Standard & Poor's Affirms Detroit's BBB While Maintaining a Negative Outlook

CHICAGO -- Standard & Poor's Corp. affirmed its BBB rating yesterday on $300 million of Detroit's outstanding debt, but it continued to give the rating a negative outlook.

The agency cited the fact that the city's financial operations "remain under pressure" due to the lingering recession and a depressed auto industry, which is affecting income tax revenues in the city, as well as in Michigan.

"If the economy stays sour for longer than they think, [the city's] going to have some big problems," stated Steve Murphy, a vice president at Standard & Poor's.

Detroit, which ended its last three fiscal years with deficits that have depleted its budget stabilization fund and general operating fund balances, now faces a $30 million to $50 million imbalance in the current fiscal year, according to the agency's report. And that imbalance does not include the $54 million deficit the city expects to close with proceeds from the sale of its Greater Detroit Resource Recovery Authority's incinerator to Philip Morris Capital Corp. for tax credits this month.

Larry Solomon, Detroit's bond accountant, said the city "was not quibbling" with the agency's estimate of an imbalance in the fiscal year that began July 1.

"Generally, the city recognizes it has got a financial problem, and we're taking steps to alleviate it," he said.

Delays in completing the incinerator sale caused the city to postpone full payment of $77.5 million owed to the city's pension fund on June 30. Mr. Solomon said the remainder of the payment would be made today.

Mr. Murphy pointed out that next year the city will probably have to issue short-term debt to make the June 1992 pension payment because it may not have sufficient funds.

The Standard & Poor's report said that "expenditure containment," which is already being undertaken by the city administration, successful completion of the incinerator sale, and "prudent management of the city's resources," particularly with the pension payments, will be needed to prevent a downgrade.

The ratings review was prompted in part by the upcoming incinerator sale-related issuance of up to $175 million of bonds to finance pollution control equipment for the facility, according to Mr. Murphy. He added that the city was also due for a general review.

City officials have said the bond sale was essential for completing the sale of the facility, which the city and its contractors would continue to operate. Detroit plans to price the bond issue, which will be sold through Detroit's Economic Development Corp., later this month.

Only $75 million of the bonds will be tax-exempt, reflecting the city's share of Michigan's private-activity cap for the year. The taxable and tax-exempt bonds will be backed by Detroit's general obligation pledge and its share of distributable state aid and will probably be secured with insurance.

The affirmed BBB rating was on $276 million of the city's GO debt and $24 million of building authority bonds. Detroit's rating has had a negative outlook since September 1990.

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