• Kevin Elliott

Has regional water board lived up to expectations?


Water from the Detroit River at Great Lakes Water Authority's Water Works Park Water Treatment Facility on Jefferson Avenue. Downtown photo: Kevin Elliott

 

The formation of a regional water authority in southeast Michigan was intended to give customers outside the city of Detroit a greater say in the governance of the system that provides nearly 40 percent of the state with drinking water, yet at the same time ensuring the stability of that system while keeping rate increases within a reasonable range. Now in it's fourth year of operation, those inside the Great Lakes Water Authority (GLWA) and the communities it serves say the new authority is on the right track. However, saddled with billions of dollars of debt and deferred maintenance projects needed to update the system, the authority faces familiar challenges.

Metro Detroit suburbs for decades had complained about water rate increases, the lack of representation and mismanagement by Detroit officials who oversaw the regional system for more than a century. Unable to meet federal clean water standards on its sewer system, the Detroit Water and Sewerage Department (DWSD) was under federal supervision for more than 30 years. In 2013, former Detroit Mayor Kwame Kilpatrick was sentenced on federal racketeering charges that involved the DWSD.

According to the FBI, former DWSD Director Victor Mercado, in his own guilty plea, admitted to steering contracts at Kilpatrick's direction to former Detroit contractor Bobby Ferguson, who was illegally awarded $73 million in contracts. Meanwhile suburban customers outside of Detroit continued to foot the bill for the deteriorating and mismanaged system with no operating control or financial oversight.

The original efforts that led to the creation of the GLWA began in 2013, when Detroit approached Oakland County with a pitch to regionalize the water system. At the time, the city was working to dig out from about $18 billion in debt, including roughly $5.7 billion in water and sewer bonds owed by the Detroit Water and Sewerage Department (DWSD). Further, the city was looking at no less than $1.5 billion in capital improvements needed in the system over the following five years.

In March of 2013, the DWSD was just coming out of federal oversight of the department for failure to meet clean water act requirements related to its sewage treatment plant. Looking to make a deal and find new funding opportunities, the city pitched a deal for regionalization that was ultimately rejected, Oakland County Deputy Executive Robert Daddow recalled.

"We met on like a Tuesday, and they wanted our decision on regionalization by that Friday," he said.

Daddow said a second meeting took place in June, this time involving the newly appointed Detroit emergency manager. This time, the city pitched a regional authority that would pay $9 billion in payments to the city's general fund over 40 years.

"This is a system where they didn't have resources to maintain the system, but they wanted $9 billion, and put together this ridiculous consulting study," he said. "That was obviously rejected. Wayne and Macomb counties just walked away."

As Detroit explored other options, including a consideration to privatize the system, Daddow said subsequent plans weren't much better, with major holes in system condition and financial information. By April of 2014, former Wayne County Executive Robert Ficano petitioned the federal court to force the parties into mediation.

Ultimately, Daddow said Detroit Mayor Mike Duggan rejected the proposal to allow the annual lease payments to go directly to the city's general fund, which allowed for more meaningful negotiations and a memorandum of understanding in late 2014 that led to the formation of the GLWA.

Starting in 2016, the GLWA began operating as an independent water and wastewater authority, separate from the Detroit Water and Sewerage Department, which had had control of the system for more than 150 years. Under the agreement that allowed the formation of the GLWA, the new authority agreed to sign a $50-million per-year lease for control over the DWSD treatment plants, major water transmission lines, sewage interceptors and related facilities for 40 years. The agreement requires those funds to go directly toward capital improvements of the city's portion of the system.

Under the previous governance, the entire system was operated as a city department overseen by a board of water commissioners, made up of seven members – four members from Detroit and one each from Oakland, Macomb and Wayne counties.

"If you're any good at math, you can figure out four members versus three doesn't provide any control of the board at all," said Daddow, who serves on the current GLWA Board of Directors.

In addition to lacking any control of the system, communities outside of Detroit were basically unable to exit the system. As previously stated by Daddow to Downtown, there was no reasonable way to exit the system because all of the required permits were held by the DWSD and there was no reasonable way to secure them and build your own system that wasn't in existence, thus creating a monopoly.

Under the new structure of the GLWA, the governing board consists of six members – one from each county (Oakland, Macomb and Wayne), two from the city of Detroit, and one representative for the state of Michigan. All major decisions, such as water, sewer and capital improvements, must be approved by a five-vote, super majority.

