By Ann Saphir
CHICAGO (Reuters) - A check of Detroit's finances has found a "serious financial problem" with the cash-strapped city, a step that could lead to the biggest municipal bankruptcy in U.S. history.
Michigan State Treasurer Andy Dillon notified Governor Rick Snyder of the report's findings late Friday, just four days after the review began, according to a statement from the state Treasury Department.
"A preliminary review of the City of Detroit's finances has found that a serious financial problem exists in the city," the statement said.
The review paves the way for the state to take a deeper look into the city's finances, which in turn could lead to the declaration of a fiscal emergency that would trigger the appointment of an emergency financial manager.
That official would have the power to put the city of 700,000 into Chapter 9 bankruptcy if other rescue plans are not feasible or effective.
Detroit, home of General Motors Co., has been hit by a steep population decline, years of severe budget deficits and escalating employee costs, all of which led state officials to begin an intervention process last year.
The preliminary review by the state treasurer found the city continues to have "significant cash flow problems," but that reporting problems have meant that projections swing wildly from month to month.
"A cash flow estimate in August, 2012 projected a cash deficit of $62 million by June 30, 2013, but estimates for October and November projected deficits of $84 million and $122 million respectively," the report said.
Should a further review of the city's finances result in the appointment of an emergency financial manager, it could mean a potential bankruptcy, "which could ultimately result in a delay or reduction of payments to city creditors," Moody's analyst Jeffrey Yorg wrote in a report.
STATE MONEY RELEASED
This week Detroit won a $10 million payment from Michigan after the City Council dropped its opposition to a key measure that had held up the release of the money.
By a 5-4 vote, the council approved the appointment of law firm Miller Canfield to work on issues related to a consent agreement that this year gave the state some oversight of Detroit's finances.
Last month council members had rejected the appointment, citing potential conflicts.
Council President Charles Pugh told reporters after the meeting that he "tried to hold his nose" to vote for the contract so that the city could avoid a state-appointed emergency financial manager
State officials, frustrated by the slow pace of reforms in Detroit, moved ahead with the preliminary review of the city's finances anyway.
"There is nothing new here," Mayor Dave Bing said, responding to Friday's finding, according to the Detroit Free Press. "We continue to be focused on our financial restructuring plan."
The city's oversight board, which was created under the consent agreement that allowed Detroit to avoid a state-appointed emergency manager, voted unanimously on Monday to support Michigan Treasurer Dillon's plan to launch the Detroit review.
Legislation that could be passed by the Michigan Legislature this month could also give Detroit a path to a Chapter 9 bankruptcy filing.
The bill would give fiscally struggling local governments like Detroit options for fixing their problems, including bankruptcy, emergency managers and consent agreements.
(Reporting by Ann Saphir; Editing by Xavier Briand)