Emergency Manager Gives His Account of Failed Negotiations for Regional Water Authority

On March 26, 2014, the Michigan Chronicle published an exclusive interview with Detroit Emergency Manager Kevyn Orr and asked for his take on why negotiations for a regional water authority (have thus far) failed.

Here are excerpts from that interview:

MICHIGAN CHRONICLE: What really happened in the deal involving the Detroit Water and Sewerage Department that made Oakland and Macomb counties balk?

KEVYN ORR: We tried to design a proposal for them that was responsive in a number of ways. First, it was responsive to their request for decades that they have increased governance control and management of the water department. Suburban communities make up over 65 percent of our revenue. We appreciate that and we want to be responsive. Secondly, it was to make sure that citizens of Detroit continue to own the water department. So the pipes, the lines, switches, the sewerage system, all of that is still going to be owned by the City of Detroit. You can’t replace that overnight. No matter what happens it will be owned by the City of Detroit. Number three, it was to generate sufficient cash from interest rate savings by having a better credit rating department.

Number four, capital improvements. The concerns about capital improvements were going to be addressed, provide a reserve for delinquent accounts that would be replenished yearly. That there will be no delinquencies, rate pressures on the counties customers or city customers and result of rate pressures. And generate a revenue stream of 47 million dollars a year for 40 years for Detroit’s creditors. We thought it was an ideal solution that was going to benefit all parties and be responsive to the requests that people have been talking about.

* * * 

MICHIGAN CHRONICLE: Can you explain what you meant by leasing as an option?

KEVYN ORR: We were going to create an authority, which would essentially lease the department and operate it and pay the city a lease payment. That would be $47 million a year. Our county partners don’t want to do that. That’s fine. So we are going to move away from the lease concept more to a contract. There are operating contractors out there who would bring greater efficiency to the system. That’s what they do. We would also entertain requests for information about an outright purchase. I said when I first came in here I did not want to sell the water department. I still do not want to sell the water department.
But I think because our expectation was that we were going to have an authority deal in fairly short time, that’s what everybody wanted. But I think in order for me to be responsive to our creditor class now that the authority proposal appears to be slipping away, we have to be able to say we explored every avenue to rationalize the key assets of the city. And when I came in I said there are 15 buckets of assets. We’ve dealt with most of them.

Click here to read the full interview with Mr. Orr at the Michigan Chronicle. 

Photo Credit: Reuters


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Amended Plan Emerges for New Regional Water Authority, Emergency Manager Slashes Proposed Payments to City of Detroit

The Detroit News is reporting here today on a revised plan to convert DWSD into a regional water authority that would require dramatically lower payments to the City of Detroit and cede control of the governing board to the suburban customer base. 

Highlights of the leaked confidential proposal reportedly include: 

• Payments to Detroit would be $47 million per year for 40 years -- $1.88 billion. This is a far cry from the $70 million per year, up to $9 billion in total, that the Emergency Manager originally floated in proposals with Wayne, Oakland and Macomb Counties. 
• Detroit would retain ownership of DWSD facilities, but operations and control would be transferred to a new nine-member board that would include two members each from Wayne, Oakland and Macomb Counties, two city appointees, and one member appointed by Governor Rick Snyder. 
• The new authority would be called the "Great Lakes Water and Sewer Authority," rather than the "Metropolitan Area Water and Sewer Authority." 
• Detroit would become a wholesale customer of the newly created authority.

Question: Is the new name of the proposed authority, "Great Lakes Water and Sewer Authority" -- which sounds more inclusive than "Metropolitan Area Water and Sewer Authority" -- meant to serve as an olive branch of sorts to the City of Flint and Genesee County? They left DWSD last year to start their own water authority and plan to spend $360 million or more just for the pipeline.  

If this plan is adopted, it will be interesting to see who Governor Snyder appoints as the ninth member of the Board. However, it doesn't make sense to appoint someone unless they're part of the customer base, right? 

What do you think? 

I'd like to hear your thoughts, either by online comment or privately. 

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Detroit Emergency Manager Reportedly Considers a "Regional Authority" Minus 2/3 of the Region

The Detroit Free Press reports this morning that Emergency Manager Kevyn Orr is contemplating a regional water authority without Oakland and Macomb Counties if they don't get on board with his plan that would have the suburban communities pay the City $9 billion over 40 years to operate DWSD under the auspices of a new authority. That would leave the City of Detroit and Wayne County, whose finances are not much better than Detroit's, to form the core of a new authority.  

