As publishedby Maryellen Tighe and Gunjan Banerji, debtwire.com

The Flint water quality deterioration is corroding investor confidence in Governor Rick Snyder’s ability to solve Michigan’s existing economic problems, said two buyside analysts and a restructuring advisor.

Flint’s cost to Michigan will be huge and will affect the state, said two buyside analysts. Flint’s water problems lead all the way up to the state level and it is all-consuming. This distracts the government from other pressing problems like restructuring Detroit Public Schools (DPS).

While the state figures out its obligation to Flint, it has also petitioned the federal government for funding. But litigation-related expenses emanating from Flint could exponentially increase costs to the state and overshadow everything else, said the two buyside analysts.

Civil lawsuits seek additional funding

It’s not clear how much Flint residents should be asking for in compensation from the state, said Julie Hurwitz, partner at Goodman and Hurwitz, which represents some Flint residents in multiple lawsuits against the state and its agencies.

The cases include #16-106112 in Genesee County Circuit Court, #16-17-MM in the Michigan State Court of Claims and #5:15-cv-14002 in the Eastern Michigan District Court, according to filings in the respective courts.

The state of Michigan will file a brief in support of its motion to dismiss on the federal lawsuit on Monday, 1 February, according to filings in the Eastern Michigan District Court. Attorney General Bill Schute’s office declined to comment on the ongoing litigation.

The lost property value in Flint as a result of the lead contamination can be calculated, as well as the social services costs and the infrastructure damage. The state’s expenses will be added to by ongoing civil lawsuits, said the first buyside analyst.

“What’s more difficult to calculate is just the emotional toll that this type of wrong has caused,” Hurwitz said. “How can they ever trust the government? How can they ever trust the safety of the water?”

Michigan state leaders are protected by some immunities, however, Hurwitz is confident that what happened in Flint will allow the clients she is representing to be successful in litigating against Snyder, former Flint emergency managers Darnell Earley, Gerald “Jerry” Ambrose, current and former employees of the Michigan Department of Environmental Quality and other actors.

“(If) those individuals that are responsible for the wrongs that were committed acted with
conscious disregard for the risks that they were aware of then they can be held responsible,” Hurwitz said.

Snyder is spending political capital

The funding to solve Flint’s problem is one issue, another is the political cost to Snyder, who will need to come up with a fix for the struggling DPS at the same time pressure from Flint mounts, said the restructuring advisor. The Flint issue is similar in scale for Governor Snyder as police misconduct has been for Chicago Mayor Rahm Emanuel. It’s prevented both of them from doing the hard financial work of balancing budgets.

“Michigan is going to have to figure out to what extent it is going to help its locals,” said Patrick O’Keefe, Michigan-based founder and CEO of a consulting firm with his namesake. 

The state legislature will have to determine how great of a financial burden it will take on, whether with DPS or Flint, O’Keefe said.

Local school districts have already been the state’s cross to bear, as unfavorable demographics and a wave of school distress has left the state on the hook with state loan and bond programs, as reported. Michigan has tried to whittle exposure to school districts, but the impending DPS restructuring would require a hefty injection of cash.

All the governor’s work in Flint may mean that he doesn’t get to pick what he wants to do for DPS, said Eric Scorsone, a professor at Michigan State University.

Support starts to trickle down

The city has started receiving incrementally more from the state and federal governments. Flint stands to receive about USD 36m from the state. It received USD 6m in October to reconnect to the Great Lakes Regional Water Authority (GLRWA), and USD 2m after Snyder declared a disaster in January, as previously reported.

The remaining USD 28m is working its way through legislative approvals. The Michigan State House of Representatives approved HB 5220 on 20 January with the Senate passing a similar bill on 28 January and Snyder signing it on 29 January. USD 22.6m of the total will come from the state’s general fund, this is 0.3% more than the USD 8.5bn the city was budgeted from the general fund in the FY16 budget cycle, according to a House Fiscal Agency review of the Senate-passed bill. The remaining USD 5.4m will come from federal funds and state restricted funds, according to the review.

“USD 28m is not all the requests we’re going to have. It’s the request we have in right now,” said Governor Rick Snyder at a press conference in Flint on 27 January, stressing that further funds may be allocated to the city.

Flint Mayor Karen Weaver at the same press conference said that these were the first steps and she would be asking for a staircase, including USD 3m for Flint residents for water bills paid while the water was contaminated.

Snyder had petitioned President Barack Obama for a federal emergency declaration and USD 96m of relief.

Currently the city may receive up to USD 23m of federal funds. President Obama declared a federal emergency for the city, sending USD 5m of funds. A later declaration that USD 80m will be available for the city will likely only result in about USD 17m because of the structure of the federal program, Lt. Governor Brian Calley’s office said. The USD 80m was the sum of the funds allocated by the federal government to the state of Michigan for use in water and wastewater projects in 2016 to 2020.

And US Senate Democrats on 28 January proposed USD 400m in federal aid to help Flint fix its pipes, S.2466. It would require a match by the state, according to a press release from Senator Debbie Stabenow.