Privatize DWSD? Blogger Says No, Explains.

[The following, published April 7, 2013, is republished with permission of the author, Chris Savage of eclectablog.]

Detroit Emergency Manager Orr should take privatizing the Detroit Water & Sewerage Dept OFF the table

Sometimes not “everything” should be on the table

In a recent interview prior to assuming his new position as the Emergency Manager of Detroit, Kevyn Orr said that “everything is on the table” with regard to solving Detroit’s financial problem. Not only that, he specifically said that “everything is on the table” with regard to the future of the Detroit Water & Sewerage Department. This could include, according to Orr, sale or privatization of the department.

"Everything’s on the table. The reality is, my operating assumption, you know, is sort of like a physician’s creed ‘do no harm’. But my operating assumption is a little different: is there a net benefit to the city and its residents? Water and Sewer, for instance. It enjoys a higher bond rating than the city, operates on its own, has a net positive cash flow, and provides services in a relatively good level. But, you know, if you look at it, if you’re able to do a structure where either through a regional authority or privatization, it flows cash positive to city, $50 million with a 10 percent cap rate, is half a billion dollars. So, we’re going to have to look at that… Everything—asset leasing, sale/leaseback, privatization, 99-year leases with a reversion to the city—everything’s on the table."

Selling or leasing the Detroit Water & Sewerage Department would be a HUGE mistake.

There is no question that the Water and Sewerage Department has a long history of mismanagement and corruption. They only recently came out from underneath the oversight of a federal court judge stemming from corruption and failure to comply with environmental regulations.

Last summer, a month-long audit of the department revealed that it is grossly over-staffed with too many job classifications that make it highly inefficient. This kind of thing makes the situation ripe for the types of criticisms that labor unions so often hear about protecting jobs and workers at the expense of customers and service and what Detroit Free Press editor Stephen Henderson termed “featherbedding”.

At a time when Detroit is facing a catastrophic financial crisis, there is simply no room for a profitable entity like the Water & Sewerage Department to be wasteful.

However, the need to make that department efficient is absolutely no excuse for selling it or privatizing it, something conservative groups like the Mackinac Center for Public Policy has been advocating for since 2000 (articles HERE and HERE, for example.) In fact, selling or divestiture of the department would, in the long term, have the opposite impact than the one privatization advocates say it would have: it would place an even bigger financial burden on the city in the future and would not, as the Mackinac Center would have you believe, lead to lower water bills for customers.

The non-profit Food & Water Watch released a report (pdf) this past week that outlines in great detail the myriad reasons for not privatizing Detroit’s Water & Sewerage Department. As Tia Lebherz, a Detroit-based organizer for Food & Water Watch put it, “Privatizing Detroit’s water and sewer system will do nothing to alleviate the city’s financial problems. Doing so would amount to a one-shot ploy to obscure larger money woes, and would ultimately come back to haunt residents in the form of higher bills.”

Her group’s report covers several major areas:

Privatization arrangements are actually just very expensive loans

The report explains that a defining characteristic of privatization schemes is that they offer a big up-front payment from the business taking over the system. This dangling carrot is often enough to persuade cities in crisis mode to leap for it. Unfortunately, after they have leaped, they find out that they are actually in a worse financial position afterwards than they were before:

"The government’s primary objective in these privatization arrangements is to obtain a sizable up front payment from the company or consortium that takes over the water or sewer system, often as a desperate response to a fiscal crisis. As a consequence, governments usually award contracts to the bidder that offers them the most money, instead of selecting the highest-quality or least-expensive option for households and local businesses."

"This money is not free; rather, it should be thought of as a loan. Residents and local businesses will have to repay it, with interest, through their water bills. In a 1997 report about wastewater privatization, the U.S. Environmental Protection Agency said as much: 'In summary, any payments a local government receives from the sale or lease of a wastewater infrastructure asset represent a loan from the buyer or lessee which must be repaid with interest by the wastewater users in the form of additional user fees.' ”

Future improvements come with an elevated price tag under privatization

Part of the problem is that, if the municipality sells the water system, future improvements will be financed at much higher interest rates than government itself can get. Who pays for this higher financing costs? The water customers, of course. Not to mention the profit the company expects to get. So, not only are customers not going to see a decrease in their water bill, they will likely see an increase above and beyond what they normally would see if the services were provided by their (not for profit) city government. In fact, the report cites the statistic that “after purchasing a municipal water or sewer system, investor-owned utilities typically increase household rates by 18 percent every other year.”

