Regional News

It's Never Dull in Detroit

CHICAGO - When a lightning strike shut down Detroit's City Hall last Friday, at least one City Council member brought up the Old Testament.

The biblical reference reflected the political, legal, and fiscal turmoil confronting a polarized city government as it worked to resolve a lingering budget deficit in light of a shaky credit rating.

After months of debate and three formal rejections, the City Council yesterday narrowly reversed its earlier decision and approved a measure that would advance Mayor Kwame Kilpatrick's plan to sell the city's half of the Detroit-Windsor Tunnel. The tunnel sale would generate a one-time cash payment to eliminate a $60 million deficit in the $3.04 billion budget for fiscal 2009 that began yesterday. The council's last-minute vote meant that the city was able to avoid layoffs of up to 1,300 city employees.

The vote also means that the council would likely abandon its original deficit-elimination plan - the sale of $78 million in fiscal stabilization bonds. The mayor had repeatedly said he would block that plan, which he said was responsible for the city's recent bond rating downgrade by Moody's Investors Service in the wake of the council's deficit borrowing plan.

The ongoing struggle over how to erase the red ink reflects the larger political struggle between the City Council and the mayor as the council attempts to force Kilpatrick from office as he awaits a criminal trial on eight felony counts ranging from perjury to misconduct of office with his former chief of staff Christine Beatty.

Last weekend, the council found itself under scrutiny after a news report of a federal investigation into possible corruption by council members over the 2007 transaction to privatize the processing of the city's wastewater sludge. The news came as the long-time chief of staff for Council President Ken Cockrel Jr. resigned after a video surfaced showing him allegedly pocketing $4,000 in cash.

Officials also face a lawsuit filed by retired police and firefighters who have sued to stop the city from shifting $75 million out of their pension fund to shore up the city's budget.

Separately, the Detroit Public Schools Monday agreed to chop $522 million out of its two-year, $1.1 billion budget to eliminate its own deficit. The measure calls for the elimination of up to 1,800 employees, including more than 800 teachers.

The city's problems could spill onto the national political scene, as Kilpatrick's mother, U.S. Rep. Caroline Cheeks-Kilpatrick, D-Mich., acknowledged recently that the mayoral scandal has stained her current re-election effort. And council member Monica Conyers, wife of U.S. Rep. John Conyers, D-Mich., is reportedly one target in the current federal investigation, with federal agents tapping her phone for over a year. Monica Conyers did not appear at Monday's City Council meeting, sending a note saying she was recovering from minor surgery.

When lightning struck a pair of transformers that power City Hall last weekend, sparking a fire and closing the building for at least a week, council member Sheila Cockrel - stepmother of Ken Cockrel - told the Detroit Free Press "It's becoming like the Old Testament."

Despite the city's headaches, it has successfully returned to the bond market over the last few months with its first new-money and refunding issues since 2006. On Monday the city sold roughly $130 in tax anticipation notes to cover operating costs for the city as it ends its fiscal year. In late May the city sold $218 million in general obligation debt in what was its first new-money transaction since late 2006. About half of the bonds were insured by Assured Guaranty Corp.

Yields on the insured, unlimited-tax GO bonds ranged from 1.9% with 5% coupon in 2009 to 4.93% with a 5% coupon in 2028. And at the end of April, the city began the process of restructuring roughly $800 million of insured variable-rate water and sewage revenue bonds in a transaction insured by Berkshire Hathaway Assurance Corp., marking the new insurer's first appearance insuring bonds in the primary market.

But the months-long battle over how to eliminate the city's current $60 million deficit could be repeated in another bond proposal being pushed by Kilpatrick. Under the proposal, the city would issue roughly $360 million in casino-tax backed revenue bonds to finance an economic stimulus plan mayor says is crucial to revitalizing the city's economy.

While officials said they wanted to go to market quickly when they first introduced the plan in early April, the inability to balance the budget became a stumbling block. The proposal is currently awaiting a hearing by City Council, where Cockrel has already criticized the plan as akin to putting $360 million on a credit card.

Despite the criticism, the administration remains determined to move forward with the plan, spokesman James Canning said Monday. "We'll be glad to work with them," he said. "Utilizing a growing revenue source such as casino revenue to improve city facilities is a great plan and we want to move forward with it."

One of the city's most immediate concerns as it begins a new fiscal year is the prospect of laying off up to 1,300 city employees to wipe out the current deficit. On Monday, when the city council rejected a measure that would allow the city to move forward with the sale of the tunnel, deputy mayor Anthony Adams told the council that the layoffs were now "inevitable."

