Detroit, counties reach deal over water, sewer authority

DETROIT (Reuters) - Detroit reached a deal with three Michigan counties over regional water and sewer services that could eliminate one roadblock to federal court approval of the city’s plan to adjust its debt and exit bankruptcy, officials announced on Tuesday.

The deal with Oakland, Wayne and Macomb counties creates a regional water and sewer authority, but allows Detroit to maintain control of its local system, Mayor Mike Duggan said at a news conference. It has the support of Michigan Governor Rick Snyder and the city’s state-appointed emergency manager Kevyn Orr, he added.

“There has been 40 years of conflict between the city and the suburbs over the Detroit water and sewer system, and what you have today is a pretty remarkable accomplishment,” Duggan said.

The future of Detroit’s Water and Sewerage Department has been a big hole in the city’s plan to adjust $18 billion of debt and exit the biggest-ever municipal bankruptcy.

U.S. Bankruptcy Judge Steven Rhodes, who is presiding over the second week of a trial on the plan expected to last until mid-October, had pushed the city and counties into mediation, hoping for a resolution that would include a regional authority.

When no agreement was reached, Detroit proposed draining $428 million over nine years from the water and sewerage department to cover “catch up” pension payments owed by the department to the city’s general retirement system and other fees - a move opposed by the counties.

Tuesday’s deal would create the Great Lakes Water Authority, giving the three counties greater control over water and sewer services for their residents.

The water system covers 1,079 square miles and serves about 40 percent of Michigan’s residents, while the sewer system covers 946 square miles.

The new authority would make a one-time lump-sum pension payment, funded possibly through a bond sale, in a yet-to-be-determined amount that would represent the net present value of the $386 million owed, said Bob Daddow, Oakland County’s deputy chief executive.

It was unclear how the deal and the prospect of new bond issuance would affect the city’s $5.2 billion of outstanding water and sewer bonds, including nearly $1.8 billion of refunding and new revenue bonds sold in August.

Spokesmen for Orr and Duggan did not immediately respond to a request for comment. Heather Lennox, a Jones Day attorney representing Detroit, told Rhodes in court that owners of the outstanding bonds and companies that insured those bonds would have to consent to the water authority deal.

Attorneys for Wayne and Oakland counties told Rhodes they were withdrawing objections to Detroit’s debt adjustment plan, but a dispute over who signed the memorandum prohibited Macomb County from following suit.

Duggan said that the city and county governing bodies have until Oct. 10 to ratify the deal. Then, the new authority would have to be “up and running” in 200 days.

Oakland County Executive L. Brooks Patterson said the trial had become a “Sword of Damocles” hanging over the heads of parties in mediation. If Rhodes deems the plan is fair and feasible, he can impose its terms on objecting creditors in what is known as a “cram down.”

Patterson and Duggan said they were concerned that would lead to privatizing water and sewer services.

Duggan said he believes Rhodes will support the settlement, but would not say if it would speed up the trial or impact Syncora Guarantee Inc, one of the remaining major objectors to Detroit’s debt adjustment plan, which claims the city is proposing to pay it far less than other creditors.

Under the deal, the new water authority would have a 40-year lease for the water and sewer systems, paying Detroit $50 million a year, to be used by the city to back up to $800 million of bonds to rebuild the system, Duggan said.

“We are going to go through the city and rebuild our water system the way it should have been rebuilt years ago,” he said.

Detroit cut off water to thousands of residents this summer in an effort to collect on $90 million in unpaid bills, fueling national outrage that the city’s poorest people went days without access to fresh water.

Additional reporting by Karen Pierog in Chicago; editing by Chizu Nomiyama and Matthew Lewis