Brom Stibitz

do we have good reasons for the denials?

Is Madhu there. | can call her Wayne Workman | Deputy State Treasurer State of Michigan | 430 W. Allegan Street | Lansing, MI 48922

I can send an email to Dan & Sygo to get it started ( & maybe Madhu)

See Gerry Ambrose and Dave Massaron’s comments about need for DEQ approval of the Flint water project. Can we get a call into the Director to push this through? No one appears to be doubting the need but they can't get to the market without DEQ approving the ACO. Thanks, Wayne Wayne Workman | Deputy State Treasurer State of Michigan | 430 W. Allegan Street | Lansing, MI 48922

| spoke to Mike Brown and he said Ed Kurtz used this report to fulfill his final report. Edward B. Koryzno, Jr. | Administrator - Office of Fiscal Responsibility State of Michigan | 430 W. Allegan Street, ist Floor | Lansing, MI 48922 (517) 373-4415 | (517) 373-0633 (fax) [email protected] BA Think Green! Don't print this e-masl unless you need to. CONFIDENTIALITY NOTICE: This e-mail, and any attachments, is for the sole use of the intended recipient(s) and may contain information that is confidential and protected from disclosure under the law. Any unauthorized review, use, disclosure, or distribution is prohibited. If you are not the intended recipient, please contact the sender by reply e-mail, and delete/destray all copies of the original message and attachments. Thank you

FYI ... | spoke with Fonger this morning and this is his story. | had asked him to confirm with Ed Kurtz, but apparently he didn’t want to wait. for gov rick_snyder.html xxxEND_PAGE:treasury01_b04_0379_0503_125

Was it clear that DWSD will no longer discontinue service in £2 months?

Ed Kurtz and Kevyn Orr spoke this afternoon. Ed indicated that Flint will not accept the last offer from DWSD. His formal letter is attached. | spoke with both (separately) after the call. They both indicated that they had a good conversation, and that they sincerely look forward to working with the other in good faith over the next couple years. Kevyn indicated that he would follow up with Sue McCormack, and that his direction will be that there be no more talking to the press about the issue. Ed plans to stay silent on the deal until Monday, at which time he will address the issue in a matter of fact matter, and stay away from any divisive language regarding the issue.

Understood. You should mention this when you talk with Kevyn today. I suspect he won't have a lot of patience for this kind of behavior by DWSD. Sent from my iPad

I have a phone conference frp, 12:15 to 1:30. Am available after that. Just let me know when. Ed

Do you have 10 minutes later this afternoon so you can discuss (over the phone) your response with Kevyn Orr? It would be good if the two of you could talk before we get back to the Governor. He would appreciate you both coming to him, even though you might not accept their offer. Sent from my iPad

If Flint is going to go into some kind of regional authority, then we need to firewall the finances of water from the general city budget. How do we keep the city from using the water system as a cash flow tool? We need to help them avoid the problem that they have been guilty of in the past of capturing water monies from customers before remittance to the Authority and using it elsewhere. | suspect that is the motivation behind their desire to split off from DWSD. If the monies go to legacy debt it will help Flint immeasurably, if general fund then they'll never get on top of the situation. Right now their legacy debt is higher than their wages for current employees and that is obviously unsustainable. | realize I'm not telling you anything you don't already know, just re-emphasizing. xxxEND_PAGE:executiveofficeemails21_b0635_1479_1479_1

> > > > Sent from my iPad > > Begin forwarded message: >

Tom please read. Sent from my iPad Begin forwarded message:

