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Fitch Rates $954MM Detroit Retirement Funding Trust 'BBB'; Rating Watch Negative.

CHICAGO -- Fitch Ratings Fitch Ratings

An international rating agency for financial institutions, insurance companies, and corporate, sovereign, and municipal debt. Fitch Ratings has headquarters in New York and London and is wholly owned by FIMALAC of Paris.
 has assigned a 'BBB' rating to the Detroit Retirement Systems Funding Trust, Michigan, $153,500,000 taxable certificates of participation (COPs), series 2006 (fixed-rate) and $800,000,000 taxable COPs, series 2006 (floating-rate). The rating remains on Rating Watch Negative, reflecting Fitch's planned monitoring of the city's financial results in fiscal 2006 and 2007. The certificates represent undivided proportionate interests in the rights to receive payments under separate service agreements between the City of Detroit and the Detroit General Retirement System Service Corp. and the Detroit Police and Fire Retirement System Service Corp. The transaction will restructure a portion of the $1.4 billion of outstanding pension certificates to accommodate the more manageable amortization of unfunded accrued actuarial liabilities (UAAL UAAL Unfunded Actuarial Accrued Liability
UAAL University Admissions Advice Letter (Western Australia) 
) of the city's pension systems.

The COPs are expected to price on or about June 5 through a syndicate led by UBS UBS Union Bank of Switzerland
UBS United Bible Societies
UBS United Blood Services
UBS United Buying Service
UBS Used Bookstore
UBS University Business Services
UBS Universal Building Society (UK)
UBS Ulaanbaatar Broadcasting System
 Investment Bank and Siebert Brandford Shank shank (shangk)
1. leg (1).

2. crus ( 2).

The part of the human leg between the knee and ankle.
 & Co., which are serving as co-senior managing underwriters. Robert W. Baird Robert Wilson Baird (born April 1, 1883) helped found the financial services firm that bears his name and led it for more than 40 years.

Baird’s father was a professor of Greek literature at Northwestern University in Evanston, Illinois, where Baird grew up.
 & Co. and Scott Balice Strategies, LLC (Logical Link Control) See "LANs" under data link protocol.

LLC - Logical Link Control
 are serving as financial advisors. These issues will reschedule floating-rate certificates and a portion of fixed-rate certificates to match the 30-year amortization of the police, fire and general retirement systems UAAL.

The 'BBB' rating is based on the City of Detroit, unconditional contractual obligation to make its service payments, which are not subject to appropriation. The city is bound to make its contractual payments to the service corporations for the full term of the contracts. Under the trust agreement, the service corporations will assign their right to receive service payments to the funding trust for the benefit of certificate holders. Failure to make COP service payments when due allows the contract administrator to file a lawsuit against the city to enforce payment of the contractual obligation. A court may require the city to raise the payment through a tax levy without limitation as to rate or amount. Voter approval would not be necessary to levy such supplemental taxes. This transaction does not affect normal annual pension payments, just the scheduled payments which financed the unfunded accrued liabilities. Proceeds are deposited with the pensions systems and managed the same as other assets other assets

Assets of relatively small value. For financial reporting purposes, firms frequently combine small assets into a single category rather than listing each item separately.

The transaction is designed to reduce the annual funding cost of the unfunded liability; minimize financial risk; and incorporate new amortization schedules of the unfunded liability.

The Michigan Constitution and the Home Rule City Act enable the city to establish the pension systems and provide for their funding. The obligation to fund normal and unfunded accrued pension liabilities Pension liabilities

Future liabilities resulting from pension commitments made by a corporation. Accounting for pension liabilities varies widely by country.
 is further clarified through Shelby Township Police and Fire Retirement Board v. Shelby Township and the Public Employees System Investment Act. The Detroit City Council in February 2005 adopted ordinances that provided for the alternative pension liability funding.

The city has two retirement systems: the General Retirement System (GRS GRS Graduate School (universities)
GRS Great Red Spot (feature of Jupiter)
GRS Gender Reassignment Surgery
GRS Gamma Ray Spectrometer
GRS Graduation Rate Survey
GRS General Records Schedules
) and the Police and Fire Retirement System (PFRS PFRS Police and Firemen's Retirement System (New Jersey)
PFRS Pro Four Racing Series
). Each has a strong history of pension funding and rapid amortization of the unfunded liabilities. As recently as 2002, the GRS was 91.6% funded and the PFRS, 103.2%. The estimated funding for 2004 was 73% for the GRS and 79.7% for the PFRS, both primarily due to diminished asset value. The estimated unfunded liability for fiscal 2004 (June 30 year-end) was $1.7 billion, from $1.3 billion in fiscal 2003. The sharp increase in the UAAL was due primarily to the recognition of investment losses. Through the pension certificates, the funding improved to 96.3% in fiscal 2005 in the GRS and 99% for the PFRS; the unfunded liability in fiscal 2005 for both systems totals $147.6 million. Although at the time of the 2005 pension certificates the city had not completed its negotiations with both retirement systems' boards to extend the pension amortization period, it structured the deal with floating-rate notes, anticipating the restructuring of the certificates. State law and GASB GASB Governmental Accounting Standards Board  require pension liability funding of no more than 30 years.

GRS Service Corporation and PFRS Service Corporation are nonprofit corporations formed by the city to receive COP service payments. The service corporations irrevocably assign to a funding trust (formed under the trust agreement) all rights to receive, collect and enforce all COP service payments. Since the service corporations are not expected to have an active role, the funding trust and service corporations will enter a contract administration agreement with the U.S. Bank N.A., the contract administrator. Interest rate swaps will change effectively the variable-rate certificates to a fixed obligation. The funding trust issues the certificates to the certificate holders and the city makes debt service payments through the contract administrator and funding trust to the certificate holders. Proceeds of the certificates flow through the service corporations to the two pension systems.

Through an interest rate swap, the LIBOR-indexed floating-rate certificates (FRCs) will be swapped into fixed payments. After a short lock-out period, the FRCs are callable Callable

Applies mainly to convertible securities. Redeemable by the issuer before the scheduled maturity under specific conditions and at a stated price, which usually begins at a premium to par and declines annually.
 at par on interest payment dates. Unlike other variable-rate transactions, which have various term structures that may change and require liquidity support, the FRCs have interest rates that fluctuate with the three-month LIBOR LIBOR

See: London Interbank Offered Rate


See London interbank offered rate (LIBOR).
 rate on U.S. dollar deposits plus a margin. The actual rate is set by the contract administrator each quarter according to LIBOR rates available through Moneyline Telerate, Inc. A liquidity provider is not necessary for the transaction since there is no remarketing or liquidity risk. Since the rate is tied to LIBOR, there is no basis risk. The counterparty is not selected yet, but is expected to meet high-quality standards and must post collateral.

Fitch's rating definitions and the terms of use Terms of Use are rules set up by the owner of an intellectual property or service to govern how they may be legally used.

In many cases, terms of service are used as a contractual agreement between a company and users of a service they provide.
 of such ratings are available on the agency's public site, ''. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures Policies and Procedures are a set of documents that describe an organization's policies for operation and the procedures necessary to fulfill the policies. They are often initiated because of some external requirement, such as environmental compliance or other governmental  are also available from the 'Code of Conduct' section of this site.
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Publication:Business Wire
Date:May 19, 2006
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