CHICAGO — The Detroit City Council earlier this week signed off on a $3.6 billion fiscal 2010 budget and approved an interest rate swap restructuring, freeing officials to focus their immediate attention on efforts to reach a deal to renovate and expand the city’s Cobo Center.
The budget adopted Tuesday closely resembled the plan proposed by former Mayor Ken Cockrel Jr., who returned to his previous job as council president after his defeat earlier this month by former National Basketball Association star Dave Bing in a special election.
The plan relies on spending cuts of more than $100 million achieved through 300 layoffs, the elimination of hundreds of vacant positions, pay cuts for non-union employees, and other measures.
The budget relies on three asset privatization transactions estimated to raise $275 million. They include leasing the Detroit-Windsor Tunnel, the city’s municipal parking system, and the Public Lighting Department. Bing is expected to review the budget plan and make some changes, but won’t veto it, a representative said. Bing has not said whether he will support those lease proposals but is expected to explore them.
“The lease proposals are probably the weakest part of the budget,” said a council fiscal analyst.
Few specifics of the lease proposals promoted by Cockrel have been released and interest in such transactions among investors has suffered as a result of the international credit crunch. Detroit would continue to own the assets and city employees would continue to maintain and operate them under Cockrel’s proposal.
Finance officials crafted the budget as Detroit struggles with revenue collections. 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.
The budget includes authorization for $450 million of water debt.
The council also approved in a 7-to-1 vote, with one member absent, a settlement between the city and the two swap counterparties, UBS AG and SBS Financial Products Co., allowing the city to avoid swap termination payments of up to $400 million that would have devastated its coffers.
Detroit announced the agreement last month after months of negotiations. The restructuring was needed after recent downgrades into junk bond territory prompted a termination event tied to swaps on $800 million of pension certificates of participation issued in 2006.
Lewis & Munday PC and Orrick, Herrington & Sutcliffe LLP, along with the city’s financial adviser, Tom Gavin of Robert W. Baird & Co., represented the city on the restructuring.
Under the restructuring’s terms, Detroit is pledging casino tax revenue that generates $180 million annually as collateral and will pay an additional $800,000 in interest rate payments beginning in 2011. In return, the counterparties agreed not to terminate the swaps.
The swap agreements are insured by XL Capital Assurance Inc. — now Syncora Guarantee Inc. — and Financial Guaranty Insurance Co., both of which have lost their investment-grade ratings.
The original swap agreements allow the counterparties to terminate the agreements in the event that the certificates’ ratings are withdrawn, suspended, or dropped below investment grade by one of two rating agencies, and at least one rating agency drops the insurers’ ratings to below the single-A category.
Earlier this year, all three rating agencies downgraded the city’s $900 million of outstanding general obligation debt and $1.5 billion of pension COPs to junk status. Analysts cited a slew of economic and financial problems, chief among them a $300 million deficit and chronically late financial audits.
Bing and other local city, county, and state officials are now working on efforts to revise a plan that would result in a $300 million renovation and expansion of the city’s convention center that is home to the North America International Auto Show, which generates $600 million annually for the city.
The show’s managers have threatened to move it if the facilities are not upgraded. The topic is a key one for officials all converging on Mackinac Island for the annual Detroit Regional Chamber of Commerce policy conference running through Saturday.
The Republican-led Senate on Wednesday approved a $299 million expansion plan that would hand control of the center over to a five-member regional authority — a requirement of past legislation that led the City Council to kill the deal. The council and the city’s Democratic legislative members want the city to retain control and lease the facility to a regional authority. “We in Detroit don’t like to be threatened, and we consider these bills a threat,” said Democratic state Sen. Hansen Clarke, of Detroit.
The new Senate legislation also allows Oakland County to use tax revenue for a $135 million renovation of its convention facility in Novi to allow it to host the auto show if Detroit rejects the new offer. The Democratic-led House is not likely to endorse that plan as its leaders want a regional agreement in place before passing legislation.
The council’s rejection of the previous bond-financed deal that would have handed control over to a regional board was upheld last month by the Michigan Court of Appeals. The authority would have paid the city $20 million for the center, and would have taken over all operational costs and up to $100 million in existing debt. The authority expected to issue roughly $288 million of revenue bonds, backed by liquor, cigarette, and hotel taxes, to finance the deal.
Bing, who won the special election to fill out the remainder of Kwame Kilpatrick’s term, has said the Cobo expansion is a priority. He faces a re-election primary in August and general election in November. Kilpatrick resigned last September from office as part of a plea agreement stemming from charges that he lied during a civil whistleblower trial.