CHICAGO - Detroit voters on Tuesday put a hole in the city's plan to eliminate a $248 million two-year budget deficit by rejecting the proposed restructuring of $122 million of limited tax debt into unlimited tax debt.
The city placed the proposal on the primary election ballot with the hope voters would agree to increase the city's property tax levy to pay debt service on the bonds, thereby freeing up $12.6 million a year from the general fund to pay other expenses.
The measure lost with 41,549 votes to 54,983, according to the city clerk's office.
Voters, however, approved $135 million of new unlimited tax general obligation bonding authority for Detroit. Projects to be financed with the bond proceeds include public lighting, recreation and zoo facilities, public health facilities, and an African-American history museum.
The restructuring of the $122 million of debt the city sold in 1989 to acquire and clean up land for a new Chrysler Corp. automotive plant was one part of a deficit-elimination plan Mayor Coleman Young of Detroit unveiled earlier this year.
The city completed the first step in the mayor's plan yesterday when it priced $107 million of deficit funding bonds, backed by Detroit's share of distributable state aid and the city's limited tax pledge.
The deal, which was headed by Merrill Lynch & Co., is expected to close Aug.13, according to J. Edward Hannan, Detroit's assistant bond accountant.
Freda Johnson, a special consultant with Government Finance Associates Inc., the city' financial adviser, said the city will resubmit the restructuring proposal to voters, probably in a special election early next year.
In a letter to the city council, Bella Marshall, Detroit's finance director, said the city would make up for the $12.6 million shortfall in the current budget by eliminating a principal payment in fiscal 1993 for the $107 million of deficit bonds. The city's fiscal year ends June 30, 1993.
Paul Devine, a vice president and manager of the Great Lakes region at Moody's Investors Service, said yesterday the failure of the restructuring proposal "highlights" [the city's] lack of financial flexibility."
Last month, Moody's dropped Detroit's GO rating below the investment-grade level to Ba1 from Baa, citing "weak credit fundamentals" that detract from long-term credit quality, despite the city's history "of continued efforts to maintain control over its budgetary operations."
At that time, Mayor Young protested the downgrade, claiming Moody's established new goals and used "substantially different criteria" to judge the city's creditworthiness. Moody's officials have denied the change.
Steve Murphy, a director at Standard & Poor's Corp., which affirmed a BBB rating with a negative outlook on the city's GO debt in June, said yesterday that the rejection of the debt restructuring "was not good news" for the city.
However, he said Detroit could make up for the $12.6 million from other sources, pointing out it was a small amount relative to the city's $2.12 billion budget for the fiscal year that began July 1.
In June, Standard & Poor's warned that Detroit must implemented the measures contained in the mayor's deficit elimination plan or come up with alternative measures in order to maintain its rating.
One major element of the plan is employee concessions. Yesterday, the city council adopted an ordinance to cut the salary of Detroit's 2,700 non-union employees by 8%. On June 30, mayor Young issued an executive order for a 10% pay cut. The city council took the mayor to court over the action, charging that only the council was legally empowered to set wage levels.
On July 23, a Wayne County Circuit Court Judge placed a temporary restraining order on the mayor's actions and set an Aug. 27 hearing date on the council's request for a permanent injunction.
Bob Berg, a spokesman for the mayor, said yesterday he did not know if the 8% cut would be acceptable to Mayor Young. He added that the city must settle the pay cut for non-union employees because it was holding up negotiations for pay reductions with the majority of the city's unions, whose contracts ended June 30. Of the 50 unions, which represents over 15,000 employees, the city has agreement for 10% wage cuts with six unions representing about 1,700 workers, Mr. Berg said.
The mayor's plan also calls for a $33.5 million-a-year decrease in the city's contribution to city pension funds. One city source said that negotiations with the pension funds would probably be on hold until the city uses part of the proceeds from the deficit bond issue for the payment to the pension funds that was due in June.
Bond Buyer Indexes Friday
Bond Call Calendar Wednesday
Bond Elections Wednesday
Bond Tenders Thursday
General Obligation Bond Prices Monday
Municipal Activities Thursday
One-Year Note Index Thursday
Placement Ratio Monday
Rating Changes Tuesday
Recent Tables Wednesday
Visible Supply Monday
Volume at a Glance Tuesday
A Decade of Municipal Finance July 1992 8/ 6, p. 17
Municipal Financing by State July 1992 8/ 4, p. 20
Long-Term Bonds July 1992 8/ 4, p. 20
Largest Municipal Issues July 1992 8/ 4, p. 20
Tax-Exempt Mutual Funds Sales: June 1992 8/ 3, p. 28
Bond Counsel Rankings: First Half 1992 7/27, p. 2A
Bond Elections: 1991 1/21, p. 12A
Bond Insurer Rankings: First Quarter 1992 4/16, p. 1
Cumulative Index: Second Quarter 1992 7/ 9, insert
Education Volume: First Half 1992 7/27, p. 4A
Electric Power Volume: First Half 1992 7/27, p. 6A
Environmental Volume: First Half 1992 7/27, p. 6A
Financial Adviser Rankings: First Half 1992 7/27, p. 2A
Health Care Volume: First Half 1992 7/27, p. 5A
Holders of Municipal Debt: 1991 4/ 1, p. 24
Housing Volume: First Half 1992 7/27, p. 5A
Issuer Rankings: First Half 1992 7/27, p. 2A
Major Municipal Issues: First Half 1992 7/27, p. 11A
Public Facilities Volume: First Half 1992 7/27, p. 6A
Purposes of Municipal Finance by State:
First Half 1992 7/27, p. 8A
Short-Term Notes: First Half 1992 7/27, p. 10A
Transportation Volume: First Half 1992 7/27, p. 4A
Types of Muni. Bonds by State: First Half
1992 7/27, p. 9A
Underwriter Rankings (Long-Term): First Half
1992 7/ 1, p. 45
Correction 7/ 6, p. 2
Underwriter Rankings (Short-Term): First Half
1992 7/27, p. 6A
Utility Volume: First Half 1992 7/27, p. 6A
A Decade of Municipal Bond Insurance 2/19, p. 15A
Bond Holdings of the 500 Largest Banks:
1988-91 6/23, p. 25
Gross Spreads by States: 6/1/91-5/29/92 6/15, p. 28
Interest Rate Indexes: 1991 1/28, p. 25
Municipal Bond Box Score: 1992 7/31, p. 52
Municipal Forward Issues: 1989-92 4/27, p. 7A
New York Fed and Prime Rate Changes 1982-92 7/ 6, p. 26
Private-Activity Bond Caps: 1992 12/30, p. 20
State Income Tax Treatment of Municipal Bonds:
1992 7/10, p. 22
Status of Legislation & Regulations: 7/13/93 7/16, p. 22
State Interest Rate Ceilings 1/17, p. 23