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Even with Mayor Duggan in Control, Detroit Should Not Privatize Water

The water war in Detroit has taken a new turn. The emergency manager (the virtual city dictator appointed by the governor) shut off thousands of customers of the Detroit Water and Sewerage Department for non-payment. Some were undoubtedly taking advantage of the chaos caused by the State takeover and the bankruptcy but most are unable to pay because of the city's economic crisis. Massive protests and the intervention of an overtly outraged bankruptcy judge prompted 15-day moratorium on shutdowns. This was reminiscent of a cease-fire in a war to curry favor with those whose opinions might be soured by reports of atrocities. City residents have even appealed to the United Nations for intervention, citing the fact that water is a basic human right. 

Today the emergency manager transferred administration of the system to the newly elected Mayor Mike Duggan, whose prior claim to fame was that sale of the non-profit Detroit Medical Center to a for-profit hospital conglomerate out of Virginia. Was this to pass on the hot potato; or is it part of a larger plan?

We have suggested that the shut offs were tactical and connected to the emergency manager's publicly stated affection for the idea of converting the management of the system to a regional board that would be appointed in part by the governor, who is behind the Detroit's takeover and bankruptcy. Parts of the system could then be privatized. The almost $6 billion of system debt would have to be refinanced, but the debt would go up, not down. And at the end of the day the system’s users would still have to fund the enterprise from user fees.

This all sounds as if it is just the thing that the mayor, the man who turned a non-profit hospital into a profit making enterprise, would like.

In our report last November, before the Water and Sewerage System was thrust to the forefront in the national accounts of Detroit’s travails, one of our six recommendations addressed the emergency manager's plans for the system:

The emergency manager should drop any plans to privatize or otherwise monetize the Water and Sewerage Department, since the asserted benefits of such a plan are not likely to be  realized and, even if they were, would have no net effect on  the current cash flow crisis. The sale price of the system or components represents an investment by a buyer that must be repaid by system revenues, the same as bonds issued against those revenues.

If the sale price is applied to retire existing bonds, the effects balance out. If they are not used to retire bonds, it is just like issuing new debt, which presumably the system could do without selling off parts of itself. The plan calls for an annual payment to the city, but this payment is from user fee revenues net of operational expenses and debt service (and return on equity investment if true privatization is used), a financial structure that is parallel to the current system

Like many, but by no means all, cities, Detroit has elected to charge users to pay for its water and sewerage system. There is no doubt that customers should pay their bills under such a system. But this is a public enterprise, at least for so long as the voices of the people of Detroit are heard. The payment problem cannot be separated from the collapse of the Detroit economy.

The governor and emergency manager may want to dress up the operating results of the system to improve its appearance to new investors, either new bondholders or privatization investors or both. But let’s hope that the mayor is not in on the plan, perhaps as part of the deal he got from the statehouse to agree to run. Unlike the governor and the emergency manager, the mayor's duty is to the people of Detroit. He should leave the Water and Sewerage Department in their hands, not sell it to the state or to a private company for nothing in return.