Regional News

Detroit Fiscal Woes Survive Kilpatrick

CHICAGO - The imminent departure of Mayor Kwame Kilpatrick may signal the end of the legal and political saga that has consumed Detroit for nearly nine months, but the city's fiscal woes are far from over.

While the impact of the mayor's resignation on the city's fiscal position remains uncertain, at least one powerful City Council member said Detroit should change the way it conducts its bond transactions.

Kilpatrick's exit also dampens the prospects of some of his long-favored finance proposals, including the sale of the Detroit-Windsor Tunnel and a $350 million bond proposal backed by casino revenue. A plan to sell fiscal stabilization bonds to wipe out the deficit could be reappear now that the plan's chief critic - Kilpatrick - is leaving office.

Facing 10 felony counts in two separate pending criminal trials, Kilpatrick yesterday pled guilty to two felony counts of obstruction of justice and pled no-contest to one felony assault count. Prosecutors dismissed seven other counts.

The deal with the Wayne County prosecutor's office requires Kilpatrick to serve four months of jail time, resign from office by Sept. 18, and serve five years' probation. The mayor also agreed to not run for office for five years and pay $1 million in restitution to the city. Kilpatrick also entered a separate deal with the Michigan attorney general that requires four months of jail time, which will be concurrent with the county deal.

The move ended the biggest public corruption scandal to hit Detroit in decades and cut short - for now at least - what many saw as a bright political future of the city's youngest mayor.

With Kilpatrick set to resign by Sept. 18, Council President Ken Cockrel Jr. will take over the office until a special election is held. The city's mayoral and City Council general election is in November.

Kilpatrick's former chief of staff, Christine Beatty, also faces eight felony counts. Yesterday she was allowed an additional week to negotiate a possible plea deal.

The mood in City Hall was "quiet and somber" yesterday, according to one city employee. The building's Internet access had frozen by mid-morning as too many employees attempted to watch their boss of seven years resign from office.

"It's exhausting," said the employee. "Nobody's ecstatic. There are a lot of fiscal problems ahead. The bigger problem is the deficits."

The city's fiscal problems will be the first priority in the coming months, Cockrel has told reporters in recent days. It's unclear how Cockrel plans to eliminate the current budget shortfall - near $100 million, according to City Council fiscal analysts - though earlier this year he strongly touted selling fiscal stabilization bonds to fill the gap.

"I think we need to revisit that question," of whether to issue fiscal stabilization bonds, said Councilwoman Sheila Cockrel, chair of the Budget, Finance, and Audit committee, in an interview yesterday. "We got a certain level of advice on that matter, but at the end of the day we're going to need to see what the options are. The deficit we're currently looking at may require looking at selling some bonds."

Speaking generally about the city's borrowing practices, Cockrel - who is the stepmother of Ken Cockrel - said the Kilpatrick administration's approach was too murky.

"As chair of the budget, finance and audit committee, I am increasingly concerned about all aspects of how we do our bond transactions," said Sheila Cockrel. "I will recommend to the incoming mayor that we go for a much higher level of transparency in the process" of choosing underwriters,.

She added that she would recommend issuing request for proposals to select firms - a process not currently practiced. "Other cities have a much more competitive process than we currently have," Cockrel said.

Siebert Brandford Shank & Co. has been the top senior manger, issuing more than $2 billion in seven deals, followed by UBS Securities LLC with $1.2 billion in four deals, and then Loop Capital Markets LLC with $764 million in six deals, all since 2002, according to Thomson Reuters. The city and its related issuers favor negotiated transactions.

Kilpatrick vowed to block the stabilization bonds from coming to market, and in July had municipal market participants testify before City Council that the move could trigger another round of rating downgrades.

In May, Moody's Investors Service 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. Moody's analysts said the downgrade stemmed largely from the city's financial problems, its chronically late audits, and the area's general economic weakness.

Fitch Ratings and Standard & Poor's rate the city's unlimited tax debt BBB. Fitch has a negative outlook, and Standard & Poor's has a stable outlook.

Kilpatrick's resignation is unlikely to impact the city's credit profile at this point, said Moody's analyst Elizabeth Foos. Moody's is waiting to review the 2007 audit at the end of the year, said Foos.

Meanwhile, amid all the political drama the state has banned the city from entering the bond market until it releases its 2007 audit, currently scheduled for November.

In August the state withheld a portion of the city's August revenue-sharing payment in protest of the city's late audit, which it said was due at the end of August. Because that money is used for debt service payments, the state only withheld that portion of the payment that is not pledged for bond payments, about $22 million, said Terry Stanton, spokesman for the state treasurer.

Once the city releases its 2007 audit and is able to issue bonds again, it's likely it would issue about $100 million in general obligation bonds, part of its annual GO bond issuance.



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