The report quotes George Marlin, director of the Nassau County Interim Finance Authority in his fight against privatization:

"As for the County’s so-called ‘Debt-Reduction Plan,’ in my 35 years as an investment banker, I have never come across such an ill-conceived plan. … The County expects to select a private investor who will finance $850 million to pay down existing low interest cost tax-exempt sewer debt and County debt. This is a form of backdoor borrowing. … To use such costly funds to pay down low interest tax-exempt County and sewer debt makes no sense. This would be like drawing down the credit line on one’s VISA card at 15 percent interest per year to pay down one’s home mortgage which has a 4 percent annual interest rate. Sheer folly!"

This is simply a way to raise taxes without directly raising taxes

When you take the 10,000 foot view of privatization schemes like those promoted by the Mackinac Center, they are simply a way to raise taxes in an indirect way that is essentially a fake-out to taxpayers and customers. The taxpaying citizens don’t see a direct increase in their tax bills and they may even be told that their water rate increases will be limited to some amount relative to inflation, for example. However, this doesn’t stop the new for-profit entity running the system from raising water bills in other ways:

"Some government officials use water privatization as a way to transfer revenue from water rates to fund general government. This circumvents legal limitations on taxes and public protections for taxpayers, and can increase the financial burden on residents who are less well-off. {…}"

"[W]ater rates are user fees, not taxes. According to Hugh Spitzer, an affiliate professor at the University of Washington School of Law, 'From a legal standpoint, these various user charges [user fees] are distinctly different from taxes — different both in terms of who bears the burdens and benefits and in terms of the distinct legal protections surrounding and regulating the use of those charges.' ”

"In the Florida Law Review, Laurie Reynolds explained that a user fee is supposed to 'correspond to the cost of the governmental activity being funded rather than reflect a general government desire to raise revenue.' Charging user fees that are higher than the cost of service to fund other government purposes may be considered an unconstitutional taking or impermissible tax in some states, including Michigan and Washington. Courts in other states, however, have sanctioned the practice, and thus, as Reynolds observed, '…provide a convenient way for local governments to raise general revenues without having to worry about anti-tax strictures.' ”

"Some local officials seem to view water privatization as a way to avoid popular anti-tax sentiment. Spitzer noted, however, '… if an imposition is made to raise money for general public purposes, it is a tax.' Thus, water rate increases that accompany privatization deals should be considered a 'wolfish tax which is cloaked in the garb of a sheepish fee,' as a West Virginia state supreme court justice once called a fire service protection fee."

The report lists other issues such as inadequate protections for water consumers and taxpayers in the negotiating process and the lack of cost savings promised by privatization proponents. It’s not surprising, of course. Any time there is a profit to be made, you can be sure that corners will be cut, costs will be shifted and risks will be minimized for the profit taker at every juncture. For these reasons, privatization of something as critical as the Detroit Water & Sewerage Department is a huge mistake.

Food & Water Watch made specific recommendations in this regard:

"Food & Water Watch recommends that Kevyn Orr reject the idea of privatizing Detroit’s local water and sewer systems, as doing so will not provide a real, sustainable and responsible solution for the city’s financial shortfall. Policymakers should grant the public access to all information regarding potential privatization contracts, encourage public input and require a referendum on any proposed lease, concession or sale of a public drinking or wastewater system."

As I said at the beginning, the Detroit Water & Sewerage Department has some clear issues. However, these issues can be fixed and do not require the privatization or selling off of this crucial public asset in order to do so. That is simply the excuse that corporatist types like Mackinac Center have been using for years to help enrich their business pals. It’s time for Kevyn Orr to take this specific thing “off the table”. It should never have been put there in the first place.

UPDATE: I was reminded on my Facebook page by Susan Dailey that privatization of public water systems has not worked out in Michigan in the past very well at all. Here’s my piece on the Pontiac situation: “EXCLUSIVE: The cost of privatization – Pontiac has water contamination issues under United Water”

DWSD: Cooking the Books?

