Flint’s switch to river water left residents holding the tab

Long before Flint’s lead-tainted water brought national attention to the city, everyone in town knew the cost of its water was sky high.

Huge price increases had created the highest rates in the nation. When service and usage fees were added up, Flint’s beleaguered residents paid an average annual bill of $864 last year. By contrast, the next highest average in Michigan was $300 lower. Predictably, in a city where 42 percent of people live in poverty, thousands failed to pay their water bills.

“People in Flint cannot afford this,” Randy Rauch, the Genesee County Child Welfare Director for the Michigan Department of Human Services, wrote in a February 2013 email to his supervisors in Lansing. Among his concerns: rising water hook-up fees, from $100 to $350. “Flint cannot live with these rates. I feel somehow the Governor needs to hear about this.”

Within a day, Rauch’s complaint had reached Gov. Rick Snyder’s office, according to internal communications made public in recent weeks by Snyder’s office.

Rauch was right, the people of Flint could not afford what they were being charged for water. But the story behind those high rates is far more complex than the easy narrative pushed by city leaders: that the Detroit Water and Sewerage Department was financially squeezing Flint, virtually forcing the city to look elsewhere for water, a decision that disastrously ended in the selection of the Flint River.

Government emails and documents, along with interviews by Bridge Magazine, show that Flint’s state-appointed emergency managers, with input from state treasury officials, continued to charge residents high rates after switching to the Flint River, even though the move had reduced the city’s water expenses to a fraction of what it had been paying to Detroit.

The reason: the cash-starved city needed every dollar it could collect from residents to replenish its water and sewer fund, money that had been reallocated over the years to close other gaps in the Flint’s budget, records show.

Residents, who may have anticipated the temporary switch to the Flint River would provide financial relief, saw no savings.

“That’s when we really started getting angry,” said Eric Mays, who was elected in 2013 to Flint’s city council. “Why isn’t that savings being passed along to the customers?”

Leaving aside for the moment the government failures that led most directly to lead from old city pipes leaching into the water supply, the tale of Flint's unyielding water rates shows the desperate choices cities like Flint must make ‒ between easing the financial burden on impoverished residents and the imperatives of balancing the books.

A city on the edge

For years, Flint was shaped by the need for, and lack of, cash: from its attempts to stem a steady, decades-long decline in population and tax revenues, to the decision in 2013, while under the authority of state-appointed emergency financial managers, to join the Karegnondi Water Authority and, temporarily, use the Flint River for drinking water.

How and why the city and the state made those decisions raise questions about the sustainability of Michigan’s model for municipal finance and the emergency manager law itself. In the end, the failures of government officials allowed a known neurotoxin to flow into the city’s drinking water, sparking fear, medical crises, lawsuits and legislative and criminal investigations.

Two months after Rauch raised flags about the high cost of water in 2013, state Treasurer Andy Dillon agreed that Flint needed a cheaper source for water. He told Flint’s then-Emergency Manager Ed Kurtz to approve the switch from the Detroit Water and Sewerage Department (DWSD) to the Karegnondi Water Authority (KWA), which was to build a new pipeline to Lake Huron by late 2016 to serve Flint and other communities in Genesee County.

The city terminated its Detroit water service a year later and began getting water from the Flint River until the KWA pipeline was ready. Other communities within Genesee County, also members of the KWA, cut a short-term deal to continue getting water from the Detroit system. But Flint officials, contending their water treatment plant was safe, made the interim switch to the river, despite concerns by the supervisor of its own treatment plant.

But any reductions in water rates charged to Flint residents did not materialize and a subsequent emergency manager, Darnell Earley, warned residents in 2014 that any savings would be poured into upgrading a water system that was losing between 20 and 40 percent of its water through leaking pipes.

By last April, when the state loaned the city $7 million, money that allowed the city to go back to local political control, the terms also included provisions that blocked Flint from leaving the KWA – and said Flint could not lower the rates it charged residents without prior consent of the state treasurer.

Budgets before people

Eric Scorsone, an economist and director of the Michigan State University Extension Center for State and Local Government Policy, has studied Flint’s finances for several years. He contends the city’s move to the Flint River was financially attractive to the state precisely because it would dramatically lower water expenses, even as the state officials running the city continued to charge residents the same high rates they paid when the water came from Detroit.

According to Scorsone, keeping the rates high allowed Flint to replenish fund reserves to help pay its share of the construction costs of the KWA.

State officials also talked about needing money to pay for $8 million in upgrades to the city’s water treatment plant – necessary to treat water from first the river and later the KWA ‒ from cost savings generated by using river water, according to a February 2015 letter from Tom Saxton, the state’s chief deputy treasurer.

Emergency Manager Earley, who took over for Kurtz, knew Detroit was willing to serve water until the KWA came online in part because Detroit was willing to (and still does) provide water to the Genesee County Drain Commission, a long-time DWSD customer like Flint that was also part of the KWA. Flint’s state-appointed leaders switched to the river because it saved the city money.

