Highland Park, Michigan, would get a $20 million lifeline under an appropriation Senate Democrats put in their version of the state budget to help pay down a $24 million water and sewer debt the city has warned could drive it into bankruptcy.

The city just north of Detroit owes the Great Lakes Water Authority $24 million and after losing a court battle must come up with a repayment plan by the end of May. Mediation is set to begin Monday, with the funds from the state budget yet to be approved.

In the absence of a payment agreement, GLWA could seek to place a levy on the tax rolls, which the city warns would drive up bills by three times. The city currently collects $9.6 million annually and operates on a $20 million budget.

The city has asked the state for a financial review that could lead to intervention or to allow it to pursue Chapter 9. Local lawmakers are aiming for state help to address the fiscal crisis and have held meetings with Gov. Gretchen Whitmer’s office and the Department of Treasury.

“While we acknowledge the city is in better financial shape than in years past, Highland Park residents, many of whom are in poverty or low-income households, simply do not have the financial ability to take on this judgment without devastating consequences,” Sen. Stephanie Chang, D-Detroit, and Rep. Mike McFall, D-Hazel Park, said in a joint statement.

The goal is to “resolve the situation in a way that one, doesn’t put this large financial judgment on the backs of Highland Park residents, and two, addresses long-term water infrastructure needs of Highland Park,” they said.

A Senate committee this week included a $20 million appropriation in the Health and Human Services budget. “The state would be on the hook for the debt. Obviously [Highland Park] would go into receivership and we as a state would have to pay that debt,” Sen. Sylvia Santana, D-Warrendale, said in a radio interview.

The governor has proposed that GLWA repurpose a $25 million 2022 state grant from federal funds to aid Highland Park’s behalf.

The city’s debt dates back to 2015 when Detroit Water and Sewerage Department won a $19.8 million judgment against Highland Park.

Highland Park fired back with state and federal litigation arguing it had been overcharged.

The city asserted in various court filings it shouldn’t be on the hook to repay some costs because of what it considered overcharges it blamed on a combination of factors including a federal consent agreement and swap losses from a past Detroit bond sale. Highland Park argued the losses were disguised as capital assets on GLWA’s balance sheet.

GLWA, which was launched in early 2016 to provide regional management of water and sewer services, took over DWSD’s debt in 2016, so the Highland Park judgment is now owed to GLWA.

A state trial court judge vacated the $19 million judgment in 2021 but the appellate court reinstated it last August. The Michigan Supreme Court on April 4th declined the city’s application to appeal that ruling, setting the stage for the current crisis.  

The City Council launched the process for seeking state intervention under the 2012 emergency manager law by signing off on an April 10th resolution authorizing the “determination of probably financial distress.” The Department of Treasury is reviewing the request for a financial review to determine the next course of action. 

The resolution notes the city of nearly 9,000 residents has resolved all of its past financial difficulties cited in its emergency state loan agreement from 2014 and that, outside of the GLWA, claim it has “no unpaid creditor’s claims and no unresolved financial issues.”

A week later the city adopted a second resolution that asked the state to bypass the review process and allow it to file municipal bankruptcy. State law allows for local governments to file Chapter 9 bankruptcy but only with the governor’s approval, which Detroit secured in 2013. 

Mayor Glenda McDonald returned to the council Monday for approval to hire a restructuring expert to aid in negotiations over the water and sewer debt, but the council rejected the measures, prompting McDonald to declare a “state of emergency.”

The city is no stranger to state oversight. It entered oversight under a financial emergency manager from 2001 and that lasted through 2009. In re-entered emergency management in 2014 and exited in 2015. Since Detroit’s bankruptcy the emergency manager law has fallen out of favor and no local governments are currently under state oversight.

“Contrary to the city’s desire for bankruptcy to absolve the city from this debt, it is neither equitable nor in the interest of the Southeast Michigan region for the debt to be written off,” the Citizens Research Council of Michigan wrote in a recent blogpost “Bankruptcy Will Not Solve Highland Park’s Financial Problems” authored by Eric Lupher.

Under the state’s EM law, if Treasury’s review finds the city to be in fiscal distress, it has four options — to seek mediation, negotiate a consent decree with the state to initiate corrective actions, request the appointment of an emergency manager, or file for Chapter 9 bankruptcy.

The council notes it was Detroit’s deep bond and pension debts that drove its bankruptcy filing. “Debt relief that does not make the GLWA whole will push Highland Park’s troubles onto its neighbors,” Lupher wrote.

The post notes that options, such as state help and issuing debt to foot the bill, come with tradeoffs and the situation puts “a new spotlight on Michigan’s small cities that lack the critical capacity and, often, the tax base to provide a full menu of municipal services” that requires a bigger picture fix to ensure long-term sustainability.