CHICAGO -- Moody's Investors Service has put Detroit on notice that it could face a downgrade of its Baa general obligation rating next spring unless it has a "credible" plan to bring its budget into balance.
While the agency affirmed Detroit's rating on Friday in conjunction with the sale, possibly this week, of $39.8 million of unlimited tax GO bonds, it warned that the city's credit position "has reached a critical juncture."
The agency pointed to an estimated $30 million to $50 million deficit in the city's general fund operations, the reliance on now-depleted budget stabilization funds and one-time revenue measures and the lack of identified measures that would result in a "sustainable and recurring operating balance."
In addition, the agency said the city may need to turn to short-term borrowing in the spring "in order to maintain basic operations."
"The budget is unbalanced, there's no money left to carry them through any more operating deficits, and no options have been identified to restore fiscal balance," said Paul Devine, vice president and manager of Moody's Great Lakes region. "When and if they do short-term borrowing and if there is not a well-defined, credible and achievable plan in place to restore balance, we will lower the rating."
Bella Marshall, Detroit's finance director, said the city agrees that its problems are "just as serious" as the rating agency indicated.
To deal with those problems, Ms. Marshall said the administration was forming a committee of business and labor leaders and private citizens to come up with a "reasonable and practical" plant to stabilize the budget in view of increased demands on the city's finances caused by dwindling state and federal assistance. She added that the committee should be put together within 30 days and that its recommendations should be completed by the spring.
J. Chester Johnson, president of Government Finance Associates Inc., the city's financial adviser, acknowledged that the city will probably issue some short-term GO debt in th spring, adding it was too early to give the size of the issue. He pointed out that following the sale of the $39.8 million bond issue, the city will not be issuing any more GO debt "for as long as a year.
"So now the city can turn its attention to the budgetary issues that confront the city," he said.
Meanwhile, a report due out this week by the House Fiscal Agency of the Michigan Legislature, will show that fiscal 1992 state budget cuts will translate into an economic loss of $1 billion for Detroit, according to Warren Gregory, the report's author.
Mr. Devine said such a loss would be considered a negative factor for the city because the adverse impact on the economy would be reflected in its finances and its security for debt. Moody's Baa rating, which the city has maintained since November 1986, covers $286 million of the city's outstanding GO debt.
Last week, Standard & Poor's affirmed a BBB rating on $276 million of Detroit's GO bonds, while continuing to give the rating a negative outlook.
The city's budget for fiscal 1992, which began July 1, is $2.12 billion.