December 12, 2012 / 12:40 AM / in 5 years

Cash-poor Detroit to get $10 million, review from state

DETROIT (Reuters) - Cash-strapped Detroit will get $10 million from Michigan after the city council dropped its opposition to a key measure on Tuesday, but the state has started a review of the city’s finances that could lead it to file the biggest municipal bankruptcy ever in the United States.

Terry Stanton, a spokesman for Michigan’s Treasury Department, said the council’s action met conditions agreed to by the state and Mayor Dave Bing for the release of $10 million raised through a bond sale earlier this year. The release of another $20 million remains tied to the city’s meeting other conditions, he added.

Michigan launched a process on Tuesday that could result in an emergency financial manager for the city, who could decide with the state’s consent if Detroit should file for bankruptcy protection from creditors. State officials frustrated by the slow pace of reforms in Detroit moved ahead with a 30-day preliminary review of the city’s finances, according to Stanton.

Facing a possible state takeover and a growing deficit, the city council reversed course and approved a controversial contract that had been a sticking point for the release of some of the money.

In a 5-4 vote, the council approved the appointment of law firm Miller Canfield to work on issues related to a consent agreement that earlier this year gave the state some oversight of Detroit’s finances. Last month, the contract with the law firm was rejected by council members, who cited alleged conflicts of interest by the law firm and concerns over its legality.

Council President Charles Pugh told reporters after the meeting that he “tried to hold his nose” to vote for the contract so that the city could avoid a state-appointed emergency financial manager.

“We’re just trying to do what’s right,” he said. “It’s a dance. You’ve got to satisfy the citizens. You’ve got to satisfy your colleagues. You’ve got to satisfy the mayor.”

Other measures the state has tied to the release of some bond money also received council approval, including contracts for auditing services and for specific audits to uncover potential worker’s compensation fraud and to determine dependent eligibility for city benefits.

The city of 700,000 has been hard hit by a steep population decline, years of severe budget deficits and escalating employee costs, all of which led state officials to begin an intervention process last year.

Mayor Bing thanked council members for their actions and reiterated that he is working to avoid the appointment of an emergency manager by the state. Jack Martin, Detroit’s chief financial officer, said planning is still underway for unpaid leaves and approximately 500 job cuts to deal with a cash crunch. It is not clear for how long the release of $10 million will forestall any immediate financial problem.

Michigan’s Republican governor Rick Snyder also praised the Detroit city council for its decisions but said that more work was needed.

“I think there is a fairly significant list of items that still need to be addressed between the mayor and city council and I hope they move very aggressively and proactively to get those issues resolved. But it was a positive step from the few items I did see that they voted on,” he said.

A financial update released by the city on Monday indicated its cash flow position could erode in the fiscal year that ends June 30 to a negative $113.7 million from a negative $76.7 million that was forecast last month.

The city’s oversight board, which was created under the consent agreement that allowed Detroit to avoid a state-appointed emergency manager, voted unanimously on Monday to support Michigan Treasurer Andy Dillon’s plan to launch the Detroit review.

Legislation that could be passed by the Michigan Legislature this month could also give Detroit a path to a Chapter 9 bankruptcy filing. The bill would give fiscally struggling local governments like Detroit options for fixing their problems, including bankruptcy, emergency managers and consent agreements.

Reporting by Eddie B. Allen Jr.; Additional reporting by Karen Pierog in Chicago and by David Bailey in Lansing; Editing by Dan Grebler and Lisa Shumaker

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