Michigan takes a milestone step next week toward resolving litigation over its failures that contributed to the Flint water contamination crisis with its $604 million taxable borrowing to cover settlement costs.
Gov. Gretchen Whitmer and Attorney General Dana Nessel first announced the outline of settlement plans last August after 18 months of negotiations. It provides $600 million to settle claims for the state’s role in the debacle that followed Flint’s move to switch its water source in 2014 while under state emergency management.
The debt matures between 2022 and 2051 and the deal is expected to price June 22. State lawmakers
The city failed to treat the water properly leading to lead poisoning that sickened residents and also deaths as the contaminated water was blamed for an outbreak of Legionnaires' disease. Other lawsuits tied to the crisis are still pending as are state criminal charges against former Gov. Rick Snyder and two former emergency managers.
Judge Judith Levy of the United States District Court for the Eastern District of Michigan gave preliminary approval to the settlement pact in January and the bonds are required to be sold within 180 calendar days of the court’s preliminary approval.
Court deadlines loom with a hearing over whether the settlement is fair, adequate, and reasonable set for July 12 and the final date for those impacted by the crisis to file claims is set for Aug. 26.
“It is expected that a final approval of the settlement agreement may be received from the federal court in late summer of 2021. Such final order may be subject to challenge or appeal,” offering documents read. “A very high proportion of the individual plaintiffs have registered for the settlement.”
If the settlement is rescinded the bonds are subject to extraordinary redemption in March 2022. A B series for roughly $30 million is being privately placed with PNC Bank NA to cover costs in that event.
The Michigan Strategic Fund, an arm of the Michigan Economic Development Corporation, is serving as issuer for the taxable limited obligation revenue bonds for the Flint Water Advocacy Fund Project, which is also known as the FWC Settlement Entity, the Michigan not-for-profit set up to manage the state’s settlement.
Citigroup Global Markets is the bookrunning senior manager and Siebert Williams Shank & Co. LLC is the co-senior manager. Dykema Gossett Pllc is bond counsel and Dickinson Wright Pllc is underwriters’ counsel. Robert W. Baird & Co. Inc. is advising the fund.
The bonds are secured by the state’s annual settlement payments of about $35 million — subject to annual appropriation —- to repay the bonds with a total of $1.05 billion of payments through fiscal 2051. The state also has provided an upfront $5 million payment into the fund so that will be reimbursed with bond proceeds.
The state requested ratings from Fitch Ratings and Moody’s Investors Service on the bonds and they carry a AA-minus rating and Aa2, respectively. That’s one notch below the state’s general obligation credit due to the need for appropriation.
“Completion of the settlement payment is crucial not only to containing future financial claims against the state, but also to restoring and maintaining the government's credibility with a large portion of its citizens,” said Moody’s which assigns a stable outlook.
“Although the transaction does not grant bondholders an interest in a physical asset, fulfillment of the state's obligation to make these payments constitutes a highly essential purpose for Michigan's government, given the pivotal role of various state agencies and officials in the catastrophic contamination of Flint's water supply starting in April 2014,” Moody’s said.
Ahead of the sale, Fitch moved the state’s outlook to positive from negative as the state has weathered the COVID-19 pandemic’s initial blows. Fitch credited the state with maintaining “structurally balanced budgets” and analysts expect “that the state's improved fiscal and budgetary resilience will be sustained.”
"With billions in federal stimulus and a $3.5 billion state budget surplus, we must continue our forward momentum and channel it into raising wages, invest in small businesses, and uplift families," Whitmer said in a statement on the outlook boost.
Settlement
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 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
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. That probe remains open.
Residents sued the Karegnondi bond underwriters in federal court accusing them of aiding and abetting in the events that led to the lead poisoning crisis.
State pledge
With the credit features supported by the state, investors will be eyeing the state’s fiscal recovery.
Michigan’s fiscal picture brightened with a $3.5 billion revenue surge now expected through the next fiscal year due to an accelerating economic recovery. The state anticipates closing out the current fiscal year Sept. 30 with $26.31 billion of general and school aid fund revenue, according to the state’s
Michigan headed into the pandemic with an improved fiscal position as it had rebuilt a $1.15 billion reserve cushion — although it now stands at about $830 million — and had strong liquidity including $6.7 billion in pooled cash.
The state limited draws on reserves in fiscal 2020 and avoided any in fiscal 2021 despite the pandemic’s initial blow to revenues. “Fitch believes the state is well-positioned to benefit from a return to economic growth following the deep, but short-lived, pandemic recession,” analysts wrote in the new report.
The flow of federal support helped softened COVID’s strains with the state receiving $3.1 billion of direct aid from the March 2020 CARES Act and is in line to receive to $6.5 billion from American Rescue Plan Act.
Whitmer, a Democrat, and the Republican legislative majority are still considering how to spend ARPA funds with Whitmer recently laying out some strategies. Both sides have stressed using it for non-recurring, once-in-a-generation investments.
Whitmer and leaders are also still hashing out a final budget package for the fiscal year that begins Oct. 1. Whitmer proposed a $67.1 billion package earlier this year and House and Senate leaders proposed their own versions. Whitmer and GOP leaders recently announced a framework that calls for including the administration in the legislature’s budget negotiations.
