City of Detroit Department of Water and Sewage employees represented by AFSCME 207 went out on strike September 30, 2012. The workers are opposing lay-offs and pay cuts. (Photo: Abayomi Azikiwe), a photo by Pan-African News Wire File Photos on Flickr.
October 7, 2013 at 1:00 am
Detroit's dictator Orr speeds regional plan for water authority
Steve Pardo
The Detroit News
Detroit— Officials are fast-tracking the creation of a regional authority to take over the Detroit Water and Sewerage Department in an effort to leverage millions in annual revenues for the city.
Detroit’s emergency manager, Kevyn Orr, has been working with regional officials and water department board members on a plan.
The authority would either own or lease the department, collect revenue from water bills and make payments to the city. The annual revenue could range from $60 million to $120 million, said Bill Nowling, Orr’s spokesman.
The move is critical to Orr’s bankruptcy strategy in part because it would provide the city with a secure revenue stream, Nowling said.
“We definitely want to have some kind of arrangement — at least an agreement in principle — by the end of the year,” he said.
Orr and Gov. Rick Snyder have said Detroit needs to take better advantage of its assets as part of the city’s financial restructuring.
The water department, which is undergoing a major downsizing with a goal to reduce its workforce by 80 percent by 2017, is considered one of the city’s most stable sources of revenue.
Questions remain about the regional authority, including who would sit on the board and how it would be financed. For years, suburban leaders have complained about their lack of input into the governance of the department that serves more than 120 municipalities in Metro Detroit. Nowling said a regional authority would give suburban leaders more of a say in operations.
The projected millions in lease revenues Detroit would see would come from expected favorable financing. State law prevents municipal water systems from making a profit by charging more for water and sewerage over production costs. Under a proposed regional authority, the city would receive revenue through the lease, not through water sales.
Nowling said creating a regional authority could have immediate financial benefits.
The department suffers financially just by having the city’s name in it, Nowling said. Removing “Detroit” could translate into a nearly half-percent improvement in the interest rate when it refinances bonds, he said.
“There is a penalty in terms of higher interest rates for anything associated with the city of Detroit or has the city of Detroit name in it,” he said.
About 80 percent of the revenue from water and sewerage fees comes from suburban customers, Nowling said.
“It makes sense for an authority to run (the department) instead of trying to sell it or having the city continue to manage it,” he said.
State Rep. Kurt Heise, R-Plymouth Township, has introduced bills calling for a regional authority. House Bill 4009, issued in January, would incorporate the department and have scores of members — one each from the 126 municipalities served. He is against the plan being considered by Orr and the current water and sewerage board.
“It is my opinion as a legislator and as a municipal lawyer that the three counties do not have the authority to bind the members of the DWSD,” Heise said. He believes it would take a state law to properly create an authority.
“My model involves the communities directly in the governance,” he said. “If we’re going to have a regional system it needs to be truly regional.”
A federal judge, who in March ended the court’s 35-year oversight of the department, blasted the idea of creating a regional authority this spring.
U.S. District Judge Sean Cox, in his filing, wrote: “This appears to be sheer speculation, based upon the hope that the department’s bond ratings would improve substantially upon the creation of the proposed authorities.” The court had maintained oversight of the Detroit agency for not complying with the federal Clean Water Act.
Water department officials, who recommended the creation of an authority in March,referred all questions regarding the regional authority to Nowling.
Commissioners in Wayne, Oakland and Macomb counties have agreed to pay up to $100,000 each to the Farmington Hills accounting firm UHY Advisors to evaluate the formation of an authority.
The results, which are to show the benefits and challenges of an authority, are expected within the next few weeks.
$5 billion in debt
The water and sewerage department has about $5 billion in outstanding debt, said David Jacobson, a communications strategist for Moody’s Investor Service. What would happen to the current bondholders if that debt is reissued to a new authority, he asked.
“If it goes forward, would they be forced into what we call a distressed exchange?” Jacobson said.
Detroit’s water debt is considered the soundest in the city.
Moody’s rates the current water and sewer liens as B1 and B2 — speculative and a high credit risk. Despite the highest outstanding debt, they hold the highest rankings in Detroit. The city’s general obligation debt rating is Caa3 — poor quality and with a very high credit risk. Another agency, Fitch Ratings, last week downgraded $613.8 million in Detroit bonds to “D” from “C” after the city said it planned to skip interest payments which were due Tuesday.
An authority involving Wayne, Oakland and Macomb counties would allow for water department bonds to be refinanced at a much better rate, Nowling said. Oakland and Macomb counties both have AAA ratings — the highest grade Moody’s provides. Wayne County ranks much lower but is still above Detroit’s junk bond rating.
“The new authority could refinance all the bonds at a much much lower rate, which obviously would be a huge cost savings right there,” said Shannon Price, a Wayne County commissioner. Price, a Canton Township Republican, is chairman of a newly formed commision water board task force.
Selling facility suggested
Price said Wayne County should look to sell its Downriver Wastewater Treatment Facility. The Wyandotte facility serves 13 Downriver communities. The value, he said, has been estimated at $500 million to $1 billion. The facility is operated by Wayne County and the 13 communities.
Interest inbuying the treatment plant from a third party is likely to be high, he said. Wayne County is facing its own financial problems outside Detroit. The threat of an emergency manager coming into the county looms, and its general fund debt was recently measured at $210 million.
But any attempt at selling the treatment plant would be met with swift legal opposition, said Dan Paletko, Dearborn Heights mayor and chairman of the committee that oversees the plant — the Downriver Joint Management Committee.
Wayne County owns the land, but Paletko said the 13 communities have some ownership claims, having made some $300 million in improvements to the plant over the years.
“You would see a fight immediately from the 13 communities, and we’re all united on that front,” he said.
SPardo@detroitnews.com
(313) 222-2112
From The Detroit News: http://www.detroitnews.com/article/20131007/METRO01/310070012#ixzz2h5DLPcaE
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