Or trashing the books?  Maybe it's no longer a question of cooking the books.  Maybe the books are beyond cooking.  Cooking the books means dissembling, hiding something under a false appearance, deceiving.  Maybe DWSD hasn't kept  records accurate enough to support an audit.

The Detroit Water and Sewerage Department (DWSD) didn’t publish its annual audit report last year and now refuses to furnish its wholesale customers in the suburbs with the financial information they need to assess a pending proposal for a regional water authority.  Omitting an annual audit is shirking a duty, dereliction of duty.  

Who's responsible?  DWSD's director is Sue McCormick.  But she may be no more than a puppet for Kevyn Orr, Detroit's emergency manager.

I googled "DWSD annual audit."  What appeared to be the most pertinent result was Detroit Water and Sewerage Department - Financials 

Didn't see any mention of a 2013 annual audit report.  It said, "The Financials page is a listing of annual report, bond and financial statements. This information is provided to show DWSD's overall performance. For a copy of DWSD's Annual Reports or other documents not listed below, please email your request to public.affairs@dwsd.org. "

So I sent an email request.  I'll update this post if and when I get a response.

In the meantime, those reading this post may want to make inquiries of their own.

UPDATE:  Received the following response from DWSD, "Thank you for your email.  The Water and Sewerage Department welcomes your comments and requests.  Please be advised the 2013 Annual Report has not been released by the City of Detroit. Unfortunately, a time frame is not available."

 

DWSD Critic Became DWSD Mouthpiece

Who wrote this?  Who was the spot-on critic who told it like it is?

“The corruptive influences within the Detroit Water and Sewerage Department (DWSD) over the last several decades raise doubts that the city should remain in control of the operation.”

“...[A]ccusations ran rampant that DWSD awarded millions in no-bid contracts, failed to collect from deadbeat customers and was guilty of gross mismanagement. Some contracts were awarded on the basis of favoritism rather than qualifications.”

“...Detroit officials may be incapable of preventing corruption from polluting the operation.”

“We can only speculate why DWSD is the poster child for Detroit corruption. It may be that inherent in the DWSD structure are all the elements of a perpetuating self-corrupting entity. Whether the water department’s besmirched reputation could be made whole under a restructured regional authority is conjecture.”

This was written by none other than Bill Johnson, Media Sage, shortly before he was bought off, strike that, hired by DWSD as Resident Mouthpiece.

Those downtown government offices all seem to have revolving doors, with the same cast of characters coming and going.  And I’m just talking about the city.  Now think about the county.  Musical chairs.  And a recipe for bankruptcy, city and county.

Where are the fresh, new faces?  Fresh, new ideas?  I suspect most of them left for cleaner, greener pastures.  But I think I see a few on the new City Council.  Let’s hope.

A New Plan for Water Services in Southeast Michigan

My view is that DWSD has broken the contracts with its wholesale customers in the suburbs.  The question becomes, what do we replace them with?  I haven’t thought this out completely, but I want to keep the discussion moving.  Here’s a general outline of my thoughts:

I.    Long range goals

         A.    Prop up Detroit.  Somebody has to do it.  It should be the State of Michigan or the federal government, not Detroit’s suburbs.  It’s too big a burden.  Gov. Snyder should be pressed for a solution. He wants to be re-elected.  Let him prove his mettle.

B.    Form a regional water authority.  Include participation by counties like Monroe, Washtenaw, Livingston and St. Clair.  Elect members of its governing board. Detroit should be included as part of Wayne County. There should be one elected board member for every 350,000 county residents.  Any counties with a smaller population would have one board member.

C.    The regional water authority would own and operate all water-related facilities in the region.  All existing facilities would be appraised and the net value, if any, reimbursed over time and debt thereon assumed by the new authority.

D.    Outmoded facilities would be phased out and replaced.  Federal revolving fund legislation needs to be updated and expanded to include a broader range of infrastructure.

1.  freshwater:  negotiate with KWA to expand into the northern suburbs.

2.  wastewater:  replace the central facility in Detroit with several smaller, state-of-the-art installations throughout the region and/or expand and modernize existing plants in Pontiac, Warren, Ann Arbor, etc.

II.    Strategies for implementation:  Stay tuned.

DWSD Relies on Vulnerable Contracts with 'Burbs

A Free Press article on February 12, 2014 about DWSD quotes suburban officials bemoaning the (perceived) fact that the suburbs are stuck in long-term contracts with DWSD.

