Judge Rejects Challenge to Detroit-Michigan Consent Agreement

JUN 13, 2012 6:19pm ET
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CHICAGO — An Ingham County, Mich., Circuit Court judge Wednesday threw out a lawsuit challenging Detroit’s consent agreement with Michigan, allowing the city to narrowly avert a cash crisis that threatened its ability to make a Friday bond payment.

Mayor Dave Bing stressed that the city would now have the funds needed to make a $34.2 million payment due on its outstanding pension certificates of participation, as the state is now expected to free up funds as part of its April consent agreement, which was designed to stabilize Detroit’s finances.

“Judge William Collette’s ruling this morning means that my administration can get back to dealing with the important issues facing our city,” Bing said at a news conference following the court ruling. “I appreciate the judge’s expeditious handling of this matter. This legal challenge has been an unfortunate distraction, but now it’s time for the city to move forward.”

Collette’s dismissal of the legal challenge mounted by Detroit’s top lawyer, corporation counsel Krystal Crittendon, appears to have brought to an end the latest obstacle that threatened the beleaguered city’s efforts to stabilize its finances.

Private attorneys from Miller Canfield Paddock and Stone Plc, arguing on Bing’s behalf during a court hearing Wednesday, said Crittendon exceeded her authority in filing the complaint earlier this month. The mayor earlier in the week ordered Crittendon to withdraw the lawsuit, but she refused.

She had taken the position she was required to contest the city’s Financial Stability Agreement with the state under city charter language that bars contracts with parties in default. Crittendon contends that the state owes the city $224 million in revenue sharing and other funds that put it in default.

The judge sided with Bing, agreeing that the corporation counsel can only take such legal action at the direction of the mayor or City Council.

Crittendon’s office did not return calls to say whether an appeal was planned.

Michigan Treasury officials last week told Detroit that the state would not release roughly $35 million held in escrow from a recent privately placed bond sale unless Crittendon dropped the challenge to the consent agreement. The pact, struck in April, allowed the city to avert bankruptcy and maintain most operational control while putting financial management under the auspices of an advisory panel.

The state defended its position, saying that Crittendon’s lawsuit destabilized all contracts between the city and the state, including bond financings.

The state also said it would not allow the city to complete a planned $137 million issue set for next week through the Michigan Finance Authority to pay off an $80 million note private placement and raise badly needed new money for the cash-strapped city.

Detroit also faced the loss of all its state revenue aid through December, which would have been intercepted to pay off the privately placed debt.

“We are very pleased with the court’s ruling, which allows the state to continue working collaboratively with the city of Detroit on implementation of the Financial Stability Agreement,” state Treasurer Andy Dillon said in a statement. “We continue to be focused on working with the mayor and CFO Jack Martin to help stabilize the city’s finances and ensure citizens are receiving the services they deserve and expect.”

Bing said the financial advisory board that has oversight of city financial decisions would meet for the first time Friday.

On Tuesday, Fitch Ratings downgraded $511 million of Detroit unlimited-tax general obligation bonds to CCC from B, about $453 million of limited-tax GOs to CC from B-minus, and $1.5 billion of pension obligation certificates of participation issued through the Detroit Retirement Systems Funding Trust to CC from B. The pension debt was placed on rating watch negative.

Fitch analyst Amy Laskey said the agency “certainty will re-evaluate whether the rating watch is still appropriate,” given the lawsuit’s dismissal.

However, the city’s ongoing fiscal challenges that include very narrow liquidity, increasing deficits, and uncertainty over revenue estimates support the agency’s Tuesday action, she added.

Detroit officials had warned that the city would run out of cash by June 15 and be operating at a $67 million deficit by next week if the standoff was not resolved.

The resolution also paves the way for the Detroit Water and Sewerage Department to enter the market next week with a $500 million debt issue. It had initially planned to sell the bonds this week, but given the headline risks associated with the lawsuit, officials opted to push the deal off to next week.

Detroit owns the utility systems but they are operated as separate enterprise funds, and most of their revenues come from customers outside the city.

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