02.18.14

The Last Lap? With the hope of filing a plan of adjustment with U.S. Bankruptcy Court Judge Steven Rhodes next week, and despite bestial weather and water main breaks, the Motor City is site to a flurry of closed-door meetings with creditors to fill in the blanks of its draft 99-page plan, meeting yesterday state government officials and a group of suburban county executives to attempt to hammer out a final agreement on a $1.9 billion plan to lease the city’s water and sewer department to a new authority. The city provided that information in its status update on its dispute between the city and bond insurers National Public Finance Guarantee Corp. and Ambac Assurance Corp. (Ambac and National Public have filed a joint lawsuit claiming it violates the law for the Motor City to use revenues raised under a voter-approved separate levy for any purpose other than for unlimited-tax GO debt service. Detroit and the insurers have been in mediation on and off since November, with Judge Rhodes having scheduled a hearing next Wednesday on the issue.) After the final plan is submitted, creditors will vote, with the city needing to obtain approval from a class of creditors who make up two-thirds of the amount of debt and over half by number.

A cornerstone of the Motor City’s final plan will include annual payments of $47 million for the next 40 years based upon the lease of its water and sewer authority to its ten surrounding county suburbs. The preliminary water plan calls for the suburbs to pay $1.88 billion to lease the Detroit Water and Sewerage Department, with the annual payment a critical component of Detroit’s bankruptcy exit and future sustainability plan to recover from the Motor City’s $18 billion debt. Should the deal go through, the counties would all be represented on the board, with two members each from Wayne, Oakland and Macomb counties, two city appointees and one appointed by Gov. Rick Snyder. Thus, much of yesterday was devoted to the arduous complexities of considering how to address the issues of governance and finances of the city’s proposal – complicated by the city’s inability, to date, to provide audited financial statements of the system, a necessity before the ten county commissioners from suburban counties can make an informed decision.

At its first meeting of elected county legislators yesterday to consider the delicate challenge of how to refinance and regionalize Detroit’s massive and troubled water system―billions of dollars in debt, riddled with a history of corruption and incompetence, and overwhelmed by antiquated infrastructure, that is falling apart with major water-main breaks occurring almost daily in Detroit, Gerald Poisson, chief deputy Oakland County executive, noted: “As it stands today, all of the suburbs are captive to a monopoly…Settling this is going to be really expensive and a hold-your-nose thing (no pun). It’ll be the most complex thing I’ve ever done in my career.”

Detroit’s proposal is further complicated by two problems: 1) income disparities: an estimated 40 percent of Detroit users cannot or will not pay their bills, and 2) Yesterday’s meeting uncovered made open what Deputy Oakland County Executive Daddow described as a “horrendously troubling” problem: the suburban negotiators have not received any financial statements about the fiscal situation of the Detroit Water and Sewerage system since June of 2012, despite repeated requests, including for the Motor City water department’s audited financial statement for 2013; the interim financial statement since the city filed for bankruptcy; details of labor contracts; lawsuits the department faces; planned capital improvements; and an explanation of how the city estimates it can generate $47 million annually on the deal while keeping ownership of the system—or, as Mr. Daddow stated: “The balance sheet is in an atrocious state…They don’t have a lot of cash, and for an operation that runs a billion-dollar business, cash is important.”

Gerald Poisson, chief deputy Oakland County executive, added: “We’ve talked to the state and said, ‘You have to find a way to backstop all of these people who aren’t paying.’ I know it’s heresy for a Republican to say that, but it has to happen” because suburbanites shouldn’t be forced to shoulder the large and swelling burden of non-payers. Yesterday Detroit officials told Mr. Poisson “they’re working hard to provide the financial statements,” although there are doubts because the record-keeping has been so shoddy and incomplete that accountants “hesitate to attach their names to this.” Nevertheless, notwithstanding the intense pressure to complete negotiations this week by Detroit and the state, Wayne County Commissioner Shannon Price said he and others on Wayne County’s board shared the determination of Oakland and Macomb officials not to bargain further without more information, fearful already about avoiding a deal that might impose decades of excessive rates for water and sewer service on suburbanites. Mr. Poisson added: “They certainly have timelines imposed by the court, but we have repeatedly informed them their timelines aren’t ours…We are on the hunt for a mutually beneficial agreement.” Or, as Wayne County Commissioner Shannon Price put it: “There’s no really good alternative. It’s really picking the best bad plan…We’re all trying to come up with something.” Macomb County Commissioner David Flynn noted the responsibility and challenge: “People aren’t going to be happy, because they aren’t going to realize that water rates will go up under any scenario, whether we accept this deal or not…At least we can get some control over the process.”

The Hard Road Back. The Harrisburg City Council last night approved the recovering Pa. capitol city’s first budget since adoption of its Harrisburg Strong recovery plan after cutting the salaries of several positions and rejecting salary proposals by the Mayor, with Council President Wanda Williams and Councilwoman Sandra Reid pressing for a freeze, especially after the police and fire unions made contract concessions. Council President Williams noted: “We had a crisis going on in the city of Harrisburg…We don’t feel comfortable just opening the checkbook and saying, ‘hey you can write a check for $79,000 for a job? We don’t even know the skills of some of the people he wants to hire.”

Notwithstanding, the city’s budget still must be approved by the state-appointed receiver. The budget action last night came in the wake of yesterday’s joint announcement by Mayor Eric Papenfuse and the Capital City Paid Firefighter’s Association IAFF Local 428 at City Hall about union concessions of as much as $1.6 million, which could pave the way for the city to exit state receivership. The union last week voted 38-15 to approve a contract extension through 2017 that features no pay hike for 2013 and 2014, then raises of 1%, 1% and 2%. The existing contract, through 2016, had called for annual 3% increases. Last month the union, which represents 63 firefighters, rejected the concession package. The other public-sector unions had agreed to concessions as part of the Harrisburg Strong recovery plan, which the Commonwealth Court of Pennsylvania approved last September. Harrisburg has petitioned the court to exit receivership, but to remain under state oversight through Act 47, the distressed communities program. Last night’s budget approval will mark a return to the debt markets for the capitol city. In the wake of the union concessions, Mayor Papenfuse’s proposed raises for managers and new hires were the most controversial issue before Council last night—especially after City Treasurer John Campbell advised that managers in existing positions could not be provided raises, as sought by the Mayor, and after City Solicitor Neil Grover advised Council that the proposed $5,000 boost for police captains’ salaries could not happen, because the city remains under a court-ordered pay freeze. That freeze, however, does not apply to new hires, even if their job is not new and their predecessor made less, or, as he added: “I realize it’s not fair. The administration intends to go back and address this in a more equitable way…But we have to have a basis by which to do this (in the eyes of) the court … in an economically responsible way.”  Nevertheless, as Council President Williams noted: “Just because this administration doesn’t have heavy anchor of debt around its neck doesn’t mean we would spend as if we have reserves to spare.”

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