CHICAGO – Flint, Michigan’s decision to stick with Detroit’s regional water system instead of switching to a new pipeline as previously planned won’t have an immediate rating impact on the project’s bonds.
S&P Global Ratings issued a bulletin on the Karegnondi Water Authority’s 2014 issue, which is rated A, on Thursday, two days after the city announced its intention to stick with the water delivery system operated by the Great Lakes Water Authority instead of shifting to the KWA pipeline.
The city backed about 35% of $220 million of bonds issued for the project that’s being led by Genesee County. Past city decisions made by Flint’s then state-appointed emergency manager to participate in the project led to the city’s water contamination crisis.
Flint Mayor Karen Weaver said the city will honor its bond obligations and will recoup the roughly $7 million in annual debt service by transferring its KWA water rights to GLWA.
“The rating on those bonds is based on Genesee County's limited tax general obligaiton pledge. We have already identified the county as the ‘strong link’ to step up in the event that Flint's financial capacity is diminished, which we now view as potentially more likely given the city's stated intent to remain a contractually obligated customer of GLWA while still paying on its obligation to KWA,” S&P said.
Analysts expressed some concerns over Flint’s commitment given the fiscal strains of dealing with fallout from it lead contamination crisis. “Although Flint will be the beneficiary of substantial federal and state assistance for distribution system upgrades and replacements, it is our view that both the general and water funds of the city have limited additional financial flexibility and are being bolstered by non-recurring, non-local cash inflows,” S&P said.
The city is accepting public input and will make a final decision next month. If it assigns its KWA water rights to GLWA, the city would no longer need to fund upgrades to it own water treatment plant. The updates are needed because the Lake Huron water to be delivered by the KWA pipeline will be untreated.
The city would receive a financial credit from GLWA in an amount equal to Flint's debt service payments to KWA as long as Flint remains current on debt service.
“It is our opinion that this is less certain given the city's current financial condition and myriad infrastructure obligations,” S&P wrote. “Additionally, the state's recognized commitments to Flint as outlined in its budget and recent court settlement with the city do not currently include direct or implicit support for the city's outstanding water system obligations.”
The city remains scarred by the water contamination crisis that began in April 2015. The emergency manager in place at the time allowed the city’s contract with Detroit to expire as the city awaited completion of the KWA pipeline.
The city drew water from the Flint River but failed to properly treat it. In the fall of 2015, it shifted back to Detroit-supplied water but the lead contamination of the city water continued because of pipe corrosion triggered by the improperly treated river water.
The KWA bonds feature a back-up pledge from Genesee County. The project participants expected to make their payments from the system's revenues, but the debt carried the limited-tax general obligation pledge of both credits. Genesee further pledged to cover Flint's payments within 15 days if the struggling city was unable to make its share of payments.