(Photo: Facebook, Detroit Water Brigade)
The Detroit Water and Sewerage Department has, in recent years, come to be known as something of an enemy of the people as it looks to raise money through controversial measures like shutting off water to delinquent customers and imposing a costly fee on impervious land.
But a new study suggests DWSD could be raising a lot of money from another source — its lease agreement with the Great Lakes Water Authority.
The Detroit News reports researchers with the University of California Berkeley have found that the agrement — whereby the GLWA leases Detroit's water infrastructure for $50 million per year for 40 years — is "flawed" and at the "center of water inequity" in Detroit.
The problem, the researchers say, is that the system was not properly appraised before the bankruptcy-era deal. Legally, it didn't need to be, because the lease was not a sale.
The Detroit News reports:
The circumstances of the transaction — reached in the midst of a municipal bankruptcy and under emergency management — "gave rise to a transaction that would not have occurred under normal circumstances and is, correspondingly, blatantly inequitable."
A challenge, however, both when the leasing agreement was made and now, is a lack of comparable deals and details to set the terms.
But based on the 2017 sale of an $880 million system in Connecticut that serves six times fewer people than the Great Lakes Water Authority, the researchers estimated the Detroit system has more than $5 billion in equity. That would translate to a leasing rate of $215 million per year — 5.8 times what the city receives from the authority now, they said.
GLWA has issued a statement in defense of the deal:
"GLWA was formed as a part of the City of Detroit’s bankruptcy proceedings. The negotiations were extremely complex and ultimately found an alternative to the then proposed sale of the water system which preserved local control and ownership, while addressing the deferred needs of the system.
The writers of the report substitute their judgement for that of the parties to this good faith, arm’s length transaction, that was negotiated as a part of a contested legal proceeding and approved by an independent federal judge. This was done without any known effort by the authors to contact GLWA to get an understanding of its formation or the parameters of its operations.
In addition to the $50 million annual lease payment, at its stand up, GLWA assumed several billion dollars in debt obligations across the water and sewer systems, which increases the price paid to several billion dollars. Also, the Federal Court allowed GLWA to establish a Water Residential Assistance Program (WRAP) and to dedicate a half percent of its total revenues annually for this purpose. Because the WRAP program was established under federal law, it is the only program of its kind permitted in Michigan. The fiscal year 2019 WRAP allocation is approximately $4.9 million.
Further, the market value for many transactions, cited as “comparable” in the report, are predicated on significant rate increases at the new utilities, and as the report’s authors note: “None of these points definitely shows that the [GLWA] lease payment is artificially low.”
