Friday, April 16, 2010

Detroit Water and Sewerage Department, Is Sale to Regional Authority a Solution for Detroit's Financial Crisis?

The Citizens Research Council of Michigan recently released a report on the dire fiscal condition of the City of Detroit.  Among possible solutions to  Detroit's $300-400 million budget deficit, the CRC report explores the idea of selling the Detroit Water and Sewerage Department to a regional water authority, which in turn would provide the City with desperately needed revenues. 
The city has only one asset that could be “monetized”at a rate sufficient to make a major contribution to resolving the accumulated deficit: the  Water and Sewerage Department, which wholesales services to suburban communities. Because this is a self supporting function, transferring the function would not contribute to resolving the city’s general fund structural operating problem.  However, the sale of all or part of the assets of the department to a regional authority could provide much needed revenues. State enabling legislation could authorize the creation of a regional water and sewerage authority with bonding capacity. The city could agree to sell its interest in [DWSD] to the authority for an amount sufficient to resolve the accumulated and current deficits, and representative of the investment the city has made in the system. Provisions in the sale agreement could require that rates in Detroit could be no more than 80 percent of the lowest rate charged in any suburb, or the system would revert to Detroit ownership. The authority could sell revenue bonds that would be the source of the payment to the city, and could include the annual debt service on the bonds in the annual charges to customers. Currently outstanding debt would also have to be addressed, and perhaps defeased.

The effect of this would be higher water and sewer-age rates for all residents and businesses in the service area, to pay debt service on bonds sold to purchase the system from the city.  ["The Fiscal Condition of the City of Detroit," CRC Report 361, April, 2010, p. 60]
Click here for a copy of the CRC's Report. 

Monday, April 12, 2010

Detroit Urged to Sell Water and Sewerage Department

Today's (April 12, 2010) Detroit Free Press includes an Op-Ed piece by a local business consultant, Marcus Hudson, urging the City of Detroit to consider selling the Detroit Water and Sewerage Department. Entitled "Dump the Myths Sell Detroit's Water Department," Mr. Hudson's article seeks to debunk two of the most frequently cited reasons for maintaining DWSD as a public agency: profits and jobs. The principal reason to consider the sale of DWSD: money. Or the lack thereof. 
Given its current state of disrepair, Detroit needs to start raising revenue and acknowledge that cost-cutting can only get the city so far. Selling DWSD could be an important part of the solution and the impetus for longer-term growth. 
Mr. Hudson's Op-Ed piece may be a trial balloon by the Bing Administration as it wrestles with huge City budget deficits and is looking for ways to raise cash.  In 2009, the City of Detroit sold the Oakland-Macomb Interceptor to Oakland and Macomb Counties. This transfer was more about shedding responsibility and debt then raising cash. And despite requiring immediate and significant repairs (discussed here, and here), these two counties were glad to assume this responsibility.

Update: Mr. Hudson is quoted again in this May 12, 2010 Fox2 Detroit article promoting the notion of selling DWSD.   
 "I would suggest that they sell it or at least look at the option of selling it. If the deal doesn't make sense, don't sell it. However, not to understand the value of the water department is derelict." also reported May 12, 2010 on this issue (here).