Emergency Manager Model Brings Fiscal Security to Pontiac

Lou Schimmel reflects on his tenure

(Editor’s note: The following first appeared as the March 2014 “Innovators in Action” feature at Reason.org. It is an interview with Lou Schimmel, former director of municipal finance for the Mackinac Center, about his tenure as emergency manager for the city of Pontiac. The interview was conducted by Leonard Gilroy of Reason and Michael D. LaFaive, director of the Mackinac Center’s Morey Fiscal Policy Initiative.)

Like in many states, Michigan law allows the state to appoint emergency financial managers for local governments in fiscal distress, granting them broad control over city operations and budget decisions, as well as contracts, asset divestiture, labor agreements and the like. In 2009, Pontiac joined the list of fiscally distressed Michigan cities that have seen the appointment of emergency managers in recent years, given its high debt load and chronic budget deficits.

Louis Schimmel was a natural choice to serve as the third emergency manager in his hometown of Pontiac upon his appointment in 2011, having previously served as a court-appointed receiver in Ecorse in the late 1980s and as the emergency financial manager in Hamtramck in the early 2000s. Schimmel’s work helped yield a number of notable accomplishments during Pontiac’s time under emergency manager control, including a reduction in the city workforce from more than 500 non-court employees down to just 20 (a 96 percent reduction), the reduction of city debt from $115 million to $28 million, and lowering general fund expenditures to $30 million, which is half what the city was spending six years ago.

Such achievements required Schimmel to implement a variety of government downsizing strategies between 2011 and 2013, including the contracting out of dozens of services through privatization and intergovernmental agreements, the sale of major city assets, the restructuring of the city’s retiree healthcare plan, the elimination of the city’s fire department through a merger with an adjacent municipality, and much more.

In August 2013, the city’s progress prompted Gov. Rick Snyder to remove Pontiac from emergency manager control, and to appoint a four-member Transition Advisory Board — which includes Schimmel — that is now overseeing the city’s finances and progress at restoring its fiscal health.

Leonard Gilroy, Reason Foundation: Can you describe the fiscal situation you walked into in Pontiac upon becoming its emergency manager?

Louis Schimmel: There were really two fiscal situations. One, they had an enormous amount of debt, and two, they were in a situation where they were underwater every year in terms of an operating budget. So they were just losing money every year, and the debt kept getting worse and worse.

As many troubled municipalities do, they played about every financial borrowing game you could play. And finally there were just no more games that could be played, and it ended up in a situation where I was appointed the emergency manager — actually, the third emergency manager, as there were two previous managers before me.

My approach was probably different than a lot of emergency managers, because I felt like I knew everything that I wanted to do before I even arrived. And I thought that my job was to get in, fix it, and get out as fast as possible. And I believe that I did that. 

Gilroy: Privatization played a major role in your efforts. Under your watch, Pontiac contracted out roughly 20 city functions — ranging from services like trash collection, building services, and road and streetlight maintenance to administrative support functions like IT, auditing and budget administration, and legal services. Can you describe the rationale for such large-scale privatization and offer a perspective on how things went, in retrospect? Has the private sector delivered?

Schimmel: The rationale was two-pronged. One goal was obviously to save a lot of money, and another goal was to improve services. There were services that just weren’t being delivered or were being delivered very poorly.

In some cases, we had services where we wouldn’t necessarily save money through contracting, but rather we were spending money but not getting very much for it. So we contracted a lot of those things out, and though we didn’t save money, we did get the service quality that we weren’t getting before.

For example, the city had been paying for public works and building department services, but we weren’t getting the work done. The difference under contracting is that while we’re still paying for it, the work is actually getting done today, and the services are being delivered.

I took a similar approach in the other cities where I’ve served as emergency manager as well, because I’m a great believer that we can deliver services cheaper and better through contracting.

That said, of the 20 services we contracted out, we did have one contract for winter streets maintenance where we thought the vendor would be great, but they just did a terrible job for a couple of months, and they’re gone now. With contracting, you’ve got to have a good administrator over it, or it can become a nightmare. But we had a very good administrator overlooking our public works contracts who determined that the vendor was not performing.

So we made a change on that one contract, and that service is now being delivered with good performance.

