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Detroit Files CAFR On Time

DEC 27, 2010 7:46pm ET
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CHICAGO — Detroit has filed its annual audit on time for the first time in five years.

The 237-page financial report, filed Dec. 21, warns that the city faced a total deficit of $1.6 billion as of June 30, the end of fiscal 2010. The deficit grew by $692 million over the previous year, the bulk of which was due to a change in accounting rules that requires governments to now report expected future costs of derivatives.

More than half of the city's possible future derivatives liabilities come from interest rate swaps that hedge $1.5 billion of pension obligation certificates issued in 2005, according to the audit.

Rating agencies have cited Detroit's chronic audit delays as a reason behind repeated downgrades that have pushed its ratings into junk territory.

The timely filing of the comprehensive annual financial report also means the city will not be penalized by the Michigan Treasury Department, which has withheld revenue aid for years in an effort to get the city to file its financial information on time. Late audits also meant that the city needed state approval to enter the bond markets — which it will still need, because it's running a deficit.

"We're in the process of reviewing the CAFR to ensure it's complete, but at this point the expectation is that the revenue sharing aid is going out as per normal and we are not currently withholding any revenue sharing dollars from the city," said Treasury spokesman Terry Stanton.

Stanton said the city would need to craft a new deficit elimination plan or update its existing one to address the 2010 deficit in order to continue to secure future aid.

Over the last several years, the state has withheld millions in aid — $42 million just in 2008 — and released only what the city needed to cover debt-service payments. The revenue aid is increasingly important, as recent borrowings are backed by first and second-liens on the revenue.

Filing the audit two weeks before the deadline marked a victory for Mayor Dave Bing, who has repeatedly promised to speed up the process.

The audit warns that the city expects to face challenges tied to the floating-to-fixed interest rate swaps that hedge $1.5 billion of pension certificates. At June 30, 2010, the city reported total liability of about $700 million for the value of all its derivatives. Of that, $281 million is from swaps associated with the pension obligations, the city said.

Issued in 2005, the pension bonds were meant to provide full funding for the city's two pension plans. The city's liabilities for its two pension plans totaled $7.9 billion as of June 30, 2009 — the latest valuation date — of which $552.7 million remains unfunded, the audit said.

"The city's pension obligations, retiree benefits, and debt service and derivatives associated with the POCs present a substantial financial challenge for the city," the audit said.

The city's general fund deficit totaled $91.1 million by the end of 2010, a $175.6 million decrease from the $266.7 million deficit at June 30, 2009. The city wiped out much of the deficit when it issued $250 million of fiscal stabilization bonds last March.

The remaining deficit was due to a decline in income tax revenue due to the bankruptcies of General Motors and Chrysler; money owed to the state for an overcapture of school property taxes from 2001 through 2008; money owed to Wayne County for uncollectable property taxes; and a decline in sales and charges for services.

Total revenues for fiscal 2010 totaled $2.4 billion, down $161 million from the previous year. Expenses totaled $2.7 billion, a decrease of $171 million from fiscal 2009. Detroit has $1 billion of outstanding GO bonds and $4.7 billion of revenue bonds, which mark only a slight increase over 2009.

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