Will Detroit run out of cash?

On Tuesday, Detroit's city council rejected a contract from a law firm that would have helped the city with its finances. The rejection means the city did not receive the $10 million dollars it was expected to receive on Tuesday. 

REUTERS/Rebecca Cook
City of Detroit activist Sandra Hines holds a protest sign to encourage the Detroit City Council members to vote no on a contract to hire a firm to help carry out an overhaul of the city's finances, during a full council meeting in Detroit, Michigan.

Detroit will not get a much-needed $10 million after the city council rejected on Tuesday a contract to hire a law firm that was part of a deal to keep the city on track to overhaul its finances.

The state of Michigan and its biggest city, Detroit, announced a deal last week that includes several milestones the city must achieve in the next month to receive the $10 million by Tuesday and another $20 million by Dec. 14.

The setback leaves the city at risk of running out of cash by the end of December if it does not meet those goals.

In a voice vote, the city council rejected a contract for the law firm of Miller, Canfield, Paddock & Stone to provide legal advice and to handle litigation related to implementing a financial stability agreement designed to fix city finances.

The rejection "means the city will not receive the first $10 million scheduled for release today," said Mayor Dave Bing in a statement issued right after the vote.

Mayor Bing said the rejection of the contract will make it more difficult for Detroit to maintain positive cash flow.

"It will be more difficult for the city to maintain its liquidity until the receipt of property tax revenues beginning in January. Today's vote is one more example of how city council has stalled our efforts to bring financial stability to the city of Detroit," the mayor said in the statement.

Detroit has struggled with its finances for many years as the city's population has dwindled and the automotive industry that once drove economic activity in the Motor City has diminished.

The city of 700,000 has been criticized by state officials for slow progress on financial reforms. It needs the money to avoid running out of cash by the end of the year. The Michigan Finance Authority raised $137 million for Detroit earlier this year through a debt sale. While Detroit received some of that money, Michigan Treasury officials tied another $30 million to Detroit's progress on reforms.

"If the milestones are not completed, the funds will not be released from escrow," Caleb Buhs, spokesman for the Michigan Treasury Department, told Reuters.

"The actions Detroit must take for the treasurer to release the funds from escrow were clearly established in the Memorandum of Understanding, sent to the mayor and city council last week," Buhs said.

City Council President Charles Pugh blamed Bing for the setback. "Why is Mayor Bing putting the city's finances at risk by marrying himself to one law firm?" he told reporters, adding he wants to meet with the mayor this week to choose a law firm that the council can accept.

Council members raised several objections about Miller Canfield, including potential conflicts of interest in the work it performs for the city and the state and the scope of the contract. Some questioned whether the contract was legal under the city's charter because it was neither prepared nor approved by the city's chief on-staff lawyer.

Projections presented by city officials to Detroit's oversight board earlier this month showed the city's weekly cash flow at just $4.1 million in mid-December before dropping to a negative $4.8 million at the end of the year.

Detroit's financial advisory board was created under an agreement that allowed Detroit to avoid the appointment of an emergency manager to run the city while giving the state some oversight and allowing the mayor to disregard collective bargaining agreements with unions.

The city council did approve on Tuesday a contract with Ernst & Young to provide cash-flow analysis for 2013. This was another condition set in the deal with the state.

Pugh said the council had previously approved a contract with consulting and actuarial firm Milliman for pension services, which was also a condition of the deal. While the council is officially scheduled to be in recess until early next year, Pugh said it could come back in a special session at any time.

Also on Tuesday, the council rejected a nearly $48 million contract with St. Paul-based EMA Inc to run some of the city's water and sewer department.

Detroit faced a cash crisis this summer that led to warning it could default on some bonds. The cash crunch and default were averted by the bond sale.

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