CHICAGO - Amid Detroit's fiscal and political woes, Moody's Investors Service yesterday cut its rating on the city's unlimited-tax general obligation debt to Baa3 and stripped the city's limited-tax GO debt of its investment-grade rating.
The downgrades came as the city yesterday priced $218.5 million of unlimited and limited tax GOs, its first new-money sale since late 2006.
Moody's cited Detroit's economic problems and its chronically late annual audits as factors behind the downgrade. No reference was made to the city's political battles as Mayor Kwame Kilpatrick faces eight felony counts from a 2007 whistleblower trial and a subsequent settlement and is embroiled in a heated battle with the City Council as it attempts to remove him from office.
The downgrade comes days after the council approved a $3.04 billion fiscal 2009 budget that relies on selling fiscal stabilization bonds to eliminate a current deficit. Kilpatrick had touted an alternative proposal to sell Detroit's half of the Detroit-Windsor Tunnel in order to raise funds for the budget.
Moody's cut its rating to Baa3 - the lowest investment-grade credit rating - from Baa2 on the city's unlimited tax GOs. It cut to Ba1 from Baa3 the rating on the city's limited-tax debt.
At the same time, the rating agency downgraded the rating to Baa3 from Baa2 on the Detroit Retirement Systems Funding Trust 2005's taxable certifications of participation, Series A and B, and the Detroit Retirement Systems Funding Trust 2006's taxable certificates of participation, Series 2006 A and B. The outlook on all the debt is stable at the lower rating, reflecting the agency's expectation that the credit will not significantly improve or decline in the near future.
"The downgrade and assignment of Baa3 (GOULT) and Ba1 (GOLT) ratings reflect the city's significant negative general fund balances, delayed financial reporting, and a struggling economy," Moody's analyst Elizabeth Foos wrote in a report announcing the downgrade yesterday.
Noting the region's chronic economic challenges - including high unemployment and a shrinking housing market - Foos wrote that the city's economic and demographic profile is one of the weakest in the nation.
The rating distinction between the unlimited and limited tax debt reflects the strong security provided by the unlimited tax, which carries the city's ad valorem property tax pledge. The city has reported operating deficits from 1999 to 2006 - the last year for which an audit is available - and general fund deficits between fiscal 2002 and 2006.
In response to the downgrade, a Kilpatrick aide touted the city's commitment to wiping out its structural imbalance and raising revenues. "We are disappointed by Moody's decision to downgrade our bond rating," deputy mayor Anthony Adams said in a statement. "We have received positive ratings from two other rating agencies because of the bold steps the Kilpatrick administration has taken to regain structural balance by negotiating historic health care concessions, reducing overtime spending, and increasing revenues. Our administration will continue to work with them to change their view of the city and its finances. Our efforts will be directed at continuing the tremendous progress we have made in restructuring the city's finances."
Fitch Ratings assigns its BBB rating to both the limited and unlimited GO debt, and has a negative outlook. Standard & Poor's rates the unlimited tax debt BBB and the limited-tax debt BBB-minus, with a stable outlook.
In advance of today's bond sale, all three rating agencies noted the city's ongoing general fund deficits and chronically late annual audits as major credit factors. Standard & Poor's also praised the city for its stated commitment to eliminating its deficits and bringing its audits up to date.
Moody's downgrade comes the same week the City Council finished weeks of hearings on Kilpatrick's fiscal 2009 budget and a series of measures to remove the mayor from office. The council's decision to issue fiscal stabilization bonds in lieu of the tunnel sale was a blow to Kilpatrick, who has reportedly long touted the sale to rating agency analysts as a crucial measure to lift the city out of debt.
In rejecting the tunnel sale, City Council President Ken Cockrel Jr. called fiscal stabilization bonds a "tried and true financial option." Cockrel also shot down Kilpatrick's newly proposed economic stimulus package for the city, a $360 million bond sale that would use casino tax revenue to pay off the bonds.
In yesterday's sale, Merrill Lynch & Co. priced $218.5 million of taxable and tax-exempt GOs for the city that sold in four series. For Series A - $59.1 million of tax exempt unlimited GOs - yields ranged from 3.85% on a 5% coupon in 2014, to 4.93% on a 5% coupon in 2028. The bonds were insured by triple-A rated Assured Guaranty Corp.
Yields on $79.7 million of Series B tax-exempt unlimited GOs also insured by Assured ranged from 1.9% on a 5% coupon in 2009 to 4.36% on a 5% coupon in 2018. Yields on $49.7 million of uninsured tax-exempt Series A1 limited GOs saw yields range from 4.59% on a 5% coupon in 2013 to 5% on a 5% coupon in 2016. The sale also included two taxable series, Series A2, comprised of $25 million of taxable limited GO capital improvement bonds maturing in 2014, and Series C, $5.1 million unlimited taxable GO refunding debt maturing in 2009.
Michael Scarchilli contributed to this story.