Leonard N. Fleming and Christine Macdonald / The Detroit News
DETROIT — The city, already grappling with a $300 million budget shortfall and future layoffs, is now bracing for a $400 million payment that must be made to bond investors because Detroit’s credit rating was downgraded, the Detroit News has learned.
The decision by Standard & Poors to lower the city’s rating to junk bond status Tuesday has triggered what city officials have described as a ‘termination event” that requires the city to pay millions.
“It’s as serious as you can get,” said Councilwoman Sheila Cockrel. “It is not doomsday, but it is a very, very serious situation and requires everybody to step up and understand that there’s no political solution to this.”
Irvin Corley Jr., the city’s fiscal analyst, said the downgrade was bad news for the already struggling city and will mean further cuts. Harris has already said the city’s deficit could reach $300 million.
“Oh wow,” Corley said when told of the downgrade. “It just exacerbates our budget challenges.”
Corley said he is hoping the city can put together a payment plan so that it doesn’t have to come up with the full amount at once.
“Given the magnitude, I am assuming the city wouldn’t have to come up with the full amount,” Corley said. “Obviously that would crash the city.”
Mayor Kenneth Cockrel Jr. was unavailable for comment.
Cockrel is currently putting together a deficit elimination plan, which likely will include layoffs and sale of city assets.
This financial calamity happened because the city entered into a swap agreement that sought to secure the city’s interest rates as if the bonds had always been issued at a fixed rate, city officials said.
“No one is going to expect us to come up with $400 million tomorrow,” said Joe Harris, the city’s budget director, in an interview Tuesday. “It has to be handled. They have to be reasonable when this termination event happens.
The tough year that financial markets had in the past few years caused interest rates to drop and the trigger amount — which once stood at $90 million if the city fell into junk bond status — to increase.
You can reach Leonard N. Fleming at (313) 222-2072 or lfleming@detnews.com.
