CHICAGO -- Detroit officials say they will proceed with a $165 million refinancing troubled by a legal dispute over the effective date of a bill that allowed the deal.
J. Edward Hannan, Detroit's assistant bond accountant, said yesterday that a syndicate led by PaineWebber Inc. will probably price the issue early next week. The refunding involves revenue bonds sold to finance the city's convention center.
The decision to price the issue came after an Ingham County Circuit Court judge ruled last week that the bill passed by the Michigan Legislature this spring had become law with immediate effect in May. In addition, the Michigan treasurer's office yesterday approved the refinancing.
Senate Republicans are contesting whether authorization for the refinancing took effect in May, under the terms of one measure the Legislature approved, or whether a later bill, which pegs the effective date to April 1994, takes precedence.
On Monday, the Senate Republicans filed an appeal of the circuit court ruling with the Michigan Court of Appeals.
Hannan said the city believes it is on "firm legal ground" after consulting its bond counsel, Lewis, White & Clay. Officials from the law firm did not return phone calls.
The lawsuit centers on whether the Legislature has the power to vacate, or retrieve, a bill from the governor's desk after it has been passed. The suit does not question the ability of Detroit to refinance the debt, only when it can do so.
Last week, Ingham County Circuit Court Judge James Giddings upheld the contention by the state's attorney general and its secretary of state that because Gov. John Engler took no action on the bill 14 days after it reached his desk.
The Republican-dominated Senate had recalled the bill from the governor's desk in May before he could sign or veto the measure in order to force Senate Democrats to act on other bills. A subsequent bill that pegs the effective date to the beginning of April 1994 was passed by the Senate on July 6 and signed into law by Engler, a Republican, on July 16.
Graham Crabtree, assistant Senate majority counsel, said that under the second bill, Detroit would be prohibited from refinancing the bonds until around April 1, 1994.
Crabtree said the lawmakers "strenuously" disagree with the lower court's ruling. He said that while the Republicans have no disagreement with the contents of the bill, they believe the action by the secretary of state to enroll the first bill into law is "a major infringement on the Legislature's authority."
Crabtree questioned Detroit's decision to proceed with the bond refinancing, saying the validity of the bill's effective date "is very much in question." In fact, Senate president Dick Posthumus, R-Alto, released a statement in June saying that because the Senate does not recognize the bill as law, "the bonds aren't worth the paper they are printed on."
However, Nick Khouri, deputy state treasurer, said yesterday that the treasurer's office approved the issue because there is adequate protection for bondholders. He said that if Senate Republicans are successful in appealing the decision, the court's remedy would probably not force the city to stop debt service payments. In addition, he said the deal is insured by Municipal Bond Investors Assurance Corp.
"The remedy is not likely to injure bondholders, and the city had the deal insured, so both bondholders and the Michigan municipal market in general are protected," Khouri said.
Stephen DeGroat, a vice president and manager of MBIA's tax-backed department, said yesterday that final approval to insure the issue is subject to MBIA's review of the appeal filed in court on Monday.
A spokesman for the state attorney general's office said the office will probably ask for an expedited hearing of the appeal.
The refinancing involves $165 million of revenue bonds, backed by state hotel and liquor taxes, sold in 1985 for Detroit's Cobo Hall convention center. Refinancing the bonds, which carry interest rates of around 9%, is estimated to give the city a present-value savings of around $20 million, according to city officials.
The law allows Detroit to refinance the debt and use the savings to pay debt service on the $20 million of general obligation bonds the city sold in 1989 for Cobo Hall. City officials have said the deal will save the city about $3.6 million a year in its general revenue fund.
If the deal is not priced by Sept. 30, Detroit officials said they would not be able to use the savings for debt service this year on the $20 million of GO debt due to legal and accounting restrictions. According to Ed Rago, Detroit's budget director, that could increase the city's $30 million fiscal 1993 deficit by $3.6 million.
