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Michigan set to step in as Detroit nears financial collapse

With infighting paralyzing its finances, Detroit will run out of money before the end of June – likely forcing Michigan to step in 'with an outcome that neither side will find desirable,' say experts.

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Snyder avoided appointing an emergency manager to take control of Detroit’s finances following a state commission report earlier this year that showed a budget deficit reaching $200 million and a looming emptying of cash reserves. At that time, Moody’s Investors Services issued two separate downgrades of the city’s tax credit rating.

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On Tuesday, Fitch Ratings said it downgraded several areas in the city's bonds in response to the uncertainty of the city's finances and the possibility it might not make payments to its pension certificates.

The governor insisted he wanted to work with the city through the consent agreement, which conceded budgetary power to city officials but allowed the state to play a more supervisory role through a chief financial officer tasked to usher the city along to meet fiduciary guidelines outlined in the agreement terms. Detroit has already used $35 million of the $80 million to help pay its bills since April.

Jack Martin, the city’s new chief financial officer, said the city will run out of money June 15 but could make payroll for employees.

Vincent Hutchings, a political scientist at the University of Michigan in Ann Arbor, says the standoff is “unprecedented” in the state and is “emblematic of the political problems that are internal to Detroit.”

“The city seems to be in an impasse and not prepared to resolve this,” which Mr. Hutchings says will likely lead to the state taking control of the state’s finances through an emergency manager, who will have the power to cancel union contracts and strip locally elected leaders of authority.

“If they don’t resolve this, it seems likely the state will step in with an outcome that neither side will find desirable,” he says.

Snyder said Tuesday that the lawsuit is “disrupting” the timetable established by the consent agreement and that if it is determined the state owes the city revenues, it will pay. However, he insisted the consent agreement remained valid and warned he would “take action” if city officials “fail to perform their part of the agreement or they have issues where they don’t perform.”

“It's an internal Detroit issue, largely, that they have real issues between the mayor, City Council, and the corporate counsel and I hope they resolve those,” he told reporters Tuesday.

Whatever action he takes, Snyder is not likely to face strong political consequences, Hutchings says.

“The elephant in the room is this is a very racially divided state,” Hutchings says. “A white Republican governor taking a firm hand to a black Democratic city is not likely going to lose support among white voters in Michigan. It’s not a loser for him, it’s a winner.”

A hearing on the lawsuit is scheduled Wednesday in Ingham County Circuit Court.

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