Detroit to Sell Part of Sewer System to New Authority

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CHICAGO - A pair of Detroit suburbs would form a new bond-issuing authority to purchase a piece of the massive Detroit sewer department as part of a larger agreement between the city and the suburbs that is expected to end more than three decades of federal oversight of the system.

Officials said they hope the regional agreement would help secure up to $4 billion in federal infrastructure stimulus dollars from the incoming Barack Obama administration.

Separately, the Detroit City Council recently approved a trio of bond measures for 2009 even as the state continues to bar the city from borrowing until it completes its long-delayed 2007 audit.

One of the largest regional water systems in the U.S., the Detroit Water and Sewage Department has operated under a federal consent decree since 1977, said spokesman George Ellenwood. The tentative agreement presented to U.S. District Judge John Feikens yesterday would resolve a number of ongoing conflicts between the city and the suburbs. To settle one dispute, Detroit would sell a sewer interceptor - a larger sewer line that runs through the suburbs - to Macomb and Oakland Counties for up to $300 million. The suburbs would finance the purchase through the sale of bonds issued by a yet-to-be created authority.

The city would continue to operate the department, which currently has a $3.55 billion, five-year capital improvement program that is expected to be financed primarily through borrowing, Ellenwood said. The system has a total of $2.27 billion of outstanding water bonds and $2.6 billion of outstanding sewer debt. All three rating agencies rate the credit in the single-A range.

Officials hope the agreement will increase their chances of securing federal road and sewer infrastructure stimulus money, Ellenwood said. "It's a more convincing case we can make together and more credibly talk about regional cooperation without outstanding litigation between us," he said.

Meanwhile, the Detroit City Council this month approved three 2009 borrowing measures, including a proposal to place a $263 million bond issue on the Feb. 24 ballot. Proceeds from the issue would finance a variety of capital improvement projects across the city.

The council also approved a measure to issue $225 million of revenue and tax anticipation notes as part of the city's annual note issuance. Aiming for a March 2009 sale, officials would use proceeds from the notes to pay operating expenses in the current fiscal year.

A separate measure allows the city to sell up to $115 million of unlimited-tax general obligation bonds that were authorized by voters as part of the 2007 and 2008 capital improvement programs. The city may issue that debt at some point in 2009.

As part of the resolution, the council also authorized officials to refinance up to $280 million in GO debt to achieve a 3% savings. In a memo to the council, Irvin Corley Jr., the director of the council's fiscal analyst division, noted that current market conditions prevent any savings on the city's outstanding debt, and that the city would probably pay an interest rate of around 6% on any GOs, higher than in past years.

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