CHICAGO - Van Kampen Merritt Investment Advisory Corp. warned this week that Detroit's rating could face another downgrade, which it believes could lead to the adoption of a financial oversight authority.
Van Kampen said in its MuniWeek newsletter that "with the potential for a [Standard & Poor's Corp.) downgrade below investment grade, Detroit may be forced to adopt a financial control board much like the one for New York City to enable it to address its future. "
Detroit's general obligation debt is rated BBB with a negative outlook by Standard & Poor's. In July. Moody's Investors Service downgraded the city's GO rating to the below-investment grade revel of Ba 1 from Baa, citing Detroit's ongoing financial problems.
Peter Ehret, an analyst at the Oakbrook Terrace, Ill.-based investment advisory service firm, said the newsletter ran the statement as part of an update on Detroit's attempt to balance its budget and the long-term implications for the city's financial health. He added that the statement about the possibility of a financial control board reflects Van Kampen's "opinion of what may lie ahead for Detroit.
"Detroit has serious long-term issues, and it is spending a lot of time dealing with a short-term budget fix." Ehret said, referring to Mayor Coleman Young's multi-step plan to eliminate a $248 million budget deficit for fiscal 1992 and the current fiscal year, which began July 1.
Ehret pointed out that some of the long-term problems facing Detroit include a declining tax base and the loss of jobs and population.
"As these things deteriorate over time, [the city] has to develop ways to deal with them, a plan to adhere to," he explained. "A control board is a mechanism for enforcing some adherence."
Ehret said he knew of no precedent with Michigan municipalities for a financial control board, but pointed out that cities in other states, like New York City, have had to adopt oversight boards in times of trouble.
Lawrence Solomon, Detroit's bond accountant, said the Van Kampen statement was speculation.
Van Kampen "has had no contact with the city," Solomon said. "We haven't been downgraded by [Standard & Poor's]. We never contemplated a financial control board, and we don't see a reason for a financial control board."
"We just don't see any reason for that kind of a statement in an article." he added.
Solomon noted that the city is "on target" with the mayor's budget stabilization plan.
Steve Murphy, a director at Standard & Poor's, said Van Kampen's statement about a potential downgrade of Detroit's rating "is a little strong." He pointed out that while Detroit must realize the cost-saving measures in the mayor's plan in order to maintain its rating, it is too early to come to any conclusion about successful implementation of the plan.
"It's only fair to give [Detroit] a chance to work out their plan before we reach a conclusion," Murphy said.
The city won a skirmish last Thursday with its largest union, the American Federation of State, County and Municipal Employees, when a Wayne County Circuit Court judge refused to stop the city's planned layoff of 600 union members. The mayor had called for the layoffs earlier this month after federation members rejected a two-year 10% pay cut that is a key element in his budget stabilization plan. The federation represents 6,000 members of Detroit's 17,000-person work force.
So far, the city reportedly has agreements with 22 of its 50 unions for the wage cut.
In addition to the pay cut, the mayor's plan includes $107 million of five-year deficit funding bonds that were sold in July, restructuring of outstanding debt, and decreased contributions by the city to its employee pension funds.