– Detroit will go broke in a week if consent deal lawsuit isn’t withdrawn (Detroit Free Press, June 8, 2012):
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of cash a week from today if a lawsuit challenging the validity of the city’s consent agreement with the state is not withdrawn, city officials said this morning.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.
Pugh said of Martin’s warning that the city will be broke by next week: “We feel like that may be a bit of an exaggeration.”
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.
Pugh said he and the council believe the bond payments can continue, despite Saxton’s letter, because Crittendon’s lawsuit is with the state of Michigan and not the Michigan Finance Authority, the agency that oversees municipal finance issues such as bonds. Pugh said the finance authority is a separate legal entity from the state of Michigan and wouldn’t be stopped from doing business with Detroit despite Crittendon’s lawsuit.
“We can finish this transaction and not run out of money,” Pugh told the Free Press. “We understand the mayor’s passion. We concur this is urgent.
“I understand why he wants to stick to the interpretation that we’re going to run out of money if Krystal Crittendon doesn’t stand down,” Pugh said. “We want her to stand her ground, and we want a judge to decide if indeed the consent agreement is valid or not.”
Pugh said Bing called a special meeting of the City Council this morning to discuss Crittendon’s suit and Saxton’s letter but were unable to do so because officials had not given enough warning about the meeting, as required by the state’s Open Meetings Act. Bing and the council are scheduled to meet at 8 a.m. Monday.
Bing said that under the charter, Crittendon has the autonomy to make such legal challenges, and as mayor he lacks any political power to curb her actions. He said the lawsuit has created an even worse financial situation than the city was already in. He said he has asked her to drop the suit but cannot force her to do so.
“It’s unfortunate that as an appointee of the mayor’s office she does not report directly to me with the change of the charter,” Bing said. “She really doesn’t report to anybody.”
Bing said he has met or spoken with Gov. Rick Snyder two to three times this week and “he’s supportive, but at the same token, we can’t put (the state) at a disadvantage. We’re going to them for certain things that would support us, and this doesn’t help the situation at all.”
Snyder has said he does not want to appoint an emergency manager, but Saxon’s letter represents a growing impatience among state officials.
“I didn’t want to get into a lawsuit — it makes no sense to me and nobody wins, as far as I’m concerned,” Bing said. “We’ve spent way too much time on this issue that keeps us from doing the things that we need to do to fix the city.”
But Pugh laid part of the blame for Crittendon’s position at Bing’s feet, saying the mayor’s office deliberately left the city’s Law Department out of the loop in crafting the consent agreement with Snyder. The city hired outside lawyers to broker the deal and never consulted with the city’s top lawyer about whether any aspects of the agreement might violate the city charter, Pugh said.
“That’s troubling,” Pugh said, “because what that means is that the person whose legal obligation it is to make sure that the city is not in any liability … wasn’t from Day 1 consulted with on the legality of everything. These issues could have been addressed before we approved” the consent agreement.