August 18, 2014 at 8:44 am

Detroit, suburbs near deal on regional water authority

City would be paid $50M annually for 40 years

Perhaps the most vexing piece of Detroit’s financial recovery puzzle is about to fall in place. The suburbs and city are finalizing a deal to turn over ownership and operation of the Detroit Water and Sewerage Department to a regional authority.

Sources very close to the negotiations, who can’t talk publicly because of a federal court gag order, told me over the weekend the final details are being worked out and the deal could be done in as soon as two weeks.

Detroit Emergency Manger Kevyn Orr recently handed off responsibility for the water department to Mayor Mike Duggan, who also has been at the bargaining table for creation of the regional authority. The parties have been working with federal Judge Sean Cox, who is mediating the negotiations.

The deal has been hung up for months over suburban concerns that Detroit’s demand for an annual premium to bolster its general fund would send water rates soaring. That revenue is key to resolving the city’s bankruptcy case, which is scheduled to go to trial Aug. 29.

The suburbs also were concerned about taking on legacy costs and absorbing Detroit’s high rate of unpaid water bills. The city recently triggered a national outcry when it began shutting off service to delinquent customers; the cut-offs are currently paused.

Those issues are said to have been resolved, or commitments made to settle them, after the authority is approved.

Here’s how the new regional authority would work:

A six-member board would be formed, with two appointments coming from the city of Detroit, one each from Wayne, Oakland and Macomb counties, as well as one from the state. Currently, the authority that runs the city-owned water system has four members appointed by Detroit and three by the suburbs.

All major decisions by the new authority, including contract awards, rate increases and construction projects, would require five votes.

That’s similar to the protocol at the Cobo Center authority, which requires a unanimous vote on major issues, a stipulation demanded by Oakland County Executive L. Brooks Patterson.

In exchange for acquisition of the water system and its assets, the authority would pay the city $50 million a year for 40 years. That premium was the major sticking point of the talks.

But it fell away when it was demonstrated that the $50 million could be recovered through efficiencies gained by better management practices and by refinancing debt. The suburbs have been promised their residents will not pay a dime more than they are now to cover the payment to Detroit.

Key to the deal is a commitment by the state to help lower borrowing costs for the system.

The water department currently has a bond rating that is basically junk status. If it were to issue bonds on its own for construction projects — and there’s no guarantee it could even find a buyer — it could expect to pay interest rates of 5.5 percent or higher.

But the state has agreed to give the authority access to its revolving fund, a federally subsidized pool of money loaned out for capital projects.

Michigan also would issue debt on behalf of the authority, lowering the interest rate to the 2-2.5 percent range and saving tens of millions of dollars once the water system’s obligations are refinanced at the lower rate.

For suburban officials, the deal maker was a pledge to contain future water-rate hikes to no more than 4 percent a year, quelling fears that they’d have to answer to residents outraged about soaring water bills.

Those participating in the talks expressed frustration with the gag order issued by Cox, saying it has kept them from keeping their legislative branches informed of the progress. The county commissions and Detroit City Council will have to approve formation of the authority.

The other concern is that too many of the details of how the water system would operate are being decided in these talks, rather than by the authority once the new board is in place. It cuts off the give-and-take that may be necessary to get it past the county boards and council.

Negotiators for Detroit and Wayne and Oakland counties are pleased with the way the deal is shaping up. Macomb still has multiple objections, but it is expected to sign the memorandum of understanding when it is presented. If the bargain hangs up, observers say it will most likely be in the Macomb County Commission.

This is the deal that couldn’t get done. But now apparently it is. And it’s one more major step in Detroit’s march out of bankruptcy.

nfinley@detroitnews.com
(313)222-2064
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