Oakland County, Mich., Sells $58M to Buy Pontiac's Sewer System

CHICAGO — Oakland County, Mich., Tuesday sold $58 million of triple-A rated wastewater bonds to finance the purchase of Pontiac’s sewer system in a deal that supporters said could serve as a model for other struggling Michigan municipalities.

The county used the proceeds for an up-front cash payment to Pontiac for its wastewater system.

The Detroit suburb, which is under emergency management, will use the $58 million to pay off debt and wipe out a general fund deficit. The deal is considered crucial to stabilizing the junk-rated city’s fiscal position, according to credit analysts.

The county will expand the wastewater system, which has excess capacity, to include 13 surrounding communities that currently send their flow to the Detroit system.

Officials said it is a precedent-setting deal that can serve as a model for other struggling communities and fits in with Gov. Rick Snyder’s emphasis on collaboration among governments to bring down costs.

The sewer sale is the largest deal in a series of privatizations and intergovernmental collaborations launched by Pontiac’s emergency manager, Louis Schimmel, a long-time Michigan municipal finance veteran who has outsourced or sold city services and assets since taking over in September 2011.

“It’s a model for the state, especially in the area of what this governor has been promoting ever since he’s been governor, which is collaboration with neighboring communities to lower costs,” Schimmel said. “We’re doing more collaboration here than any other community in Michigan.”

State officials, including Snyder and Treasurer Andy Dillon, who had to approve it, were “very intrigued,” said Oakland County Water Resources Commissioner John McCulloch, who spearheaded the deal on the county side.

“This is a very innovative way of providing up-front cash to a troubled community,” he said. “I’m not aware of anywhere else in the state of Michigan where a deal is structured similar to this.”

The bonds were sold competitively Tuesday morning, in two series.

The first series, consisting of $53.4 million of taxable 20-year bonds, attracted four bids.

Raymond James & Associates Inc. submitted the winning bid, with a total interest cost of 3.57%, according to Meredith Shanle at Municipal Financial Consultants Inc., the financial advisor.

Hutchinson Shockey Erley & Co. submitted the winning bid of 1.86% for Series B, $4.5 million of tax-exempt bonds.

Dickinson Wright PLLC was bond counsel.

The limited-tax general obligation bonds carried the triple-A ratings of Oakland County, one of Michigan’s wealthiest counties.

Pontiac is expected to continue to make debt payments on the bonds from the system’s revenues, but the bonds are backed by the county’s full faith and credit pledge. The new municipalities joining the system will begin to cover both operating and debt payments starting in 2015, a move that is expected to bring Pontiac’s costs down by half, officials said.

A separate intergovernmental agreement authorizes the county, if it is required to make a debt payment on behalf of Pontiac, to reduce the delinquent tax revolving fund distribution made to the city or impose a judgement levy on Pontiac’s taxpayers, according to Moody’s Investors Service.

The deal also calls for the system’s revenues to be sent directly to the Oakland County treasurer starting in October, a move that will help insulate the money from Pontiac’s fiscal problems.

Moody’s rates the wastewater bonds Aaa and affirmed its Caa1 issuer rating on Pontiac. The rating agency changed its outlook on the city to developing from negative, saying ongoing events, particularly the bond sale, could impact Pontiac’s credit profile over the next few months.

Standard & Poor’s also rates the deal AAA.

One of the city’s chief challenges is a high debt load, and Schimmel said he will use about $31 million of the proceeds to pay off outstanding debt.

Another $2 million will be used to pay a property tax refund due to General Motors Co., and $17.1 million will be used to eliminate the city’s general fund deficit.

“The city’s deficits would be about $14 million were it not for this transaction,” Schimmel said. “We’ll end up with a surplus of $3 million or $4 million as a result of this deal.”

Paying off a chunk of the city’s debt will bring down the structural deficit going forward, he said.

“It frees up several million each year going forward, and we can use that money for some other reason other than paying debt,” Schimmel said.

McCulloch terms the deal a “win-win,” as it will ease the city’s debt burden and allow the county to tap into the system’s excess capacity without a large capital outlay.

“The surrounding communities have a need for additional capacity,” the commissioner said. “They currently send their overflow to the city of Detroit. But we’re capped in terms of how much we can send down to Detroit. We’ve had a lot of growth in recent years, and rather than spend millions on that infrastructure, this provides an alternative source.”

Schimmel is the third EM to run Pontiac since Michigan declared the city to be in a state of fiscal emergency in 2009.

Schimmel also dissolved the city’s police force, outsourcing the job to Oakland County, and the fire department, outsourcing that job to neighboring Waterford Township.

Many of Schimmel’s moves, including the sewer deal, were authorized under Public Act 4, the state’s controversial emergency management law. The law was suspended last week to give voters a chance to consider a repeal referendum in November. The suspension triggered the automatic revival of the state’s previous management law, Public Act 72.

The suspension or eventual repeal of the law could spark legal challenges to the privatizations, labor contract changes and other deals, but the transactions are for now expected to stand as they were completed before the suspension, according to bond counsel and the state attorney general.

Schimmel said the suspension of Public Act 4, combined with chronically falling revenues, will stall his departure date for several months.

“I had hoped to leave by the end of the year, but the setback with PA 72 will affect me to some degree by how fast I can see my way to the end of it,” he said.

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