Detroit's 'Fiscal Cliff' And Michigan's Response

Detroit's increasingly distressed financial condition has created a dynamic and rapidly evolving situation where the potential of a Chapter 9 filing appears to be the subject of renewed discussion and legislative attention. In particular, state legislation providing Detroit a menu of options for addressing its finances appears headed to enactment this month. Although such legislation includes one option expressly protective of debt service payments on Detroit's public debt, several of the options may lead to a Chapter 9 filing as a first or last resort.

Estimates suggest that Detroit is on pace to be $113 million short on cash by the end of its fiscal year on June 30, 2013.Earlier this year Detroit signed a "Consent Agreement" with the State of Michigan to address its financial challenges and to fend off the threat of the appointment of an emergency fiscal manager (an "EFM") by the governor. The Consent Agreement required the city to meet certain financial milestones. Both Michigan Gov. Rick Snyder and State Treasurer Andy Dillon claim that Detroit has defaulted under the Consent Agreement. Consequently, the State is withholding $30 million in bond proceeds that would otherwise serve as bridge financing for Detroit to the end of its June 2013 fiscal year. In addition, last week, Dillon recommended, and on December 10 the Financial Advisory Board established under the Consent Agreement unanimously supported, commencement of a 30-day financial review process to determine whether an EFM should be appointed for Detroit under Public Act 72. The financial review is expected to begin this week, and to result in Gov. Snyder appointing an EFM for Detroit, which may eventually result in Detroit filing for Chapter 9 bankruptcy.

At the same time Detroit appears to be headed toward the appointment of an EFM, the State legislature is considering a bill known as the "Local Financial Stability and Choice Act" (the "Financial Stability Act"). The Financial Stability Act would provide additional restructuring choices for local governments facing financial emergencies, but would also increase the authority of the governor and any appointed emergency manager (an "EM") over local operations. The Financial Stability Act is intended to replace Public Act 72. On Wednesday, December 12, 2012, the House voted to approve the Financial Stability Act, largely along party lines. The legislation, which has been endorsed by Gov. Snyder, now goes to the Senate for consideration. It is anticipated that the Senate will approve the Financial Stability Act and that Gov. Snyder will sign the legislation before the end of December, 2012.

The...

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