Economy

Detroit Water Deal Means Bankruptcy Resolution Is Just Around The Corner

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Detroit seems poised to complete its bankruptcy process — the largest in American history — by the end of the year, about a year and a half after it began.

The two major obstacles standing in the way of finalizing the city’s restructuring were each cleared in a pair of deals announced this week. The bankruptcy judge has suspended the trial that will determine final approval of the city’s plan for emerging from bankruptcy so that all parties can complete negotiations.

The deal leaves the bankrupt city on the verge of moving into the next phase of its redevelopment. What sort of future the Detroit metropolitan area will obtain for itself depends in large part on how far city officials are willing to go in physically restructuring the Motor City.

One of the two new deals announced this week resolves longstanding objections by a bond insurer called Syncora which would be on the hook for hundreds of millions of dollars in insurance payments to various creditors who Detroit cannot pay in full. In exchange for dropping its objections, the firm will gain control of a parking garage and continue to control revenues from the tunnel connecting Detroit to Windsor, Canada. Syncora’s objections to the city’s plan have been so sharp that Judge Steven Rhodes had to reprimand the firm’s lawyers for attacking the character of their counterparts on the city’s legal team. While Bloomberg has reported that Syncora’s deal is contingent upon further, private concessions from retirees, pension fund spokesman Bruce Babiarz told ThinkProgress that the retirement system is not involved in the Syncora deal at any level.

The financial restructuring of the bankruptcy has brought pain to workers and retirees who played no role in Detroit’s unraveling, but the physical changes to Detroit’s geography may yet bring more. The city must contract from the sprawl that defined it in the boom times for American carmakers, according to urban development experts, and replicate the compact residential, industrial, and technological design of other rust belt success stories like Pittsburgh.

The other deal unveiled this week confronts these physical infrastructure issues head-on. The Detroit Water and Sewerage System (DWSD) will transition to a regional authority managed jointly by Detroit and the surrounding counties. Two of the six board members for the new Great Lakes Water Authority will come from the city. Oakland, Wayne, and Macomb counties will each appoint one member, as will the State of Michigan. The city will still own all water and sewerage infrastructure and be responsible for the debts that DWSD has accrued over the years, but future financial burdens will be shared among the city, counties, and state.

Detroit’s recent collapse has been driven primarily by a critical decline in population and economic opportunity that has left the city unable to collect the revenues necessary to provide even basic services to those who haven’t moved away. Expanding the customer base responsible for covering the costs of improving and maintaining the filtration and distribution systems that bring people potable water is a crucial positive step for restoring Detroit’s broader economic health.

“If you have a larger customer base, when bad things happen there’s a larger number of people that can brunt any financial shock to your bottom line,” Professor Andrew Whelton of Purdue University’s Lyles School of Civil Engineering said in an interview. “When there is some major event, whether it be an economic downturn, a natural disaster, or a man-made disaster that affects the integrity of the water system, regional authorities can be a great step forward as long as there’s equal representation for the constituents.”

Back in the spring, some of the same county officials who agreed to the new Great Lakes Water Authority rejected similar proposals. Gerald Poisson, Chief Deputy County Executive for Oakland County, explained by phone that the new deal satisfies his office’s concerns. With financial backing from the state and firm limits on county liabilities for the city’s legacy costs, Poisson said, the deal became not only palatable but promising — especially as compared to Emergency Manager Kevyn Orr’s initial proposal to privatize the water system.

“We absolutely can’t afford to monetize the system to divert resources into other systems other than water and sewer,” Poisson said. “We started this in October with a proposal from [Orr] that would’ve taken $9 billion out of the city and counties over the next 40 years,” he said. But with the new deal, “all that money stays in the system to fix the system, [and] when you improve the city side of the system you save all people in the system money because you don’t have the leakage problems you have today.”

Privatization was widely regarded as the worst-case scenario for Detroit’s struggling water utility, and this week’s deal ensures the region’s water system will remain public. The cooperation required to make that happen is notable. Detroit and its neighboring counties have a reputation for divisive conflicts between them, and Poisson’s boss L. Brooks Patterson has a reputation for alienating Detroit from Oakland County in public statements. But Poisson insisted that the county doesn’t get enough credit for its participation in regional efforts and agreed that the city and counties face a shared fate. “The city has to recover in order for us to continue to thrive,” he said. “We think you cannot have a sustainable economy without a water and sewer system that works.”

Detroit officials have hundreds of millions of dollars from both private and federal sources to tear down blighted and vacant buildings as part of that effort to retrofit Motown. Once the bankruptcy is resolved, they will also have roughly $1.4 billion to dedicate to restoring the public services that are necessary to assure a quality of life in Detroit sufficient to attract new people and retain the current population. But while they await new economic development, those current Detroiters are likely to face difficult choices as bulldozers and developers reshape the city around them.

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