Regional News

Detroit's Deficit Dilemma

CHICAGO - Detroit would securitize the revenues of several city assets as well as cut employee pay by 10% to wipe out an estimated $300 million shortfall under a long-awaited deficit reduction plan that city officials unveiled Friday.

The proposals come a few weeks after all three ratings agencies downgraded the city's general obligation debt into junk-bond territory. Credit analysts cited the deficit as one of the chief factors behind the downgrades.

Pending City Council approval, Mayor Ken Cockrel Jr. will use the deficit-reduction plan to help craft a 2010 city budget that will be unveiled in three months.

While outlining the plan to the Detroit City Council last Friday, Cockrel and chief financial officer Joseph Harris also said they expected the city's long-delayed 2007 audit to be completed by Feb. 28. The city's chronically late audits have been cited as another key credit concern by rating agencies.

Meanwhile, the mayor's office declined to comment on whether it has reached an agreement with a pair of swap counterparties allowing the city to avoid an estimated $400 million in termination payments that were triggered by downgrades of $800 million in pension certificates of participation.

Only 57 employees would be laid off under the current deficit plan. But that assumes 10% pay cuts for all city employees, which officials estimated would save $48 million annually. Without the cuts, the city would likely lay off around 1,000 employees, warned Cockrel, who added he would cut his own pay by 20%.

The mayor planned to meet later Friday with the city's unions to begin negotiations on the pay cuts.

"We're fighting for our financial survival, nothing less than that," he told the council. "If we don't all agree to give up something, we'll have to take a look at more financial cuts."

The centerpiece of the deficit-elimination plan is the proposed securitization of revenue streams from three city assets: the Detroit-Windsor Tunnel, municipal parking, and the municipal lighting department. Officials estimated the move would generate roughly $250 million in up-front cash payments.

"This is no different than a citizen winning the Mega Millions jackpot and taking a single lump sum payment immediately instead of a series of payments over many years," Cockrel said. "This transaction allows a person to get money when it is needed most. The city is in the same situation."

Under the plan, the city would securitize revenues of the three assets for an as-yet-undetermined period of time - most likely around 50 years - in return for an upfront cash payment. The city would retain ownership and would continue to be responsible for maintenance of the assets, CFO Harris told the council.

Pending approval by the City Council, the city hopes to close the lease deals by December, 2009.

The plan to securitize the Detroit-Windsor Tunnel's revenue stream could generate $100 million, according to Cockrel. In contrast to former Mayor Kwame Kilpatrick's high-profile and controversial proposal to sell the tunnel, under Cockrel's plan, Detroit would retain ownership - a key concern for many council members who rejected Kilpatrick's plan last year.

Harris said the proposal to lease the city's parking department is based on a similar move by Chicago, which recently entered into a 75-year lease of its parking meters for an upfront payment of $1.157 billion. Detroit would likely enter into a shorter-term lease, Harris said, but like Chicago the plan would include increases in parking meter rates, as well as an increase in parking structure fees, parking fines, and towing fees. The city estimated it could get a $75 million upfront payment for the lease.

"We are looking at how much we can get today for dollars over X number of years," Harris said. "After 75 years it's minimal. Fifty years might be the cut-off point. It has to be enough for the concessionaire to reap their return, and even 20 years is not going to be enough."

Officials estimated they could get another $75 million to lease the profits generated by the city's Public Lights Department, which supplies power to nearly 900 public buildings and oversees the city's utility poles, and maintains the traffic signal and emergency communications systems.

Harris and Cockrel repeatedly assured the council that the leases would have no impact on existing city employees.

"The whole idea is the management of the revenue stream, and nothing else changes," Harris said. "If it does impact [the private company's] ability to receive a return, then we will get less [up front]."

Cockrel also proposed generating another roughly $20 million by raising fees, improving collections, and hiring a towing company to manage the city's towing services, which are currently operated by the police department.

Some council members appeared in favor of the securitization plan.

"I applaud you for your courage if that can be worked out without giving up our asset," said councilwoman JoAnne Watson. "That takes vision."

The city is also hoping for an influx of federal stimulus dollars, but is not relying on it in its budget considerations.



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