CHICAGO -- The war of words over the sale of a waste incinerator has heated up between Detroit Mayor Coleman Young and some members of the city council, with the mayor claiming that the city will be put "on the brink of bankruptcy" if the facility is not sold.
The city is depending on the proceeds of the $54 million sale of the Greater Detroit Resource Recovery Authority incinerator to balance its budgets for the last two fiscal years.
In an Aug. 5 press release, the mayor stated that "the inability to sell the incinerator will plunge the city $60 million further in debt and put us on the brink of bankruptcy."
The mayor's statement was in response to the city council's 5-to-3 vote that day to reject new energy purchase contracts with Detroit Edison. City officials had said that those contracts were essential to completing the sale of the incinerator to Philip Morris Capital Corp.
But Bella Marshall, the city's finance director, said that while the mayor was "highly disturbed" by the council's action, the city was not anticipating filing for bankruptcy.
"The city of Detroit does not foresee a bankruptcy," she said on Monday. "What the mayor is indicating is his opinion that this is one series of actions by some members of the council, and if such a pattern continues, its consequence might very well be bankruptcy."
Political and financial observers attributed the mayor's statement to political brinkmanship.
"I think it's a public relations move to put pressure on the city council," said Paul Devine, a vice president and manager of the Great Lakes Region at Moody's Investors Service. The mayor "is engaging in rhetorical excess."
Bettie Buss, a senior research associate at teh Citizens Research Council of Michigan, a government watchdog group, called the mayor's bankruptcy warning "an alarmist kind of puffery." She pointed out that for a municipality to file for bankruptcy in Michigan, it has to follow a 1988 state law calling for a lengthy evaluation process that includes state oversight.
"I think the probability of the state allowing the city to get that far and file is nil," Ms. Buss said.
Still, without the incinerator sale, the city's financial situation would be serious. On Friday, a Wayne County Circuit Court judge ordered the city to pay the remaining $53.7 million of a $77.5 million pension fund payment that had been due June 30. The judge also ruled that the city must pay an 8.7% interest rate penalty on the money it owes the fund, according to Tom McPhial, a spokesman for the Detroit Police Officers Association, one of the three unions that filed suit against the city on Aug. 1.
Ms. Marshall said that while the city will be negotiating a payment plan with the unions, the $54 million from the incinerator sale would be needed by Aug. 30 or the city would be forced to dip into its general fund for the payments.
In an Aug. 9 letter to the city council, Ms. Marshall outlined "some of the very critical problems" that will arise if the incinerator sale does not take place.
These problems included a $54 million deficit that would force "draconian service cuts" to maintain a "minimal cash flow," Ms. Marshall wrote. Given the deficit, she said the city's Baa rating with Moody's and BBB rating with a negative outlook from Standard & Poor's Corp. would probably be lowered. Without an investment grade rating, she said, the city could not insure a planned sale of up to $175 million of bonds to pay for pollution control equipment at the facility, and therefore, the city would be unable to proceed with the deal.
Ms. Marshall also warned that without the pollution control equipment, the Michigan Department of Natural Resources could shut the incinerator down. That would eliminate the tipping fees and energy sales revenues the city had been collecting and would force the city to seek other ways to pay debt service on the $438 million of limited tax GO bonds that were issued for the incinerator in 1986. The lower rating would also preclude the sale of almost $40 million of GO debt in fiscal 1992, which began July 1, she said.
Meanwhile, the city is continuing negotiations both with Philip Morris to buy the incinerator, which the city and its contractors would continue to operate, and with Detroit Edison to negotiate the contracts, Ms. Marshall said.
"We're still talking to all the parties involved in this transaction," Ms. Marshall said. "At this time, the transaction is still alive."
She added that the administration still hoped to get the city council back into session to vote on the Edison contracts prior to Sept. 3, when the council returns from its summer recess. However, Council President Maryann Mahaffey said last week that council staff would need the time this month to investigate the impact of the proposed contracts on city finances. She had attributed the negative vote on the Edison contracts to a lack of adequate information on the matter. City officials have said the incinerator sale is contingent on the city's ability to renew an agreement with Edison to purchase steam from the facility, and that agreement depends on getting the new energy purchase contracts approved.
Philip Morris, which is buying the facility for tax credits, must file with the internal Revenue Service by Sept. 30 in order to realize the tax credits this year.