CHICAGO — The three counties around Detroit logged their objections to the city's bankruptcy exit plan Thursday, arguing that the proposed treatment of the massive Detroit Water and Sewerage Department would spell catastrophe for the aging system.
Attorneys for Wayne, Macomb and Oakland counties outlined their objections on the morning of the third day of a high-profile trial that will determine the fate of Detroit's plan to exit the largest municipal bankruptcy in the U.S.
The counties told U.S. Bankruptcy Judge Steven Rhodes the plan is illegal in part because it discriminates against creditors and because, if implemented, it could mean the downfall of the DWSD, with the city no longer be able to provide adequate services.
The DWSD, which serves the three counties and much of Michigan, providing water to 40% of the state's population, is one of Detroit's most valuable assets.
Even before the city filed for bankruptcy in July 2013, it began talks to privatize the system by creating a new regional authority with the three adjacent counties. But talks stalled and, despite court-ordered mediation, a deal has not yet been reached.
Already faced with aging infrastructure and chronic unpaid bills, the DWSD would be subject to "capital breakdown" under the confirmation plan, argued Wayne County's attorney, Max Newman from Butzel Long. The one thing the system can't have is a "grossly inadequate capital improvement plan," Newman said, according to local reports from the courtroom.
Detroit's confirmation plan calls for the diversion of $47 million a year from the system's revenues to pay for city pensions. That would mean the loss of $428 million over the next nine years that should be used for capital upkeep and improvements to the aging infrastructure, attorneys argued.
"From the first day, Emergency Manager Kevyn Orr and his team focused on monetizing DWSD assets for the city's general fund," said Macomb County attorney Allan Brilliant.
The city's current plan would repair about 1.5 miles of sewer line each year, according to Oakland County's attorney, Jaye Quadrozzi of Young and Associates. At that rate, it would take 561 years to repair it, she said.
Revenues have been declining, by about $200 million annually recently, Quadrozzi said, while the confirmation plan assumes they will stay the same. The plan also assumes revenue from the city of Flint, which recently left the system to create its own department. That means a $789 million shortfall over the next 10 years, Quadrozzi said.
The city's capital plan totals $2.9 billion over the next 10 years, but recent reports show the system will actually need $4.5 billion in repairs. Rates are already too high to pay for that upkeep, she said.
"Raising rates is incompatible with saving the city," she said, noting a recent national controversy over the city's decision to begin shutting off water to residents who have not paid their bills.
An ongoing dispute over the size of the city's pension liabilities is part of the counties' challenge. Like some other creditors, the counties argue that Detroit has deliberately exaggerated the size of its pension liability to inflate recoveries.
Part of the city's strategy has been to assume a 6.75% investment return, a figure that is overly conservative and leads to an outsized liability projection, according to the lawyers.
Opening statements ended by mid-morning Thursday, and the city called its first witness: Detroit Chief Financial Officer John Hill. Hill opened his testimony by describing the city's broken down financial systems and current efforts to repair it. Hill also said the city may be forced to "make adjustments" to the confirmation plan if money for capital investment does not come in as expected.