While the city of Detroit retains ownership of the entire system, the GLWA manages the system under the lease agreement. All funds received from the lease must remain in the system, meaning lease payments can't be used for the city's general fund or for other uses outside of the water and sewer system managed by DWSD within the city. Ultimately, the lease must be used to make needed repairs and investments in Detroit's local water and sewer infrastructure, many of which could assist both the city and improve the regional system.

The new structure not only gives the counties more input and control of the system, it ensures planning, financial and operational oversight that had been lacking for decades.

"As much as anything, the seat at the table provides us with the information necessary to deal with business decisions that were under the prior entity's control. Having a seat at the table where all the information is shared with all the partners simultaneously is a fairly significant improvement," Daddow said. "There's some consternation on the board from time to time as to who is going to pay for what and why, but in those former types of scenarios, we didn't know what we didn't know."

For instance, while Daddow said it was known that deferred maintenance was an issue under the DWSD, the extent of the physical condition wasn't entirely known. In general, he said, the DWSD didn't have an assessment program in place, making the creation of a long-term capital plan difficult.

"They didn't know where the problems were," he said. "Now we have a methodical way of doing it that has been an exceptionally good move on the part of the GLWA in doing assessments and are prioritizing projects."

As backlogs become more apparent, the cost for capital improvements go up.

"It takes years or decades for deferred maintenance to really effect performance, and that includes water main breaks and sewer collapses," he said. "That still plagues us today."

Daddow pointed to a massive water main break in the fall of 2017 in Farmington Hills that left more than 300,000 people without water and prompted a boil water mandate in 11 Oakland County communities. The rupture led to closings of schools and effected hospital operations.

"Midway through the first night, we had to make a decision whether three to five hospitals had to be shut down," Daddow said. "The people in the hospitals are sick, and moving them is a critical decision, particularly if they're in the intensive care unit. Those are life and death situations. Those are significant issues associated with deferred maintenance."

The formation of the GLWA also meant the system wasn't tied to Detroit's finance system.

"We have a better understanding of transactions, but some of those issues persist only because the transactions preceded the GLWA," Daddow said.

For example, about $1.16 billion in bonds were issued by the DWSD in 2011 and 2012 for water and sewer. Of those, about $547 million was used to fund swap termination payments on financial deals that had been terminated by financial institutions because of a credit downgrade of the city, meaning more than a half-billion dollars of debt was accumulated that provided no benefit to the system.

"Those are the types of things that were absolutely the decision of Detroit that effect the cost of water and sewer services now, and well into the future," he said. "The debt is an issue."

Major refinancing of debt occurred in 2017, allowing the GLWA to save about $300 million over the next 20 to 25 years through increased bond ratings, which weren't available under the DWSD. In terms of operating costs, roughly 50 to 55 percent is used for debt service alone.

While costs to address deferred maintenance are expected to rise as more issues are uncovered, water rates charged to suburban customers by the authority have stabilized. Under the agreement forming the authority, rates are based on peak demands, as well as the amounts communities pay for water on a 24-month average. Previous rates were based on customer-community water purchase commitments and had a smaller fixed cost component.

Additionally, the agreement requires budget increases for water and sewer not to exceed four percent for the first 10 years under the GLWA management. Revenue requirements reflect overall costs of the system and a primary component of the rate formula. Further, the agreement created a Water Residential Assistance Program (WRAP) which provides assistance to low-income customers receiving water and sewer services. Under the program, GLWA sets aside .5 percent of its budgeted revenue to help qualifying customers pay their bills.

"Dollars from the WRAP program are now available through the regional system," said DWSD Director Gary Brown.

Brown said the program has helped customers in Detroit to catch up on bills while cutting back on water cut-offs. Brown said collection rates in the city have increased from about 77 percent in January 2016 to nearly 95 percent.

"I have to give credit to customer service. The main tool to collect was shut-offs. Detroit had 50,000 customers being shut off and collection was only 77 percent," he said. "Today, we provide assistance and we have a 94 percent collection rate. For every one percent we raise in collections, we bring in over $4.4 million. There's $64 million this year that wasn't available last year based on collections. And we are passing that $64 million on to pay for bad debt into next year's rates.

"There were double digit rates for years. Now, with the lease agreement capped at four percent of revenue, this year we had two percent increases, and last year was 1.3 percent."

