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Last week a financial review team appointed under Public Act 4 of 2011, Michigan's Local Government and School District Fiscal Responsibility Act, declared that a "severe financial emergency " exists in Detroit, the 18th largest city in the U.S. with a population of 713,777, and the center of the 11th largest metropolitan area of about 4.3 million.

Until recently, the financial review team had exercised forbearance in coming to a finding of financial emergency. The declaration followed by two days a ratings downgrade by Moody's on Detroit's unlimited tax General Obligation Bonds to B2 from Ba3, accompanied by the rating agency's continuing review for possible further downgrade. Fitch subsequently lowered its ratings to B from BB-, as well, and maintained the ratings on Negative Watch, where the ratings had been since December.

Virtually all of Detroit's direct debt [other than its Limited Tax GO Bonds, Series 2008 A(1) and A(2)] payable from its General Fund is wrapped with municipal bond insurance, which would be sufficient to sustain timely payment of interest and maturing principal as long as the insurers' reserves hold up.

According to the City's January 2012 Cash Flow Forecast Report posted on the Mayor's Office website, the $76mn estimated General Fund cash balance on January 27 was projected to be drawn down to $42.2mn by March 30 and $2.5mn by April 27, before factoring in tentative agreements for concessions from the police and firefighters unions, and assuming scheduled distributions to other funds are remitted in full.

If the finding of financial emergency is confirmed, under Public Act 4 Michigan Governor Rick Snyder would be directed to declare Detroit to be in receivership; appoint an emergency manager with broad statutory authority to remedy the financial emergency; and assure the city's fiscal accountability, as well as its capacity to provide the requisite governmental services essential for preserving the health, safety and welfare of the citizenry.

Source: The City Of Detroit And Its Bonds