CHICAGO -- Detroit was dealt a setback this week on the planned $54 million sale of its waste incinerator when the city council rejected new energy purchase contracts essential to completion of the deal.

Mayor Coleman Young called the lack of council approval of the contracts "a serious situation," according to his spokeswoman Teresa Blossom.

Detroit officials are counting on the incinerator's sale to balance the city's budget for the last two fiscal years with about $15 million from the $54 million sale going to the fiscal 1990 budget and $39 million to the fiscal 1991 budget, which ended June 30.

However, the sale of the Greater Detroit Resource Recovery Authority incinerator to Philip Morris Capital Corp. is contingent on the city's ability to renew an agreement with Detroit Edison to purchase steam from the incinerator. And that agreement depends on receiving council approval of two new contracts with the utility.

Those contacts, which were defeated in a 5-to-3 vote on Monday, would increase the rate the city pays for electricity for its public lighting department and extend the sale of electricity to the city's water and sewer department.

Despite the setback, Bella Marshall, the city's finance director, said negotiations with Philip Morris and Detroit Edison are continuing.

"At this point in time, all the players are in place," she said.

The city had hoped to complete the deal earlier this year, but negotiations with prospective buyers interested in realizing tax credits from owning the facility -- which the city and its contractors would continue to operate -- and legal complications led to numerous delays.

Another complicating factor that is key to the sale involves the installation of pollution-control equipment to be financed with proceeds from a bond sale. City officials have been working for months on a plan to issue up to $175 millioni of taxable and tax-exempt pollution-control bonds, backed by the city's general obligation pledge and its share of distributable state aid, through its Economic Development Corp.

Ms. Marshall declined to pinpoint a new target date for the deal, saying, "We are hoping to close the sale and issue the bonds as quickly as possible."

It also is uncertain whether Philip Morris has set an absolute deadline for the transaction. However, Maryann Mahaffey, city council president, said city officials told the council that Philip Morris has a Sept. 30 deadline for filing with the Internal Revenue Service in order to realize tax credits this year. Spokesmen for the company could not be reached.

Ms. Mahaffey said the Edison contracts were turned down at Monday's special meeting because "the information given us was totally inadequate."

"We were asked to sign off on contracts with blank spaces for numbers," she explained. She added that council staff would spend the next month investigating the impact of the proposed contracts on city finances.

Ms. Blossom, pointed out that under the city's charter, the council must approve all contracts and that after Monday's vote the council went into its summer recess until Sept. 3.

"We're looking at two things -- restructuring the Edison package and getting the council back in a quorum from their vacation," Ms. Blossom said. "We still need council approval. The clock is ticking."

Officials at the rating agencies said they are taking a wait-and-see attitude on the transaction and its ultimate impact on the city's finances.

"It's a pretty fluid situation at this point," said Paul Devine, a vice president and manager of the Great Lakes Region at Moody's Investors Service. "We won't take any definitive action until this thing is done one way or another."

The city's general obligation debt is rated Baa by Moody's and BBB with a negative outlook by Standard & Poor's Corp.

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