Moody's downgrades Detroit's debt

Detroit — Moody's Investors Service on Tuesday issued two downgrades to the city's tax debt that illustrate Detroit's weakening fiscal condition as it fights to stave off a stake takeover, The Detroit News has learned.

The city received a downgrade to B2 from Ba3 for its $553.1 million in outstanding general obligation unlimited tax debt and also a downgrade to B3 from B1 for the $486.4 million in outstanding general obligation limited tax debt. Both ratings fell two points.

Moody's also downgraded the Detroit Retirement Systems Funding Trust from Ba3 to B2, the report states.

It is yet another blow to the financially strapped city, which is fast running out of cash as Gov. Rick Snyder is pressuring Mayor Dave Bing and City Council to agree to a consent agreement that would help implement financial structure and stability.

"We changed it because despite some positive steps that the mayor and City Council have done to reduce the city's general fund deficit, the problems have persisted," said David Jacobson, a spokesman for Moody's. "The fiscal year 2011 general fund deficit balance continues to increase. There's been a persistent inability to achieve structural balance despite all the big spending cuts."

Mayor Dave Bing's chief operating officer, Chris Brown, said in a statement Tuesday afternoon that the downgrade "isn't unexpected." The city is taking steps to mitigate any negative financial impact, he said.

"In December, we narrowly averted a downgrade," Brown said. "Since then, we've been concerned about the continued possibility, and we've worked to avoid it."

Jacobson said that because of the uncertainty of the emergency manager law, all city bonds remain on review for another possible downgrade, and a risk remains of another downgrade happening in another 90 days. Opponents of Public Act 4, which gives an appointed emergency manager more power to sell assets and terminate union contracts, have collected 220,000 signatures to freeze the law and place it on November's ballot. A decision is expected in a month or so.

The "challenges" listed in Moody's report include the city's "weak liquidity profile," the "ongoing inability to achieve structural balance in the general fund," declining population base and a potential "termination payment" due for swap agreements made.

Bradley Coulter, a turnaround specialist, said there will continue to be uncertainty in the markets until the city reaches an agreement to restructure itself.

"It's a reflection of the ongoing inability to come to an agreement on how the city should restructure between the city and the state," said Coulter, director of the Bloomfield Hills-based O'Keefe & Associates Consulting.

"You will see uncertainty in the markets until some type of plan is put together and the bond holders can see what the outcome will be," he added. "Some really quick decisions need to be made. When you run out of money, it forces your hand to make decisions. The pressure is on the city to come up with something that works, whether it's with the state or on their own."

Detroit News