CHICAGO - Detroit Mayor Ken Cockrel Jr. Monday unveiled a 2010 budget that features a slew of layoffs while leaving open the possibility of leasing city assets to wipe out an estimated $300 million deficit.
Cockrel presented the $3.6 billion spending plan to the City Council by April 13 as required by law, but said that a number of ongoing negotiations could impact a final budget. The budget includes no federal stimulus funds.
Also on Monday, Cockrel and chief financial officer Joseph Harris urged the council to approve an ordinance that would allow Detroit to avoid an interest-rate swap termination payment that could total $400 million.
The agreement between the city and the two swap counterparties, UBS AG and SBS Financial Products Co., was announced last week after months of negotiations. The termination event, tied to swaps on $800 million of pension certificates of participation, stems in part from the downgrade of the city's debt into junk territory by all three rating agencies earlier this year.
Detroit's finance team expects to introduce the ordinance cementing the deal to council within the next three weeks, according to Harris.
"It was a day of jubilation when the investors agreed to not require the city to pay $400 million," he told the council.
Warning that the termination payment would devastate the city's finances, he singled out for praise the public finance professionals who helped negotiate the final agreement.
"Our hats are off to [Orrick, Herrington & Sutcliffe LLP] and Lewis & Munday and our financial adviser Tom Gavin, for they really did an outstanding, outstanding job," Harris said. "We literally would have been bankrupt" if forced to make the payment.
Cockrel's budget comes just a few weeks before he faces off against businessman Dave Bing for the mayoral seat. If Bing wins on May 5, he would take office the next day. A final budget must be approved by the end of June. The City Council will begin budget hearings on May 11.
Cockrel's proposed $3.6 billion budget includes laying off 334 employees and eliminating 504 vacant positions to save around $45 million. Saying he takes every layoff "very personally," the mayor said he still hopes to avoid the move by reaching an agreement on pay cuts with the city's unions.
Officials hope to eliminate a projected $300 million deficit - a key concern to credit analysts who monitor the city - by leasing a number of its assets. Officials are considering the securitization of revenue streams from the Detroit-Windsor Tunnel, Municipal Parking, and the Public Lighting Department. The leases could generate up to $275 million in up-front cash payments, officials have said.
Detroit would continue to own the assets and city employees would continue to maintain and operate them, said Cockrel, who compared the move to a lottery winner who decides to take all winnings up front as opposed to parceled out over several years.
Finance officials crafted the budget as Detroit - like most governments across the U.S. - faces dwindling revenue. In Detroit's case, its largest revenue source in 2010 is projected to be state aid from Michigan, totaling $275 million.
Income tax revenue is expected to total $245 million, down $30 million from earlier projections. Casino taxes are projected to bring in $177 million, down $18 million, and property taxes are expected to total $169 million, down $13 million.
Cockrel's proposed budget does not include any general obligation bonds for capital improvement projects, though it does recommend issuing $450 million of water revenue bonds. Detroit's overall debt burden next year will be eased by $30 million after the city makes its final payment on $61 million of fiscal stabilization bonds issued in 2004.