“Commissioners asked a question that homeowners and business customers across suburban Detroit have posed for years — is there a way to break away from Detroit’s historic stranglehold on supplying water and sewer service to nearly 4 million people in southeast Michigan?”

“The answer was no. That would be all but impossible because numerous communities have long-term contracts with the Detroit Water & Sewerage Department, including many that won’t expire until 2043, said Richard Sulaka Jr., Macomb County deputy public works commissioner.”

I don’t agree.  DWSD’s contracts are as full of holes as a wool sweater in a moth colony.

First, let’s think about the makings of a sound contract.  Implicit is the idea of arms-length bargaining.  Not much of that with a monopoly like DWSD (especially when run by a criminal enterprise headed by the city’s mayor).  How about duress?  When is somebody going to play that card?  Or adhesion contract?  Cornell Law defines it as:

“A standard form contract drafted by one party (usually a business with stronger bargaining power) and signed by the weaker party (usually a consumer in need of goods or services), who must adhere to the contract and therefore does not have the power to negotiate or modify the terms of the contract…”

“Courts carefully scrutinize adhesion contracts and sometimes void certain provisions because of the possibility of unequal bargaining power, unfairness, and unconscionability. Factoring into such decisions include the nature of the assent, the possibility of unfair surprise, lack of notice, unequal bargaining power, and substantive unfairness…”

Last but certainly not least, massive fraud, bribery, extortion and bid-rigging by one party in the performance of its contractual duties, to the detriment of other parties, will void contracts that precede the crimes.

Unless all existing contracts were signed subsequent to those crimes, suburban representatives in current negotiations with Detroit should consider their options more carefully.

Forensic Audits, Another Tool Related to Transparency

Couple of years ago in Saugus, Massachusetts, the Board of Selectmen engaged an accounting firm to conduct a forensic audit of the town's water and sewer enterprise fund.  Financial irregularities were suspected and subsequently found.  There was public anger over the revelations.  Some had been lied to in town meetings.  The matter was reported in the Saugus (MA) News on May 2, 2012.

On completion of the forensic audit, one of the accounting firm's members appeared before the Board to answer questions.

The accountant, Jim Powers, said the mischief  "...could have been stopped at any time...checks and balances are dependent on people doing their jobs."  How could the shenanigans have gone unnoticed so long?  Selectman Castinetti asked, “Why did it take a forensic audit to bring all this to light?”  Why didn't the town's previous accountants discover the violations?

Selectman Horlich knew part of the answer.  As soon as the previous accountant asked embarrassing questions, the former town manager got himself a new accountant.  Horlich said,  “I believe the feeling was ‘If you open your mouth, you’re going to get fired.’”

Powers summed it up, saying that a town could avoid this kind of trouble by assuring greater transparency and wider distribution of power.  A financial committee member observed, "It’s incredible, the depth of this forensic audit."

Bankruptcy Receiver Covets Suburban Money Machine

 

I’m rebooting my argument about the relationship between Detroit and its suburbs concerning water services.

The suburbs are the source of 80 percent of DWSD’s revenue stream, which amounts to the better part of $1 billion every year.  It’s the only foreseeable security for the financing needed to rebuild dilapidated infrastructure.

It’s possible that the bankruptcy court has the authority to nullify any present equitable interest of the suburbs in DWSD or its successor, but where is the authority of either the court or Kevyn Orr (in either of his roles) to require future lease payments by the suburbs to the City of Detroit for the use of water facilities?

Consider the analogy of a corporate reorganization in bankruptcy.  The bankruptcy court can wipe out the stockholders’ equity, but it would be ludicrous to suggest that the court could then order the former stockholders to begin purchasing stock in the reinvigorated entity coming out of bankruptcy.  

If suburbanites want water and sewer service from Detroit, they can continue to pay the costs of such services, deferred to the following year, same as they do now.  But if they so chose, any of the suburban communities (or combination of them) could acquire those services elsewhere or build their own, more efficient facilities utilizing the latest technology.  It’s their choice, not Orr’s or the court’s.

The billion dollar money machine in the suburbs doesn’t belong to DWSD, Kevyn Orr or the bankruptcy court.  A 700k Detroit tail doesn’t wag a 3000k suburban dog.