What is often not considered with contracting out services is the immense amount of time and money spent dealing with unions — in the contract negotiations, all of the time that the administrative staff spends on personnel problems and labor union negotiations, with grievances and arbitrations, that sort of thing. When that’s gone because you’re contracting out, it doesn’t necessarily show up on the balance sheet, but it certainly frees up time to spend on other efforts in running the city. The legal costs alone are staggering when you’re dealing with union issues.

Michael LaFaive: Private sector firms haven’t been the city’s only contracting partners. Pontiac also entered into agreements with Oakland County and other public entities to take over some major functions, including police and fire services, 911 dispatch, water and wastewater operations, and animal control services. Can you describe some of these efforts, in terms of the rationale and the results achieved?

Schimmel: The reason that we did a lot of contracting with other governments like Oakland County is that there are certain functions of government that you really can’t contract out to a private company. Police work is one of them. Also, there really was no good alternative for providing fire services other than to partner with a neighboring community, which we did.

For other services, we have the luxury of being in a well-run county that runs some of these functions very, very well. I sat down with a lot of the county leaders, and they were very interested in helping Pontiac. We just found it so easy to go with the county on some of these services instead of going out to the private sector.

Let me tell you a little more about our fire contracting.  At one point prior to my arrival, the fire department was costing the city as much as $14 million per year for fire service. Fire service was in some ways the Achilles’ heel of the city of Pontiac. Firefighters had language that was written into the city’s charter instead of its labor contract, which means that it was very difficult to change it. You had to go to a citywide vote to change some provisions that should have just been part of the labor contract and dealt with in negotiations — things like minimum manning.

I knew I had to address that one right up front, and the latest state emergency manager law (Public Act 436 of 2012) allowed for me to deal with that situation. So I negotiated a contract with a neighboring municipality for fire services — Waterford Township — that the city of Pontiac now pays just under $6.5 million per year instead of what used to be $14 million. When I came in as emergency manager, that cost had actually dropped to about $9.5 million, so in that one deal we created about $3 million per year in savings. That’s why I did it, and that’s also why we did the police contract and the other ones.

We have a very interesting fire department as a result of the negotiations with the neighboring community. In Pontiac, I actually did away with the EMS service. And if you know fire services, you know that that’s one of the sacred cows because it calls for a lot of employees in the EMS service.

But you can get EMS service for nothing, as we did in Pontiac, instead of having the fire department provide it. That’s the direction I went. We have a very good provider of EMS service — a private company called Star Ambulance — and we went out of the business of providing EMS ourselves in the fire department. The company recovers their costs through direct charges to the users, which means we pay nothing.

The combined fire department is interesting because the other municipality (Waterford) still provides its own EMS service. So we have a dispatch that dispatches both private and municipal ambulances, and though they’re handled differently in the two areas, they’re still the same fire department. Of course, I was told that you could never do anything like that — that from a dispatch standpoint it just couldn’t be done — but we went right ahead, did it anyway and proved otherwise.

If you were in the city of Pontiac today, you would have a very hard time finding anybody that does not think that the sheriff’s department, for example, is doing a fantastic job compared to when they had their own local police force. Police and fire response times improved dramatically as a result of this. We created the third-largest fire department in the state of Michigan with the merger of Pontiac’s department with the neighboring community of Waterford. And they have advantages with that size as well. Certainly from a management standpoint it helps, because you don’t have to have two fire chiefs, and they’re better able to get grant funds, buy equipment on a larger scale, and those sorts of things.

LaFaive: Rather than a contract with another unit of government, had you considered an entirely private service provider like Rural Metro, or perhaps turning Pontiac’s fire department into a largely volunteer one?  Troy, another Oakland County city, operates a largely volunteer force and services 33.6 square miles.

Schimmel: One of the reasons that we went with a municipality was that in places where you’ve always had unions there delivering services — in urban areas especially — it’s very difficult to go from that situation to a private model. For example, in the area of fire services, here in Michigan you could probably use a private or volunteer entity if you’re in a more rural area, but in a heavily urbanized and unionized city, your best bet is to stick with the full-time, public sector fire department model rather than part-time or contract. So the best thing for us to do there was to contract with another municipality, which worked out terrific for us. We’ve provided a more efficient combined force.

In addition, regarding Troy, that city has always had a volunteer fire department. But the word “volunteer” is not entirely correct because they are paid something. And it’s also a situation in Troy where they have a much better building stock, sprinkler systems and the like. Pontiac is an older city and more urban, so it would be more difficult to have a part-time fire department.