Comment: Huh, what?!?  Cut off about 2/3 of your paying customer base, and go it alone with Wayne County? You can't be serious? The old expression - "cutting off your nose to spite your face" comes to mind when I read this story. 

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Detroit Ordered to Disclose Details of Plan of Adjustment to Water and Sewer Bond Holders

Earlier today [12/31], the Judicial Mediator in Detroit's Chapter 9 bankruptcy case, Judge Gerald Rosen, ordered Detroit's Emergency Manager to disclose to bond holders the details of the City's plan to convert DWSD into a regional authority.  Specific details of the City's plan have thus far been kept secret.

In a two-page order, Judge Rosen ordered the City of Detroit to disclose to water and sewer bond holders by the close of business on Thursday, January 2, 2014 detailed information including the following:

1. The amount that the City expects to receive if the water and/or sewer systems are leased, sold, or transferred, including a summary of how those amounts will be paid.
2. Payment terms, including interest rate, treatment of existing call provisions, and any proposed make whole provisions. and how the payments will be treated relative to the bond payments.
3. The amount of legacy pension, other post-employment benefits (OPEB) and certificate of participation (COP) liabilities the City intends to assess to the water and sewer systems under all potential approaches being addressed by the plan including, without limitation, those being assumed by the City as part of the lease/transfer payment, those being assumed by the lessee/transferee, and those being assessed to the water and sewer systems as operating and maintenance (O & M) expenses if the City retains the water and sewer systems.

Judge Rosen has also scheduled two mediation sessions in New York with bond holders for January 6 and January 7, 2014.

Thus far, the specific details of the Emergency Manager's plan for regional authority have been confidential, and shared only with the suburban counties  that would comprise the new regional authority and their advisers. The general outline of the EM's plan, however, is not a secret and follows the plan first adopted by the Board of Water Commissioners on March 13, 2013.

Under the proposed "Metropolitan Area Water and Sewer Authority," the City would either lease the assets of the DWSD system to the authority for up to 40 years, sell it to the newly created body, or operate under a concession agreement. The authority would collect water bill payments and pay the City a monthly fee. How much of a fee, of course, is one of the major sticking points.

A self-imposed December 20th deadline for reaching a deal with Wayne, Oakland and Macomb Counties passed without a deal.

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Update (1/2): As of 5:20 p.m. today, no documentation related to the Plan of Adjustment had been filed with the bankruptcy court. Judge Rosen did not specifically order that the City file its information with the Court, but I thought there might be a proof of service indicating compliance with the Court's order. 

Plan for Regional Water Authority Moves Forward (UPDATED)

The Detroit News reports this morning (here) that the Emergency Manager is pressing ahead with plans for the creation of a regional water authority. Wayne, Oakland and Macomb Counties reportedly have put up $100,000 each for the accounting firm UHY Advisors to evaluate the formation of a new authority. 

In June, 2013, the Emergency Manager endorsed the idea of creating a regional authority. This followed approval of a plan for the creation of a regional water authority by the Board of Water Commissioners on March 13, 2013. 

State Rep. Kurt Heise (R-Plymouth Township), who introduced legislation calling for a regional authority in January (HB 4009), 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.”

Update:  On Thursday, October 10, 2013, Rep. Heise will be a special guest at a town hall meeting in Livonia hosted by Council President Laura Toy. The meeting is to discuss water and sewer rates from DWSD and the potential for a regional water authority. The meeting will take place at the Livonia Civic Center Library, 32777 Five Mile Rd, Livonia, MI from 7:00 to 9:00 p.m.

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EM Embraces Root Cause Committee's Plan of Action, Proposes Creation of Regional Authority

Earlier today, at a closed-door meeting with about 150 banks, bondholders, unions and pension funds, Detroit's Emergency Manager, Kevyn Orr, outlined his plan to restructure the City of Detroit's massive debt. 

As part of the plan presented to creditors, the EM outlined a plan to convert DWSD into a regional water authority that followed the Plan of Action proposed by the Root Cause Committee, and adopted by the Board of Water Commissioners on March 13, 2013.  

The EM proposes creating a new authority called the Metropolitan Area Water and Sewer Authority (MAWSA), which would operate as a standalone public authority. The City would permit the new authority to operate the DWSD assets through a concession agreement or lease agreement.

