CHICAGO -- Moody's Investors Service affirmed a Bal rating Friday for Detroit, but warned that the city still faces some long-term problems.
"Over the longer term, unless there are some fundamental changes in operations and broadened economic growth, Detroit will continue to face some difficulties," said Charles Kishpaugh, an assistant vice president at Moody's.
The rating agency cited Detroit's "weak economic base and long-term economic decline and its extraordinary high debt levels" as factors contributing to its decision to maintain the non-investment grade rating.
Moody's review of Detroit's rating was triggered by the passage last month of a $2.2 billion budget for the fiscal year, which begins July 1.
Kishpaugh said that while the budget avoids relying on "unrealistic assumptions" seen in past Detroit fiscal plans, it is balanced through anticipated economic growth and the issuance of deficit funding bonds.
The budget calls for eliminating a $63.3 million deficit through the issuance of $125 million of deficit funding bonds this fall.
The debt plan involves restructuring $82 million of remaining principal from the city's 1992 issuance of $106 million offive-year deficit funding bonds and issuing about $43 million of new deficit funding bonds.
Proceeds from the $43 million of new debt, along with $20 million saved through restructuring the old debt to eliminate principal payments until fiscal 1996, would erase the deficit. The deficit was caused by a proposed cut in revenue sharing from Michigan, the lack of wage concessions by uniformed employees, and a failure to implement planned health care reforms.
Moody's said that "due to cash flow stringency," Detroit plans to issue about $60 million of tax anticipation notes this week in order to make a $52 million payment to its pension funds by June 30. Lehman Brothers is the senior manager on the deal.
J. Edward Hannan, executive assistant director of Detroit's finance department, said Mayor Dennis Archer, who took office in January, wants to solve the city's recurring problems.
"There are lots of things we could be doing better, and that's what the mayor wants to do to encourage economic growth," Hannan said.
Hannan said that he hoped to send out a request for proposals soon to underwriters for the upcoming deficit funding bond issue.
Moody's Bal rating was affirmed for $255.3 million of Detroit's general obligation debt and nearly $5 million of Detroit and Detroit-Wayne County building authority debt. The rating agency also affirmed a Baa rating for the city's $82 million of outstanding deficit funding bonds.
In July 1992, Moody's dropped Detroit's rating to Bal from Baa, citing 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."
Last month, Standard & Poor's Corp. affirmed a BBB rating with a negative outlook for the city. The rating agency held open the possibility that it will revisit Detroit's rating this fall to review the structure of the deficit funding bond issue and to review any progress made with ongoing negotiations with Detroit's uniformed employees.
Detroit is in arbitration with its uniformed employees over a two-year 10% wage cut worth $26 million a year.