Andy - I asked for thoughts from bond counsel on issues raised in the Tucker Young February 2013 report related to debt service and operating reserves. There are also some Act 436 procedural issues discussed in the letter. I just received this and want to send it to you in advance of the meeting today. Jim James G. Fausone 41700 West Six Mile Road, Suite 101 Northville, Michigan 48168-3460 (248) 380-0000 tel. ext. 1818 xxxEND_PAGE:treasury01_b04_0379_0503_062 (248) 380-3434 fax Check out our Legal Help for Veterans practice group at or www. erans> This message is intended only for the use of the individual or entity to which it is addressed, and may contain information that is privileged, confidential and/or exempt from disclosure under applicable laws. If the reader of this message is not the intended recipient, or the employee or agent responsible for delivering the message to the intended recipient, you are hereby notified that any dissemination, distribution or copying of this communication is strictly prohibited. If you have received this communication in error, please notify us immediately by telephone and/or reply to the e-mail message. Thank you. xxxEND_PAGE:treasury01_b04_0379_0503_063 CLARK HILL Clark Hill PLC 151 South Old Woodward Avenue Suite 200 irmingham, Michigan 48009 Robert Schwartz 1258 G22 9622 TSA ORM ebAT F 248 642 2174 F 248 988 1834 Emall [email protected] clarkhill-com April 19, 2013 Mr. James Fausone Chair Board of Water Commissioners Detroit Water and Sewerage Department Detroit, Michigan Re: KWA Proposal Dear Mr. Fausone: This is in response to your request for our advice regarding certain financial and procedural aspects relating to the proposal made by the Karegnondi Water Authority (“KWA”) to the City of Flint (“Flint”) to replace the Detroit Water and Sewerage Department (“DWSD”) as Flint’s water supplier. As bond counsel! for the City of Detroit (the “City”) in connection with the issuance by the City, on behalf of DWSD, of over $650 million in sewer system bonds las! year, we are familiar with DWSD, the water and sewerage systems and those matters most important to the successful financing of system improvements. For purposes of this letter, we have reviewed, among other documents and correspondence, the City of Flint Water Supply Assessment, “Preliminury Findings,” of Tucker, Young, Jackson, Tull, Inc., dated December 21. 2012 (the “Tucker Young Report”). We understand that the Tucker Young Report has been central to the discussion regarding whether or not the proposed KWA proposal should be pursued. In our view, the financial analysis of the transaction and its consequences require reference to two subjects not materially considered by the Tucker Young Report or otherwise in connection with the KWA proposal. Among the most important are the effects on system debt service coverage and operating reserves. The Tucker Young Report notes that, among others, debt service coverage ratios and the funding of operating reserves were not specifically analyzed. The result could be a very significant understatement of costs. In this regard, we also note that the interest rates suggested for future Flint or system debt are, at best, purely speculative, if not considerably understated. xxxEND_PAGE:treasury01_b04_0379_0503_064 Mr. James Fausone April 19, 2013 Page 2 Debt Service Coverage The debt service coverage ratio of any governmental body is a major consideration in the credit analysis of our national rating agencies. In this regard, one of the City’s major underwriting firms, Siebert Brandford Shank & Co., LLC, has provided a comparative analysis of the credit ratings and debt service coverage ratios of several water systems, including the DWSD water system. The ability of a governmental body to pay its indebtedness is succinctly reflected in its debt service coverage ratio. National rating agencies have different credit criteria in this