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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With No Regional Authority in Sight, Emergency Manager issues RFP for Private Operation of DWSD (UPDATED)

On March 21, 2014, Detroit Emergency Manager Kevyn Orr issued an RFP seeking proposals from potential private operators for the Detroit Water and Sewerage Department. This RFP comes after negotiations with Oakland and Macomb County stalled. Proposals are due April 7, 2014.

  
Given the size and complexity of the DWSD system, there are only a few companies that will likely respond to the RFP. I would look for responses from:

• Veolia Water
• United Water
• American Water

The RFP can be viewed or downloaded below. 

   RFP for Potential Operators of Detroit Water and Sewerage Department - Due April 7, 2014

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Update (3/31): The Detroit News is reporting here that Kevyn Orr's office has been in contact with 41 companies who are interested in operating and managing DWSD. The EM's office must be using a loose definition of "interest" as there are only a handful of companies that could qualify to operate a utility as large and complex as DWSD and respond to this RFP in 2 weeks. 

Update (6/6): The Detroit Free reported on Wednesday that Kevyn Orr's office received proposals from two companies.  American Water has confirmed they are in discussions. United Water and Aqua America have confirmed that that did not submit bids. The likely second bidder, Veolia Water North America, would not comment either way. 

Rep. Kurt Heise Introduces (Second) Bill to Create a Regional Water Authority (UPDATED)

On January 22, 2013, Rep. Kurt Heise (R. Plymouth) introduced H.B. 4009, a bill that would incorporate the Detroit Water and Sewerage Department into a regional water and sewer authority. Rep. Heise campaigned in 2010 on a similar plan, and introduced a similar bill in January, 2011 [H.B. 4112] shortly after his first election to the Michigan House of Representatives.

Rep. Kurt Heise (R. Plymouth)

Under Section 4 of the current proposed legislation, H.B. 4009, a new regional water and sewer authority would be incorporated and be governed by a board of directors whose members would be the chief executive officers from each county, city, village and township located in the service area of the regional system.  Board members would then select 5 members to serve a single, 2-year term on the executive committee.  The executive committee would have powers similar to the current Board of Water Commissioners. 

DWSD currently provides water service to 126 communities; 76 communities are served by DWSD's wastewater treatment facilities.  Source: DWSD Factsheet.

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Update (3/4): Rep. Heise's legislation is featured in the March, 2013 issue of American Water Intelligence (here), in which he describes his legislation as a "firewall against the current state of affairs. If Judge Cox cannot or will not make this happen, then my bill is ready to go."    

Detroit City Council Rejects EMA Contract, Plan to Downsize DWSD. What's next?

Last week, the Detroit City Council took no action on a $48 million contract with EMA, the consultant behind a controversial plan to reduce DWSD's workforce by some 81%. 

Earlier today, the Detroit City Council took action, but voted to reject the EMA contract outright and along with it DWSD's restructuring plan. The Detroit Free Press reports (here) that the City Council vote was unanimous. Council member Ken Cockrel Jr. cited the EPA's October 12, 2012 request for 45 days to review the EMA plan as a key reason to delay approval. 

“Those 45 days have not elapsed yet," Cockrel said. "We have not heard from the EPA. They have not indicated that they have no concerns. And I think when you have a federal agency that’s in charge of regulating environmental concerns for the country…I think we ought to give them the time to do it.” (Cite: Michigan Radio)  

The Board of Water Commissioners, anticipating this outcome, last week voted to proceed with EMA under a $2.0 million stopgap contract. This is only a temporary solution. 

Comment: So what's next? Will the Water Board acquiesce (uh, not likely) or proceed with (24) consecutive $2 million contracts, each one just small enough to avoid a City Council vote? (Possibly) Or will Judge Cox resort to "more drastic measures" as he has alluded to in several of his rulings this past year? (What will that look like?)  And is this any way to run a public utility, one that serves 4.3 million people? Really?  

