Bond borrowing will fund Michigan's Flint water settlement

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The Michigan Strategic Fund would borrow to fund a lump sum payment into a special claims fund under a preliminary pact that resolves litigation over the state’s role in the Flint water contamination crisis.

Michigan Gov. Gretchen Whitmer and Attorney General Dana Nessel in August initially outlined a preliminary $600 million settlement agreement between the state and Flint residents who sued. Blame for the crisis fell on local, state and federal authorities including the city’s state-appointed emergency managers. The agreement was reached after 18 months of negotiations.

Michigan Strategic Fund bonds would finance a legal settlement stemming from contamination of the Flint, Michigan water system.

The updated preliminary pact now totaling $641.2 million was submitted to a federal judge this week. It outlines payment terms and additional defendants who have agreed to participate.

The city of Flint will contribute $20 million, McLaren Regional Medical Center will pay $20 million, and Rowe Professional Services Co. will provide $1.2 million.

“Resolving these legal disputes against the state, and now the other defendants who have joined the settlement, is the best possible outcome for Flint’s future,” Nessel said.

The crisis occurred after the city's contract with Detroit to receive Lake Huron water ended and the city shifted to Flint River water in April 2014 while awaiting the completion of a $285 million pipeline carrying Lake Huron water to Flint and other Genesee County communities.

The city, which was under a state-appointed emergency manager, failed to properly treat the Flint River water, triggering lead contamination because of pipe corrosion, and it was not resolved until after the city in the fall of 2015 shifted back to Detroit-supplied water.

The state filed the preliminary pact Tuesday with U.S. District Court Judge Judith Levy who is presiding over the case in the U.S. District Court for the Eastern District of Michigan. The court must decide whether the pact is fair, adequate, and reasonable. A public hearing is expected ahead of a final decision on whether claim registration can proceed.

Defendants will make payments into a special purpose, trust-like entity being created known as the FWC Qualified Settlement Entity. The state must initially pay $5 million of its agreed amount into a special settlement fund within 15 days of the court’s preliminary approval order.

The special entity will apply to the Michigan Strategic Fund for a loan to pay out claims.

“The Plaintiffs require a single lump sum contribution to the FWC Qualified Settlement Fund instead of receipt of the annual payments to be made by the state defendants,” the documents read.

The Michigan Strategic Fund is expected to issue bonds to fund the loan amount so that proceeds can be sent to the FWC Settlement Entity by March 1 or 180 calendar days after the court enters the preliminary approval order.

“To facilitate the bond issuance by the Michigan Strategic Fund, the Special Purpose FWC Settlement Entity shall be authorized to pledge and assign amounts paid and payable by State Defendants to obtain a loan funded from bonds issued by the Michigan Strategic Fund,” the documents say. The MSF is an economic development arm of the state.

The state will make annual appropriated payments over 30 years to the Special Purpose FWC Settlement Entity, and that entity will use those annual funds to pay the loan to the Michigan Strategic Fund.

State lawmakers must sign off; the state’s “obligation to pay is subject to their ability to obtain legislative authorization, appropriation, and approval to pay the above sums into the Special Purpose FWC Settlement Entity, and to amend the Michigan Strategic Fund Act to authorize that Fund to issue bonds and make a loan to the Special Purpose FWC Settlement Entity,” the documents say.

Flint’s obligation to pay is subject to its ability to obtain City Council authorization, appropriation, and approval.

The agreement directs 80% of net settlement funds to claims of children who were minors when first exposed to Flint River water, with a large majority of that amount to be paid for claims of children age 6 and younger. It earmarks 2% for special education services in Genesee County. About 18% goes to claims filed by adults and for property damage. Businesses can also file for losses.

Plaintiffs’ lawsuits filed against other entities will continue. If given final approval, it is likely to be the largest in Michigan state government history and will resolve more than a hundred cases in state and federal trial and appellate courts, officials said.

The governor, who took office last year, inherited the Flint debacle from predecessor Rick Snyder, whose administration came under attack for failing to prevent or move quickly to correct the contamination.

Whitmer previously said the settlement would bring the state’s funding for relief and recovery efforts to $1 billion. The state previously agreed to provide $97 million toward replacing all of the city’s lead service lines, which is 85% complete.

The seeds of the crisis were planted when the city's state emergency managers agreed to participate with Genesee County in financing the construction of a new water pipeline to trim water costs.

Flint pledged to repay about 34% of the $220 million 2014 bond issue that provided initial financing for the Karegnondi Water Authority’s 63-mile pipeline led by Genesee County. The deal was recognized by The Bond Buyer as Midwest Deal of the Year.

In addition to the toxic lead poisoning of household water that is especially damaging to children’s developing brains, a 2014-15 Legionnaires’ disease outbreak in the Flint region led to the deaths of at least 12 and sickened another 79 individuals.

Flint reverted back to Detroit water in October 2015 and it signed a long-term contract to continue receiving water through the Great Lakes Water Authority, a regional agency that is the successor agency to Detroit’s system.

The long-term water supply arrangement between GLWA and Flint dis not alter the terms of the KWA financing contract or the obligation of Flint to make contractual payments to the issuer but Flint receives credit for the portion of the debt service on the KWA system bonds that Flint pays to the issuer.

Fifteen government officials were criminally charged. Seven struck plea agreements.

Nessel, a Democrat who took office last year, dismissed all pending criminal cases related to the crisis, two of which were against former state-appointed city emergency managers. The office launched a new case citing the development of new evidence and criticisms of the original investigation under her Republican predecessor, Bill Schuette.

The previous criminal charges named former emergency managers Gerald Ambrose and Darnell Earley. Ambrose served as Flint’s EM from Jan. 13, 2015 through April 28, 2015. Earley was named EM in September 2013 and served until January 2015. Both were appointed by Snyder.

Earley oversaw the decision to change the city's water source to the Flint River. A March 13, 2014, order signed by Ambrose for a water main cut-in at the water plant cleared the way for the switch to the river supply.

Early faced misconduct and willful neglect of duty charges for allegedly making misleading statements that the Flint plant could adequately treat the water and it was safe to drink. Ambrose faced similar charges in part for allegedly obstructing a county probe of ties to the Legionnaire's disease outbreak. Misleading information was also allegedly provided over the city’s ability to participate in the bond sale and Early was later charged with involuntary manslaughter.

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