regard. Standard & Poor’s Ratings Services requires a 1.5 debt service coverage ratio to assign a “strong” credit rating, while Fitch Ratings demands a debt service coverage ratio above 2.0. The Ordinance governing the issuance of indebtedness for DWSD requires that the ratio of rates and charges to expenses be no less than 1.2 for senior debt. In contrast, the KWA data reflects debt service coverage only in its financial proforma, which translates to a debt service coverage ratio of only 1.0, based on expectations, not experience. That ratio is extremely poor and unlikely to support any meaningful debt at any rate other than an unreasonably high one. This subject demands considerably more attention before a determination regarding the viability of the KWA proposal should be made. Operating Reserves In addition to the need for more analysis of the debt service coverage potential in connection with the KWA proposal, the strength of the potential operating reserves of the system must be considered. Our national rating agencies consider cash on hand as an indication of financial strength or weakness. The absence of cash to withstand negative unforeseen circumstances is a major negative factor in the rating analysis. Evidence of a three to twelve month operating reserve is extremely important. To our knowledge, there is no evidence of the means by which a meaningful operating reserve will be developed under the KWA proposal, Act 436 Procedural Issue Another issue of major importance is the procedure by which the KWA proposal has been or will be considered. The Local Financial Stability and Choice Act, Act 436, Michigan Public Acts of 2012 (“Act 436”), requires, in Section 12(3) thereof, that contracts with a cumulative value of $50,000 or more be subject to competitive bidding, absent authorization by the State Treasurer to abandon bidding. The circumstances under which Flint is considering the KWA proposal are totally unclear as to whether this provision has been satisfied. To our knowledge, based on correspondence we have seen to date, the State Treasurer has not specifically waived the competitive bidding process. Moreover, we are not aware that any specific bidding requirements were published or xxxEND_PAGE:treasury01_b04_0379_0503_065 Mr. James Fausone April 19, 2013 Page 3 any information regarding evaluation criteria (of which, in complete disregard of customary and accepted governmental policy and practice, there appear to be none) disseminated. On what basis, then, can Flint legally proceed, particularly in view of the chronology of proposals submitted. No meaningful review of the DWSD’s proposal viz-a-viz the KWA proposal conceivably could have been performed. Consequently, it can be concluded that the technical requirements of Act 436 were not satisfied and that a fair and intelligent analysis of competing contracts was clearly not made. Public Policy Finally, matters of public policy must be considered under circumstances as significant as these. Among such considerations are the existence of substantial public infrastructure with excess capacity, demographic data showing shrinking demand in the service area, the enthusiastic momentum behind the creation of a regional authority of which DWSD would be the structural foundation and the reduction in customer costs by a substantial percentage as reflected in the DWSD proposal, all of which militate substantially in favor of the DWSD proposal. We have endeavored to summarize only a few of the more salient points relating to the analysis of the proposed KWA proposal in light of the proposals made by DWSD to continue the current relationship with Flint. Certainly, other matters of significance can and should be considered which may further affect the credibility of the KWA proposal. Very truly yours, P rr CANS SA Robert L. Schw: — a“ RLS/jmh xxxEND_PAGE:treasury01_b04_0379_0503_066 Headen, Frederick (T reasury)