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Water Board Approves Stopgap Contract with EMA as City Council Fails to Act on Larger Contract

Confronted with the Detroit City Council's failure to take action toward approval of a $48 million contract with Minneapolis-based consultant EMA, the Detroit Board of Water Commissioners yesterday held a Special Meeting and approved a resolution authorizing Director Sue McCormick to negotiate a stopgap agreement with EMA, for an amount not to exceed $2.0 million.  

The term of this agreement will cover the period from November 14, 2012 to June 30, 2013. And because of the dollar amount, this contract will not require City Council approval. 

Comment: It is unclear to me why City Council was required to approve EMA's $48 million contract -- it was approved by the Water Board on September 7, 2012 -- after all of the steps taken in the past 12 months by Judge Cox and others to separate DWSD from the rest of the City of Detroit. DWSD now has its own general counsel, HR department and finance. Submitting a contract that comes with an 81% staff reduction, to an elected body for approval, is a suicide mission. The Board of Water Commissioners knows this; Judge Cox must know it too. 

This situation probably explains a November 8, 2012 Root Cause Committee Report that requests, in part, that DWSD be allowed to exempt certain contracts from City Council approval. Without the Court giving the Board of Water Commissioners sole authority to approve the entire $48 million EMA contract, it will surely languish with City Council taking no action for the foreseeable future. 

On the other hand, what are the limits of Judge Cox's authority? Can he effectively divest City Council of its role in reviewing and approving significant contracts? Does enforcement of the Clean Water Act trump these concerns? What do you think? 

Update (11/20): Earlier today, the Detroit City Council voted to reject the EMA contract. The Detroit News reports (here) about Council's decision. Now what?  

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EPA Notifies Court, Seeks Time to Evaluate DWSD Plans to Cut its Workforce

On October 12, 2012, the U. S. Environmental Protection Agency (EPA) asked Judge Sean Cox for 45 days to evaluate DWSD's recently-announced plan to dramatically cut its workforce and  to take no further actions toward implementing the plan during this evaluation period. 

In a two page document(*) filed with the U. S. District Court captioned "Notice of the United States Regarding the DWSD's Motion for Interim Order," EPA Attorney Annette M. Lang, and Assistant U. S. Attorney Peter A. Caplan request that the Court give the EPA time to evaluate DWSD's proposal and whether it would affect compliance with the Clean Water Act:

"The Michigan Department of Environmental Quality ("MDEQ") recently informed EPA about a proposal that the Detroit Water and Sewerage Department ("DWSD") was considering that recommended, inter alia, a dramatic reduction in staffing level within DWSD's wastewater treatment plan and combined sewer overflow operations. EPA has not had the opportunity to review and evaluate the potential impact and implications of the proposal on DWSD's compliance with the Clean Water Act, 33 U.S.C. 1251, et seq, and its NPDES permit, including the operation and maintenance requirements contained therein. To the extent that actions by this Court on DWSD's Motion for Interim Order may open the way for DWSD's initiation of the implementation of that proposal, EPA seeks to notify this Court and the parties of its interest in having the opportunity to meaningfully undertake an evaluation of the proposal prior to any such action. 

"During the period of its evaluation of the proposal, EPA plans to work with both MDEQ and DWSD. To that end, managers and staff from EPA are already planning to meet with managers and staff from MDEQ on Tuesday, October 16, 2012, to discuss and evaluate the current situation. The meeting is intended to provide further clarification on a path forward. 

"With this notice, EPA is not taking any position on any aspect of the proposal before DWSD.  

"Accordingly, EPA seeks a period of forth-five (45) days to evaluate the potential impacts of the proposal on CWA compliance and asks this Court not to take any actions that would open the way for DWSD to initiate the implementation of the proposal prior to that time. DWSD has not reported any violations of its NPDES numeric limitations on solids since November 2011 and has not reported any other NPDES numeric limitations since March of this year [2012]. Therefore, nothing in the record would indicate that immediate commencement of the implementation of the proposal is required." (emphasis added)

Note: The case that Judge Cox currently presides over was originally filed in 1977 by the U. S. Environmental Protection Agency to enforce compliance with the Clean Water Act. The EPA has not played an active role in the case, however, for a number of years. The EPA's request that Judge Cox 'take no action' for 45 days is an interesting development. Judge Cox is not bound to comply with the EPA's request, but it is unlikely that he would simply ignore it. Stay tuned for how the Court and DWSD responds to the EPA's request.

