Correspondence between

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.

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.

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.

| thought we had settled all these questions. If so, we need to answer his email with an explanation.

Andy; The rate setting process used by the Detroit Water and Sewer Department (DWSD) is as follows: (1) DWSD has a series of internal meetings with the other governmental units to which it supplies water. These meetings are not required, but have become customary. This series of meetings occur on an annual basis. (2) Based upon these meetings, DWSD recommends proposed water rates for the ensuing year (July 1 to June 30) to the Board of Water Commissioners. In turn, the Board of Water Commissioners recommends proposed water rates to the City Council, which has final approval. (3) Rates tend to be based upon factors such as usage, distance, and peak usage levels. If the contract with the City of Flint is characteristic, termination would require one-year’s advance notice for a governmental unit to leave. Since rates are set annually, the departure of any governmental unit would result in rates for the next rate setting cycle being adjusted commensurately among remaining customers. Valerie Brader, with whom I spoke this morning, was very helpful and provided much of this information. xxxEND_PAGE:treasury01_b04_0379_0503_036 CITY OF FLINT OFFICE OF EMERGENCY MANAGER EDWARD J. KURTZ ELECTRONIC LETTER April 16, 2013 Andy Dillon State Treasurer P. 0. Box 30716 Lansing, MI 48909 Dear Treasurer Dillon: Flint, Genesee County and KWA received an eight page letter from Detroit Water and Sewerage Department (DWSD) offering a framework for a long-term agreement with our region. Two scenarios were presented; Scenario 1: Water from the Lake Huron Plant. This offer was dismissed immediately because Flint would still be responsible for their share of the KWA water pipeline delivery system estimated to be $79 million. In addition Flint would not be able to operate the Flint Water Plant in which we have invested over $40 million per MDEQ mandates over the past ten years. Finally, although DWSD shows this as an option and supplied a per month cost projection for the first year, no total costs over the life of the contract were provided. Scenario 2: “Full Service” Water Supply This offer was also rejected. DWSD would supply water to Flint/Genesee the same way they currently are today. They would change the method of calculating our bill. The offer would provide a $1.00 per ccf reduction on our usage for the first year, providing a 30 year contract is signed. After review of the offer, Flint/Genesee has the following concerns: City Hall 1101 S. Saginaw Street - Flint, Michigan 48502 810-766-7346 FAX: 810-766-7218 | www.cityofflint.com xxxEND_PAGE:treasury01_b04_0379_0503_037 Andy Dillon, State Treasurer April 16, 2013 Page 2 1. DWSD's offer is a framework subject to negotiations and is not a firm offer. 2. DWSD’s offer is based on 40.6 mgd, the KWA plan is based on 60 mgd. Flint/Genesee last summer hit the peak of 40.6 mgd and this DWSD offer provides no room for growth. Growth would result in penalties or added cost. 3. DWSD's offer does not include a guaranteed rate for years two through thirty, nor does it provide a maximum annual increase. 4. DWSD's offer does not provide a redundant supply for GCDC. 5. DWSD's offer does not allow for the use of Flint's existing water plant. 6. The offer indicates that the total cost to Flint over the life of the contract would be $587,990,665. No indication of what annual rate of increase was used in this projection. Flint can only assume it is 4.4% based on the Tucker Young report. It is also based on 40.6 mgds. KWA’s proposal is for $649,775, 166 based on 60mgds (33% more). Based on 60 mgds DWSD’s proposal would be $868,950,738. On a final note, Flint(Genesee has great concern over the accuracy of the figures provided by DWSD. Attachment 1 indicates that our joint annual cost to DWSD is $50 million; actual cost is less than $25 million. Attachment 2 indicates $800 million in savings over the next 30 years. That is greater than the total cost we would pay DWSD. Therefore, | will sign the resolution to join KWA at the close of business today. Sincerely, Nuxeo Edward J. Kurtz Emergency Manager xxxEND_PAGE:treasury01_b04_0379_0503_038 Stanton, Terry A. (T reasury)

Follow Up Flag: Follow up Flag Status: Flagged FYI Amy Hichez Executive Administrator to State Treasurer Andy Dillon Richard H. Austin Building 430 West Allegan Street Lansing, MI 48922 Office: 517-241-2624 Cell: Fax: 517-335-1785

Lhave a few details to pin down: will need another few hours.