On Monday, as it closed out the fiscal year, the council voted 5 to 3 to reject the tunnel proposal, marking what seemed to be the end of a long push by Kilpatrick to accomplish the deal, which he first proposed in 2007, and which he reportedly touted to rating agency analysts as key to gaining stable financial ground. Under his plan, the city would sell its stake in the tunnel for $75 million to a new holding company, the Detroit Tunnel Authority. The transaction was expected to generate $65 million in a one-time cash windfall after insurance and other transaction costs.

After the council vote, Adams told the council that the layoffs of up to 1,300 employees were now "inevitable." Perhaps to avoid the discouraging prospect of those layoffs, two council members yesterday decided to reverse their no votes and approve the measure, which allows the city to set up the tunnel authority. Kilpatrick still needs to win approval within the next 120 days from the council for the remaining financing and operational details of the deal, but the mayor heralded the reversal as a major victory for the city.

"This tunnel agreement would be the final piece of the puzzle to put the city on stable financial footing and start moving forward," said Canning.

The lateness of the vote means the city will likely carry a $60 million deficit until the tunnel transaction is completed, said city officials.

The council is now unlikely to pursue its original counter-proposal to sell $78 million in fiscal stabilization bonds to plug the shortfall

Kilpatrick blamed the Moody's downgrade on that plan, and said Fitch Ratings and Standard & Poor's were "waiting in the wings" to downgrade the city if the bonds were issued.

In late May, Moody's cut its rating on Detroit's unlimited-tax general obligation debt to Baa3, the lowest investment-grade credit rating, and stripped the city's limited-tax GO debt of its investment-grade rating.

Fitch rates the city BBB and maintains a negative outlook on the city's general obligation debt. Standard & Poor's maintains a BBB rating on the city's unlimited-tax debt and BBB-minus on the limited-tax bonds. The outlook is stable.

Another key to balancing the 2009 budget - one approved by both the mayor and the City Council - was threatened last week by a new lawsuit filed by the city's retired police and firefighters. The lawsuit challenges the city's plan to transfer $75 million from the police and fire pension fund into the city's general funds.

Kilpatrick proposed the idea in April, saying the city's police and fire pension funds are overfunded by $400 million. Under the agreement, the pension board said it would increase some of the benefits to active police and fire employees, but not for retirees, a decision that in part prompted the lawsuit.

Amid the fiscal and political uncertainties, the council closed out the city's fiscal year Monday with a vow to move forward with its plan to force Kilpatrick from office as he awaits criminal trial on a series of felony counts stemming from testimony in a 2007 whistleblower trial.

"It doesn't change anything," Cockrel assured council members of the apparent federal investigation into council members. "All we know is there may or may not be an investigation. No one has been indicted, no one has been charged. It's dramatically different in the case of the mayor, where there's overwhelming evidence of wrongdoing," he said.

The federal investigation reportedly focuses on the council's approval by a 5-4 vote last November of a plan to pay $47 million annually to a Houston-based company to process its wastewater sludge. Federal agents have reportedly been investigating the matter for months, according to the Detroit Free Press, which reported the news over the weekend.

"It's not clear to me what stage of the investigation they're in, or who the targets of the investigation are," Cockrel said Monday after completing budget negotiations. "We all know that my chief of staff did resign, and since it may or may not be related to that investigation, I can't get into it, but that's where things are."

The charges against Kilpatrick and Beatty stem from testimony in a 2007 police whistleblower's trial. The Wayne County prosecutor's office has accused the pair of lying under oath about the nature of their relationship, their role in the firing of Detroit deputy police chief Gary Brown, and the nature of a confidentially agreement in a $8.4 million settlement stemming from the Brown trial and two other police lawsuits.

For its part, the council has said it was misled into approving the settlement as the administration kept secret the true motive behind it, which kept secret dozens of sexually explicit text messages between Kilpatrick and Beatty.

The council has scheduled public hearings to begin Aug. 18 to force the mayor to step down as he awaits criminal trial.

"It's going to be an interesting and exciting year in Detroit," said Ben Burns, director of the journalism program at Wayne State University journalism and former executive editor of the Detroit News.

Burns predicted that the swirling political scandals would ultimately not impact the city's economic development, which he said is moving forward on several fronts.

"I think that Detroit's public image nationally tends to be bizarre even though what's going on in Detroit is usually similar to any big urban city on the Rust Bucket Riviera," Burns said. "It's that way because we have such interesting, eccentric people that get in office. At the same time, we have a lot of very solid citizens who are working to make Detroit a better place to live. Detroit will keep on trucking."



Upcoming Events

Already a subscriber? Log in here
Please note you must now log in with your email address and password.