Brown said there was a misconception that Detroit rate payers were responsible for failing to pay their bills, but he said there are customers in Flint, Pontiac and other locations who have had trouble in the past who are now receiving assistance from the new WRAP program.

In late June, the DWSD announced it would invest $500 million over the next five years to upgrade water and sewer systems in the city. The project, which is funded from the GLWA lease payment, is a direct result of updated assessment operations in the system.

Brian Baker, who serves as president of the GLWA Board of Directors, as well as Chief Deputy for Macomb County Public Works, said the county is pleased with the progress of the GLWA so far, although some struggles remain.

For instance, he said, the city of Highland Park, which owed about $25 million in unpaid water bills when the GLWA was formed, now owes about $42 million– a bill which isn't expected to be paid.

"They seem to be spending money on lawyers and suing GLWA and DWSD. We have an agreement, and they have delayed paying," Baker said. "They are a community of only 10,000 residents, so that would put them in bankruptcy. There will have to be a political solution... in the meantime, the suburbs are paying for unpaid bills Highland Park isn't fully paying."

Still, Baker said the good achieved by the GLWA outweighs the bad, including capped water rates and refinanced debt. Likewise, he said increased oversight and accountability has helped to increase transparency – reasons the memorandum of understanding had been rejected by Macomb County in the past.

"It's still a work in progress, but there's been a lot of hard work by many people, and there's greater oversight and accountability, which is a good thing," he said. "We have been able to provide more input and that has changed things that we felt weren't being addressed."

GLWA Chief Executive Officer Sue McCormick said the transformation to the GLWA has included a change in philosophy both inside and out of the authority.

"The move to GLWA has been incredible," McCormick said. "It was a city department serving the regions, and others viewed that they served others for their own benefit. We have gone from 'customer communities' to 'member partners' because we wanted to flex that operating partnership. Pipes don't know where the boundaries are. By not having any entity that has more rights than others, it gives a level playing field for asking what is the right path forward. That has been an exciting transition."

The new approach is reflected in the GLWA's motto of "We are One Water."

From a communications viewpoint, McCormick said GLWA starts by listening to its member partners – a strategy that has been noted by those members.

"Overall, I think things are going very well," said Jeff McKeen, general manager of the Southeastern Oakland County Water Authority (SOCWA), which purchases water from GLWA at non-peak hours and provides it to member communities, which include Birmingham, Bloomfield Hills and Bloomfield Township, as well as Berkley, Beverly Hills, Bingham Farms, Clawson, Huntington Woods, Lathrup Village, Pleasant Ridge, Royal Oak, Southfield and Southfield Township. "They continue to produce a very high quality product and the cost has been a lot better over the past few years than it has historically, and they are taking more input from communities."

McKeen said GLWA has implemented member outreach programs to gain feedback, something that didn't exist under the DWSD. One result of that outreach was GLWA's response in moving up its timing in the rate setting process to allow local municipalities additional time to set rates that residents ultimately pay.

"I specifically made that request to them," he said. "We wanted their rates set by the end of March, and they were able to do that this year."

McKeen said GLWA continues to put out a high-quality product while better keeping costs down.

"The cost has been a lot better over the past few years than historically, and they are taking a lot more input from communities."

Additionally, McKeen noted increased training efforts by the GLWA, which works with local communities to help train their public works staff, a benefit that didn't exist prior to the authority's formation.

Bloomfield Township Public Works Director Tom Trice said although the township receives water from SOCWA, the communications with GLWA have improved "big time."

"They are more responsive and get things done," he said. "If we have something we need, one, they respond. I think that reflects a lot on their CEO, Sue McCormick. She has a tough job that includes changing the whole culture from the DWSD to GLWA."

Trice said improved communications includes notifying the township and SOCWA about any potential issues happening in the water delivery system, as well as involving engineers in meetings on issues that impact the township.

West Bloomfield Utilities Director Ed Haapala, who has overseen water operations for the township for 17 years, said customer outreach and water rates have improved under GLWA, although capital improvement projects will eventually drive rates up in the future.

"They are doing the best they can in respect to rates and keeping below the budget revenue requirements, and ratcheting costs down," he said. "Rates were favorable this year, but they do have a 50-year, rolling master plan that will be billions of dollars. Right now, they are in the planning stages, but when they come to bonding and construction, we are naturally going to see increases again. But they are doing a nice job of trying to balance those costs with affordability."