DWSD Has Chance to Foster Accounting Transparency.

If you were to look back several decades for the public institution in Michigan most shrouded in secrecy and obfuscation by reason of corruption and incompetence, it’s hard to imagine you would find one more qualified than the Detroit Water and Sewerage Department (DWSD).

Traditional annual audits (1) were not, aren’t and never will be comprehensible by the public and (2) obviously didn’t reveal, stop or even slow down the laundry list of crimes and mismanagement at DWSD.  And anyone who thinks those problems are completely over at DWSD has his or her head in the sand.

But now we have available a revolutionary system for transparency, and it can be had at a discounted price.   I’m convinced that the shortest, most effective route to transparency at DWSD is through the application of Checkbook 2.0, the brainchild of John Liu, New York City’s comptroller.  Checkbook 2.0 is a readily adaptable accounting system in which an institution’s financial transactions are disclosed on a public website as they happen.

Checkbook 2.0 vacuums up, correlates and displays an institution’s revenues, expenses, budgets, payroll, projects, contracts, subcontracts and such.

The next most effective safeguard of the public interest in lieu of traditional audits, I suppose, would be annual forensic audits (which would be a lot more expensive and much less effective).

A third alternative might be annual petitions for accounting in a suburban circuit court (which would probably be even more expensive and less effective).

Karl Fogel of Open Tech Strategies, LLC wrote, “...the release of the Checkbook NYC code...is significant because of a larger initiative that accompanies it. Long before the code release, the Comptroller's Office started a serious planning process to ensure that the code could be easily adopted by other municipalities, supported by other vendors, and eventually become a long-term multi-stakeholder project...”

Rebecca Williams of the Sunlight Foundation reported, “...[T]his might be the first instance of city officials proactively and premeditatively building civic applications with the intent of having other cities -- and cities with varied software vendors at that -- use and contribute to making that software better.”

There will be a few public officials who howl in objection to the Checkbook 2.0 concept before exploring its possibilities. But there will be many others willing to consider a new way to deal with an old problem.  Let's work to generate strong public support for such an initiative.

Suburban Lease Payments Not Justified in Detroit Water Deal

As owner of the Detroit Water and Sewerage Department (DWSD), the City of Detroit is responsible for capital investments, including major improvements and replacements.  If that responsibility were being met, then the city would be justified in requiring lease payments from ratepayers as part of the conversion of DWSD to a regional authority.

But the city doesn’t have the cash or credit to rebuild DWSD, the city’s (purported) capital asset.

It appears to me that Emergency Manager Kevyn Orr wants to rely on the ratepayers’ credit worthiness to pay for capital improvements and replacements (as if the ratepayers were the owners), as well as requiring ratepayers to make lease payments to the city (as if they were renters).  Bear in mind that the system was never intended to be a cash cow for the City of Detroit. Rates were not supposed to include a profit margin.

Let’s face it.  DWSD is basically a pile of junk with negative or negligible value.  No sooner is one cluster of belt presses, incinerators or water mains replaced than another breaks down.  The only value in this whole scenario is the revenue stream flowing from city (20%) and suburban (80%) ratepayers.  Nick Carey of Reuters wrote on December 16, 2013, ”[An Oakland County official] said preliminary financials he had seen estimated it would cost $20 billion to upgrade the system over two decades.”

It’s one thing to require that ratepayers take over the responsibility to rebuild DWSD.  It’s something entirely different to also require that they make lease payments to the city for the “privilege” of assuming ownership responsibilities.

If conversion to a regional authority goes through, the savings realized by refinancing debt and cutting costs should accrue to the ratepayers without being offset by so-called lease payments to the city.

Can a Metro Detroit Water Deal Exclude Oakland and Macomb?

Concerning an anticipated metro Detroit water deal that would exclude Oakland and Macomb counties, reported in the Detroit Free Press* on January 22, 2014 by John Wisely:

How likely is it that Gov. Snyder, having in mind a re-election bid, would risk losing Republican campaign money and votes in Oakland and Macomb counties by siding exclusively with 99 percent Democratic Detroit and Wayne County’s discredited executive, a Democrat, on a water pact?

* http://www.freep.com/article/20140122/NEWS05/301220028/detroit-water-sewerage-department-suburbs-cooperation-deal