Small-town Michigan deals underscore munis’ role in water infrastructure

The bonds are secured by the net revenues of the water system. Bond provisions include a debt service reserve fund; an additional bonds test that allows further debt issuance, but only if net revenue over the past year for the system equals 1.15x MADS; and a rate covenant requiring net revenues be maintained at a minimum of 1.1x annual debt service.

S&P said its underlying rating could be pressured if the system’s coverage metrics dip below forecast figures due to declines in service area growth or failures to raise rates in a timely manner. It said the stable outlook is due to an expectation that liquidity will remain low but consistent.

“The BBB-minus rating reflects the low nominal liquidity for a small system relative to that of higher-rated peers, as well as a limited economy with below-average incomes, which could constrain future rate raising flexibility,” said S&P credit analyst Alan Shabatay.

The lead manager on the deal was Stifel. The bond counsel was Miller, Canfield, Paddock and Stone. Baker Tilly was the municipal advisor.

Albion City Manager Doug Terry said that while it was a dicey time to go to market, the city had a successful pricing.

All but three of the maturities priced at a premium, according to disclosures posted on the Municipal Securities Rulemaking Board’s EMMA website.

“We believe that Albion is going through a renaissance, and we want to make sure that we can meet all of our public needs through adequate water and sanitary sewer (upgrades),” Terry said. “We’re anticipating growth from some local industries, manufacturers in the region.”

He said the city of 7,300, 90 miles west of Detroit on Interstate 94, intends to develop a new industrial park, and hopes to locate major manufacturers in the industrial park.

The bonds funded water supply system upgrades including the construction of a new elevated storage tank, water treatment plant improvements, a new transmission main, distribution system upgrades, and lead service line replacements.

Terry said right now the city’s water reserve tank is 500,000 gallons; the new one will be 1 million gallons. 

The upgrades factor in fire flow, which is now a standard engineering consideration. It involves ensuring there is “enough water to sustain the town according to industry standards — if we have a major fire, how many gallons per minute the fire trucks pump, things like that,” Terry said. 

The state has seen wildfire smoke from Canada recently, but Michigan is also at risk of wildfires itself due to decades of having too few prescribed burns, MLive reported last month. 

The state also faces increased fire risk from climate change, as rising temperatures bring more droughts and higher lightning activity, according to the Western Fire Chiefs Association.

Albion’s water system improvements were undertaken in consultation with the state Department of Environment, Great Lakes and Energy, or EGLE. 

“We work hand-in-hand and cooperatively with one another,” Terry said. “Any time we make water system improvements we’re required to consult with EGLE.”

EGLE’s Dean said the department issued over 1,000 permits in 2024 for drinking water infrastructure. The 2025 total will likely be in the same range.

“The numbers between last year and this year have been stable due to the federal money available for infrastructure upgrades being available for both last year and this year,” Dean said.

He said the biggest infrastructure updates currently needed are to distribution systems.

“Many drinking water plants have received appropriate maintenance because the plant is very important to having water available to feed into a distribution system and the plants are able to be visualized regularly so maintenance is easier to identify,” he said.

He pointed to an increase in federal funding available in the water sector as a driving force behind the recent uptick in upgrades. 

“The need has been there for many years, but now that funding is available more systems are seeking to update their older infrastructure,” he said. “This will all come to an end soon if the new administration decides to end the federal investment in infrastructure.”

Another similar deal — this one from Northville, Michigan, which is about 28 miles northwest of Detroit — priced via competitive sale this month. 

Sandi Wiktorowski, Northville’s finance director and treasurer, said Northville’s upgrades were prompted by an administrative consent order with EGLE requiring a feasibility study for the underground water reservoir and the city’s water system. 

“The study concluded that the underground reservoir must be decommissioned, necessitating the construction of a new booster station to move water into the water tower,” Wiktorowski said. “Additionally, the water reliability study identified needed water system improvements over the next five years.” 

Northville sold June 4 $14.06 million of Series 2025 capital improvement bonds to Baird, priced to yield from 2.87% for the April 2026 maturity to 4.8% for the 2050.

The city of about 6,000 plans to repay the bonds from its water fund, but Northville made a limited tax full faith and credit general obligation pledge to pay principal and interest on the bonds.

Broadening the pledge beyond water revenues helped land the deal S&P’s AAA rating with a stable outlook. The rating agency pointed to a “robust and affluent” residential tax base, consistently positive operating performance, healthy reserve and liquidity positions and robust management planning.