Gilroy: Overall, private and intergovernmental contracting have played a major role in the dramatic downsizing of the city workforce. As a result, Pontiac is effectively a contract city today. Though there are many contract cities in places like California and Georgia, they usually start that way from their incorporation, as opposed to transitioning from a “traditional” city to a contract city as Pontiac did. Skeptics often claim that a traditional city cannot or should not move in the contract city direction for fear of what would happen to existing employees. How would you respond to those fears, based on Pontiac’s experience?

Schimmel: Let me tell you what I’ve always felt in all of the municipalities I’ve been in. I became aware of how quickly attrition happens in a municipality’s employment force. For example, in police and fire, their careers are pretty short when you think about it — 20 or 25 years. The same thing happens in other departments, like public works — there’s just a relatively quick turnover.

So I used attrition and buyouts heavily in the privatization of services of all three municipalities I’ve been in. And as a result of doing that, the layoff of employees have been almost zero. In Pontiac, there were really only two people in the Department of Public Works that lost their jobs. They were simply there too short a period of time, and there wasn’t much I could do for them.

And in the fire department, we had 13 employees that were close to retirement, and I gave them the extra time they needed to give them an early buyout so that they could leave early. There were younger firefighters that lost very little money and were hired by the newly combined fire department, and there were some middle-range workers who kept their jobs, but they did have to take a reduction in wages.

But overall, including police, fire, public service and administration, very few jobs were lost because of contracting.  Also, several employees were hired by the contracting companies.  

So yes, you have to do some negotiating and work with attrition and buyouts, but becoming a contract city isn’t what people think, in terms of wholesale layoffs and that sort of thing.

Gilroy: Was there a learning curve for how to handle such a large degree of contracting, from an administrative standpoint?

Schimmel: There was certainly a learning curve for myself over the years. It became very obvious to me after my first municipal experience that you cannot simply contract out with someone and walk away. The fact that contractors turn over from time to time is a good thing, because you’re letting everyone know that you expect results and you expect them to perform. It’s important to bid out contracts every few years to make sure the price stays right.

You also learn that you have to have someone on board as a city administrator that really knows what they’re doing in terms of oversight of contracts.  For the winter street maintenance contract I mentioned — the one where we had problems — we discovered that the company was billing us for a certain amount of cold patch, and the city’s person overseeing that contract realized that there was no way they could be using the amount of material they were reporting. He had several meetings with the company, and went out to review the actual work, and it was clear to us that they were basically just billing us but not really doing the work they claimed.

So if you don’t have someone overseeing contracts, it can turn out poorly.

I think the city is well set to continue contracting out into the future. Now that all of these contracts are in place, it would be difficult to go back to direct city operation. For example, we sold the city’s fire engines when we did that contract, and we even sold off the city’s public works department building, so it would be a challenge for the city to get back into that business. You’d have to have a lot of upfront money, and you would have to demonstrate that the cost of doing it yourself compared to the contractor would be at least equal or lower, which I consider at this point to be nearly impossible to do.

So I see the contract city model staying in place in Pontiac indefinitely. And in my opinion, the citizens have accepted that and are very happy with the services provided today. Some of the politicians are probably not as happy with some of the contracting on employment grounds because—let’s face it—they don’t get to put their friends into a city job. Of course, my response to that is that contractors have to hire people too. But from the politician’s standpoint, that’s not the same, and some of them might feel a loss of power as a result of not having the same number of city employees that they used to have.

Gilroy: You also sold off some of the city’s assets, including a golf course, city land and buildings and excess water/wastewater capacity. Can you describe some of these efforts and the results you achieved?

Schimmel: There were a couple of different reasons for doing the asset sales. In the case of selling the excess capacity of the water and sewer system, it was strictly a way to monetize the system. We had a tremendous amount of capacity that was just sitting there, and I put together a deal with the county that got us a $55 million upfront payment. This was badly needed in order to deal with trying to fix the city financial problems, and it was also a way of getting even better management of the system than we had ourselves.

A lot of the asset sales were done simply to get them off the books of the city and into the hands of some private owner who might do something with it. I recently got a call from a local reporter asking if I remembered the day that we had gone through one of the community centers that I ultimately sold. It was in deplorable condition after it had sat idle for eight years, and it had been heavily vandalized. I sold it, and the new owners completely renovated the building, which is now being used to teach music, art, sports and for afterschool tutoring programs for Pontiac kids. Unlike the water system capacity, I didn’t sell that facility to make money, but rather as a way to stop losing money through things like vandalism, police calls and maintenance.

