CHICAGO - The Michigan Administrative Board has approved the issuance of up to $117 million of deficit funding bonds for Detroit, but warned that more steps need to be taken for the city to reduce its fiscal imbalance.

Meanwhile, Mayor Coleman Young took a second step toward implementing his deficit reduction plan by issuing an executive order yesterday cutting pay for non-union city employees by 10%, effective next Monday.

Last week, the state administrative board, which is chaired by Gov. John Engler, approved the bond issue after reviewing the city's budget restructuring plan, which is based on the $2.12 billion budget approved by the city council in May for the fiscal year that begins today.

The board also received assurances from Detroit officials that steps would be taken to bring the city's budget into balance, according to a news statement from state Treasurer Doug Roberts's office.

Mr. Roberts, a member of the administrative board, called the deficit bond plan "another step in a long road to economic stability for the city of Detroit."

"The fact that the city of Detroit has requested the approval to issue over $100 million in deficit bonds is in itself an indication of the seriousness of the fiscal situation in Detroit," he said in the statement. "It should be understood that the growth of future expenditures by the city will be severely constrained because of the necessity to repay these bonds."

Last month, Mr. Roberts and some state lawmakers expressed concern that if Detroit does not address its "long-term structural problems," the city could ultimately face bankruptcy.

Bella Marshall, Detroit's finance director, said the city was "very encouraged" by the board's approval of the bond issue. She agreed that the issuance of the bonds was not meant to solve the city's financial problems, but to resolve a budget imbalance and a cash-flow problem. The city is facing a combined budget deficit of $248 million for fiscal 1992 and 1993.

Nick Khouri, the state's chief deputy treasurer, said the state treasurer must still approve the use of state revenue sharing through an intercept mechanism for debt service on the bonds, as well as the city's plan to use an interest rate swap from a fixed rate to a variable rate for the five-year bonds.

Ms. Marshall said the city was still structuring the swap transaction and would apply to the state treasurer for approval of the state revenue sharing funds and the swap within two weeks. She added that the plan was to sell the $117 million of bonds this month in a deal headed by Merrill Lynch & Co. The city is still in the process of picking co-managers for the deal, Ms. Marshall said.

Mayor Young's executive order cutting nonunion employees' pay came on the heels of an agreement reached last week with the Teamsters Union, which represents about 1,000 of the city's workforce.

That agreement called for a pay cut that would be accomplished through a shorter work week for union members, according to a news release from the mayor's office. The mayor's fiscal 1993 budget calls for an across the board freeze on employee wages as well as salary rollbacks.

The release did not say how many employees would be affected by the mayor's executive pay cut. City officials did not return phone calls.

Ms. Marshall said the city hoped its approximately 47 other unions will "understand the wisdom" of the mayor's action and follow suit.

"Making the same adjustments to the overall compensation package would allow the city financial flexibility that it would otherwise achieve by looking to the private sector," she explained, referring to the possibility of privatizing some city services.

Union concessions and the deficit bonds are two of the steps outlined by Standard & Poor's Corp. last month when it affirmed a BBB rating with a negative outlook for $286 million of Detroit's general obligation debt. At that time the agency said the measures must be realized for Detroit to maintain its rating.

The other steps are getting voter approval next month for restructuring $126 million of outstanding limited tax bonds as unlimited GO bonds, decreasing contributions to city pension funds by increasing earnings assumptions of the funds, and holding the line on other expenses.

Steve Murphy, a vice president at Standard & Poor's, said the agency hopes to rate the deficit bond issue this week.

Charles Kishpaugh, an assistant vice president at Moody's Investors Service, said the agency has Detroit's Baa rating under review. Last year, the agency warned that Detroit could face a downgrade unless it has an "achievable and credible" plan to restore budgetary balance.

"We haven't come to a conclusion yet," he said.

[TABULAR DATA OMITTED]

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.