I don't know who Fred the Engineer is. I spoke to Brooks Patterson Sat night. He won't get in middle of this despite Det News story. I think we need to understand if the legacy liability issue raised twice now presents a real risk to Flint. Also, Fred were you able to sort thru rate issue we discussed? Thanks, Andy Sent from my iPhone Begin forwarded message:

lthink Ed should respond to Moflorrnick. i wouldn't have reacted quite so negatively, but then that’s me. | weudd encourage him te always stress that they are open to new proposals, but haven't seen one. Bul, lm in me position to rewrite emails. i cio think that a clean closure on both sides is warranted. it’s not like KWA wouldn't still need a negotiating posture with CWSD. What was Sue‘s resporise to the request for a last best offer? | take it she wasn’t interested, or at least didn’t feel that she could offar any more than previously done? Schenk’s about as good as you can get in pubic life, so with Sue if they dan‘t have an offer, | can't figure out what we can do more, im really surprised that DW5E hasn’t responded with a final counter, Sounds like the well is pretty poisoned (no pun intended).

FYI General Office Assistant Executive Office - Department of Treasury (517)241-2840 - direct (517) 373-3223 - main

This was dropped off this afternoon. Thanks, General Office Assistant Executive Office - Department of Treasury on iz direct (517) 373-3223 - main 15 xxxEND_PAGE:treasury01_b06_0561_0924_361 Edward J. Kurtz Dayne Walling Emergency Financlal Manager Mayor March 29, 2013 Andy Dillon, Treasurer MAR 2 9 2013 Michigan Department of Treasury Lansing, MI 48922 OFFICE OF THE STATE TREASURER Dear Treasurer Dillon: As per Section 12 (3) “Except as otherwise provided in this subsection, any contract involving a cumulative value of $50,000.00 or more is subject to competitive bidding by an emergency manager. However, if a potential contract involves a cumulative value of $50,000.00 or more, the emergency manager may submit the potential contract to the state treasurer for review and the state treasurer may authorize that the potential contract is not subject to competitive bidding”. KWA needs commitment from its members regarding the capacity that each member will purchase in the pipeline. Capacity is available to members in increments of | million gallons per day know as units, For each unit of a capacity that a member purchases, the buyer shall pay to the KWA a one time fee of $32,300.00. Additionally, the buyer shall pay to the KWA not less then $32,300 per unit per year until such time as water is made available to the buyer. After water is made available, the buyer shall pay to the KWA an estimated amount not to exceed $335,300.00 per unit per year until such time as the bonds are paid in full. If it is determined that the costs per unit will exceed $355,300.00 the buyer has a right to cancel the contract”. Therefore, the Emergency Manager (EM) is asking Treasury to authorize the EM to adopt a resolution to and enter into a contract with KWA for up to 18 MDGS based on the above terms. If you need additional information, please contact me. Sincéily, ory Mi, Emergency Manager City Hall 1101'S Saginaw Street - Flint, Michigan 48502 810-766-7346 FAX 810-766-7218 ww cityofflint com xxxEND_PAGE:treasury01_b06_0561_0924_362 Stanton, Terry A. (Ti reasury)

fyi

FYI 1 Sent from my iPad Begin forwarded message:

xxxEND_PAGE:deq26_b112_1085_1095_01 ROWE PROFESSIONAL SERVICES COMPANY Large Firit Resources. Personal Auention, 4 January 7, 2013 Mr. Edward Kurtz, Emergency Financial Manager City of Flint HiOES. Saginaw Street Flint, Mi 48502

