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Detroit spins a regional water group

Detroit suburbs balk at spinning off water works to help city
By Bloomberg – Crains Detroit Business

Originally Published: January 28, 2014 5:44 AM
Modified: January 28, 2014 6:49 AM

Time is running out for Detroit Emergency Manager Kevyn Orr to
persuade suburban leaders and bondholders to help the city wring
cash from its water-and-sewer system, a key to resolving
its bankruptcy.

The Detroit-owned utility serves 127 area communities that now
pay for its services. Talks to lease the system to a new
regional authority that would generate revenue for municipal
services are bedeviled by mistrust and the cost of upgrading
a network that serves 40 percent of Michigan’s population
across 1,079 square miles (2,795 square kilometers).

Of the $18 billion in long-term debt the city is restructuring,
$5.8 billion belongs to the water system. Republican Gov.
Rick Snyderand nine private foundations pledged $680 million
to shore up pensions and shield Detroit’s art collection from
creditors. Leveraging the water department’s value, and the
$744 million it produced last year, is an elusive element of
a plan Orr must submit to a judge by March 1.

“What’s it going to cost Macomb County residents?” said
County Executive Mark Hackel. “That’s one thing you don’t hear
in these discussions: How do we minimize future costs
for the upgrade and everything else?”
Detroit divide

Orr must overcome a generation-long divide between Detroit and its
suburbs, some with per-capita incomes four times as high as those
of city residents. He also must convince other governments that
joining a new system won’t imperil their finances.
The July bankruptcy froze the market for Michigan bonds,
forcing at least three municipalities to delay deals in the
face of higher borrowing costs.

Upgrading pipes, basins and pump stations may cost as much as
$7 billion, said Gerald Poisson, chief deputy executive of
Oakland County, which borders Detroit to the north and
has a AAA rating from Standard & Poor’s.

Suburban customers are leery, said Robert DiMella,
co-head of MacKay Municipal Managers, which
oversees about $7.5 billion of local debt,
including Detroit water and sewer bonds, in Princeton, N.J.

“They don’t want their rates to go up four- or five-fold just
simply to bail out Detroit,” DiMella said. “They want to know
that if it gets refinanced, certain dollars don’t go directly
to Detroit to help their current cause,
but it’s used for maintenance.”

Slow progress

The makeup of a regional board and the question of who would pay
for repairs, maintenance and debt are unresolved, said
Oakland County Deputy Executive Robert Daddow.
The existing seven-member water board is appointed by Detroit’s
mayor, four people representing the city and three from suburbs.

“Progress is being made, but it’s slow,” Daddow said.

Divorcing the department from Detroit and its tarnished name
would allow cheaper refinancing of the $5.8 billion of
water-and-sewer debt, said Orr’s spokesman, Bill Nowling.

“There is a premium that the water and sewer department
currently pays on its financing because it’s associated
with the city of Detroit,” Nowling said.
“Bringing down the cost of borrowing is a major component
in the overall cost structure for the authority.”

Orr in his bankruptcy filing classified the bonds as secured
debt, which he plans to repay in full, while general-obligation
bonds are among $11.5 billion in unsecured debt he wants to reduce.

Bondholder leverage

That means that any plan to alter the system’s structure must
satisfy bondholders promised that payments will continue.

“Bondholders hold all the cards,” said Paul Mansour,
head of municipal research at Hartford, Conn.-based Conning,
which oversees about $9 billion of local debt.
Though a regional authority makes sense, investors are
“not going to give up something without something in return,” he said.

Suburban officials may take a similar stance.
They have long complained of mismanagement,
a lack of input into rates and decaying infrastructure.

In 2012, former department director Victor Mercado pleaded
guilty to rigging contracts to benefit then-Mayor
Kwame Kilpatrick and his friend, Bobby Ferguson,
an agency contractor. Kilpatrick was sentenced in October
to 28 years in prison for corruption.

Whoever runs the system will inherit higher costs for repairs
that were deferred for years, said Wayne County
Executive Robert Ficano, who is involved in the negotiations.
Until last year, the system spent 35 years under federal
oversight to reduce sewage overflows into the Detroit River.

Flint flight

Rates are expected to rise 4 percent in July. Detroit’s
combined residential rates in 2009 were ranked 22th
among 50 large U.S. cities in a survey by Black & Veatch,
an engineering consultant based in Overland Park, Kan.
The ranking was based on households using 7,500 gallons a year.

The Detroit system’s rate increases for Flint, Mich.,
prompted officials there to start digging their
own 84-mile pipeline from Lake Huron.
It will be cheaper for 250,000 customers who’ve seen
rates rise 342 percent since 2000, according to
data from Genesee County Drain Commissioner Jeff Wright.

The Karegnondi Water Authority, which is building the pipeline,
borrowed $35 million to begin construction, Wright said.
Total estimated cost of the pipeline is $275 million,
plus $60 million for a new treatment plant, Wright said.

Losing Flint-area customers will cost the Detroit system
about 6 percent of its revenue, according to the department
in an April 2013 statement.

Bond uncertainty

Water-and-sewer bond trades since the bankruptcy filing show
investors are uncertain about their investments.
The debt has changed hands at prices ranging from
less than 80 cents on the dollar to more than face value.

The varying levels reflect in part the credit quality of the
insurers backing the securities. Those include Berkshire
Hathaway Assurance Corp.., Assured Guaranty Municipal Corp.
and National Public Finance Guarantee Corp.

Ficano, the Wayne County executive, said bondholders would
rather see the city make draconian cuts elsewhere than put
their investments at risk with a restructured water department.

“It’s in the interest of a lot of creditors to strangle the situation
because they don’t want precedent set for other municipal bankruptcies
around the country,” Ficano said.

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