Dillon KWA.PDF; UPDATED FLINT DWSD KWA ASSESSMENT Version VIII 02-21-13.pdf; TYJT Recommendaton DWSD vs Flint.pdf Follow Up Flag: Follow up Flag Status: Flagged Additional reading material, per your request. Attached: 1) 2 page summary put together today by Office of Fiscal Responsibility Staff, “KWA SUMMARY FOR GOVERNOR...” 2) Final Offer from DWSD, “KWA and City of Flint.pdf’ 3) Letter from Ed Kurtz, declining DWSD offer, “Dillon KWA.PDF” And if you are really into reading more... 4) Office of Fiscal Responsibility Analysis of Situation (from February), “UPDATED FLINT DWSD KWA ASSESSMENT...” 5) One pager from Tucker Young Jackson Tull (from March), “T'Y]T’ Recommendation...” Finally, some comments from DEQ staff after the 4/15 offer from DWSD: Comment 1: From a capacity standpoint, supplying KWA is completely feasible under either proposal with no adverse impact to the rest of the DWSD supply network. The proposal lists KWAs contracted max day demand at 40.6 mgd, the design and rated capacity of the Lake Huron Plant is 400 mgd. ‘The DWSD service area average and max day are about 650 and 950 med; the other four water plants combined have a rated capacity of over 1100 med. I don’t know the details of the cost analysis other than what has been reported by DWSD. It is my understanding that over the 30 year pay back period that full service water provided from DWSD would be more a lot more expensive than what KWA has projected if they separate. Several intermediate proposals of varying cost estimates have been presented without success. KWA was issued a permit last fall for constructing an intake @ndependent of DWSDs) and I think the plan is to start construction as early as this fall. Then a treatment plant would be constructed to treat the water. Flint has a water plant that draws raw water from the Flint River, but the plan would be to purchase raw water from the KWA intake and treat at their plant, using the River as a backup source. KWA has estimated a project cost of $274 million, DWSD estimated the project cost at $375 million; but I don’t know exactly what the scope of work was for those estimates so I’m not sure that it’s an apples to apples comparison. Overall, besides the know impacts to DWSD for loss of revenue and increased cost to the rest of the system users to cover fixed cost, debt, etc., there could be other systems revisiting their proposals to separate. Grosse Tle and a few surrounding communities had looked into forming a water authority and building a plant to serve them; Grosse Pointe Park had submitted incomplete plans a few years back to build their own microfiltration plant. At one point, Grosse Pointe Shores was 1 xxxEND_PAGE:executiveofficeemails21_b0672_1557_1558_1 considering a study to see if they could re-work the Grosse Pointe Farms network to purchase water from them rather than DWSD through GP Woods. Comment 2: A response at this pomt may be moot as Flint and Genesee Co. already held a press conference yesterday rejecting the DWSD offer. It is also unclear whether DWSD provided its offer directly to Flint and Genesee Co. by the deadline in Treasurer Dillon’s letter. However, Flint and Genesee Co. still took the offer under consideration. Our office concurs with both Flint and Genesee Co. that the offers provided by DWSD were incomplete. Of the two scenarios provided by DWSD it appeared that only Scenario 2 was listed as potentially being more cost effective. However, this scenario did not address the following: 1. The DWSD scenarios are based on 40 MGD of service capacity. However, the KW’A project is providing 60 MGD of initial capacity with potential expansion to 75 MGD in the future. Therefore, in order for a more direct comparison the DWSD scenario would need to increase capacity to 60 MGD, which would increase fixed rate commodity costs as well as the capital costs for the Huron Plant that DWSD was planning to allocate to Flint and Genesee Co., presumably by as much as 50%. 2. DWSD proposals cover a 30 year period to 2042, but fail to recognize that after this period bond payments for the KWA project will be complete and result in a significant reduction in costs for the KWA option. 3. While DWSD indicates that Flint and Genesee Co. would be given “broadened representation”, it remains unclear exactly what this means in terms of actual control in the decision making process. 4. This scenario continues to rely on a single transmission system and would require the City of Flint to maintain its WIP for emergency purposes and these costs do not appear to be included. In addition, use of the Flint WTP as an emergency backup would leave Genesee Co. without an adequate backup supply to meet their 30 year needs. Again, without DWSD providing the specific details of these proposals, it is difficult to provide a true comparative analysis, and as such Flint and Genesee Co. appear to be justified in their rejection of these proposals.

