Report: Detroit could be losing out on millions under 'flawed' water system lease

Breana Noble
The Detroit News
Workers from Lakeshore Global Corporation work on a water main break at Larned and St. Maron Place in Detroit Sunday morning.

Detroit — A new report on Detroit's water system contends the city could be losing out on millions of dollars under a "flawed" 40-year lease with a regional authority forged in secret during Detroit's landmark bankruptcy.

The report, authored by researchers from the Haas Institute for a Fair and Inclusive Society at the University of California Berkeley, urges a reassessment of the city's lease agreements tied to the creation of the Great Lakes Water Authority, which operates the system.

The 100-page report, which was funded by $42,000 from the Troy-based Kresge Foundation, outlines the health, social and environmental impacts of water shutoffs in Detroit. It also lists seven broad actions that the researchers recommend should be taken to address disparities in water access and the system's governance in Metro Detroit.

The institute and Detroit's Metropolitan Organizing Strategy Enabling Strength, a faith-based advocacy organization, came together to push for the study in partnership with a dozen other local groups based on concerns over water affordability and infrastructure dating back prior to the city's bankruptcy, organizers said. 

At the center of water inequity in Metro Detroit, the researchers said, is the lack of a proper appraisal of the water system prior to the water authority being stood up as a component of the city's Chapter 9 filing. 

The report, released Monday, questions whether the $50 million annually the authority pays the city to run its water system accurately reflects the value of the city-owned asset. The majority of negotiations over the deal were conducted in mediation.

Since the deal was not a sale, it did not require a comprehensive assessment of the asset’s value, the report notes. 

The circumstances of the transaction — reached in the midst of a municipal bankruptcy and under emergency management — "gave rise to a transaction that would not have occurred under normal circumstances and is, correspondingly, blatantly inequitable."

A challenge, however, both when the leasing agreement was made and now, is a lack of comparable deals and details to set the terms.

But based on the 2017 sale of an $880 million system in Connecticut that serves six times fewer people than the Great Lakes Water Authority, the researchers estimated the Detroit system has more than $5 billion in equity. That would translate to a leasing rate of $215 million per year — 5.8 times what the city receives from the authority now, they said. 

"The economic value would help to achieve a respectful lease payment to the city of Detroit that represents the value of the asset as made available to the region," said Joseph Recchie, a report author and founder of Praxis Partners, a Columbus, Ohio-based company that seeks solutions to social justice objectives. 

Michelle Zdrodowski, a spokeswoman for GLWA, said negotiations over the formation of the authority were "extremely complex" and "preserved local control and ownership, while addressing the deferred needs of the system."

The authors of the report, she said, put it together "without any known effort" to contact the authority to gain an understanding of its formation or the parameters of its operation.

In addition to the lease, she said, the authority assumed billions in debt obligations across the water and sewer systems. Also, the federal court allowed the authority to set up an assistance program and to dedicate a half-percent of its total revenues annually toward it. 

Further, the market value for many transactions, cited as “comparable” in the report, are predicated on significant rate increases at the new utilities, and as the report’s authors say, "none of these points definitely shows that the GLWA lease payment is artificially low," Zdrodowski said.

Detroit Water and Sewerage Department Director Gary Brown said the city is benefiting from the lease deal.

The department, he said, has leveraged the lease payments to fund a five-year, $500 million capital improvement project to rehabilitate its aging infrastructure.

"It funds replacing water mains and relining sewer mains at the rate of 2 percent per year, which is the national water utility industry standard," said Brown, adding that last year the department replaced 25 miles of water main and relined 22 miles of sewer pipe.

"DWSD and contractors are hiring hundreds of Detroiters over the next few years to go to work rehabilitating our aging water and sewer infrastructure," he said.

The release of the report coincides with ongoing repairs of a water main break over the weekend that’s prompted a boil advisory for much of downtown Detroit as the city welcomes automotive industry executives for the North American International Auto Show.

"This is a beautiful city filled with a resourceful population and they are coming back," Recchie said at a Monday news conference at Metropolitan United Methodist Church on Woodward. "But if you bring international executives making site decisions, contracts ... they have to think about the city of Detroit as vibrant."

"The worst thing they can do is see a failed infrastructure because in the back of their mind is 'would my plant be shut down? In this instance, would I be shut down and be subject to liquidated damages because I can't deliver basic infrastructure.'"

Dr. John Powell of the Haas Institute said it was ironic that the report came out during the boil advisory.

“This crisis is going to get worse," Powell said at a Monday news conference at Metropolitan United Methodist Church on Woodward. "We know the system is under tremendous stress.”

Organizers said copies of the report have been sent to the offices of Detroit Mayor Mike Duggan and Wayne County Executive Warren Evans and they hope to arrange meetings to discuss the findings. 

James Martinez, a spokesman for Evans, confirmed Monday that the county received the report and "is open to discussing it once we’ve completed our review."