Fyi... in case you missed it I heard about this on the news this a.m. Flint City Council approves resolution to buy water from Karegnondi, state approval still needed By Dominic Adams | [email protected] on March 25, 2013 at 10:45 PM, updated March 26, 2013 at 1:28 AM FLINT, MI -~ Flint is one step closer to getting its water from Lake Huron as part of the Karegnondi Water Authority. The vote, approved 7-1 at the Flint City Council meeting Monday, March 25, may have set in motion the end to Flint paying to get its water from Detroit. Under the proposal, Flint would get 16 million gallons per day of raw water from Lake Huron, pipe it to Flint for treatment and then sell it to customers throughout the city. Another 2 million gallons per day would come from the Flint River and will be treated in Flint. Mayor Dayne Walling said the Department of Environmental Quality must approve Flint’s getting 2 million gallons per day from the Flint River. Tuesday’s meeting followed weeks of discussions and special meetings surrounding the resolution. “We got there,” Councilman Joshua Freeman said. “That’s the important thing.” There were more than 50 people at Monday’s meeting. “Going with Karegnondi is the best decision. We have no opinion on the economics of the decision,” said Rebecca Fedewa, Flint River Watershed Coalition executive director. “If we start drawing water out of the Flint River, we are at risk of having to start releasing water from our reservoirs.” Genesee County Drain Commissioner Jeff Wright said the decision must still be approved by a county water and waste advisory board. The KWA board will then be reconvened for final approval. Wright said construction could start in May. State treasury officials still must approve the city council's move because Flint has an emergency 1 xxxEND_PAGE:treasury01_b06_0561_0924_237 financial manager. All expenditures over $50,000 must be approved. Genesee County Drain Commissioner Jeff Wright has said that Flint would pay roughly $6.4 million annually for water service if it joined the pipeline — a nearly $4 million savings on what it pays Detroit for water. Walling previously said the city would save $19 million over eight years by getting water from the KWA. “It’s a historic night in the City of Flint,” Walling said. “The savings will be less with the capacity level approved by city council because there will be increased treatment cost for the river water.” He said the DEQ told the city it needed to get 18 million gallons per day or there would have to be additional work done at Flint’s water plant. Flint’s water plant and the Flint River is currently the backup for Flint and Genesee County, however, the plant only operates four times per year. Councilman Bryant Nolden was the lone dissenting vote. “Tt was a protest vote,” Nolden said. “I knew they had enough votes. | just feel like the Flint River is our best option.” Karengnondi is the regional water authority that includes Genesee, Lapeer and Sanilac counties and the cities of Flint and Lapeer. Flint is the second municipality, behind Genesee County, to officially decide to purchase raw water through the K WA. Lapeer city officials said they intend to purchase water, but an agreement has been finalized. Dominic Adams is a reporter for MLive-Flint Journal. Contact him at [email protected] or 810-241-8803. Follow him on Twitter, Facebook or Googlet. © MLive.com. All rights reserved. xxxEND_PAGE:treasury01_b06_0561_0924_238 Koryzno, Edward (T reasury)

Follow Up Flag: Follow up Flag Status: Flagged Yes. Pls email dan the report. Sent from my iPad

Follow Up Flag: Follow up Flag Status: Flagged This came up in our meeting. Let's forward this to TY and ask them for a brief explanation why City's decision to pull these options were not prudent plus I think DWSD modified their proposal from that point. Sent from my iPad

Follow Up Flag: Follow up Flag Status: Flagged The report is attached. Edward B. Koryzno, Jr. | Administrator - Office of Fiscal Responsibility State of Michigan | 430 W. Allegan Street, 1st Floor | Lansing, MI 48922 (517) 373-4415 | (517) 373-0633 (fax) [email protected] GaThink Green! Don't print this e-mail 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/destroy all copies of the original message and attachments. Thank you