Michigan will issue up to $700 million of taxable private activity bonds with Citigroup Global Markets Inc. and Siebert Williams Shank & Co. LLC at the helm to fund a settlement that resolves litigation over the Flint water contamination crisis.
Gov. Gretchen Whitmer and Attorney General Dana Nessel first announced the outline of settlement plans in August after 18 months of negotiations.
It provides $600 million to settle claims for its role in the debacle that followed Flint’s move to switch its water source in 2014 while under state emergency management. The city failed to treat the water properly leading to lead poisoning. Other lawsuits tied to the crisis are still pending as are state criminal charges against former Gov. Rick Snyder and two former emergency managers.
State lawmakers
The Michigan Strategic Fund’s board approved the bond issue at a meeting Tuesday marking the final step to authorize the bond sale. The agency, an arm of the Michigan Economic Development Corporation, will sell the bonds on behalf of a newly created special purpose entity known as the Flint Water Advocacy Fund which is turn will transfer the funds to a settlement administrator.
“I’m encouraged to see this step taken in the settlement process,” Nessel said in a statement Tuesday.
An additional series may be sold as a private placement.
“The MSF may issue another series, if it determines necessary, to be privately placed with a Qualified Investor Buyer,” MSF documents say.
The bonds will be structured with level annual debt service and will carry ratings from at least two rating agencies, according the borrowing authorization approved by the MSF board. The $35 million annual repayment will be subject to annual appropriation. The bonds won't carry a state general obligation pledge.
Judge Judith Levy of the United States District Court for the Eastern District of Michigan gave preliminary approval to the package in January. A hearing over whether the settlement is fair, adequate, and reasonable is set for July 12 and final approval could follow, but the bonds are supposed to be issued within 180 calendar days of the court’s preliminary approval.
Defendants that have joined in the settlement since August include Flint, which is providing $20 million through its insurer; McLaren Regional Medical Center which is providing $20 million; and Rowe Professional Services Co. which is contributing $1.25 million.
Fitch Ratings late last year called the settlement a
The settlement directs 80% of net settlement funds to claims of children who were minors when first exposed to Flint River water. 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.
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.
The crisis occurred after the city's contract with Detroit to receive Lake Huron water ended and the city, under the control of state appointed emergency managers, began pulling its water supply from the Flint River in April 2014 while awaiting the completion of the $285 million bond-financed Karegnondi water pipeline carrying Lake Huron water to Flint and other Genesee County communities.
The city failed to properly treat the Flint River water, triggering lead contamination because of pipe corrosion. It was not abated until the city in the fall of 2015 shifted back to Detroit-supplied water. The lead poisoning resulted in long-term damage to residents, especially children.
Fifteen government officials were criminally charged as a result by former Attorney General Bill Schuette. Seven struck plea agreements. When Nessel took office she dismissed all pending criminal cases related to the crisis, two of which were against former state-appointed city emergency managers, and launched her own investigation.
In January, a grand jury handed down charges against
All nine have entered "not guilty" pleas.
The charges filed against the Republican ex-governor who served from 2011 to 2019 are only misdemeanors — two counts of willful neglect of duty — but a conviction can carry a prison term of up to one year for each count and/or a $1,000 fine.
Former Flint Emergency Manager Gerald Ambrose was charged four counts of misconduct in office, each a felony that carries a possible five-year sentence and/or $10,000 fine. Former Flint Emergency Manager Darnell Earley was charged with three counts of misconduct in office. The probe remains open.
Residents last October sued the Karegnondi bond underwriters in federal court accusing them of aiding and abetting in the events that led to the lead poisoning crisis.
A motion to dismiss filed by the banks in December is pending. The plaintiffs responded in February.
Most recently, the Securities Industry and Financial Markets Association, or SIFMA, filed a brief in support of the banks. It argues that underwriters are not and cannot be liable for the actions of bond issuers merely by underwriting bonds, that federal securities law preempts the plaintiffs’ negligence claims, and that the theory of liability argued by the plaintiffs “would have catastrophic consequences for municipalities.”
