The Complexities of Federalism in Municipal Distress

Columbus Day, 2014
Visit the project blog: The Municipal Sustainability Project

Invoking State Oversight & Federalism. Jefferson County filed a motion last Friday to appeal a ruling by U.S. District Judge Sharon Blackburn which could undermine a critical provision of the County’s plan of debt adjustment approved by the U.S. Bankruptcy Court last November which provided that the court could enforce sewer rate increases. The county is raising issues which go to the heart of federalism—especially with regard to which level of government―and branch―has authority to make fundamental revenue decisions. Judge Blackburn’s decision permitting an appeal could threaten the security of investors who purchased $1.8 billion of 40-year refunding sewer warrants last December. Under Jefferson County’s plan, if Judge Blackburn agrees to certify her ruling, Jefferson County will immediately file an appeal with the 11th U.S. Circuit Court of Appeals, with Jefferson County Commissioners David Carrington and Jimmie Stephens stating: “The county’s appeal would challenge the power of the district court to invalidate the portion of the plan of adjustment under which the bankruptcy court retains jurisdiction to enforce the county’s compliance with its sewer rate covenant throughout the term of the new sewer warrants…Regardless of the outcome of the county’s request to appeal last week’s ruling, and regardless of any ultimate ruling on the merits of the appeal before the district court, we fully intend to comply with the obligations undertaken by the county when it issued the new sewer warrants, including the rate structure that was adopted by the County Commission.” Judge Blackburn’s actions arose in the wake of a series of motions that were filed in as part of three appeals to Jefferson County’s approved plan of debt adjustment which U.S. Bankruptcy Judge Thomas Bennett had approved by a group of local residents and elected officials who are ratepayers of Jefferson County’s sewer system, with one appeal challenging Judge Bennett’s confirmation order (of Jefferson County’s plan of adjustment) and claiming the ability of the federal court to retain jurisdiction over sewer rates is unconstitutional—a claim the county sought to dismiss, but which Judge Blackburn denied, noting, in her ruling, that Jefferson County had already issued new sewer warrants to retire the outstanding debt, and that some parts of the bankruptcy plan “may be impossible to reverse.” Nevertheless, she said she would consider the constitutionality of the plan that cedes the county’s future authority to set sewer rates to the bankruptcy court. In its motion, Jefferson County argued that no federal court can strike down a provision of a Chapter 9 plan of adjustment or a confirmation order “without the debtor’s consent.”

The Sharing Economy. Mayhap ironically water and sewer authority are a fundamental part of Detroit’s proposed plan of debt adjustment—and now on Friday Moody’s has weighed in affirming its view that the regional authority takeover of Detroit’s Water and Sewerage Department (DSWD) should be a positive for holders of existing DWSD debt in the wake of the Motor City’s and its adjacent three counties’ approval of the Great Lakes Regional Water Authority, writing: “The regional authority may result in greater legal separation from the city, a positive for existing creditors of DWSD because the authority may potentially isolate creditors from the risk of a future bankruptcy filing by the city.” Moreover, Moody’s analyst wrote that the credit rating agency expects no major changes in operations and that the new authority would not impact the credit of Macomb, Wayne, or Oakland Counties. Nevertheless, according to Moody’s, the new authority will have some exposure to Detroit’s credit weakness, because the Motor City is expected to become its largest wholesale customer. Indeed, in a related development, Motor City Mayor Mike Duggan issued a statement praising his neighboring jurisdictions for their approval of the deal: “Forty years of division over control of our regional water and sewer system has ended…The fact that the legislative bodies of the City of Detroit and all three counties have approved the creation of the Great Lakes Regional Water Authority shows the new sense of cooperation and partnership that exists between our city and its suburban neighbors.” The new authority will be run by a six-member board made up of two Detroit mayoral appointees, one appointee from each county, and one appointee of the Governor, with key decisions on issues such as contracts or future privatization necessitating five out of six votes.


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