CHICAGO — Moody’s Investors Service pushed Detroit further down into junk-bond territory Thursday over escalating political risks that challenge the beleaguered city’s ability to give its fiscal consent agreement with Michigan enough time to stabilize the city’s finances.

The downgrade came on the same day that the state appeals court declined to review a recent three-member panel decision further advancing a ballot measure that would allow voters a say on the 2011 state emergency management law. Some provisions of the city’s Financial Stability Agreement with the state are based on that law, Public Act 4.

Opponents of the referendum said they planned to appeal to the Michigan Supreme Court. If the measure is ultimately cleared to appear on the ballot, the law would be suspended pending the outcome of the vote.

Moody’s lowered Detroit’s $511 million of general obligation unlimited-tax bonds and nearly $1.5 billion of certificates of participation to B3 from B2 and its $453 million of limited-tax GO bonds to Caa1 from B3.

In addition, it downgraded the city’s water and sewage revenue senior- and second-lien bonds to Baa2 and Baa3, respectively, from Baa1 and Baa2.

The action followed the resolution of a separate legal dispute that had threatened the city’s ability to make a Friday debt-service payment on its pension COPs. Though resolved, the conflict underscored the depth of the city’s challenges, even with the FSA in place.

Moody’s attributed its action to “recent events that have highlighted risks associated with the city’s illiquid cash position and lack of a clear political consensus to successfully implement the city’s Financial Stability Agreement.”

In a statement, the city said Moody’s action was not unexpected, given the lawsuit. “In April, following the signing of the Financial Stability Agreement, the general credit community, including Moody’s, viewed this as 'credit positive’ and 'reduced the city’s near-term risk of bankruptcy.’ Ultimately, we are working to restore our financial reputation with the rating agencies by stabilizing the city’s finances,” read a statement from Detroit chief operating officer Chris Brown.

An Ingham County Circuit Court judge on Wednesday tossed the lawsuit filed earlier this month by Detroit’s top lawyer challenging the city’s April consent agreement with the state on the grounds that the state government owes the city money. The FSA puts control of city finances under a special advisory board. It allowed the city to avert bankruptcy and maintain operational control.

The state had warned that with the lawsuit pending, it would not release pledged escrow funds from a private placement loan or complete a much-needed $137 million new-money and restructuring bond issue planned for next week through the Michigan Finance Authority.

Mayor Dave Bing, in turn, said that would force the city to miss a $34 million debt payment owed on the COPs Friday.

The court’s dismissal of the complaint Wednesday paves the way for the state to make good on the release of funds and planned debt issuance through the MFA next week and for Detroit to make its Friday debt payment.

Moody’s said the city’s GO and COP ratings remain under review pending completion of the MFA bond sale next week.

Moody’s lists a long series of ongoing risks and challenges to Detroit’s general fund, including very narrow liquidity, tax revenue stability, a dependence on the state for cash flow and operating deficits.

The agency also raises risks posed to the city’s ability to achieve long-term structural changes, given the lack of a political consensus behind its agreement with the state.

The sewage system ratings also remain under review pending completion of the Detroit Water and Sewerage Department’s planned $500 million sewer bond issue also slated for next week. The deal was postponed last week amid the city’s latest financial crisis. A successful sale next week will allow the sewer enterprise to unwind its complex swap portfolio.

Detroit owns the utility systems but they are operated as separate enterprise funds, and most of their revenues come from customers outside the city. The department has stressed those factors with investors.

Moody’s took action on the department’s bonds in tandem with Detroit’s direct debt “as the risk of a city bankruptcy filing has incrementally increased in light of persistent liquidity pressures at the city level and ongoing political instability,” analysts wrote. Department officials were not available to comment. Moody’s continues to review how the water and sewage systems would be treated in the event of a bankruptcy filing by the city.

The utility has $1.9 billion of senior-lien water bonds and $642 million of second-lien paper. It also has $1.9 billion of senior-lien sewer bonds and $1 billion of second-lien bonds.

On the emergency law developments, the Board of State Canvassers had rejected the petition last month, arguing that the font on the headlines was too small. If the petitions are certified by the board, it would automatically suspend the controversial law. Unless the high court intervenes, the measure would appear on the November ballot. Opponents said they would appeal and seek a stay of any suspension of the law before the vote.

In its downgrade this week, Moody’s cited as a concern legal risks posed to the pending challenge of the emergency management law. Opinions differ as to the impact on the city’s agreement, which officials have said was crafted to sustain a challenge to the state law.

However, analysts have said those exemptions could also get caught up in a legal dispute. Some believe that if repealed, the former emergency management law would remain legal, but others disagree. q

The City Council on Thursday signed off on the final appointments to the fiscal advisory board that will oversee city finances under the FSA. Its first meeting is scheduled for Friday.

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