CHICAGO — Detroit hopes to issue up to $250 million of fiscal stabilization bonds — a move that would require a change in Michigan law — as part of Mayor Dave Bing’s plan to eliminate the city’s $325 million deficit and avoid running out of cash by early next year.
The City Council late Friday approved a pair of resolutions that allow the city to begin the bond issuance process. The state treasurer still needs to sign off on the borrowing, and the Legislature would need to raise the cap on the 28-year-old Fiscal Stabilization Act to allow the city to issue the full amount.
Under Bing’s plan, Detroit would issue up to $250 million of 20-year, new-money deficit bonds that would pledge state revenue aid to pay back the bonds — a crucial feature that would raise the marketability of the bonds, city officials said.
The move would allow the city to stop issuing short-term notes, which it has relied on with increasing frequency to raise funds for cash flow purposes, according to Detroit chief financial officer Norman White.
“Because of the crisis situation that we have, we have put ourselves at risk of not being able to go out to the short-term market to get cash,” he said.
Long-term borrowing “takes the risk off the table of asking short-term lenders whether they will lend us money or no,” White said, adding later that frequent short-term borrowing raises the risk of another downgrade. “At this point honestly I don’t see a different strategy.”
The borrowing is a key part of Bing’s deficit elimination plan, which he released Friday. Also Friday the administration released to the state Treasury the city’s long-delayed 2008 comprehensive annual financial report.
The council passed the bond proposal and the deficit elimination plan 5-2 after quizzing city finance officials for hours in what was a sometimes emotional meeting, the council’s last for the year. Five new members will join the body when it reconvenes in January.
Independent council fiscal analyst Irvin Corley Jr. recommended the council approve the plan despite criticizing its reliance on one-term revenue shots.
“What this plan does it gives you two or three more years to deal with trying to correct a structural imbalance,” he said. “If those hard decisions are not made by year three, the city will seriously face an emergency receiver.”
Corley said new debt would need to be sold by February to avoid running out of money.
“It’s imminent that the city of Detroit could run out of cash by January,” he said. “I’m mystified as to how we’re making it day to day.”
With the bond resolution in hand, the city will next head to the State Administrative Board to try to secure its approval for the deficit-elimination plan before returning to the council with a final bond sale resolution in January.
Before the city can enter the market with the $250 million issue, the state Legislature needs to amend the Fiscal Stabilization Act, which currently caps at $125 million the amount of fiscal stabilization bonds a city can issue. City officials have crafted a bill and are looking for sponsors, said a city official.
The bill would also amend the law so that all the debt would carry a pledge of state revenue aid, which would make the debt more attractive to investors and lower the cost of borrowing, said city officials.
Without the amendment, Detroit expects to issue $125 million of new-money and $125 million of refunding bonds.
Bond documents provided to the City Council show that mandatory redemption is triggered if Detroit does not have a deficit at any point in the 20-year life of the debt, noted council member Sheila Cockrel, who voted against the resolutions.
“So going forward for the next 20 years there will be a deficit?” Cockrel asked White, the CFO.
“Yes, if we have a surplus at any time we would use that to pay off the bonds,” he said.