UPDATE 1-Detroit rejects condition for cash infusion

Tue Nov 20, 2012 4:44pm EST

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DETROIT Nov 20 (Reuters) - 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 help the city 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.

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 overhaul 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. Detroit raised $137 million earlier this year through a debt sale, but can only access that money if it meets the conditions in the deal.

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

Projections presented by city officials to Detroit's oversight board 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.

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