(*) For readers with a PACER Account, the EPA's Notice was filed 10/12/12 in Case No. 2:77-cv-71100-SFC at Dkt #2492. If you're interested in a copy, I'd be glad to e-mail it to you. Just write me and put "EPA Notice" in the reference field.   

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Water Board Authorizes Director to Negotiate 5 Year, $48 Million Contract with EMA (UPDATED)

At a Special Meeting of the Board of Water Commissioners this morning, the Board unanimously approved a resolution that authorizes the Director, Sue McCormick, to negotiate and execute a 5 year professional services contract with EMA, Inc. for an amount not to exceed $48 million.

EMA is the consultant that on August 8, 2012 recommended that DWSD cut staffing levels within the Department by 81%.  Crain's Detroit Business also reported on this story here.  

The $48 million EMA will be paid over 5 years breaks down as follows:

• $19.5 million - Consulting Services ($17M) and Expenses ($2.5M)
• $21 million - Outsourcing Services
• $7.575 million - Contingency Reserve

This information was provided to Board Members by Matthew Schenk during this morning's Special Board Meeting.

Note: I realize the breakdown figures exceed $48 million a bit, but that's what I wrote down in my notes. Once the minutes for this meeting were published, or if I can get a copy of the full text of the Board resolution, I'll fix these numbers. 

Update (9/7): The Department published a press release this afternoon announcing the Board's approval of the EMA contract, along with a bit more explanation of what's expected to be part of EMA's contract. 

"In addition to the [consulting] services listed above, EMA will work on the development, assessment, and implementation of non-core outsourced services as originally identified within the 90-day operational assessment. Non-core services include building maintenance, grass cutting, snow removal, and janitorial services. Over the term of the agreement, it is anticipated that those outsourced services will come at a cost of roughly $21 million, resulting in an expected net savings to DWSD of more than $50 million." 

Update (9/10): Here's the breakdown of projected costs from Section 10.1 (Costs) of EMA's Phase 2 and 3 Proposal: 

 

Update (9/12): The Detroit News is reporting (here) that a formal contract with EMA is expected by October 1, 2012.  

Update (11/14): The Detroit News reports (here) that the Detroit City Council, which apparently has to approve EMA's contract, has put off a vote. One Council Member referred to the contract as "outrageous." No surprise. Its unclear, at least to me, why City Council is required to approve this contract after all of the steps taken in the past 12 months by Judge Cox and others to separate DWSD from the rest of the City of Detroit. DWSD now has its own general counsel, HR department and finance. Submitting a contract that is part of an 81% staff reduction to an elected body for approval is a suicide mission. The Board of Water Commissioners knows this; Judge Cox must know it too. This situation probably explains a November 8, 2012 Root Cause Committee Report that requests in part that DWSD be allowed to exempt certain contracts from City Council approval. Without the Court giving DWSD sole authority to approve the EMA contract, it will surely languish with the City Council for the foreseeable future. 


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Wayne State Law School Symposium, Panel to Address Possible Privatization of DWSD

On Friday, March 23, 2012, the Wayne State University Law School, Journal of Law and Society will host a symposium entitled “Michigan In Transition: The Restructuring of Governance Through Privatization and Corporatization."

Of interest to readers of DWSD Update is Panel 2 of the Symposium, which is scheduled to begin at 2:30 p.m., and will discuss privatization of DWSD.

The second panel will address the possible privatization of Detroit's water and sewage system. Environmental consultant and former assistant director at the Detroit Water and Sewerage Department Jim Ridgway will focus on how the current system functions. Oakland County Water Resources Commissioner John McCulloch will present the suburban perspective on privatization. Shar Habibi of In the Public Interest will provide insight on competition, valuation and delivery under privatized systems. Alex Beauchamp of Food and Water Watch will contribute with his grassroots expertise of water privatization in Atlanta and Chicago.

