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Detroit losing millions as neighboring counties abandon city water system

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Image of the Detroit skyline on the podium where Detroit Emergency Manager Kevyn Orr and Michigan Governor Rick Snyder will address the media in Detroit, Michigan July 19, 2013. (Reuters)

The steady drip of Detroit's financial woes is turning into a gusher as the city braces to lose one of its most reliable sources of revenue: contracts with surrounding communities for the city's water supply. 

For years, Detroit’s water system played the middle man in getting water from Lake Huron to neighboring communities. But the city’s aging water system is of enough concern that the city of Flint has joined with Genesee County and others to build a $300 million pipeline parallel to an existing one to get water directly from the lake, cutting out the Motor City. 

For Detroit, Flint's decision means losing its second-biggest customer and drying out an already-depleted revenue sheet.  

Flint’s deal with Detroit dates back to the mid-1960s when it signed a 30-year lease with the city. Since that lease expired, Flint has been operating on a yearly extension basis. Losing Flint and Genesee is expected to force Detroit to take a $22 million-a-year hit.

Flint wants to turn away from Detroit and join the Karegnondi Water Authority (KWA). Detroit turned to the courts to stop it, arguing that building a new pipeline would be a waste of resources and money. It didn’t work.

Jeff Wright, CEO of KWA, says the new pipeline should be operational in the spring of 2016. He says Genesee County spent $24.1 million on water last year -- $18 million more than when he first became drain commissioner more than a decade ago.

Wright says the spike was too high and so Flint, Genesee, Sanilac and Lapeer counties decided to build their own “for less than the cost of continuing to purchase water from Detroit." 

It’s a hard hit for Detroit. But the city, which filed the largest municipal bankruptcy in U.S. history last summer, isn’t going down without a fight and is trying desperately to hold onto its other customers.

Detroit remains in talks with three other counties – Oakland, Macomb and Wayne -- to reorganize its water system as a regional operation. Success is vital for a city that has been struggling to climb out of bankruptcy.

Detroit’s emergency manager, Kevyn Orr, included plans for a regional authority in his blueprint for rebuilding the city.

While Orr has at times pushed to privatize the city’s water department, he recently told the Detroit Free Press he prefers an option that would raise money through leasing the system to a regional authority that would run the water and sewer system. The money rolling in would provide Detroit with a hefty $47 million-a-year payment for the next 40 years that would allow the city to reinvest in public services.

Currently, the Detroit Water and Sewerage Department is required to take whatever money it makes and spend it on its own department.

But trying to convince others to take a chance on Detroit has been a tough sell.

The city’s widely reported fiscal missteps haven’t done much to cultivate confidence in its ability to deliver the goods. City and state officials routinely used a “business-as-usual” approach, critics said, to what’s been called an “open and notorious” mismanagement style that eventually led to Detroit’s financial house of cards crumbling.

Other concerns about teaming up with Detroit include flaws in the city’s rate structure, outstanding delinquencies in residential and business accounts and a $1 billion loss in value.

According to Crain’s Detroit Business, interest expenses and investment losses have put the city’s water and sewer funds in the red. The concern is that Detroit’s fiscal free-fall will make it unattractive to creditors and affect its ability to borrow money.

Oakland County Executive L. Brooks Patterson said Detroit’s proposal to turn its water department into a regional authority would likely triple water rates.

“I tell my team no deal is better than a bad deal – and right now it’s a bad deal, so we’re probably going to walk,” he said during a speech at “Governing” magazine’s Outlook in the States & Localities conference.

Orr argues that creating a regional water authority would help Detroit shed some of its water weight. In exchange, the city would give up some of its control to the neighboring counties.