CHICAGO - Bank of America Merrill Lynch has agreed to push back the due date on $80 million that Detroit owes the bank in order to give state and city officials time to work out a dispute that has threatened to tie up badly needed state aid for the city.

The agreement gives Detroit and the Michigan Finance Authority until August 15 to complete a planned $137 million refinancing to repay notes the authority privately placed with the bank to raise cash for the city. The original mandatory redemption date on the notes was July 27.

The move allows Detroit to collect most of its June revenue aid from the state, which otherwise would have been held by the bond trustee to begin to pay off the debt.

Of the $28.5 million payment, the city will get $23.6 million and $4.9 million will go toward debt-service on the privately placed bonds, according to the state.

The extension allows time to resolve an ongoing dispute with Detroit Corporation Counsel Krystal Crittendon, who last month filed a challenge to the three-month-old consent decree with the state aimed at stabilizing Detroit's finances.

The state said Crittendon's challenge made the refinancing impossible and would require that all of Detroit's state revenue aid through December be used to pay off the $80 million note deal. Crittendon also refuses to sign the bond documents enabling the refinancing, according to the state.

An Ingham County judge two weeks ago threw out Crittendon's challenge, but she has since indicated she might appeal.

Thursday is the deadline for an appeal.

"Despite the deadline extension to August 15, without an opinion on the take-out financing from the city's corporation counsel, and some assurance the city will not lodge future legal challenges to the financial stability agreement between the state and the city of Detroit, the Department of Treasury believes it will be difficult to complete a financing transaction," the treasury department said in a statement.

The Michigan Finance Authority privately placed the notes with B of A Merrill in late March to generate cash for Detroit and push off an upcoming debt payment. Officials at the time planned to have the authority take out the debt before June 27, the mandatory redemption date.

The interest rate on the debt jumped to 6.25% from 2.97% after June 27.

Detroit pays the debt on the bonds, which are backed by state aid payments.

In related news, the state has filed a lawsuit to prove that it does not owe the city $5 million for an overdue water bill, a key part of Crittendon's challenge, which argues that the consent decree is invalid because the state owes the city money.

The Michigan Department of Technology, Management & Budget filed a lawsuit in Wayne County Court that says the city overcharged the state for water at the fairgrounds, according to local press reports.

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