Fitch Drops Detroit Two Notches

CHICAGO — Fitch Ratings hit Detroit with a downgrade, pushing its debt two notches further into junk territory.

Fitch late Friday downgraded $453 million of unlimited-tax general obligation bonds to BB-minus from BB-plus and $486 million of limited-tax GO debt to B-plus from BB.

It also cut its rating to BB-minus from BB-plus on $1.5 billion of pension obligation certificates issued in 2005 and 2006.

The outlook is negative, even at the lower rating, Fitch said.

All three rating agencies maintain below investment-grade ratings on the city.

"The downgrade is based on a lack of progress, despite concerted efforts, to address fiscal imbalances and the increasing challenges on an already highly stressed budget, including revenue losses related to a weakened economy and population declines," Fitch analyst Amy Laskey wrote in the downgrade report.

Fitch believes the city will continue to struggle economically and face even weaker revenues going forward.

City officials said they expect to end fiscal 2011 with an accumulated unreserved fund balance deficit of $188 million, but that's uncertain, Fitch said.

"In recent fiscal years, audited results have been quite a bit weaker than projections indicated, so Fitch is concerned that results for fiscal 2011 could follow the same trend," Laskey said.

The downgrade comes as Mayor Dave Bing and the City Council debate final passage of a fiscal 2012 budget by the end of the month. City Council members made deep cuts to Bing's spending plan, saying the mayor is relying on unrealistically high revenue assumptions next year.

Bing vetoed the changes, the City Council overrode the vetoes, and a budget amendment is expected to restore at least some of the cuts, Laskey said.

"Fitch views this type of contention in the budget process negatively," she wrote.

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