Thoughts and Opinions On Today's Important Issues

Thursday, April 08, 2010

The Tunnel Deal Questioned

The question I have always had in my mind is why Edgar (aka Eddie) who is supposedly such a smart business person bid so much money for the Detroit half of the Tunnel. The $75M was so outrageous an amount that even the Bridge Company who wanted it backed off
  • "Windsor’s $75-million bid to secure a tunnel deal with Detroit involves a price tag the Ambassador Bridge company has no intention of competing with, bridge president Dan Stamper said on Thursday."

A new report out the other day makes this deal appear even dumber than before! It could have meant severe financial problems for this City at a time when we are having enough problems with the economy. It brings into question the financial acumen of our Mayor in a very stark fashion.

The Citizens Research Council (CRC) of Michigan prepared an interesting report on "The Fiscal Condition of the City of Detroit."

Its role:
  • "For over 90 years, the objective of the Citizens Research Council of Michigan has been to provide factual, unbiased independent information on significant issues concerning state and local government organization and finance. CRC believes that the use of this information by policymakers will lead to sound, rational public policy in Michigan."

I read the part of the report that dealt with the Windsor/Tunnel deal and what it said made that deal even more absurd than before. Let me quote relevant sections:

  • "The city budgeted $275 million as revenue from the monetization of assets. Although there is precedent for the sale of future revenue streams in other cities and states (Chicago leased the Chicago Skyway TollRoad and parking meters, and tried but failed to lease Midway Airport), it is highly unlikely that Detroit can sell future revenues from the parking and lighting departments. Discussions on the Detroit-Windsor Tunnel have occurred, but, even if an agreement were to be reached, the sale would not generate the amount included in the budget."


  • "Monetization is the process of converting assets into legal tender. The FY2010 City of Detroit budget includes $275 million in general fund revenues to be generated by the long term lease of Municipal Parking, Public Lighting, and Detroit’s 50 percent interest in the Detroit-Windsor Tunnel. This plan to sell the income from specific city operations or assets for a specific period of time was defined by the former mayor as “unlocking the value of city assets for citizens...

    Probability. There may be progress on the sale of income from the city’s interest in the Detroit Windsor Tunnel this fiscal year, but the $275 million budgeted from monetization of assets appears to be a “plug” to balance the budget. [Bing's] Crisis Turnaround Team estimated that $225 million of the budgeted $275 million would not be realized in 2009-10.”


  • The major revenue component of the plan was the sale of future revenues from the City’s interest in the Detroit-Windsor Tunnel, and from the Municipal Parking Department and the Public Lighting Department. In his statement, Mayor Cockrel made the following comparison “This is no different than a citizen winning the mega millions jackpot and taking a lump sum payment immediately instead of a series of payments over many years.” According to the City Council Fiscal Analysis Division review of the Cockrel Plan, “it appears the generation of $250 million will require present value calculations of revenue streams to be taken over a 50 to 75-year period to realize this level of one-time cash. One major caveat, however, is the outstanding debt service and capital improvement requirements on the leased assets that could significantly lower the amount of cash generated from the proposals in order for the investor to earn a reasonable return on investmentt.”


  • The city must reengage the discussion with Windsor or other entities about sale of the revenues from the Detroit Windsor Tunnel. Although the city receives only about $60,000 annually [may be a typo: $600K] from the operations of the Detroit Windsor Tunnel, there does appear to be some potential for monetizing this particular asset.


  • The FY2010 budget, with its $280 million prior years deficit, was “balanced” by the inclusion of three revenues that are highly unlikely:

    Detroit Windsor Tunnel Securitization $100 million

There has to be more behind this deal than meets the eye. I really wonder if it was ever going to be completed as structured.

The whole Tunnel deal is so strange to me especially because we cannot get the facts to decide if the deal ever made sense. Clearly, from what is being said, CRC seems to believe that the amounts being thrown around are completely unsupportable.

Even now, Windsor is still fighting WeACT's request for:

  • "Any or all appraisal reports, valuations prepared by any party with respect to the tunnel or any part of it from September 1, 2005 until the present."

We still do not know how much money Infrastructure Ontario was prepared to loan Windsor for the Tunnel deal although I was told that the amount was $20M or less.

We know that both Matty Moroun and Transport Canada thought a deal with Detroit was only worth a fraction of what the City was prepared to pay Detroit.

Now the CRC Report states that "even if an agreement were to be reached, the sale would not generate the amount included in the budget" and that "the outstanding debt service and capital improvement requirements on the leased assets that could significantly lower the amount of cash generated from the proposals in order for the investor to earn a reasonable return on investment."

Why then would Windsor offer $75M? The Tunnel is worth much less especially if DRIC is going to take away a huge amount of its traffic. Edgar is such a smart business person we are told. Why would he overpay so dramatically? It mystifies me especially when Edgar is backing the DRIC bridge. He would be supporting the Tunnel's competitor who would take business away from him and make his deal risky.

Here is how the Star reported it at first:
  • "Under the terms of the proposed tunnel deal, the Ontario government would first loan the $75 million to the recently formed Windsor-Detroit Tunnel Corporation. The $75 million would next be sent to its counterpart in Detroit -- the Detroit Transportation Authority -- with $65 million passed on to plug a hole in Detroit's budget."