Note: The report presented to creditors by the EM can be found here.  The portions relevant to DWSD are at pages 37-38, 83-86, and 101-102.

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City of Detroit Seeks 10 Percent Cut from Suppliers, Including DWSD Contractors

Detroit Mayor Dave Bing is seeking a 10 percent price reduction from City of Detroit suppliers effective January 1, 2012. Crain's Detroit Business reports today that the Mayor's request extends to companies that do business with the Detroit Water and Sewerage Department.

In a December 2, 2011 letter, which was received by suppliers last week, Mayor Bing writes:

The financial participation of all stakeholders, including suppliers, has been identified as a key component in this overall cost reduction strategy. Given the importance of the supplier community, the City of Detroit will be contacting all suppliers to begin an earnest dialogue around the City's financial position and its implications.

2011-12-02.City of Detroit - Letter to Suppliers Re 10 Percent Price Reduction

Update (12/13): The Detroit Free Press (here) and Crain's Detroit Business (here) are reporting that the City of Detroit has already stopped paying some of its vendors.  I've not heard or read of anything similar happening on DWSD projects, however.  Have you?

Update (12/14): The Chair of the Board of Water Commissioners, James Fausone, indicated at today's regular Water Board Meeting that the 10 percent cut requested by Mayor Bing would be discussed further at a Special Meeting of the Water Board on December 21, 2011. 

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Emergency Financial Manager, Appointment Would Trigger "Credit Event" and Hit DWSD Hard

Governor Snyder's announcement last Friday that the State of Michigan was initiating a review of the City of Detroit's finances, the first step in the appointment of an Emergency Financial Manager (EFM), has triggered concerns about the financial impact such an appointment would have on the Detroit Water and Sewerage Department.

Following the Governor's announcement, The Bond Buyer, a national trade publication that covers the municipal bond industry, warned (here) that DWSD could face "huge fees" triggered by the appointment of an EFM, which would be a "credit event" under insurance policies that accompany $1.6 billion worth of water bonds.

[T]he appointment of an emergency manager . . . would trigger termination events on [credit default] swaps that hedge $948 million of pension obligation certificates issued in 2006 and $1.6 billion of water bonds. Detroit in early 2009 narrowly avoided a $400 million termination fee tied to the pension certificates after it was hit with a downgrade that prompted a termination event. Local officials negotiated for months with the two counterparties to achieve an amended agreement that avoided the payment. If the state appoints an emergency manager, Detroit would face the same problem again.

* * * 

Last April, Fitch Ratings downgraded the city's $2.1 billion of water bonds, citing in part an extensive derivative program at the Detroit Water and Sewerage Department that hedges $1.6 billion of the debt. "In recent years the negative fair value of the department's swaps have risen, increasing the termination risk associated with the swaps," Fitch's Doug Scott wrote. "Should the department be required to post collateral, it would negatively affect the department's financial profile to some extent."

The city is planning to come to market with a water bond refunding to shed the swaps and avoid termination payments. The price tag of the termination fees remains uncertain, but it would likely be in the hundreds of millions. At the end of 2010, the negative valuation of the water and sewer bond swaps was $165 million. (emphasis added)

Cite: "Detroit May Face Huge Termination Fees for Swaps." The Bond Buyer 2 Dec. 2011

The issue (and risk) of termination fees is discussed in the financial notes section of DWSD's 2010 Water Fund Financial Statement (here) beginning at p. 25.

Comment: I profess no expertise in this area, but this report seems rather alarming to me. At a minimum, faced with penalties in the "hundreds of millions" range, DWSD would have to delay or defer a number of significant capital improvement projects. If someone with a background in public finance or municipal bonds (or credit default swaps) can shed light on this issue, please comment. Your input would be appreciated.  

Update (12/6): The Detroit News reports this morning (here) that "The [State of Michigan] has yet to approve a deficit elimination plan Detroit submitted in July, a delay that puts a hold on the sale of about $900 million in bonds for capital improvements of the city water-sewer system."

Additional Resources:

• “Moody’s: Detroit Ratings On Review For Cut On Possible State Takeover,” Wall Street Journal, December 7, 2011 (subscription required)
• “Detroit on Review by Moody’s Will Pay $211 Million to Cut Swaps,”  Bloomberg Business Week, December 8, 2011 
• “Moody’s Puts Detroit GO, Water Debt on Negative Watch,” The Bond Buyer, December 8, 2011 
  

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