For Flint residents, “there was never a financial savings in going to the river,” said Valdemar Washington, a Flint resident and attorney who is challenging the city in court over its rates.

After residents loudly complained about the odor and taste of the water and there were indications of health problems, calls to rejoin the Detroit system were rejected in early 2015 by then-emergency manager Jerry Ambrose, who argued that doing so would be too costly. Two months later, in March 2015, he mocked a largely symbolic city council vote to make the switch back to Detroit as “incomprehensible.”

Again, Flint leaders’ decision to stick with the Flint River for the city’s drinking water was about money – even as residents continued to complain and as a local General Motors facility switched water sources because the river water corroded its parts (this was still before the lead problem was publicly acknowledged).
“Money was the issue. That’s what drove the emergency manager,” said Mays, the city council member, “not health, safety and welfare.”

An emergency manager’s priorities

Some who have studied the emergency manager laws in Michigan are troubled, too. Joshua Sapotichne, an MSU political scientist, has looked at Flint and other cities where Gov. Snyder has appointed emergency managers. In Sapotichne’s view, emergency managers in Michigan have a limited tool box, one that tends to rely heavily on cutting costs, at the expense of residents’ health or other interests. Salaries, pensions and benefits for city employees were cut and services trimmed in the financially struggling city.

“All they can do is cut,” Sapotichne said. “They’re not doing anything on the revenue side.”

But peeling back the layers some more, another question emerges. Why did the city council and later the city’s emergency managers have to borrow from its water and sewer funds, which it did repeatedly from 2007 to 2013? Why did it have to dip a straw into the Flint River in an effort to save money?

The conventional wisdom has been the city of Detroit’s high water rates pushed Flint to seek a cheaper long term solution. It’s true that costs had risen and the DWSD could not guarantee its rates. “It’s an easy narrative to say Detroit raised the rates,” Scorsone said.

But other places in Genesee County that paid the same base rate to Detroit had far lower bills. How Flint’s became the highest in the nation is still somewhat of a mystery. “That’s the tough part of all this is, we don’t know that for sure.”

What is known, however, is that the people running Flint were finding it more and more difficult to pay its bills.

Flint, once home to nearly 200,000 people, now has fewer than 100,000. The city has lost tens of thousands of residents, jobs and the taxes they generated. Property values fell by half between 2001 and 2015 while personal income, over $2.5 billion in 2002, was just under $500 million in 2013.

Flint had been home to more than 80,000 well-paying GM jobs in the late 1970s, but by 2006, the company employed fewer than 8,000 in the city.

It was against that backdrop that city leaders struggled with finances, which led to the appointment of a succession of state emergency managers. There were fewer people and businesses to spread the costs of an aging water and sewer system, and fewer taxpayers to fund the city’s services. Income tax rates were capped by state law and the city’s share of state revenue sharing fell by $63 million since 2003, including $7.7 million less in 2013 when compared with 2003, according to a report by the Michigan Municipal League issued this week (The numbers were not adjusted for inflation, according to the League).

Much like Flint, municipalities across Michigan face cuts in core services like police and fire ‒ as well as infrastructure bills – making it difficult to balance budgets. Some towns ended up under state supervision or with emergency managers. Detroit, most famously, filed for bankruptcy.

In Flint, leaders both before and after the first emergency manager chose to use its water and sewer money to balance other parts of the city’s cash-strapped budget. In 2006, the city had “unreserved system equity” in the water and sewer funds of more than $60 million.

“Flint used the water and sewer funds as a bank,” MSU’s Scorsone said.”In one sense it made sense: That’s where the cash is.”

Mays, a colorful if controversial city official who recently spent time in jail for impaired driving, agreed. “The water and sewer funds always were the funds that had the money.”

After settling a lawsuit over sewer overflows, the city dipped into the water and sewer reserves in 2007 for $15.7 million, a decision a judge later called illegal. Before the first emergency manager, the city council approved loans from the water and sewer funds and, later, emergency managers would do the same. By 2013, the funds – once flush with millions in reserve – were drained.

As a result, the city charged residents a rate increase of more than 20 percent in early 2011, and another 35 percent for water and sewer service later that year.

Washington, who is still fighting the rate hikes, said the increases didn’t follow Flint’s own ordinances requiring residents to be notified in advance. MSU’s Scorsone said the hikes may have been “legal but not financially wise.”

Tough decisions still

Today, Flint’s water budget continues to lack money for basic maintenance. Faulty pipes need millions of dollars in repairs.

“Unfortunately, the city should have been using (water fund reserves)” for infrastructure, said Jerry Preston, a former president of the Flint Area Convention & Visitors Bureau. He has raised questions for years about the difference in water bills between those in Flint and the surrounding communities, which also drew water from the Detroit system. To him, the math “didn’t add up.”

