June 13 (Bloomberg) -- A Michigan judge dismissed a lawsuit seeking to void Detroit’s agreement with the state on a plan to resolve the city’s budget crisis, removing an obstacle to the deal.
Detroit’s corporation counsel, Krystal Crittendon, filed the suit this month, asking a court to find that the city wasn’t legally able to enter into the financial-stability consent agreement with the state because Michigan was in default on obligations to Detroit, including $224 million in revenue-sharing.
Ingham County Circuit Court Judge William Collette in Mason, Michigan, ruled such suits must be brought by mayors or city councils and Crittendon had no right to file it.
“It’s an obvious issue,” Collette said at a hearing today. “People have to learn to live with this and move ahead.”
The decision assures the city won’t run out of money at the end of this week and possibly miss a bond payment. Republican Governor Rick Snyder had threatened to withhold as much as $80 million in revenue-sharing funds from the city unless the suit was dropped.
The end of the case will allow the consent agreement to move forward, Snyder told reporters today in Grand Rapids, Michigan.
“It was a Detroit internal issue, I hope they continue to work hard to resolve their issues so they can work better between the mayor, city council and corporate counsel,” he said.
Asked if the city is fiscally safe as a result of the ruling, Snyder said, “It’s something we’re working on.”
Crittendon didn’t immediately return a call seeking comment on the ruling.
Fitch Ratings cited the suit in reducing Detroit’s debt rating further into junk status. Fitch cut by two steps to CCC from B about $511 million in unlimited tax general-obligation bonds. Fitch also lowered $453 million in limited tax general-obligation bonds two steps to CC from B-.
A Detroit general-obligation bond issued in 2001 and maturing in April 2019 traded today at an average yield of 5.65 percent, up from 4.9 percent on June 1, according to data compiled by Bloomberg. The nine trades today are the most since March 28, the data show.
The bond is rated BBB by Standard & Poor’s, the second-lowest investment grade. The underlying rating by S&P is B, five levels below investment grade.
Fitch’s director of public finance, Amy Laskey, said the ratings company will reevaluate the downgrade of pension-obligation certificates in light of today’s ruling but not general-obligation bonds.
Detroit officials reached the financial-stability agreement with the state in April to empower an oversight board to monitor the city’s finances. Detroit, Michigan’s largest city, was facing a projected accumulated operating deficit of $265 million this month.
The dismissal clears the way for the City Council to appoint two members, and approve a third, for the nine-member financial advisory board.
“We’re in favor of the consent agreement between the city and the state because it demonstrates the city’s willingness to make some tough decisions,” said Michael Camarella, senior portfolio manager at OppenheimerFunds Inc., which oversees about $33 billion in munis. “They’ve already hit the bottom and they’re on the upswing.”
The lawsuit was a “nuisance” that was to be expected because the decision on the agreement wasn’t unanimous, said Camarella, who helps run the Oppenheimer Rochester Michigan Municipal Fund, which holds Detroit general-obligation bonds.
“We feel that we are getting compensated for the risk when we buy the bonds where we’ve been buying them,” he said in a telephone interview.
Michigan officials denied the state has failed to turn over money owed the city, putting it in default.
Detroit Mayor Dave Bing, who also opposed Crittendon’s lawsuit and asked her to withdraw it, filed yesterday to intervene in the case.
“This legal challenge has been an unfortunate distraction, but now it’s time for the city to move forward.” Bing said today in an e-mailed statement after the ruling.
Detroit officials have been “talking to the state today about releasing the city’s escrow funds and proceeding with bond refinancing,” Bing said.
“The City of Detroit is going to make its $34.2 million bond debt payment by Friday,” he said.
He said he would convene the first meeting of the city’s financial advisory board that day.
The agreement between the state and city came after Snyder appointed a financial review board to determine whether Detroit needed an emergency manager. The state treasurer had earlier made a finding of “probable financial stress” for Detroit, which gave Snyder the right to appoint the board.
Crittendon’s suit challenged the legality of the agreement.
“There is no valid contract between the parties because, on or before the date when the contract was made, the state was in default to the city,” Crittendon and James Noseda, a city attorney, said in court papers.
Detroit’s charter bars the city from entering into a contract with any person or entity that has “failed to meet a financial, contractual, or other obligation to the city,” the lawyers said.
The alleged default stemmed from the state’s failure to turn over $224 million in revenue-sharing funds, $1.2 million in delinquent parking fees, $39.7 million from past due invoices for electrical services, and other costs, according to Crittendon’s complaint.
The ruling “allows the state to continue working collaboratively with the City of Detroit on implementation of the Financial Stability Agreement,” Michigan Treasurer Andy Dillon said today in a statement.
The treasury department will continue to work with Detroit officials “to help stabilize the city’s finances and ensure citizens are receiving the services they deserve and expect,” Dillon said.
The case is City of Detroit v. State of Michigan, 12-66-MK, Court of Claims, State of Michigan.
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