Introduction
Seven years after the Flint water crisis, the state of Michigan recently announced plans to payout $600 million to the residents of Flint to settle lawsuits filed against the State. Yet before the bond goes to market, there are a number of unresolved challenges from the handling of the crisis and the structure of the pending settlement that deserve deeper examination. This brief addresses those issues utilizing a fiscal justice analysis, which is an intersectional approach to understanding fiscal health and racial justice outcomes.
Key Takeaways:
● Beginning in 2014, the City of Flint, Michigan, experienced one of the worstpublic health crises in modern U.S. history.
● The Michigan Strategic Fund (MSF), which will issue the debt, approved theissuance of up to $700 million of private activity bonds (PABs) on April 27, 2021.
● Activest has identified key fiscal justice concerns in the financing of thesettlement, questions of fairness in the original KWA bond offering, and anethically dubious standard of victim verification.
● From a fiscal justice investing perspective, there are clear ESG and impact risksassociated with purchasing Flint water settlement bonds.
● We provide two complementary strategies to bolster the fiscal justice of holdingthe Flint Water Settlement Bonds: Intermediate-term Impact Hedge and Bondholder Engagement.
Despite numerous complaints from residents, state and local environmental officials failed to apply appropriate corrosion inhibitors to the water, without which the water supply became poisonous.
Beginning in 2014, the City of Flint, Michigan, experienced one of the worst public health crises in modern U.S. history. High levels of lead from aging pipes and fixtures contaminated city drinking water after switching sources from the Detroit River to the Flint River. Despite numerous complaints from residents, state and local environmental officials failed to apply appropriate corrosion inhibitors to the water, without which the water supply became poisonous. The CDC reported that 99,00 residents – including 6,000 to 12,000 children – were exposed to elevated lead levels between April 2014 and October 2015.
Additionally, an outbreak of Legionnaires Disease infected ninety people and resulted in at least twelve fatalities. Ultimately, the federal government declared a state of emergency. Former Governor Rick Snyder and eight other officials were indicted for willful neglect of office and other felonies. In addition to the public health toll, a 2016 study found that Flint residents had been paying the highest rates among the nation’s 500 largest community water systems, or $864 per capita annually for water service. This amounted to roughly 7 percent of household income for a community where 40 percent of residents live in poverty.
Download the full PDF with expanded investor analysis
Flint Water Settlement Bonds
Seven years after the start of the crisis, a $641 million settlement with Flint residents was proposed and approved. Legal documents filed in U.S. District Court detail the main entities responsible for the payouts which include the State of Michigan, the City of Flint, McLaren Regional Medical Center, and Rowe Professional Service. Careful scrutiny of these details raises fiscal justice concerns about the financing of the settlement.
State-Financed Settlement Bonds
The Michigan Strategic Fund (MSF), which will issue the debt, approved the issuance of up to $700 million of private activity bonds (PABs) on April 27, 2021. A memo distributed to the MSF board details the team and possible structure but includes no timing details. Citigroup Global Markets Inc. and Siebert Williams Shank & Co. LLC are slated as co-managers on the settlement deal.
Proceeds
Proceeds will finance the $641 million Master Settlement Agreement (MSA) with Flint residents—most of them children—who suffered fallout from drinking lead-poisoned water. The settlement provides the opportunity for monetary awards for every
minor child exposed; every adult exposed with a resulting injury; every residential property owner, renter, or person responsible for paying Flint water bills; and certain business owners impacted during the relevant time period.
In Search of Responsible Settlement Finance
Each year, cities and counties spend and allocate an estimated $7.1 billion fighting and settling lawsuits involving gross mismanagement, alleged police misconduct, injuries on public property, and a range of other legal challenges. In large settlements that incorporate bond finance, like the Flint settlement, there are no clear protocols for responsible settlement finance. When the need for a settlement bond arises — which is an increasing occurrence — equitable standards should be in place to ensure that:
1. The largest possible portion of proceeds go to benefit victims, and
2. The system failures that allowed for or precipitated the victimization of residents are remedied.
For Investors
Investment Considerations
Fortunately, we have confidence that the majority of bond proceeds will ultimately go to residents that are seeking economic restitution from the harm negligently inflicted upon them. We view that as a distinct positive. However, residents lost their lives, and tens of thousands of children and families will be forced to navigate lifelong implications of cognitive delays, along with behavioral and physical health issues from lead poisoning. In this vein, a $641 million judgment providing approximately $12,000 per resident is a start, but it falls short of a fiscally-just investment. Below we provide two complementary strategies to bolster the fiscal justice of holding the Flint Water Settlement Bonds: Intermediate-term Impact Hedge and Bondholder Engagement.
Intermediate-to-long Impact Hedge
A significant portion of any spillover to come from underinvestment in Flint’s economic and social recovery, will undoubtedly fall on Hurley Medical Center, Flint’s BBB-/Stable rated safety net hospital. With $70 million in bonds outstanding and LTM Debt-to-EBITDA of 1.81x, purchasing Hurley’s recently issued Building Authority Revenue Series 2020 alongside the Flint Water Settlement Bonds as a quality approach to boost current returns (4-5 percent coupon), grab a little yield and obtain an impact hedge against poor health outcomes in and around Flint over the intermediate-to-long term (2029-41).
Bondholder Engagement
As the U.S. Treasury announced $94 million in American Rescue Plan funds for Flint and that market waits in anticipation of the pricing of this $641 million settlement, impact-oriented bondholders must ask:
What does fiscal justice look like from the perspective of a Flint resident?
Flint Water Settlement Bonds
As a bondholder with a vested interest in the long-term fiscal outcomes of Flint, consider advocating in support of the following commitments and restorative investments that would build the economic and social outcomes of Flint’s residents and businesses over the long-term. Such investments are good for residents, good for its bondholders, and good for the City of Flint.
For Flint residents impacted by lead-poisoned water, we check out our full report for a listing of recommended advocacy points. A few include:
Health
● Free universal healthcare to address any and all of the aforementioned physical and behavioral health issues
Water Quality and Affordability
● A moratorium on any water bill increases for ten years. All water infrastructure improvements within the City of Flint will be directly and fully paid by the State of Michigan.
Education
● Free and universal accredited childcare and after-school care provided until 5:30pm every weeknight
● Free academic support and tutoring for all Flint children (PreK to12)
Quality Jobs
● Direct and intentional efforts by the State of Michigan and the federal government to invest in Flint’s economic development