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Detroit Won’t Run Out of Cash as Council Clears Lawyer Deal

Dec. 11 (Bloomberg) -- The Detroit City Council approved a $300,000 contract for a law firm to advise it on a recovery plan, clearing the way for Michigan to release $30 million to stabilize municipal finances and ensure that the city won’t run out of cash this month.

The decision today to hire Miller Canfield Paddock & Stone Plc was part of a November agreement with the state to avert the possibility of an emergency manager takeover. The firm was named in the agreement at the insistence of Mayor Dave Bing. The city, whose annual budget is $1.6 billion, continues to amass a deficit that may top $400 million by June.

The council had balked at the contract with Miller Canfield, saying the firm’s role in designing the agreement was a conflict of interest. It was the most contentious of some 20 measures required before the state would release money from a $137 million bond sale.

Bing had warned that without the state money, he’d fire as many as 500 workers and place others on unpaid furloughs in January. The $30 million won’t solve the deficit, which grows despite steps including a 10 percent pay cut for city workers. Bing’s administration has struggled to implement a five-year plan to wipe out the deficit.

Financial Review

State Treasurer Andy Dillon said yesterday that he’ll begin another financial review of Detroit, citing slow progress under the consent agreement that was supposed to speed financial repairs and reduce spending.

That review may lead to appointment of an emergency manager.

Michigan’s largest city has at least $12 billion in long-term debt, and lost one-quarter of its population since 2000.

Detroit’s bond ratings were cut deeper into noninvestment grade last month by Moody’s Investors Service, which cited the possibility of bankruptcy or default within two years. The rating company dropped general-obligation unlimited tax bonds and certificates of participation one step to Caa1, seven steps below investment grade, from B3. It cut general-obligation limited tax debt to Caa2 from Caa1, and lowered ratings on water and sewer revenue securities.

On Nov. 6, Michigan voters repealed a 2011 law that gave state-appointed emergency managers sweeping power to fix the finances of distressed cities, including authority to sell assets and cancel union contracts. Emergency managers in five cities and three school districts are functioning under a 1990 law that gives them less power.

Republican Governor Rick Snyder has asked lawmakers to approve a new emergency manager law that would give distressed cities and school districts four options -- emergency managers, bankruptcy, consent agreements such as Detroit’s or mediation with creditors. Emergency managers would have many powers they held under the repealed 2011 law, although they could be removed by local elected bodies after a year.

To contact the reporter on this story: Chris Christoff in Lansing at cchristoff@bloomberg.net

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net

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