CHICAGO — A struggling Detroit suburb will ask voters to approve a property tax increase to cover debt payments on a failed film studio development that is draining the city’s general fund.

Allen Park, Mich., will propose a four-mill hike for the next two years on the May 8 special election ballot.

If approved, the tax hike would generate roughly $2.6 million annually. That would be just enough to cover debt payments on $31 million of limited-tax general obligation bonds the city floated in 2009 and 2010 to finance the film studio and a new government complex located next door to the current City Hall.

Last year, the city was forced to pay $1.6 million out of its meager general fund to make debt payments. The move nearly doubled the city’s general fund deficit, which totaled $3.2 million at the end of fiscal 2011. The bonds feature a final maturity of 2039.

“If it doesn’t pass, then the city will have serious problems,” said John Zech, the city administrator.

If it does pass, the millage increase would take effect in July. To cover its May 1 payment, the city plans in March to issue $2 million of tax anticipation notes, and roll the them over in August with fiscal stabilization bonds, according to Zech.

If the millage proposal is approved, the council plans to ask voters to extend the increase after two years. “The council’s feeling was it would increase the chances of it being passed if they asked voters for just two years,” Zech said.

Allen Park is located about 15 miles from Detroit. It has long enjoyed a stable economy, anchored by Ford Motor Co. But its fiscal position has deteriorated in recent years amid falling property tax revenue and state aid — the city’s two main revenue sources.

The city issued a total of $31 million of limited-tax GO bonds in 2009 and 2010 to finance the so-called Southfield project, including the film studio. The bonds featured a first budget obligation pledge from the general fund, though officials expected to make the payments from lease revenue.

The project was sparked by an agreement with a Hollywood producer and Detroit native who was to a lead a studio headquarters in the space. Bond documents tout the project as a full-service movie, television and new media production studio that would employ thousands of union workers.

But the producer abandoned the project just months after the last bond sale, and the project has since failed to generate enough revenue from lease payments to cover debt service.

City officials are in the midst of negotiating with unions over new labor contracts and are working with the Michigan Department of Treasury on its deficit elimination plan to stave off a state review of its finances, often the first step toward a takeover. “We’re hoping we don’t have to go there,” Zech said.

In March 2011, the Securities and Exchange Commission sent Allen Park a letter announcing an informal inquiry into disclosure issues involving the bonds. Zech said he did not know the status of the probe but that the SEC has not made contact with any city officials since he took his position in August 2011.q

It is the second high-profile production studio failure in Michigan in recent months. Raleigh Studios LLC, based in nearby Pontiac, defaulted on its Feb. 1 payment on $18 million of privately placed tax-exempt bonds, forcing the state pensions, which back the debt, to pick up the payment. That studio also failed to generate sufficient lease revenue to cover debt payments.

Both projects were launched under former Gov. Jennifer Granholm who crafted one of the most generous film tax-credit programs in the country in an effort to make Michigan a top production destination. Since then, Gov. Rick Snyder has slashed the program.

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