CHICAGO - Detroit has reached a deal with three counties to form a new authority to take over the bulk of the troubled Detroit Water and Sewerage Department and issue up to $800 million of bonds to repair broken pipes in Detroit.
If the deal closes, the metropolitan Detroit counties are expected to drop their objections to the city's bankruptcy exit plan.
The deal calls for Detroit to get a $50 million annual lease payment for at least 40 years. The city can only use the money for upgrades to its water and sewer system, and cannot divert it to the general fund.
Mayor Mike Duggan made the announcement Tuesday, joined by the heads of Wayne, Oakland and Macomb counties at the federal courthouse where its bankruptcy confirmation trial is underway. The agreement comes after a year of failed talks and court-ordered mediation.
"There has been 40 years of conflict between the city and the suburbs," Duggan said. "What you have today is a pretty remarkable accomplishment."
The boards of the three counties, as well as the Detroit City Council or Emergency Manager Kevyn Orr, still need to sign off on the deal, with an Oct. 10 deadline.
The new regional plan is expected to be an important part of the city's effort to exit bankruptcy. It was crafted during court-ordered mediation under U.S. District Judge Sean Cox.
Orr has been trying for months to spin off or privatize the troubled system, which serves 40% of the state population, requires billions in capital upkeep and is plagued by unpaid bills.
The deal is expected to eliminate one of the major potential roadblocks to approval of the city's Chapter 9 exit plan. During the confirmation trial last week, attorneys for Oakland and Macomb counties argued that the plan's treatment of the DWSD would mean the downfall of the aging system.
U.S. Bankruptcy Judge Steven Rhodes, who is presiding over the ongoing confirmation trial, was expected to meet with the attorneys for the city and the counties Tuesday during a break in the proceedings.
The announcement comes a week after Detroit refinanced $1.8 billion of water and sewer bonds after asking holders of $5.3 billion of the DWSD's outstanding revenue bonds to tender the debt to help the city achieve interest rate savings. The restructuring of the DWSD debt portfolio was also an important part of the city's bankruptcy exit plan.
Oakland County Executive L. Brooks Patterson, originally one of the biggest opponents to Detroit's regional authority proposal, said the governments were under pressure from the federal court to come to an agreement.
"I wouldn't have signed off on it just because of the pressure [but] the pressure was out there, that if we didn't make a deal the federal judge would make it for us and don't know he would have fought for the kind of protections we put in the [Memorandum of Understanding]," Patterson said Tuesday.
Duggan, who gained control over the DWSD in late July after emergency manager Kevyn Orr handed it over, said it's an agreement he "would not have hesitated to make even if we weren't under the pressure of bankruptcy."
The new Great Lakes Water 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. Major decisions on issues like contracts or future privatization will require five out of six votes.
Under the deal, the city will retain control of its 3,000 miles of local pipes, while the counties will assume control of all regional assets, which include 300 miles of suburban pipes. The new authority would operate the five water treatment facilities.
The regional authority plans to sell between $500 million and $800 million of bonds to repair Detroit's part of the system, according to Duggan.
The debt will be backed by the $50 million lease payment, the mayor said. The state of Michigan will help back the bonds in some way to help achieve a higher rating, he said.
"We intend to put thousands of Detroiters to work rebuilding our pipes with those bond proceeds," said Duggan.
The $50 million lease payment will come solely from revenues already generated by the system, Patterson said, saying the county's finance chiefs have come up with a formula to account for the annual payment. Some of it will come from refinancing existing debt and others from savings, he said.
Sticking points on negotiations included voting control as well as the annual lease payment.
Having the money stay within the system was important to the counties, Patterson said.
"If it was the cash cow [for Detroit] it had been in the future, it had to stop, and it will going forward," said Patterson. "The city cannot take a dime out for any other purpose and that gives me a sense of comfort."
Rates cannot increase more than 4% annually over the next 10 years, with the authority setting rate increases by a super-majority vote after that.
The regional authority will also set aside $4.5 million into an affordability fund to help ratepayers having a difficult time paying their bills.
Gov. Rick Snyder praised the officials for reaching the deal, saying it reflects the importance of the state working with Detroit.
"Judge Sean Cox should be commended for his skillful efforts as a mediator, working with elected leaders on this plan," Snyder said. "While this is a critical first step, there is still much work to do. We are committed to helping make that a reality."