Fitch Rates Detroit, MI's $153MM UTGO Bonds 'A'

CHICAGO--(BUSINESS WIRE)--Sept. 11, 2003--Fitch Ratings has assigned an 'A' rating to the City of Detroit, Michigan's following bonds:

-- $50 million unlimited tax general obligation bonds, series

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2003-A;

-- $21 million unlimited tax general obligation refunding bonds,

series 2003-B; and

-- $82 million unlimited tax general obligation refunding bonds,

series 2005-A.

All three series will sell on or about Sept. 23 in a negotiated underwriting led by Loop Capital Markets, LLC and Fahnestock & Co., Inc. The Rating Outlook is Stable.

Dated the date of delivery, the bonds will pay interest each April 1 and Oct. 1, beginning April 1, 2004 for the series 2003-A and 2003-B bonds and April 1, 2005 for the series 2005-A bonds. The series 2003-A and 2003-B bonds will mature April 1, 2005-2023; the series 2005-A bonds will mature April 1, 2006-2011. Early redemption terms will be set at pricing. The bonds have the unlimited full faith and credit pledge of the city. Proceeds of the series 2003-A bonds will finance various capital projects and the series 2003-B and 2005-A bonds will refund outstanding unlimited tax general obligation bonds.

The 'A' rating is based on broad-based economic growth that diversifies the tax base; steady financial position despite reduced state revenue-sharing and slower own-source revenue growth; and a moderately high debt burden. In recent years, the city has improved its business investment climate, enhanced relationships with suburban communities and initiated reform measures at the Detroit Public Schools.

Mayor Kwame M. Kilpatrick, elected in November 2001, has committed to neighborhood development, public safety initiatives and city service improvements. By utilizing private volunteer efforts to support city service delivery -- for example, environmental cleanup programs such as the 'Motor City Makeover' -- the Mayor has supported neighborhood development without compromising financial performance.

The City of Detroit is experiencing renewed growth because of increased private and public investment and continued conservative financial management of city operations. Expansion of automotive production, modernization efforts of the downtown area and burgeoning residential construction throughout the city are expected to sustain the rapid economic expansion of the last few years.

Slower economic growth led to a small general fund shortfall in fiscal 2001 (June 30 year-end), requiring use of the budget stabilization reserve. Although the city faced continued economic weakness in fiscal 2002 -- particularly in its income tax receipts -- stronger spending control, a delinquent property tax amnesty program which generated $21.4 million in city taxes and better-than-expected wagering taxes produced balanced general fund results.

The city administration negotiated permanent development agreements with the three casino gaming establishments, which will sustain the new tax revenue resource. State revenue sharing for the city remained fixed through fiscal 2002, but experienced a 3.5% reduction in fiscal 2003. Most collective bargaining contracts expired June 30, 2001, but labor bargaining units have extended the contracts to accommodate negotiations.

While the city witnessed a shift of economic activity to the suburbs over decades, its economy has achieved marked success in the past five decades with its economic development efforts, increased taxpayer confidence and strong fiscal controls. Expansion of automotive and other durable goods production, significant office space and cultural district development in the downtown area and increased residential construction city-wide have produced a decade of 8.3% average annual property value growth.

The use of empowerment zones, significant expansion efforts among the automotive companies, the prospects for three casino sites and an attractive tax environment have contributed to the recent surge in construction activity. Although residential employment grew 1.3% annually in the 1993-1999 period, recent city employment losses increased the residential unemployment rate to 16.1% in July 2003, compared with 8.2% for the metropolitan area and 8% for the state.

Reflecting stringent budget control and a firmer economy, Detroit's general fund grew from a deficit position of $17.6 million in fiscal 1992 (negative 1.7% of spending) to a positive $246.9 million in fiscal 1998 (17.6%). Salary increases and programmatic and capital initiatives slightly outpaced rapid revenue growth in the three subsequent fiscal years as the general fund balance declined to $218.1 million (14.6% of spending) by the end of fiscal 2001. While the general fund results in fiscal 2002 may not be comparable to previous years due to the GASB34 accounting model, the city maintained an ending general fund balance of $206.2 million (12.7% of spending) through a 5% cut in operating expenditures and a dramatic reduction in overtime expenditures. Fiscal 2003 results are not available, but the administration responded to weaker income tax collections and reduced state aid by eliminating 549 budgetary positions and consolidating non-personnel costs.

The city's unreserved general fund balance improved from a deficit of $106 million in fiscal 1992 to a positive $102 million in fiscal 1998, but declined to $42.4 million in fiscal 2001. Although income taxes in fiscal 2004 are expected to decline 3.8% and state revenue sharing by 3%, the current budget is balanced and does not anticipate using the remaining $7.7 million in the budget stabilization fund, primarily through conservative revenue assumptions and the elimination of 138 additional budgetary positions.

The city's direct tax-supported debt, including its tax increment districts, totals $1.2 billion or $1,280 per capita. Including $1.6 billion of overlapping debt, which increased precipitously with issuance by the Detroit school district, overall per capita debt is $2,923 or 11.5% of property value. As the economy grows, relative debt indicators will have room to decline, but the city's capital needs suggest that the direct debt burden will be stable. City pension systems are well funded: 84.3% in the general retirement system and 111.7% in the police and fire retirement system.