774 million of annual state revenue sharing. The revenue sharing, along with a 50% increase in the state sales tax and various other new or increased taxes, would be used to replace the more than $6 billion of property taxes lost by schools.

The money would be used to give schools an annual per pupil grant of $4,500. So far the Senate has passed a package of school reforms that were included in Engler's plan.

Meanwhile, House members last week proposed a bipartisan alternative financing plan that could be put in place if the governor's plan is defeated by voters in February.

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