CHICAGO - One of the final pieces of outgoing Mayor Coleman Young's plan to stabilize Detroit's finances will fall into place tomorrow, when the city plans to sell about $166 million of, general obligation bonds in two issues.
In one deal, the city will sell $140 million of bonds, insured by AMBAC Indemnity Corp., to refund and restructure $11.8 million of bonds.
The second issue comprises $26.7 million of unenhanced GO bonds for improvements and capital projects.
The debt restructuring is the final bond-related piece of the fiscal stabilization plan that Young unveiled in April 1992 after organizing a group of business people and other professionals to come up with ideas for eliminating a two-year $248 million budget deficit.
The city issued nearly $107 million of deficit funding bonds in August 1992 and refunded $165 million of bonds this September that had been issued for a convention center. The mayor's plan also called for layoffs, pay and service cuts, fee increases, and a decrease in pension fund contributions.
The bonds that will be refunded and restructured were issued in 1989 with a limited tax GO pledge. The proceeds were used to acquire and clean up land for a new Chrysler Corp. automotive plant, which is producing Jeep Grand Cherokees.
In September, Detroit voters approved the restructuring of the debt into unlimited tax GO bonds, after rejecting the measure in August 1992.
J. Edward Hannan, executive assistant director of Detroit's finance department, said the restructuring should save the city's general fund about $12 million a year. The refunding is expected to produce a present value savings of $1 million to $2 million, Hannan said. The money will be used for debt service on the bonds next year, he said.
The bonds will be secured by Detroit's unlimited tax pledge, as well as by an intercept of the city's revenue sharing from Michigan. The future of Detroit's $210 million annual revenue share is in question due to Gov. John Engler's proposal to eliminate all but state sales tax revenue sharing to local governments and use the approximately $774 million balance to help fund schools in the state.
Engler has pledged to replace up to $190 million of Detroit's annual revenues, although under his plan the money would be subject to annual appropriation by the Legislature. Lawmakers are scheduled by yearend to act on a final school funding plan, which may or may not include state revenue sharing.
Robert Doherty, a vice president at Merrill Lynch & Co., the bookrunner for both Detroit deals, said that insuring the $140 million issue will be helpful because of the uncertainty over the future of state revenue sharing. The insurance will ensure a triple-A rating from Moody's Investors Service and Standard & Poor's Corp. for the deal.
The second bond issue of $26.7 million of unenhanced unlimited tax GO bonds will be used for improvements to parks, recreational and zoo facilities, economic development projects, and the acquisition, construction, and equipping of an African American museum.
Moody's affirmed the city's Bal rating for the issue, while Standard & Poor's confirmed a BBB rating with a negative outlook. In ratings reports, both agencies cited Detroit's continuing budget deficits since fiscal 1990 and a potential $88 million deficit in its $1.1 billion general fund budget for fiscal 1994, which began July 1. The city is projecting it ended fiscal 1993 with a $26 million deficit.
"While they have put a couple elements of the fiscal stabilization plan in place, they still haven't achieved everything and continue to have the kinds of budget problems they've had in the past," said Charles Kishpaugh, an assistant vice president at Moody's.
Ed Rago, Detroit's budget director, said about $25 million of the $88 million deficit projection is due to the inability to get police and fire unions to agree on a 10% wage cut that has been accepted by the city's other unions.
The city stands to increase its deficit by another $34 million unless unions agree to switch to a new health care. The switch will require approval from all the unions, Rago said. The deficit projection also includes a $23.5 million cut in state revenue sharing that is not related to school funding.
Standard & Poor's said Detroit must continue to contain spending and find a "manageable solution" to the outstanding police and fire contracts in order to lose the negative outlook on its rating.
Hannan said the two bond issues will be the last sold under Young, who declined to seek a sixth term. Mayor-elect Dennis Archer, who takes office Jan. 1., met with rating agency officials on Friday to ask for time to get the city's finances in order, according to his spokeswoman.
Kishpaugh of Moody's said the new administration faces "serious challenges" without a lot of options left.
A statement from Merrill Lynch's market and sales department said "substantial demand" is expected for both bond issues given Michigan's status as a specialty state. The firm said the unenhanced GOs should be attractive to funds looking for yield.
The $140 million of insured bonds are tentatively scheduled to be priced as serials with maturities from 1995 to 2009. The $26.7 million of GOs are listed on the preliminary official statement as term bonds due in 2014.