Dillon KWA.PDF; UPDATED FLINT DWSD KWA ASSESSMENT Version VIII 02-21-13.pdf; TYJT Recommendaton DWSD vs Flint.pdf Follow Up Flag: Follow up Flag Status: Flagged Additional reading material, per your request. Attached: 1) 2 page summary put together today by Office of Fiscal Responsibility Staff, “KWA SUMMARY FOR GOVERNOR...” 2) Final Offer from DWSD, “KWA and City of Flint.pdf’ 3) Letter from Ed Kurtz, declining DWSD offer, “Dillon KWA.PDF” And if you are really into reading more... 4) Office of Fiscal Responsibility Analysis of Situation (from February), “UPDATED FLINT DWSD KWA ASSESSMENT...” 5) One pager from Tucker Young Jackson Tull (from March), “T'Y]T’ Recommendation...” Finally, some comments from DEQ staff after the 4/15 offer from DWSD: Comment 1: From a capacity standpoint, supplying KWA is completely feasible under either proposal with no adverse impact to the rest of the DWSD supply network. The proposal lists KWAs contracted max day demand at 40.6 mgd, the design and rated capacity of the Lake Huron Plant is 400 mgd. ‘The DWSD service area average and max day are about 650 and 950 med; the other four water plants combined have a rated capacity of over 1100 med. I don’t know the details of the cost analysis other than what has been reported by DWSD. It is my understanding that over the 30 year pay back period that full service water provided from DWSD would be more a lot more expensive than what KWA has projected if they separate. Several intermediate proposals of varying cost estimates have been presented without success. KWA was issued a permit last fall for constructing an intake @ndependent of DWSDs) and I think the plan is to start construction as early as this fall. Then a treatment plant would be constructed to treat the water. Flint has a water plant that draws raw water from the Flint River, but the plan would be to purchase raw water from the KWA intake and treat at their plant, using the River as a backup source. KWA has estimated a project cost of $274 million, DWSD estimated the project cost at $375 million; but I don’t know exactly what the scope of work was for those estimates so I’m not sure that it’s an apples to apples comparison. Overall, besides the know impacts to DWSD for loss of revenue and increased cost to the rest of the system users to cover fixed cost, debt, etc., there could be other systems revisiting their proposals to separate. Grosse Tle and a few surrounding communities had looked into forming a water authority and building a plant to serve them; Grosse Pointe Park had submitted incomplete plans a few years back to build their own microfiltration plant. At one point, Grosse Pointe Shores was 1 xxxEND_PAGE:executiveofficeemails21_b0672_1557_1558_1 considering a study to see if they could re-work the Grosse Pointe Farms network to purchase water from them rather than DWSD through GP Woods. Comment 2: A response at this pomt may be moot as Flint and Genesee Co. already held a press conference yesterday rejecting the DWSD offer. It is also unclear whether DWSD provided its offer directly to Flint and Genesee Co. by the deadline in Treasurer Dillon’s letter. However, Flint and Genesee Co. still took the offer under consideration. Our office concurs with both Flint and Genesee Co. that the offers provided by DWSD were incomplete. Of the two scenarios provided by DWSD it appeared that only Scenario 2 was listed as potentially being more cost effective. However, this scenario did not address the following: 1. The DWSD scenarios are based on 40 MGD of service capacity. However, the KW’A project is providing 60 MGD of initial capacity with potential expansion to 75 MGD in the future. Therefore, in order for a more direct comparison the DWSD scenario would need to increase capacity to 60 MGD, which would increase fixed rate commodity costs as well as the capital costs for the Huron Plant that DWSD was planning to allocate to Flint and Genesee Co., presumably by as much as 50%. 2. DWSD proposals cover a 30 year period to 2042, but fail to recognize that after this period bond payments for the KWA project will be complete and result in a significant reduction in costs for the KWA option. 3. While DWSD indicates that Flint and Genesee Co. would be given “broadened representation”, it remains unclear exactly what this means in terms of actual control in the decision making process. 4. This scenario continues to rely on a single transmission system and would require the City of Flint to maintain its WIP for emergency purposes and these costs do not appear to be included. In addition, use of the Flint WTP as an emergency backup would leave Genesee Co. without an adequate backup supply to meet their 30 year needs. Again, without DWSD providing the specific details of these proposals, it is difficult to provide a true comparative analysis, and as such Flint and Genesee Co. appear to be justified in their rejection of these proposals.

Attachments Additional DEQ Responses - KWA; DEO Position - KWA; KWA Indi¢ation from Kurtz Eric; Attached! issome fallawup information from DEG, which indicates their continuing support of KWA even after the mast recent offer from DWSD, Also, Filnt's letter jays out theirreasoning for rejecting. Can you please inc|yde same of this content in the memn? Thanks,

May not be a bad idea to have this available for public consumption seeing as the two sides like to negotiate in the media. Sent from my iPad Begin forwarded message:

Interesting threat here. They will seek to recover sunk costs through rates in last two years. My guess is this will be a wildly huge increase. We cannot ignore the threat. We need legal advice asap. This needs immediate attention. Fred please work with the AG and Valerie.

Background information from DEQ on KWA. They also believe that KWA remains the best option, even in light of the most recent offer by DWSD.