Fitch Ratings last week downgraded to B from BB-minus $7.8 million of water and sewer debt issued by Pontiac, saying the city’s habit of dipping into the utility funds to subsidize its own general fund has constrained financial flexibility and could lead to future pressures.

Fitch retained its negative outlook at the lower rating. The action comes as the city struggles to resolve some of its fiscal pressures in order to avoid emergency takeover by the state.

The downgrade reflects the deteriorating operating flexibility of the utility stemming from the city’s fund transfers, analyst Eric Kim said in a release. As of the Sept. 30, 2007, the water fund had a total liability of $4.7 million, and the city owed it $2 million.

“Considering the precarious state of the city’s finances, Fitch views repayment of these loans as unlikely and anticipates that the city will continue to subsidize general operations with water and sewer system surpluses,” Kim wrote.

Pontiac recently approved a measure to pursue selling its Silverdome stadium — former home of the Detroit Lions — for $20 million to help plug the current deficit. Meanwhile, the city’s main safety-net hospital, North Oakland Medical Center, recently moved toward beginning bankruptcy proceedings after defaulting on two recent trustee payments on $38 million in outstanding bonds.

Located in southeastern Michigan between Flint and Detroit, Pontiac has been hit particularly hard by the loss of manufacturing jobs across the state.

Moody’s Investors Service recently downgraded $1.4 million in general obligation limited-tax debt issued by the city’s building authority to Ba3 from Ba2. Moody’s does not rate Pontiac’s water and sewer debt.

Standard & Poor’s pulled its ratings on most of the city’s debt in 2004 due to inadequate financial information. In 2006 the agency gave an A1 rating to $22 million of fiscal stabilization bonds, primarily reflecting the state aid pledge, not Pontiac’s fiscal profile, said analyst Helen Samuelson.

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