Correspondence between

Thanks, Natasha L. Henderson, City Administrator City of Flint, Michigan @Samsung Galaxy Note 4 xxxEND_PAGE:treasury01_b35_5648_6098_021 Natasha L. Henderson CITY OF FLINT, MICHIGAN City Administrator Department of Finance Jody N. Lundquist Finance Director Dawn Steele Dayne Walling Mayor Deputy Finance Director DATE: October 1, 2015 TO: Natasha Henderson, City Administrator FROM: Jody Lundquist, Chief Financial Officer RE: Review of Water/Sewer Funds’ Fund Balance On August 7, 2015 Genesee County District Court Judge Archie Hayman issued a Preliminary Injunction Order (the “Order”) against the City of Flint (the “City”). As a result of the Order, the City anticipated an immediate and devastating impact on the financial stability of the Water and Sewer Funds if a stay was not quickly granted by the Michigan Supreme Court Appellate Court. Indeed, the City’s request was denied and the financial impact of the Court order has been reviewed through the fiscal year ending June 30, 2016. Upon issuance of the Order, the City was immediately enjoined from charging and collecting water and sewer rates that include the September 16, 2011 35% rate increases and disconnecting water service for its delinquent water and sewer customers wherein the delinquency arose between September 16, 2011 and the date of the Order. This immediately resulted in a decrease in cash collections on outstanding and current water bills and a decrease in total billed revenue. At August 7, 2015 the City had $8,024,558.65 in outstanding accounts receivable (or unpaid bills). As of September 25, 2015, the City’s outstanding accounts receivable had grown to $10,313,020.61. This clearly indicates that all outstanding accounts due and payable as of the date of the court order remain unpaid. With an xxxEND_PAGE:treasury01_b35_5648_6098_022 increase equivalent to the amount of non-delinquent bills issued since the order. It is highly probable that the entire accounts receivable balance as of the court order will have to be written off as uncollectible without the ability to enforce payment. On a foregoing basis, the City has already experienced a decrease in monthly revenue by approximately $666,000 for the month of September as a result of the reduced water and sewer rates. Projecting the rate loss of the remaining nine months of the fiscal year will result in total lost revenue of $6.6 million. The City’s adopted FY 16 budget projected a beginning unrestricted fund balance of $16 million for its water and sewer funds. As the City works to finalize its FY15 operating activity, it appears that actual results were close to projections with the only difference being outstanding capital improvement projects in progress at year end. The information was summarized before Council at the Department of Public Works Committee meeting on September 30, 2015 as follows: Budget Actual Beginning Unrestricted Fund Balance $16M $18M FY15 CIP N/A <S2M> Adjusted Unrestricted Fund Balance } $16M Net Income <$26K> 514M Ending Unrestricted Fund Balance $16M $2M Required Fund Balance Reserve 516M $16M In addition to the budgetary impact, the City has seen a drastic decrease in payment activity since the date of the Court Order. The City began tracking daily collections activity on a weekly basis since August 7. On average, the City is receiving approximately 100 less water payments per day. For the period August 10- September 25, the City has realized $1.75 million less in cash receipts than the same period last year. With approximately the same number of customers, the City’s apples-to-apples comparison illustrates that not only is the City billing less, less customers are paying. While shut-off efforts to enforce non-payment will resume in October, the outstanding balance of accounts receivable at August 7 and loss in monthly revenues has already been incurred. xxxEND_PAGE:treasury01_b35_5648_6098_023 The City is working diligently to review the FY 16 water and sewer fund operating budgets for additional sources of spending. Upon issuance of the Order, the City immediately implemented a spending and hiring freeze for all non-critical items. In addition, the City is working to redevelop its capital improvement plan to cancel and postpone planned projects and purchases until financial stability has been regained. The City’s emphasis at this time continues to be on providing safe, clean water to the City’s residents and moving forward with preparations for the KWA pipeline to come online. xxxEND_PAGE:treasury01_b35_5648_6098_024 Workman, Wayne (TREASURY)

Natasha, I am following up on yesterdays phone call with you. Angela will contact you to set up a conference call for tomorrow afternoon. Because Wayne is out of town Tom Saxton will participate in the discussion regarding your request. Tom and I would request you, Peter Bade and Howard Croft be on the call. We have a number of follow-up questions: What is the basis for the estimated $18M cost to temporarily reconnect to the Great Lakes Water Authority? What is the timeline? Why didn’t Viola advise the City about the potential for elevated lead levels when using Flint river water? What assurances do you have indicating a temporary reconnection to the Water Authority resolves the elevated lead problem or other system problems? Who are the assurances from? Did the Viola report recommend using Ortho Phosphates to treat the water? Ed 12 xxxEND_PAGE:treasury01_b37_6553_6782_174 Workman, Wayne (TREASURY)

Natasha, I am following up on yesterday’s phone call with you. Angela will contact you to set up a conference call for tomorrow afternoon. Because Wayne is out of town Tom Saxton will participate in the discussion regarding your request. Tom and I] would request you, Peter Bade and Howard Croft be on the call. We have a number of follow-up questions: What is the basis for the estimated $18M cost to temporarily reconnect to the Great Lakes Water Authority? What is the timeline? Why didn’t Viola advise the City about the potential for elevated lead levels when using Flint river water? What assurances do you have indicating a temporary reconnection to the Water Authority resolves the elevated lead problem or other system problems? Who are the assurances from? Did the Viola report recommend using Ortho Phosphates to treat the water? 15 xxxEND_PAGE:treasury01_b37_6553_6782_176 Ed Edward B. Koryzno, Jr. | Director - Bureau of Local Government Services State of Michigan | 430 W. Allegan Street, 3rd Floor | Lansing, MI 48922 (517) 373-4415 | (517) 373-0633 (fax) [email protected] = Think 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 16 xxxEND_PAGE:treasury01_b37_6553_6782_177 Pleyte, Beth (T reasury)