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.

By , Staff writer

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    Detroit Mayor Dave Bing, right, speaks before the Detroit City Council in Detroit on Monday, as Chris Brown, Detroit's chief operating officer, listens at left. Bing and City Council members held a spirited debate Monday about the city's corporation counsel's decision to legally challenge the consent agreement, with the mayor warning the state will let the city run out of cash this week.
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Just a few months ago, the face of Detroit was Clint Eastwood, an icon of American toughness and resilience featured in Chrysler's popular Super Bowl commercial. The symbol of American industrial decline showed some modest hope of bouncing back from the brink.

No longer. Now, the Motor City looks set to become mired in bankruptcy and state control, thanks in part to an unpaid water bill.

A political skirmish between Detroit Mayor Dave Bing and the city council is threatening to freeze the city’s finances and leave it without money to pay its bills by the end of the month. The standoff is the latest chapter in an ongoing dispute about what role the state should play in keeping Detroit fiscally solvent.

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Michigan Gov. Rick Snyder is threatening to withhold $25 million due to the city this month from state revenue-sharing payments. The next payment due the city is scheduled for June 27.

In a letter sent to the city last week, Michigan State Treasurer Thomas Saxton said the state would divert the money toward repayment of an $80 million bond if the city refuses to drop a lawsuit filed by city attorney Krystal Crittendon. Ms. Crittendon filed the lawsuit last month, claiming that the recent consent agreement reached between the city and the state in April is invalid because the state owes Detroit $4.75 million for a 2010 water bill and $224 million in state revenue sharing.

The majority of city council members, already angered by the state’s involvement, support her actions and say Detroit should never have entered into the consent agreement because the city charter forbids contracts with entities that are in default to the city.

Treasury Department Spokesman Terry Stanton told reporters on Monday that Crittendon needs to withdraw her lawsuit because it will dissolve the consent agreement and the state will divert all remaining revenue-sharing payments that the city is due to pay off its $80 million debt.

“If the lawsuit is not withdrawn, the original bonds cannot be refinanced, which would lead to the intercept (not suspension) of revenue sharing monies,” Mr. Stanton said.

Mayor Bing insists he cannot control Crittendon under the rules of the city’s charter, which the state disputes. Bing described this latest chapter of Detroit’s fiscal crisis as a “game of roulette” and appealed to the city council Monday to vote against the lawsuit, but they refused.

City Council President Charles Pugh said the state would be “irresponsible” if it refused the city the payments, causing it to run out of cash. The city attorney’s “opinion does not prevent the state from living up to its responsibilities,” Mr. Pugh said.

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.

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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