He said his suspicions have been validated. The city did indeed raise rates to balance the budget; it needed the lower expenses of the Flint River, leaving the city’s poor residents to make up much of the shortfall.

“It’s about a bunch of bad decisions,” Preston said. “What’s missing is the first decision: leaving the Detroit water system because the cost is too high.”

More trouble looms, Scorsone fears. A $30 million state package to refund up to 65 percent of past water bills for Flint residents has indeed lowered bills, but is scheduled to run out next year. And no one suggests that the city’s transition to the KWA will offer relief to residents on water bills.

“Within a year, this system’s going to be in serious financial trouble,” Scorsone predicts. “I don’t see how water rates are going down.”

The water may be safer, but there’s no guarantee it will be cheaper.

About The Author

Mike Wilkinson

Mike Wilkinson is Bridge’s computer-assisted reporting specialist. He can be reached here.

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Comments

William Plumpe
Thu, 03/24/2016 - 9:57am
It seems obvious that somebody in the chain of command was using Flint drinking water sales as a cash cow to raise money. There has been a definite history of municipalities tacking on extra "fees" and charges to Detroit water bills to raise money. These fees are in reality hidden taxes that the local government can blame on DWSD. More investigation of Flint's finances are needed to see how the City became so financially strapped. And in fact the whole billing system for DWSD must become more transparent and customers more informed. Hopefully that goal will be accomplished with the advent of the new Water Authority.
David Waymire
Thu, 03/24/2016 - 11:41am
Worth noting that state revenue sharing cuts have cost Flint $63 million in the least decade or so. That money could have been used for operations, allowing the water revenues to be used for maintenance.
Jack
Thu, 03/24/2016 - 1:11pm
Is the state revenue sharing to municipal governments based on population? If so, ... the precipitous decline in state distributions over the years was predictable. A better question is why this emergency, and it is an obvious emergency both for those relying on Flint water and for the image of the State of Michigan for inept government management, didn't warrant immediate claims on the "rainy day funds" to promptly take actions to fix the water problems in Flint...not just the unhealthy source, but the treatment facilities and replace the ancient, lead leaching, & inefficient leaky pipes. Citizens deserve responsive & efficient government. We're not getting it.
Mike Wilkinson
Thu, 03/24/2016 - 1:46pm
Jack, Revenue sharing is on a per-capita basis. But the state, during belt-tightening, also substantially reduced the pot of money that was split on a per-capita basis, money that was part of a 1998 statute. That's the portion that plummetted across the state. The losses occurred in cities where population grew as well. -- Mike Wilkinson
Nick Ciaramitaro
Thu, 03/24/2016 - 2:52pm
Here's what Michigan law says on the subject. Neither DWSD nor a city buying from them is allowed to profit: 123.141 Sale of water; authority of municipal corporation to contract with city, village, township, or authority; price; limits; applicability and effective date of subsection (2); adjustments; proceedings to determine rate changes; retail rate; applicability of act. Sec. 1. (1) A municipal corporation, referred to in this act as a corporation, authorized by law to sell water outside of its territorial limits, may contract for the sale of water with a city, village, township, or authority authorized to provide a water supply for its inhabitants. (2) The price charged by the city to its customers shall be at a rate which is based on the actual cost of service as determined under the utility basis of ratemaking. This subsection shall not remove any minimum or maximum limits imposed contractually between the city and its wholesale customers during the remaining life of the contract. This subsection shall not apply to a water system that is not a contractual customer of another water department and that serves less than 1% of the population of the state. This subsection shall take effect with the first change in wholesale or retail rate by the city or its contractual customers following the effective date of this subsection. Any city that has not adjusted rates in conformity with this subsection by April 1, 1982 shall include in the next ensuing rate period an adjustment to increase or decrease rates to wholesale or retail customers, so that each class of customer pays rates which will yield the same estimated amount of revenue as if the rate adjustment had been retroactive to April 1, 1982. A city that is subject to section 5e of Act No. 279 of the Public Acts of 1909, being section 117.5e of the Michigan Compiled Laws, shall begin proceedings to determine rate changes pursuant to section 5e(b) of Act No. 279 of the Public Acts of 1909, being section 117.5e of the Michigan Compiled Laws. (3) The retail rate charged to the inhabitants of a city, village, township, or authority which is a contractual customer as provided by subsection (2) shall not exceed the actual cost of providing the service. (4) This act shall not apply to a jointly operated water system or authority that supplies raw untreated water to 2 or more municipalities. History: 1917, Act 34, Imd. Eff. Apr. 5, 1917 ;-- CL 1929, 2445 ;-- CL 1948, 123.141 ;-- Am. 1957, Act 53, Imd. Eff. May 17, 1957 ;-- Am. 1981, Act 89, Imd. Eff. July 2, 1981