The Symposium will be held at the WSU Law School, Spencer M. Partrich Auditorium, 471 West Palmer, Detroit, MI 48202.  The  event is free, but attendance limited to 200 people.

If you're interested, click here to register online or call WSU at 313-577-8032.

Additional Resources:

• Brown, "Water Privatization Can Help Detroit from Drowning in Debt," Michigan Privatization Report (Mackinac Center for Public Policy, 2001). 
• Wolfram, "Don't Waste Water Treatment Privatization Opportunities," Michigan Privatization Report (Mackinac Center for Public Policy, 2001).
• "The Fiscal Condition of the City of Detroit," Citizens Research Council, April, 2010, p. 60 [discussed here] 
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Judge Cox Adopts Plan of Action for Overhaul of DWSD

On November 4, 2011, Judge Sean Cox entered an Order adopting the Plan of Action submitted by the Root Cause Committee that was created by his September 9, 2011 order.

Comment: We are studying the Court's Order and Plan of Action, and will have a complete review and analysis shortly. Suffice it to say, the Plan of Action put forward by the Root Cause Committee, which Judge Cox has now adopted by his Order, requires major changes to the way DWSD operates going forward, including its procurement policy. These changes are long overdue. 

2011-11-04.Judge Cox Order Adopting Plan of Action for DWSD Proposed by Root Cause Committee

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Governor Snyder Urges Private Dialogue on Water Issues

As reported by MLive.com earlier today - 

"Michigan Gov. Rick Snyder on Monday refused to take sides in the ongoing dispute over the Detroit Water and Sewerage Department, but he did indirectly criticize both city and suburban leaders for fighting the battle in the media rather than behind closed doors.
 

"Appearing on WJR-AM 760 moments after Detroit City Council President Charles Pugh and Oakland County Water Resources Commissioner John McCulloch made arguments against and for regionalization of the water department, Snyder told host Paul W. Smith he was disappointed by recent developments.

"I would rather have quiet discussions with people asking them to sit down and talk about the facts," Snyder said.  "Because there are many things that should be resolved before it gets to the point it is already.  It's unfortunate it has become a divisive issue at this time given all of the discussions going on.  It would be better if people said it doesn't have to happen on the radio station."

Governor Snyder was responding to recent legislation that would create a regional water authority (See, H.B. 4112 introduced by Rep. Kurt Heise on January 20th), and Oakland County's January 26th request that a federal judge impose an interim regional board through judicial decree. 

$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. 

House Candidate Kurt Heise Proposes Regional Water Authority for Southeast Michigan

The former Director of the Wayne County Department of Environment, and Republican candidate for the open 20th District House seat in Plymouth, Kurt Heise, has outlined a 6-point plan for replacing the Detroit Water and Sewerage Department (DWSD) with a new regional water authority (Southeast Michigan Water Quality Authority). Heise envisions a regional authority operated by a private company.

My plan would keep ownership of the system with the people of Detroit, but would transfer decision making to a regional board elected by community customers of which Detroit would be a member," Heise said. "State law would also be amended to allow the new Authority to refinance existing and future improvements, saving hundreds of millions of dollars that could stabilize water bills and provide new investment for infrastructure repair both in Detroit and the suburbs.

Mr. Heise is not the first to to promoting the idea of a regional authority -- legislation was introduced in 1999 (S.B. 781) and again in 2003 (H.B. 4206) -- nor is he alone. Earlier this year, in April, 2010, the Citizens Research Council of Michigan issued a report (here) which detailed the financial benefits to the City of Detroit of selling DWSD to a regional authority.  Op-Ed pieces in the Detroit Free Press (here) have also pointed in the same direction. The Mackinac Center for Public Policy also advanced the idea almost 10 years ago in several articles (here and here).

 

Update: The chorus of voices calling for a regional approach to water and sewer matters has grown louder following the federal indictments announced on December 15, 2010. Many of the allegations focus on corruption within DWSD.