In 1984, the city of Ecorse, a small downriver city south of Detroit, was sued by its electricity provider and its police and fire pension board for being delinquent in payments.[*] The missed payments were the culmination of a long history of fiscal problems, ranging from improper accounting, a falling tax base, and fringe benefit and other auto-pilot expenses that increased steadily. The city’s expenses in its general fund — the city’s key operating fund — rose from $7.6 million in 1980 to $8.2 million in 1986.
Judge Richard Dunn, who initially presided over the case, asked for a review of the city’s finances and commanded the city to issue bonds in order to raise the cash necessary to pay the bills. The judge also ordered the city to pass a balanced budget, as required by state statutes.
City officials, however, did not comply with the judge’s orders. While they did use the bond proceeds to pay some of their debts to the plaintiffs in the case, they again failed to pay new bills from the city’s electric, water and sewer utilities.
In fiscal 1986, the city did not receive as much tax revenue as officials had expected, and the city again operated at a deficit. They also failed to pass a budget for the general fund for fiscal 1987.
At this point, the city of Ecorse’s accumulated deficits were unknown. The city was also paying general expenses by borrowing from funds earmarked for restricted purposes, such as the water and sewer fund, from which the city borrowed $1.86 million. Other inappropriate borrowing occurred from the major streets fund, the local streets fund, the debt service fund and others.
In addition, Ecorse, like other cities, collected property taxes for other governments entities, such as school districts and counties. Instead of passing the revenues from these other millages to their respective governments, the city kept this tax revenue and spent it on the city’s own general operating expenses. There were also other fiscal problems with the city’s insurance, infrastructure, unions and the city-financed municipal court.[†]
The final straw for Judge Dunn appears to have come when the Ecorse City Council approved travel expenses for some council members to attend a conference in San Antonio. Shortly thereafter, the judge appointed a receiver for the city for a three-year period.
Court-ordered receivership for local governments is rare. Ecorse was not the first example in Michigan, however: A receiver had been ordered by a court in the Taylor School District — another downriver community — in 1979. While this receivership was later overturned by an appeals court, that court nevertheless affirmed that a judge may appoint a receiver as a permissible remedy in extreme cases “when other approaches have failed to bring about compliance with court orders, whether through intransigence or incompetence.”
In Ecorse, the receiver was Louis Schimmel, then the executive director of the nonprofit Municipal Advisory Council of Michigan. As receiver, Schimmel was given broad authority over the city. He was empowered to set budgets, control finances, sell assets, hire workers, close positions and negotiate contracts and collective bargaining agreements. Although the city’s elected officials were still in office, he eliminated their annual salaries and their benefits package, including the mayor’s city-paid leased vehicle. The receiver, however, was not allowed to alter the city’s union collective bargaining agreements or other contracts.[‡]
Schimmel made a number of changes to city operations over the 45 months of his tenure. He eliminated nonessential services, such as the ice arena and the community center. He also corrected city accounting, contracted out city services, closed libraries and parks, eliminated the city’s water bill delinquencies, ended interfund borrowing, renegotiated vendor contracts, won major concessions from the city’s unions, and contracted with a private firm to perform the major functions of the city’s department of public works. This privatization of the department of public works alone saved the city a minimum of $509,451 annually — substantial savings in an $8 million to $9 million budget.
He also resolved ongoing litigation — usually with the litigant dropping interest (and sometimes claims) in order to obtain the original amounts the city owed. Overall, the city’s net general fund deficit — the amount that the city owes but does not have equity to cover — reversed from $2.0 million in 1986 to a $95,707 general fund surplus in 1990. More importantly, the city was on firmer fiscal ground, with an accounting system in place and payments to vendors and the pension fund made on time.
The judge ended the receivership on August 31, 1990, and control of the city returned to the mayor and city council.
As the actions in Ecorse show, and as a state court of appeals affirmed, local governments were subject to being operated by unelected managers before the passage of Public Act 4 and earlier state legislation in this area.
[*] Robert Daddow, “Ecorse: The Fall and Rise of a Michigan City,” (Mackinac Center for Public Policy, Dec. 1, 1992), http://www.mackinac.org/5596 (accessed Oct. 15, 2012). The Detroit Water and Sewer department and Wayne County later joined the suit to receive payment for the city’s purchase of water and use of the county sewer system.
[†] For an detailed assessment of the problems that led to the judicial placement of a receiver, and the actions taken to correct the city’s finances, see Daddow, “Ecorse: The Fall and Rise of a Michigan City,”(Mackinac Center for Public Policy, 1992).
[‡] Daddow, “Ecorse: The Fall and Rise of a Michigan City,” (Mackinac Center for Public Policy, Dec. 1, 1992), http://www.mackinac.org/5596 (accessed Oct. 15, 2012). Judge Dunn retired shortly after ordering the city into receivership. The scope of the receiver’s powers was largely decided by Judge James Rashid, who took over the case.