We had another closed community center that was in similar condition and that I took a lot of heat for selling. I sold it to a private developer who is turning it into one of the largest outdoor grass court tennis facilities in the United States. We’re going from something that was a derelict eyesore into something that’s going to be a terrific community asset.

Similarly, we also had an old theater in the downtown area that was just sitting there costing money. The city spent a lot on it, and it never did get opened, so it was money that was just thrown away. We sold that to an individual that’s putting $4 million into the facility, and when it’s done it will be a great entertainment center.

One I’m particularly proud of is the sale of our Department of Public Works building, which was an environmental nightmare. It was formerly a creosote plant for Consumers Power, a utility company. When we did away with the public works department operations, I sold that building back to Consumers for $1 in order to get a major environmental liability off of the city’s hands.

So we had several of those kinds of sales — those that got major costs and liabilities off of our books.

I also sold the golf course, which was losing money and decreasing in value because nothing was being done in the area of making needed capital improvements. So we put that into the hands of a private owner who is already spending a lot of money to fix the water sprinkling system, upgrade the clubhouse building, and make other capital improvements that couldn’t be done by the city because we didn’t have enough money.

We sold a number of vacant parcels too. Every time you sell a vacant residential lot, you have one less thing that you have to take care of in terms of maintenance, mowing and all of the other costs associated with a vacant lot.

So overall, for our assets sales, we were either looking to generate revenue or do away with problems that cost the city money.

LaFaive: Can you describe the debt reduction aspect of your financial restructuring?

Schimmel: I was being criticized for taking the savings that we were getting from not only privatization, but also the sale of the sewer system capacity and using the revenues to pay off millions of dollars of city debt. The reason for that was that the cost out of the general fund to pay interest on all of the bonded debt was a large item. With that debt gone, it freed up $3 million to $4 million each year going forward that is now being used to spend on city services rather than debt interest. That was very contentious, and I was sued over it and fortunately prevailed.

Overall, we reduced the debt from $115 million down to $28 million by the time I left.

LaFaive: You took a vast array of different city retiree healthcare plans from more than 80 to just one during your tenure. Can you describe the one that remains? Is it competitive? Is it tied to a high deductible policy and Health Savings Account?

Schimmel: For retirees, we’ve gone to a system where the city’s General Employees Retirement System pays a $400 monthly benefit amount to the retirees, which can be used to purchase their own healthcare or to purchase the plan provided by the city.  We were fortunate enough to have an overfunded General Employees Retirement pension plan — it’s 150 percent funded — to be able to afford to make the $400 monthly payment to the retirees. By paying the retirees from the pension plan it saves the city $6 million annually.

With our retirees, you had 87 different plans with 87 different sets of benefits, depending on which labor contract you retired under. To me it was nonsense — and we needed to have one plan that fit all. So we eliminated the 87 different plans and consolidated into one very good plan that all of the retirees have access to. That made it easy for us to competitively bid out the one healthcare insurance plan. Blue Cross is the current provider of the one plan of insurance to the city’s retirees.

While $400 a month does not cover the full cost of buying healthcare insurance for a two-person family coverage, it is better than no coverage and the most the city can do with its current available revenues.

LaFaive: Do you worry that existing tax and regulatory burdens in Pontiac might otherwise thwart growth in the city going forward?

Schimmel: I’ve always wanted to do away with the income tax in Pontiac, but there’s no way we could do away with it right now, given what’s happened with the economy, and property valuations, and with the city’s revenue picture. But I do believe that the income tax is a big detriment to the city of Pontiac. No one wants to go into a town that has an income tax.

That’s my only worry though. I’ve got a lot of optimism given the improving financial picture as a result of what the three emergency managers have accomplished here. We’ve had a lot of economic development as a result. I’ve always said that cities do not need economic development directors — just clean up your own mess and businesses will show up. That’s been the case in Pontiac, and I think a lot of it has to do with cleaning up the financial picture of the city.

LaFaive: Where does Pontiac stand today in financial terms as a result of your efforts and those of the emergency managers that preceded you?

Schimmel: As a result of all of our work, we were able to right the ship. We’ve downsized the expenditures and improved the services. We’ve gone from spending $57 million per year — and not having the greatest services—to spending $30 million per year and having much better services. So I think it’s a rosy picture from that standpoint.

