CHICAGO - In continued wrangling over Detroit's $3.04 billion budget for fiscal 2009, Mayor Kwame Kilpatrick yesterday vetoed the City Council's plan to borrow up to $78 million of fiscal stabilization bonds to balance the spending plan - blaming the move for Moody's Investors Service's downgrade of the city last week.

Moody's last week cut the rating to Baa3 - the lowest investment-grade credit rating - from Baa2 on the city's unlimited-tax general obligation debt. It cut to Ba1 - junk bond status - from Baa3 the rating on the city's limited-tax debt.

The City Council last week approved a plan to borrow up to $78 million of fiscal stabilization bonds - considered deficit borrowing - in order to plug the city's current general fund deficit, which current estimates put at around $58 million. The council approved the borrowing in lieu of Kilpatrick's long-touted plan to sell Detroit's half of the Detroit-Windsor Tunnel to an independent holding company. That plan is estimated to raise $75 million, of which $65 million would go into the city's coffers.

In a statement accompanying his veto, Kilpatrick blamed the council's borrowing plan for Moody's downgrade last week. "This type of financial irresponsibility must not be allowed to happen," Kilpatrick said in the statement. "Standard & Poor's and Fitch [Ratings] are waiting in the wings to downgrade the city's credit rating if we continue this path."

But Moody's analyst Ted Damutz yesterday said the bond plan was not the main factor behind the downgrade. The agency's move was driven largely by the city's ongoing general fund deficits, chronically late annual audits, and the region's struggling economy, Damutz said. "[The bond plan] wasn't the crux," Damutz said. He added that the lack of a tunnel sale also was not a chief factor behind the ratings action.

In general, Damutz said the use of fiscal stabilization bonds are "a patch" that the city has tried before that have not yielded any last benefits. In 2004, the city issued about $61 million of fiscal stabilization bonds. Those bonds will mature in 2009.

While the council can override the mayor's veto, Kilpatrick last week said that he would block the bonds from coming to market, according to local media reports. The state would also need to approve the bond issue because the city has been chronically late with its annual audits. The city released its long-delayed 2006 financial report in March, and expects to release its 2007 audit in November.

The dueling proposals to eliminate the city's ongoing general fund deficit comes at a time of larger political battles between the City Council and the mayor, who faces a series of felony charges stemming from testimony in a 2007 whistleblower's trial and subsequent settlement. During budget hearings, the council also passed a trio of measures aimed at forcing Kilpatrick to vacate the office as he waits his criminal trial. As part of that effort, the council in the 2009 budget had appropriated $250,000 to finance its ongoing investigations of the mayor. Kilpatrick last week vetoed that money.

Fitch assigns its BBB rating to both the limited and unlimited GO debt, and has a negative outlook. Standard & Poor's rates the unlimited tax debt BBB and the limited-tax debt BBB-minus, with a stable outlook.

While Moody's analysts did not cite the city's political battles in its report, a recent Fitch report noted that it is "concerned that the current political environment in the city may make adoption and implementation of the fiscal 2009 budget challenging."

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