Chicago - Detroit averted a rating downgrade yesterday by Standard & Poor's Corp.

Instead, the rating agency opted to affirm a BBB rating with a negative outlook for the city's general obligation debt.

Joe O'Keefe, a director at Standard & Poor's said that while a downgrade had been a possibility, problems with the city's finances were not significant enough to warrant the action.

While the city is facing a $63.3 million budget deficit, positives such as strong management and budget controls "support the rating where it is," O'Keefe said.

Detroit's plan to issue $125 million of deficit funding bonds this fall to eliminate the budget imbalance will not greatly increase the amount of deficit funding bonds the city has outstanding, said Steve Murphy, a director at Standard & Poor's.

Mayor Dennis Archer's debt plan calls for restructuring $82 million of remaining principal from the city's 1992 issuance of $106 million of five-year deficit funding bonds and issuing about $43 million of new deficit funding bonds.

Proceeds from the $43 million of new debt, along with $20 million saved through restructuring the old debt to eliminate principal payments until fiscal 1996, would erase a projected $63.3 million budget deficit. A large portion of the deficit was caused by a proposed cut in revenue sharing from the state of Michigan.

The rating agency officials held open the possibility that they will revisit Detroit's rating this fall to review the structure of the bond issue and to review any progress made with ongoing negotiations with Detroit's uniformed employees. Murphy said the city will also know by then just how much its revenue sharing will be cut.

"They've done what they can to get the city in line, and we feel they're committed to continuing that," he said.

Detroit officials were pleased with the rating affirmation, which affects nearly $300 million of the city's outstanding unlimited tax debt.

"We appreciate their recognition of the progress we have made," said J. Edward Hannan, executive assistant director of Detroit's finance department. "Our only disappointment is they didn't remove the negative outlook because we believe we have stabilize our finances."

Charles Kishpaugh, an assistant vice president at Moody's Investors Service, said yesterday that the agency is reviewing the city's rating and new budget, but does not expect to release an opinion for a couple of weeks.

In July 1992, Moody's dropped Detroit's rating to Bal from Baa, citing weak credit fundamentals, "which detract from long-term credit quality, despite the city's history of continued efforts to maintain control over its budgetary operations."

On May 17, the Detroit city council approved Archer's $2.2 billion fiscal 1995 budget after making minimal changes. Yesterday, Archer vetoed four of the changes made by the council, according to Ed Rago, Detroit's budget director.

One of the changes vetoed is a 3% increase in the maximum salary cap for city council employees. Council President Maryann Mahaffey has said the increases would only be given on a merit basis and if funds are available. But, Rago said, the move would send the wrong message, given the fact the city is in arbitration with its uniformed employees over a two-year 10% wage cut worth $26 million a year.

The council has until Wednesday to try to overturn the vetoes, Rago said. A two-thirds vote of the nine-member council would be needed to restore the vetoed items. Detroit's fiscal 1995 begins July 1.

Before the deficit bonds are issued, Hannan has said the city will issue $50 million to $60 million of tax anticipation notes by the end of June. The proceeds will be used to make the city's June 31 payment to its police and fire pension funds.

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