CHICAGO — Michigan Treasurer Andy Dillon last week recommended that Gov. Rick Snyder send a review team to investigate the city of Allen Park, which is on the brink of running out of cash as it struggles to cover payments on bonds issued for a failed film studio.

A review team is the first step toward possible appointment of an emergency manager and a full state takeover. Dillon recommended the move after saying a preliminary investigation, launched in early May, found that the city faces "probable fiscal stress."

There is not yet a timeline for the appointment of the new team, state officials said.

One of the Detroit suburb's biggest problems is a three-year-old, $30 million bond debt tied to a failed film studio and government complex, called Southfield Lease Properties.

With insufficient lease revenue generated to cover debt service on the bonds, Allen Park has been forced to dip into its general fund to cover payments, which has nearly doubled its deficit.

The problem has sparked a trio of downgrades from Standard & Poor's that have pushed the formerly wealthy city into junk-bond territory.

After another downgrade in mid-March, the agency now assigns a B rating to Allen Park's unlimited-tax and limited-tax general obligation bonds with negative implications, warning that another downgrade is possible.

In his letter to Snyder, Dillon cited both the film studio debt and the downgrade as chief reasons for the need for a full state review.

"The general fund balance has decreased substantially since 2009, primarily because of the appropriation required to pay the debt service in the Southfield lease properties fund," Dillon said.

Voters have twice rejected efforts to increase taxes to cover annual debt-service payments, which total $2.6 million. Voters in May did approve a tax hike for police and fire services, and city officials now plan to outsource those public safety operations to free up funds it can use for debt service on the film studio debt, according to Dillon.

Allen Park already leases its community center and civic arena to a private company.

The city has also stopped making payments to vendors, has not made any payments to its pension plans since October 2011, and does not make most of its annual required contribution for other retiree benefits because it uses a pay-as-you-go method.

Despite the payment delays, the city would have run out of general fund cash in the spring if it had not floated a $2 million tax anticipation note issue in May. The notes are due in October, and the city had planned to roll them over into long-term bonds with an emergency loan from the state.

But the Allen Park City Council has not approved the move, and is reportedly split on whether or not to ask for the emergency loan. Mayor William Matakas says he wants to stave off state intervention long enough to put another tax hike measure on the November ballot.

"Without a similar inflow of cash, the city may run out of cash while substantially increasing the deficit condition in its general fund," Dillon said. "Significant changes in the way the city spends will be required."

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.