CHICAGO — Michigan officials said Thursday that an upcoming bond deal that is critical to keep Detroit’s finances stable will be derailed if city officials proceed with a lawsuit challenging the city’s recent consent decree with the state.

The letter from Tom Saxton, deputy state treasurer, urges Detroit Mayor Dave Bing to order the city’s top lawyer, Krystal Crittendon, to drop the lawsuit by early next week or the state will not be able to follow through with a planned $137 million Michigan Finance Authority bond deal. Crittendon filed the lawsuit in the state court of claims last week, saying the consent decree signed in April between the state and the city was invalid because the state owes the city money.

The deal, planned later this month, would be used in part to pay off an $80 million private placement Detroit made in late March with Bank of America Merrill Lynch that allowed the cash-strapped city to push off a debt service payment that was less than two weeks away.

Not only would Detroit’s lawsuit derail the future bond financing, but it also means the city would lose $80 million in sorely needed state aid payments through December, Saxton wrote, because the trustee on the privately placed debt would likely seize all aid revenue to redeem the notes in the absence of the takeout financing.

The notes were backed by state aid payments, with an intercept mechanism that directly placed the revenue aid with a bond trustee. The trustee, U.S. Bank, would collect all revenue aid, keep the dollars needed for debt service, and send the rest to the city.

Saxton, in the letter to new Detroit chief financial officer Jack Martin, said the lawsuit threatens the validity of all agreements between the city and the state, including the recent financing agreement. As a result, Saxton said U.S. Bank was set to keep all Detroit’s revenue aid until it had paid off the $80 million notes.

“This litigation has led Treasury and other third parties involved in the take-out financing transaction to question the ability of the city and the state to enter into the agreement to deposit distributable state aid to complete the transaction,” Saxton’s letter said. “Therefore, while the city’s legal action is pending, 100% of the city’s ongoing revenue sharing payments will be intercepted by U.S. Bank, with no residual payments transferred to the city until the $80 million bond issue is paid in full.”

The aid payments include $25.1 million in June, $25.1 million in August, $27.7 million in October, and $4.6 million in December. Saxton said the state maintains that the lawsuit has no merit and that Michigan does not owe Detroit any money.

“While we fully expect the state to prevail in this litigation, there is inadequate time to resolve these questions through the courts before ramifications will have a crippling effect on the city’s finances,” the letter continues.

“The state is committed to the financial recovery of the city of Detroit, and this bond issue obviously is a critical component,” Saxton wrote. “However, the lawsuit clearly undermines agreements that secure that financing.”

Bing said the lawsuit “only impedes our progress and places the city’s fiscal recovery in grave jeopardy” in a statement issued after receiving Saxton’s letter.

“My team is working closely with the state to mitigate any negative impacts on my administration’s plan to financially stabilize the city,” Bing said. “We want this matter resolved expeditiously for the sake of the citizens of Detroit.”

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