Note, $10M of the $75M was NOT going to Detroit but for legal, insurance and other expenses of the transaction that I never saw reported broken down in dollar amounts. In fact, my recollection is that Kwame needed $58M leaving an additional $7M that needed to be accounted for.

Here is a comment from the CRC Report:
  • "There may be progress on the sale of income from the city’s interest in the Detroit Windsor Tunnel this fiscal year, but the $275 million budgeted from monetization of assets appears to be a plug to balance the budget. "

PLUG, an interesting choice of words. Like plug a hole in the dike before it breaks and there is a flood that causes huge damage too all in its path.

Remember that the previous Detroit Mayor was able to "balance his budget" with the $75M supposedly coming from Windsor. As I wrote at the time:
  • "I saw this in Crains Detroit:

    "Two Detroit City Council members changed their minds Tuesday and voted "yes" on Mayor Kwame Kilpatrick's sales plan for the city’s half of the Detroit-Windsor Tunnel.

    Kilpatrick said the action allows Detroit to begin the new fiscal year with a balanced budget."

    Without actually receiving one penny from Eddie, Detroit's deficit was wiped off the books! Ahhhh, isn't accounting wonderful! Kwame has a balanced budget as promised. Who cares if the Windsor money ever comes in. As far as Kwame is concerned, he just bought 4 months worth of time thanks to Barbara-Rose. That goes along with the year he received since June of last year even though no deal was ever done with Windsor. Why Eddie and his lawyer, Cliff Sutts, were his biggest allies as they restructured the deal how many times trying to get this deal done. Fortunately for Kwame, they never gave up or backed out of it.

And this:

  • "On Monday, as it closed out the fiscal year, the council voted 5 to 3 to reject the tunnel proposal, marking what seemed to be the end of a long push by Kilpatrick to accomplish the deal, which he first proposed in 2007, and which he reportedly touted to rating agency analysts as key to gaining stable financial ground. Under his plan, the city would sell its stake in the tunnel for $75 million to a new holding company, the Detroit Tunnel Authority. The transaction was expected to generate $65 million in a one-time cash windfall after insurance and other transaction costs.

    After the council vote, Adams told the council that the layoffs of up to 1,300 employees were now "inevitable." Perhaps to avoid the discouraging prospect of those layoffs, two council members yesterday decided to reverse their no votes and approve the measure, which allows the city to set up the tunnel authority. Kilpatrick still needs to win approval within the next 120 days from the council for the remaining financing and operational details of the deal, but the mayor heralded the reversal as a major victory for the city.

    "This tunnel agreement would be the final piece of the puzzle to put the city on stable financial footing and start moving forward," said Canning.

And this:

  • "So here are the key points that I think you should understand in all of this:

    --the hope of a Tunnel deal was necessary to "balance" the Detroit budget and to eliminate Detroit's deficit

    --deal or no deal by June 30, the Mayor can claim a balanced budget since the 2 sides are working on a deal

    --without one penny coming in, the Mayor has been able to claim that the budget will be balanced for a year and now for another 120 days

    --this transaction was important for the bonding agencies to keep Detroit's rating up and interest costs down and since Kwame made promises to them."

For over a year, Eddie's seemingly extravagant offer allowed Detroit to claim it had a balanced budget when it appears that it really did not since the likelihood of getting so much money was remote. Remember, when Mayor Cockrel wanted $100M for the Tunnel, Edgar (aka Eddie) went ballistic and said:

  • "Mayor Eddie Francis questioned how Detroit arrived at a $100-million price tag for control of the U.S. side of the tunnel.

    Windsor has gone through an "exhaustive process" to arrive last year at a $75-million value, he said.

    "That was the number we were prepared to pay back then, but economic conditions have changed considerably and are very different than five or six months ago."

    The mayor said 2010 toll revenues for the Detroit side are projected at about US$11.5 million, but the city has no way of knowing exactly since it is controlled by Alinda, a private company which holds a lease until 2020.

    "Does the tunnel have revenues to support $100 million on the American side? I'd be interested in looking at their numbers," Francis said.”

Getting the information requested about the results of the "exhaustive process" would go a long way to understanding the deal and what the participants were doing but that is being firecely opposed.

I wonder what the answer would be if the valuation was less than $75M, or if the IO amount was $20M requiring Windsor to find $55M. Would Kwame have come to Windsor if he knew that the valuation was lower than $75M or that IO would not put up the cash needed? Heck, he might never have had to go to jail for coming over here.

Perhaps there is more. I ask again if the whole so-called Tunnel deal was part of an effort to get control over both sides of the Tunnel to control Tunnel tolls to make it easier for a DRIC P3 operator to run the new Bridge. Seriously, who else would have an interest in a declining asset.

Let's watch if the Tunnel deal is revived by Edgar. To me, given the low valuation of the Tunnel, Detroit might be smarter to keep the $600K income per year. Windsor would be smarter to run away from the deal.

Remember that the Tunnel is almost as old as the Ambassador Bridge and Congressman Dingell has still not asked for the reports on the condition of this "unique security risk" to protect the users of the Tunnel.