The report also renews an ongoing call for a moratorium on water shutoffs in the city and overhaul of payment policies amid a "crisis" that report authors contend is evidenced by some 100,000 water shutoffs in Detroit since 2014.

It advocates for an income-based rate structure and warns of "wide-ranging health consequences" of water deprivation. Depriving people of water, it adds, is a "violation of basic human rights."

"Inequity is a problem across the country," said Wendy Ake, an author of the report and director of the Just Public Finance project at the Haas Institute. "As systems built a century ago were patched together and as decisions for updating and expanding them were made, there was severe racial discrimination."

Other pieces of the agreement between the authority and Detroit also are "flawed," the report's authors say.

DWSD, in response to the report, issued a statement saying it "delivers clean, safe drinking water to our customers."

As a public utility, the department noted, it relies on rate-payers to fund the cost of service and to maintain the water and sewer system. The state empowers municipal water utilities to set rates, but basing them on income "is currently illegal in this state due to the Headlee Amendment and Bolt vs. Lansing," DWSD said.

"Therefore, an income-based water rate is not legally-defensible," the statement reads. "In Detroit, an income-based rate would transfer the cost of water service to the working poor."

Researchers, however, argued an income-based affordability plan funded by meter fees does not require the implementation of taxes and thus, does not require a voter approval.

The report notes that the lease is a "common-to-all" cost across the authority, with Detroit contributing $13.6 million to the annual payment. That adds to the city’s affordability problems, the researchers said, because the city already owns the asset and shouldn't pay a lease on it.

Researchers argue the current system has resulted in high, unmetered drainage charges in the city, which has hurt churches and other local institutions.

"Congregations have maintained a social fabric as our city has gone through its turbulent periods," said Ponsella Hardaway, a report author and executive director of MOSES. "This is a big heavy burden on them that could force some to close."

Because Detroit holds a unique role in the ownership of the system, the researchers argue it does not have proper representation on the authority’s six-person board.

Detroit has two board positions, while Macomb, Oakland and Wayne counties each have a single representative. A governor-appointed representative from Flint joined the board this year.

A supermajority — five of six votes — is needed to approve influential actions, which moderates the city’s influence, the report writers said.

The secret negotiations to establish and shape the regional water authority in 2014-15, conducted under a federal gag order, led to tension between Detroit and its suburban neighbors. Officials from Macomb and Oakland counties questioned the accuracy of financial figures provided by Detroit during the talks.

Macomb County Executive Mark Hackel said Monday that he disagreed from the beginning with the $50 million lease. Boosting that payment even higher, he said, is an "unacceptable thought." 

"I think it's heavily in Detroit's favor to begin with," Hackel said. "Off the top of our rates, we're paying $50 million a year to have the privilege of leasing Detroit's system to fix Detroit's infrastructure at a cost to rate payers that don't live in the city of Detroit."

Bill Mullan, a spokesman for Oakland County Executive L. Brooks Patterson, declined to comment on the water report. 

To address the water inequity most immediately, the researchers said, a moratorium should be put in place to end all resident water shutoffs. The shutoffs gained national attention in 2014 when about 33,000 homes lost water access for unpaid bills.

The shutoffs have continued, though they have slowed in recent years. The researchers said unlike for electrical shutoffs or foreclosures, there is no clear, navigable process by which users can appeal water shutoff decisions.

They also recommended an investigation into a water affordability plan and the suggested use of the income-based rates developed by economist Roger Colton in 2005. The Water Affordability Program, which City Council approved in 2006 but was never implemented, calls for a rate that does not exceed 2-3 percent of household income.

That initiative, the researchers said, could be bolstered by lowered or eliminated late fees, water repayment programs and other financial assistance programs to avoid water shutoffs. Actions to preserve water access, quality and oversight also could be supported by state legislation and more federal funding, they said.

“People want to pay their bills, and they want to have access to water," the researchers wrote, "and a true affordability plan would make this possible.”

The service agreement between the authority and Detroit, however, would make this difficult. It caps the amount rates can be increased by 4 percent annually, which the researchers said may need to be abandoned.

In its first three years of operation, the authority said it had an average annual increase of 2 percent for the water system and 2.6 percent for the sewer system.

"A more equitable cost structure would result in extremely modest increases (for suburban communities)," Recchie said. "A large community share in the costs. If you place it on a few people, it makes it very difficult."

DWSD said Monday there's a path for every customer to avoid interruption in water service. 

Since March 2016, DWSD noted, more than 10,000 households have benefited from the payment and arrearage assistance provided by the Water Residential Assistance Program. 

Customers also are enrolled in the 10/30/50 Payment Plan, which spreads past due balances over 6-24 months. In addition, nearly 2,500 Detroit households have benefited from minor home plumbing repairs through WRAP and toilet replacement, which has reduced their monthly bill an average of 23 percent.

"DWSD agrees more can be done to support water affordability and continually seeks additional funding for customer assistance programs through donations and grants," the statement said.