Detroit intends to refinance bonds today despite legislator's concern, MBIA decision.

CHICAGO - Detroit is scheduled today to refinance $165 million of bonds sold for its convention center, despite a warning from a high-ranking Michigan lawmaker that an appeal concerning the enabling legislation is still pending.

The appeal also caused Municipal Bond Investors Assurance Corp. to decline yesterday to insure the issue.

In a statement released yesterday, Michigan Senate President Dick Posthumus. R-Alto, one of the plaintiffs in the lawsuit, said, "I believe that at this time, the validity and security of purchasing these bonds is unclear and could present a substantial risk or increased cost to those interested in purchasing them."

Posthumus also said that he believes the Ingham County Circuit Court judge's ruling this month, which upheld the effective date of the legislation, is "incorrect" and that an appeal of the ruling was filed by state Senate Republicans on Sept. 13 in the Michigan Court of Appeals "to protect the Legislature's constitutional authority."

J. Edward Hannan, executive assistant director of Detroit's finance department, said yesterday said that the city plans to sell the issue today. He added it is "absolutely clear that we have the authority" to refinance the bonds.

"We don't feel the validity of the bonds is at question at all." Hannan said. "We are very comfortable.

David Lewis, chairman of Lewis, White & Clay of Detroit, the bond counsel on the deal, called Posthumus' statement irresponsible given that the state attorney general and the state treasurer have concluded along with the circuit court "that the senator's position is meritless." Lewis also charged that Posthumus is "playing fast and loose political games with the public's financial interest. "

The preliminary official statement for the issue, dated Sept. 17, states that Lewis White "is of the opinion that the appeal is substantially without merit."

The bond counsel also said that regardless of the outcome of the appeal, the Michigan Supreme Court has ruled that the rights of bondholders are "inviolate" in cases in which bonds were acquired before a judicial decision was made overruling a former judicial decision pertaining to the bonds.

Detroit officials say that if the deal is not priced by Sept. 30, they would not be able to use the savings for debt service this year on the $20 million of general obligation debt because of legal and accounting restrictions.

Jim Haddon, a managing director at PaineWebber Inc., the senior manager on the deal, said that based on the firm's understanding of the facts and the legal opinion, the firm "feels comfortable underwriting this issue."

"We take comfort that the circuit court was favorable to the city's claim that the plaintiffs have no standing and that if considered, the lawsuit was meritless," Haddon said.

The lawsuit, filed in Ingham County Circuit Court in July by Posthumus and other Senate Republicans against the Michigan secretary of state and attorney general, concerns the power of the Legislature to vacate a bill from the governor's desk after it has been passed. The lawsuit does not question the ability of Detroit to refinance the debt, only when it can do so.

The bill allowing the bond refinancing to take place immediately upon becoming law had been recalled from Gov. John Engler's desk in May by Senate Republicans before the governor could sign or veto the measure in order to force Senate Democrats to ae, on other bills.

However, Attorney General Frank Kelley and Secretary of State Richard Austin maintained that the bill automatically became law 14 days after it reached Engler's desk and no action was taken on it. A subsequent bill that did not have immediate effect and would not allow the refinancing to take place until around April 1, 1994, was passed by the Senate on July 6 and signed into law by Engler on July 16.

On Sept. 7, Ingham County Circuit Court Judge James Giddins upheld the action of the secretary of state to enroll into law the original bill that was effective immediately.

Hannan said that the issue will be sold unenhanced with the A rating Standard & Poor's has affirmed on the bonds. Stephen DeGroat, a vice president and manager at MBIA, said yesterday that the company does not feel comfortable insuring the issue without knowing the outcome of the appeal.

The refinancing involves $165 million of revenue bonds, backed by state hotel and liquor taxes, that were sold in 1985 for Detroit's Cobo Hall convention center. Refinancing the bonds, which carry interest rates of around 9%, will give the city a present value savings of around $20 million, according to city officials.

The bill 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.

The appeal process for the lawsuuit will take months, according to the Senate Republicans' legal counsel. A spokesman for the state attorney gencral's office said the office is weighing the option of asking for an expedited hearing of the appeal.

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