$4.6 Billion in DWSD Water, Sewer Revenue Bonds Downgraded

On December 20, 2010, Moody's Investor Service lowered its rating on $4.6 billion of water and sewer bonds issued by the Detroit Water and Sewerage Department.

Moody's lowered to A1 from Aa3 the credit rating on $1.43 billion of outstanding sewer bonds secured by a senior lien pledge of net revenue, and lowered to A2 from A1 on $1 billion of revenue debt secured by a second lien. At the same time, Moody’s lowered to A1 from Aa3 the rating on $1.54 billion of senior lien water bonds and to A2 from A1 on $660 million of second lien water bonds.

All of Detroit's water and sewer revenue bonds are now graded in the "Upper Medium Grade" category, down from "High Grade." Moody's also revised its outlook for Detroit's water and sewer bonds to negative.

Moody's cited the risk from interest-rate swaps and "lean financial flexibility" that could crimp Detroit's ability to service this debt. Moody’s said debt service coverage on the bonds has diminished amid the economic slump that has hit the Detroit area and because of large payments it may face to cancel interest- rate swaps.

Federal Indictments Heighten Calls for Regional Water Authority

Not unexpectedly, the federal corruption charges brought last week against former Mayor Kwame Kilpatrick, Contractor Bobby Ferguson, and former DWSD Director Victor Mercado, have led to renewed calls for the creation of a regional water authority. Many of the allegations in the 38-count indictment involve bid rigging, kick-backs and general corruption in the DWSD contracting process over the past 8 years.

Oakland County's Brooks Patterson (County Executive) and John McCulloch (Water Resources Commissioner) have been outspoken in their calls for a new regional water authority.  

"The entire system has been extremely dysfunctional, and we need to start with a blank sheet of paper as to how the system is governed and how the system is managed on a day-to-day basis," McCulloch said.

Macomb County officials, including Public Works Commissioner Anthony Marrocco also supports a regional authority citing last week's indictments as the final straw. Wayne County Executive Robert Ficano opposes a regional authority. Mayor Bing has not weighed in yet on this issue.

Of the plans being considered, including legislation to be proposed by Kurt Heise, recently elected to the Michigan House of Representatives, most involve the City retaining ownership of the water and sewerage system with management of the system shifting to a regional authority. Advocates of this approach cite the transition of Cobo Hall and the Detroit Zoo to independent authorities with ownership retained by the City of Detroit. As we reported (here) in April, under such an arrangement, the City of Detroit would likely receive a significant annual revenue stream at a time when it desperately needs money. As such, Mayor Bing is unlikely to dismiss out-of-hand  the idea of  creating of a regional water authority. 

Mayor Bing will also have to contend with an issue that is certain to arise -- privatizing daily operation of DWSD's water and sewerage plants. Contracting with a private company for such services will stir up fierce opposition by the unions representing most of DWSD's  employees, operators and professional engineering staff. This debate will play out over the next 12 months. 

Update: Local journalist and political commentator, Jack Lessenberry, has also weighed in on this issue. His December 21, 2010 essay entitled "Time for Sanity," which endorses a regional approach, is published here.