Flint, Michigan’s finances stable but fragile as citizens get closer to state settlement payout

Flint, Michigan’s fiscal condition remains stable but fragile with some positive signs on the horizon as its citizens move closer to receiving compensation for the 2014 water contamination crisis, with a $600 million state-backed settlement clearing its final legal hurdle.

Following federal court approval in 2021 and an appellate affirmation last week, Genesee County Circuit Court Chief Judge David J. Newblatt signed off on the $626 million settlement this week. It was the final legal milestone before distribution of the proceeds that resolve claims over the state’s role in the crisis.

Attorney General Dana Nessel and Gov. Gretchen Whitmer announced the pact in August 2020 after 18 months of negotiations with lawyers for residents harmed by the lead poisoning that followed Flint’s move to switch its water source in 2014 while under state emergency fiscal management.

The final legal step in the settlement marks another phase in the city’s ongoing recovery.

“I think Flint has been on a path from crisis to recovery and this is great news and another step,” Robert Widigan, a Flint native who took over as chief financial officer in August 2021, said in an interview. “We are stable but fragile on our path to recovery from crisis.”

The city’s closed out fiscal 2022 with a $19 million surplus, which helped to balance the fiscal 2023 books and Mayor Sheldon Neeley’s proposed fiscal 2024 $66.7 million budget anticipates more spending than available revenues, so a prior year’s balance and looming state pension aid will help.  

Widigan said it’s a goal to structurally balance the books and begin building reserves, but it’s difficult when weighing those goals against the city’s needs to build up services, remove blight, promote economic development, and enhance public safety amid rising pension funding demands and a decades-long diminishing tax base.

The population has shrunk from 200,000 in 1960 when it housed middle-class auto workers to about 80,000. “There’s no room to increase city services,” Widigan said. The city’s $94.7 million share of COVID-19 American Rescue Plan Act funds has helped, but they are one-time in nature and so are being used for one-time expenses, like first responders’ premium pay, blight removal and infrastructure.

The state placed the city under direct state oversight 2011. It ended in 2015 but the state-appointed Receivership Transition Advisory Board continued reviewing city decisions until 2018.

The city will soon get some relief on the pension front. The Michigan Department of Treasury recently kicked off the funding process for $750 million of grant funds authorized in the state’s fiscal 2023 budget aimed at bringing local government pensions up to 60% funded. Flint is slated to be the largest recipient, with an award of $170 million.

Contributions have been on the rise from $21 million in 2018 to $32 million this year and $40 million next year. The city’s retirement system carries a $500 million unfunded pension tab and $160 million of other post-employment benefits unfunded liabilities.

The infusion of $170 million would bring the pensions to a 55% to 60% funded ratio, up from 28%, and should bring the payments down this year to $18 million, providing more budget flexibility.

The city hopes to establish a prefunded trust for OPEBs and will pursue state and philanthropic help. The city intends to press for a piece of a smaller $50 million grant opportunity for pensions in the state’s budget and will push for increases in state revenue sharing. Recent state budgets have increased funding using surplus tax revenues.

On the economic development front, the city is banking on progress in the private redevelopment of the former Buick City site. Funding is in place through state and federal sources for the ongoing replacement of all lead pipes while the city is footing the bill for some water main replacements.

The city had $26.2 million in long-term bonds and loans outstanding for governmental activities and $119.4 million outstanding for business-type activities, according to its 2022 audited statements. The city last issued general obligation debt in 2021 when it sold $6.6 million through its Economic Development Corp., with a state backing, that resulted in a Aa3 rating from Moody’s Investors Service.

The city doesn’t have stand-alone ratings and no near-term, new money issuance planned. But it does keep its eye on refunding opportunities and, to promote better investor relations, launched a website through BondLink:CityofFlintInvestors.com.

“It’s a one-stop shop to share Flint’s story” with investors and other stakeholders, Widigan said.

The city put its GO pledge behind debt issued for the $285 million bond-financed Karegnondi Water Authority’s new pipeline, but after the crisis transferred 97% of those water rights to the Great Lakes Water Authority. The city carries a liability of $96.3 million to the KWA and a receivable from GLWA in the form of a water credit.  

The city’s contamination crisis occurred after its contract with Detroit to receive Lake Huron water ended and the city, under the control of state-appointed emergency managers, began pulling its water supply from the Flint River in April 2014 while awaiting the completion of the KWA pipeline.

The city failed to properly treat the Flint River water, triggering lead contamination because of pipe corrosion. It was not abated until the city in the fall of 2015 shifted back to Detroit-supplied water.

In addition to the toxic lead poisoning of household water that is especially damaging to children’s developing brains, a 2014-15 Legionnaires’ disease outbreak in the Flint region led to the deaths of at least 12 and sickened another 79 individuals.

Judge Judith E. Levy of the United States District Court for the Eastern District of Michigan. who oversaw the consolidated lawsuit. approved the state settlement in in 2021 and on March 17, the Sixth Circuit Court of Appeals affirmed her ruling.  

The state sold $603 million of taxable private activity bonds in June 2021 to cover its share of the settlement. Flint is putting $20 million into the pool. Insurance is covering the liability, so there’s no impact on the city’s budget, Widigan said.

McLaren Regional Medical Center has contributed $5 million and $1.25 million will come from Rowe Professional Services Co.

The preliminary agreement calls for 80% of the net settlement fund to pay claims of children who were minors when first exposed to the Flint River water, with a large majority of that amount to be paid for claims of children ages six and younger.

Another 2% is to be earmarked for special education services in Genesee County. Roughly 18% of the net settlement funds are to be spent on claims of adults and property damage. Finally, about 1% will go toward claims for business losses. 

“This ruling provides families with much needed compensation for the injuries they have suffered,” Nessel said in a statement this week. A claims administrator continues to review claims.

Nessel launched a criminal case against various officials including two former emergency managers and Gov. Rick Snyder, whose administration’s handling of the crisis came under fire, and a separate private civil case was filed in federal court against the Karegnondi bond underwriters. The criminal case was tossed by the Michigan Supreme Court and the underwriting case was dismissed.

Flint is also at the forefront of the development of XBRL for financial reporting. Flint participated in a pilot project with the University of Michigan’s Center for Local, State, and Urban Policy at the school’s Ford School of Public Policy, in partnership with XBRL US. The state is exploring the feasibility of moving toward the use of machine-readable financial documents by local governments on XBRL — extensible business reporting language —instead of their current PDF format.

The technology is “truly is, in my opinion, a quantum leap in financial reporting,” Widigan said. The market has pushed back against changes imposed under a new law, the Financial Data Transparency Act, that requires issuers to standardize disclosure data in a machine-readable format like XBRL and shift away from the traditional PDF format.