Lots of action, uncertainty as Detroit-Lansing standoff continues

Jun 12, 2012

The standoff between Lansing and some Detroit city officials over a lawsuit showed little sign of fizzling out Tuesday.

But it also appears the state might be looking for ways to give the city some leeway if the contentious situation continues much longer.

The standoff began last week when Detroit’s corporation counsel, Krystal Crittendon, went to court asking for a judge’s opinion about whether the consent agreement between the city and state should be voided.

Crittendon maintains that it should be, because both state law and the Detroit city charter forbid the city from entering into contracts with debtors. And Crittendon maintains the state owes the city about $224 million.

But the state disputes that, and is now threatening to withhold the rest of a revenue-sharing payment it had promised the city to get through the fiscal year. State officials say they’ll re-direct that money to pay off bondholders, who are uneasy about the whole situation. Both Fitch’s and Moody’s downgraded Detroit’s credit rating (already at junk status) again on Tuesday.

Detroit Mayor Dave Bing says if the state follows through on its threat, the city could go broke by this week. After initially trying to persuade Crittendon to back down—and failing to persuade the City Council to support him—Bing has now sent a letter ordering her to drop the case.

A judge is set to hear legal arguments on the consent decree in Ingham County Circuit Court Wednesday.

But Detroit City Council President Charles Pugh said Tuesday he supports Crittendon. And he blasted what he called Snyder’s “irresponsible” threat.

“What point would the Governor be trying to make by letting the city run out of cash?” Pugh asked. “Why would he do it?”

For his part, Governor Snyder said he’s prepared to “protect” Detroit if this standoff drags on, and the city faces insolvency. But he stopped short of saying he would appoint an emergency manager.

And State Treasurer Andy Dillon is trying to buy Detroit more time to make a debt payment due later this month.

The state let the city borrow money in March so Detroit wouldn’t run out of cash.

Dillon says Detroit was supposed to pay the loan back through a bond sale later this month. But the legal mess has made investors wary, and “People wouldn’t buy the city’s bonds until this is cleared,” Dillon said.

Dillon says he's asking for a three or four month extension before Detroit has to re-pay the initial loan. It’s unclear whether the bond sale would go ahead as planned.

In the meantime, Detroit City Council’s fiscal analyst is questioning Bing’s assertion that the city would go broke on Friday if they don’t get any more money from the state.

Irvin Corley says their cash flow statements show an unexplained $13 million drop in the city’s cash balance—seemingly overnight, between May 31 and June 1.

 “And that seems to be a hefty drop,” Corley said. “And I just need more information to understand why cash flow would drop by 13-million dollars in one day.”

A Bing spokeswoman says the city has provided Corley with updated information that accounts for the discrepancy.

And Corley acknowledges that whatever the case, the city could go broke by June 30 if it doesn’t get at least $20 million more from the state.