Detroit could go broke in one week

The Motor City will be broke in 7 days unless a lawsuit challenging the consent agreement between Detroit and the state of Michigan is withdrawn.

Detroit Free Press:

Detroit will run out of cash a week from today if a lawsuit challenging the validity of the city's consent agreement with the state is not withdrawn, city officials said this morning.

Jack Martin, the city's new chief financial officer, said the city will be broke by June 15 but should be able to make payroll for its employees. He said the city will be operating in a deficit situation if the state withholds payments on a portion of the $80 million in bond money needed to help keep the city afloat.

The battle ultimately could lead to an emergency manager if state officials deem the city to be in violation of the consent agreement that gives the state significant control over Detroit's finances.

Deputy Treasurer Thomas Saxton told the city Thursday that the lawsuit against the consent agreement could force the state to hold back $80 million in revenue sharing that was used, essentially, as collateral for interim refinancing of bonds issued in March so Detroit would not run out of cash.

Detroit has already used $35 million of the $80 million. The money is in an escrow account, but based on Saxton's letter city officials will not be able to draw down any more of the money, Martin said.

"If our city runs out of money, there is no bigger crisis that we would have in our city," Detroit Mayor Dave Bing said this morning, adding that his frustration level is "off the charts."

But Council President Charles Pugh said he and several other council members want the city's top lawyer, Krystal Crittendon, to "stand her ground" on the lawsuit she filed last week challenging the consent agreement as a violation of the city charter.

Just about the only people living in Detroit now are trapped there. Anyone with the wherewithall to leave has done so. There is no tax base to speak of, and the city government is presiding over what is increasingly becoming a ghost town.

Why is the city suing?

Crittendon filed a lawsuit last week saying that the consent agreement was "void and unenforceable" because Michigan owes the city $224 million in revenue sharing plus more than $1 million in unpaid water bills, parking tickets and other debts. Under the city charter, Detroit can't enter into contracts with entities in default to the city, so Crittendon challenged the consent agreement under her authority to investigate violations of the charter.

Some city officials disagree that the state will go broke, citing the ability to tap that bond money regardless of whether the suit is dropped. The Michigan Finance Authority is a separate entity from the state and is therefore, not in default.

But Mayor Bing isn't sure, hence the panic. I doubt whether the state of Michigan will actually allow Detroit to not make payroll so the police and firefighters will continue to work. But long term, the situation just doesn't look good and seeing Detroit eventually become a ward of the state - either Michigan or the federal government - is not out of the question.

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