Fri Sep 19, 2014 2:50pm EDT
(Adds council member comments, Syncora deal, details of authority)
By Lisa Lambert
DETROIT, Sept 19 (Reuters) - The Detroit City Council on Friday approved the creation of a regional water authority, pushing forward an integral part of the city's plan to exit the biggest-ever municipal bankruptcy.
A deal Detroit reached last week with Oakland, Wayne and Macomb counties creates a regional water and sewer authority, but allows Detroit to maintain control of its local system. The authority must now be approved by at least one of the counties.
"When you go through rough times, you have to make decisions that are not always popular, but are necessary," said council member Andre Spivey prior to the 7-2 vote.
The city's water and sewerage department had become a sticking point in the plan to restructure Detroit's $18 billion of debt and other obligations.
The three southeast Michigan counties initially objected to the city's proposal to drain $428 million out of the system over nine years to make catch-up payments to Detroit's General Retirement Fund and to cover some fees. Under the deal, the new Great Lakes Water Authority would be able to make a smaller lump-sum pension payment.
Detroit will continue to own the system and lease it to the authority for $50 million a year for 40 years. That money would allow for the issuance of up to $800 million of bonds to fix ageing pipes and other related infrastructure in the city.
The authority will also have an affordability fund to help customers who cannot pay their bills. The water and sewerage department inspired city-wide protests this summer when it shut off delinquent bill payers' water in an effort to collect on $90 million in unpaid bills.
Detroit City Council President Brenda Jones, who cast one of the votes against the authority, advocated for putting the deal before city voters.
In a statement after the vote, Jones said she is concerned that Detroit would have to contribute to the lease payments, the potential bond issuance will not cover the costs of necessary repairs, and the 40-year lease does not account for inflation.
U.S. Bankruptcy Judge Steven Rhodes, who is currently holding a hearing on Detroit's bankruptcy plan that is expected to last until mid-October, had pushed the city and counties into mediation, hoping for a resolution that would include a regional authority. The judge must decide if the plan to shed about $7 billion of the city's $18 billion of debt is fair and feasible.
The council on Friday also approved another part of the bankruptcy plan, a deal with bond insurer Syncora Guarantee Inc., which has a $400 million exposure in the case. As part of that settlement, Syncora will receive options to acquire six vacant lots, take control of a public parking garage and extend its lease on Detroit's part of a tunnel connecting to Canada.
In addition, Syncora will see a 13.9 percent recovery on its claims involving the city's pension debt.
Council members and Mayor Mike Duggan had warned that if the city council did not approve the new water authority state-appointed Emergency Manager Kevyn Orr would privatize the systems. Orr had requested, and received, indications of interest from potential private operators, but the idea faded as negotiations on the authority advanced.
The water system covers 1,079 square miles and serves about 40 percent of Michigan's residents. The sewer system covers 946 square miles. (Reporting by Lisa Lambert Additional reporting by Karen Pierog in Chicago; Editing by Chizu Nomiyama, G Crosse and James Dalgleish)
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