However, the general fund is razor thin, and there’s no room for mistake at this point. I think that $30 million is about as low as you can go and still run the city effectively. Everything that can be done to save money has just about been done, so if revenues drop below $30 million then it’s going to get very dicey. I don’t think it will — I think we hit bottom, and the revenue picture will improve. But there’s no money in the general fund to have what I would call a reasonable general fund balance, with about 10–15 percent of a balance for cushion. If we had another downturn in the economy, I’m not sure what we would do. We’d probably have to head the route of Detroit and start talking about things like bankruptcy.

LaFaive: What are the major comparisons or contrasts that you would draw between doing business as a court-appointed receiver, an Emergency Financial Manager under Public Act 72 and as an EM under the latter two laws (Public Acts 4 and 436). How does one prevent a city council from undoing all of the work that was done by an EM?

Schimmel: Before there was an emergency manager law, there was really no dialog with the state of Michigan whatsoever. For example, when I was in Ecorse before there was an emergency manager law, I was working for the Wayne County Circuit Court. I resolved their problems with much of the same strategies as we’ve discussed here, but after I left, it didn’t take too much time before they just fell back into the same problems again.

I later went to Hamtramck, and at that time there was an emergency manager law called Act 72, but there were no provisions in the Act other than “when you’re done, you’re done.” After I left Hamtramck, the same thing happened — they fell back into their old ways.

Under Public Act 4 — and now Public Act 436 — the emergency managers have more power than under Act 72, which gave me the ability to do a lot of the things we’ve talked about in terms of righting the ship. And now, all major moves — things like asset sales over $50,000, contracts negotiated with unions, and so on — all go through a process of having the state treasurer grant approval before these actions are taken. So there’s oversight of emergency managers now by the state, which is a good thing.

Also, the law now provides for a Transition Advisory Board that meets monthly. I currently serve on that board in Pontiac now. For the first two years, we oversee the budget that the emergency manager creates as part of the departure plan. Then after two years, we continue to oversee the budget that the mayor and council put together from that day forward. So the law now provides for oversight powers to ensure that what we’ve done in Pontiac is not lost like it was in the previous two cities I served in.

So as long as the city performs correctly, I don’t think they’ll fall back, certainly as long as there’s a transition advisory board. If, after the board’s work is done, the city falls back into fiscal crisis, then I suppose that they would simply face the prospect of having an emergency manager come in again.

I don’t think that will happen anytime soon because now we’ve all learned that you can’t simply fix the city and walk out. You have to fix the city and have some close monitoring afterward to make sure that it sticks.

Gilroy: Based on your experience in Ecorse, Hamtramck and Pontiac, what are some of the lessons learned in solving fiscal crises that you can share with other city leaders, whether they’re emergency managers troubleshooting existing crises or elected officials trying to avoid them?

Schimmel: When I was approached for the emergency manager role in Pontiac, I made it very clear to the state that I would not be a babysitter. I was going to use the emergency manager law to its fullest, make the necessary changes, and then leave. In places like Pontiac, Flint and Detroit, the people in power want to talk about everything else other than the real problem issues. They want to talk about getting grant money, having the state kick in more money, economic development, etc. I’ve always said that before you do any of that—begging for money from other places—you really need to fix what you’ve got, because nobody wants to help you until you do that.

You have to make all of the types of changes that we’ve done in Pontiac first. Then, if you get to the bottom of that list of doing what you ought to — which is running an efficient city through privatization, asset sales and other fixes — and just deal with providing the basic services that cities need to — like police, fire, trash and public works — once you’ve done all of these things, then you can see where you are and what else may or may not be necessary.

That’s what’s happened in Pontiac from my standpoint. After we did all of these things, we realized that you could run this city for $30 million. Now, if the city wants to go out and pursue grants and that sort of thing, they’ll be able to demonstrate that they’ve done everything that they can locally first.

For a new emergency manager, I’d advise them that one thing to expect when they step in is a lot of people telling them what they cannot do — you can’t privatize, you can’t sell assets, you can’t consolidate a fire department, etc. My response to that is — yes you can, and I believe we’ve set up a good template to prove that in Pontiac. You’ve got to have the conviction that these things can be done and can’t let yourself be talked out of it. I did it all, so I know it can be done.

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