(Reuters) – Detroit may run out of cash in a week if the city is cut off from money raised under a now-shaky deal with the state of Michigan, city officials said on Friday.

Jack Martin, Detroit‘s new chief financial officer, made the pronouncement on Friday, a day after Michigan warned that a pending lawsuit threatens to derail plans for a bond financing that would raise $137 million for the cash-strapped city, said Naomi Patton, a spokeswoman for Mayor Dave Bing.

While Detroit will be able to make its next payroll, the city could be out of cash by June 15, Patton said.

Tom Saxton, Michigan‘s deputy treasurer, advised the city in a letter on Thursday that a city lawsuit challenging Detroit‘s financial stability agreement with Michigan needs to be withdrawn by early next week or the city will lose $82.5 million in state revenue-sharing payments between this month and December. Those funds are needed to pay off an interim bond issue that was privately placed in March.

If the financial stability agreement is breached, Detroit, which has an accumulated deficit of about $265 million, risks being put under the thumb of a state-appointed manager who would essentially run the city.

The debt issued in March was supposed to be replaced with the sale of a longer-term bond issue later this month that Saxton said may not proceed because of the litigation. Detroit‘s state revenue sharing would be intercepted for payments on the bonds as a way to improve security and ratings on the debt.

The deal to provide junk-rated Detroit some breathing room in its budget included a pact over revenue sharing for the interim bonds, which the city and state entered into in March, according to Saxton’s letter. The replacement bond issue would allow the city to restructure some outstanding debt to push $37 million in debt service payments into the future and to sell $100 million of new bonds to fund its fiscal 2012 and 2013 self-insurance payments.

The complaint, filed by Detroit Corporation Counsel Krystal Crittendon against the state in Michigan’s Court of Claims, challenges the validity of the financial stability agreement on a claim that Michigan owes the city more than $230 million.

In a statement, Bing said while he has urged Crittendon to drop her lawsuit, he does not have power under the city’s charter to make her do so. Crittendon did not immediately reply to a request for comment.

The financial stability agreement entered into by city and state officials in April gave the state more control over Detroit‘s sagging finances, stopping short of having an emergency manager appointed by the governor to run the city.

A meeting on Friday between Bing and the Detroit City Council was scuttled due to the lack of adequate public notice. Patton said a new meeting has been scheduled for Monday.

(Reporting by Karen Pierog; Editing by Leslie Adler)

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