General Fund Expenditures

The principal component of expenditures (or expenses) is employee compensation and related fringe benefits, utilities, water and sewer costs, and debt service (principal and interest payments). In all likelihood these costs would exceed 90% of all costs incurred.

The General Fund's deficit steadily increased throughout the early 1980s to June 30, 1985 (and beyond). Vendors were paid sporadically in the early 1980s as cash flow permitted. Beginning in 1982, one of the principal vendor not paid was the Wayne County Department of Public Works (Wayne County) for the purchase of sewer services by the Water and Sewer Fund. Instead, the cash derived from the Water and Sewer Fund revenues was used to repay previous Water and Sewer Fund borrowings from the General Fund and then, to fund the operations of the General Fund.

In addition to the suspension of the sewer payments by the 1983 fiscal year, Ecorse began delaying utility payments to Detroit Edison and withholding certain components of the Police and Fire Pension Plan contributions. As with the sewer costs, the cash withheld was used to fund General Fund operations.

During the early 1980s, Ecorse was continually negotiating and arbitrating with its various unions. Often, contract periods would lapse and retroactive compensation would be required. In June, 1985, Ecorse lost an arbitration award to the Police union which required wage increases through the 1988 fiscal year and the following retroactive payments:

To Be Paid

Fiscal Year Recorded

Amount

July, 1985

1985

$543,189

July, 1986

1986

$236,582

July, 1987

1987

$255,558

TOTAL

1,035,329

The above amounts represent compensation paid and does not include the effect on General Fund operations associated with fringe benefits, including: Social Security taxes, pension, and workers' compensation. The effect of these additional costs could easily exceed $100,000.

In addition to the suspension of the payment of the sewer, utility and certain components of the pension contributions, Ecorse began to use gas and weight taxes received by the Major and Local Street Funds for General Fund purposes as well. While the Major and Local Street Funds' equities were increasing, these Funds had insufficient cash to accomplish their restricted purpose. In addition, property taxes collected by Ecorse on behalf of the Ecorse School District were often not remitted on a timely basis.

The Police and Fire Departments were operated by a five member, semi-autonomous Commission. The appointment of Commission members arose from the Mayor (one member), Council (one member), Police and Fire Departments (one member each) and the fifth member by a consensus of the four appointed members. Due to Ecorse's inability to control the operations of the Police and Fire Departments, the continual budget over-runs, labor disputes, and the failure to fund the pension contributions in accordance with the labor agreement, City Council requested that a receiver be appointed in 1982 by the Wayne County Circuit Court to operate these two departments.

Judge Dunn appointed a receiver to operate the Police and Fire Departments and litigation ensued between the receiver, the commission and Ecorse management. The Police and Fire commission and this receiver were eliminated early in the 1986 fiscal year. At this point, the Police and Fire Departments' operations were returned to the Mayor and City Council.

Water and Sewer Fund

On June 27, 1984, Wayne County and Ecorse entered into a Consent Agreement whereby Ecorse would pay the then owing sewer costs of $1,525,748 in semi-annual payments, plus interest at 8.0%. The principal payments ranged from $93,342 to $132,309 and were due on November 1 and May 1 through November 1, 1990. The payments were to be paid from the revenues generated by the Water and Sewer Fund. No other new revenue source was identified for this obligation.

Pension Plans and Other Post Employment Benefits

Ecorse employees participate in one of two pension plans, as follows:

  • Police and Fire Pension Plan (Pension Plan) – The Pension Plan, is administered under a three member Police and Fire Pension Board (Pension Board) and covers all of Ecorse's Police and Fire personnel prior to the receivership.

  • Michigan Municipal Employees Retirement System (MMERS) – MMERS is a State-administered pension plan covering substantially all full-time Ecorse employees other than those employees included in the Pension Plan above.

In addition to pension benefits, Ecorse provided health insurance to its retirees on the basis of paid premiums through an insurance company. Ecorse was self-insured for life insurance for both active personnel and retirees. Active employees' and retirees' beneficiaries received $15,000 and $5,000, respectively, in the event of death.

One of the areas that highlights Ecorse's fiscal distress, both then and currently, is the financial condition of the Pension Plan. While the Pension Plan was significantly underfunded, Ecorse did not receive annual actuarial reports to monitor its financial condition and funding progress. The following is a comparative analysis of the Pension Plan derived from the only available actuarial reports (in thousands):

Dec. 31, 1986

Dec. 31, 1983

June 30, 1980

Actuarial accrued liabilities

$15,817

$11,100

$9,300

Pension Plan assets used by actuary

($5,132)

($2,048)

($1,313)

Unfunded Actuarial Accrued Liabilities

$10,685

$9,052

$7,987

The 1980 actuarial report used an investment assumption of 6.0% for investment income derived from Pension Plan assets. The 1983 and 1986 actuarial reports used a 7.0% interest rate assumption which has lowered the actuarial accrued liabilities otherwise reflected.

As early as 1978, the Department of Treasury Municipal Finance Commission realized the Pension Plan's depth of fiscal distress. The Municipal Finance Commission ordered Ecorse to "fund the plan properly, adequately, and fully, in accordance with the State of Michigan constitution".

In the early 1980s, the Pension Plan was so badly underfunded that the Police and Fire bargaining group had negotiated an agreement that required the General Fund to pay retiree benefits directly (rather than to the Pension Plan) as well as an additional contribution of $350,000 to the Pension Plan. However, the General Fund's cash flow resulted in the suspension of the $350,000 payments throughout the early to mid-1980s. Several instances occurred in which retirees' benefits were delayed until such time as sufficient cash in the General Fund could be obtained to fund the retiree benefits.

As a result of the failure to adequately fund the Pension Plan, Ecorse's annual pension contribution had grown to over $1.0 million by 1986. Due to the failure to fund the $350,000 payment in addition to the direct retirees' benefits, this component of the pension contribution was increased to $408,000 as part of the $4.0 million judgment bonds issued in 1986 (discussed subsequently).

The unfunded actuarial accrued liability in the Pension Plan of $10.7 million at December 31, 1986 is similar in nature to an unsecured loan (eg. principal portion) in that the loan will grow unless interest on the debt is paid. The interest income assumption included in the actuarial report was 7%. Using this percentage, the interest component to the pension contribution alone approached $750,000 each year. Resolution of the unfunded actuarial accrued liability, the annual interest charge and pension rights accruing for that year ("normal cost") equaled or exceeded the amounts being contributed by the funding mechanism identified in the union agreement.

While the Pension Plan was substantially underfunded, MMERS had a nominal excess of assets:

Dec. 31, 1985

Actuarial accrued liabilities

$5,099,000

MMERS assets used by actuary

($5,768,000)

EXCESS OF ASSETS OVER ACTUARIAL ACCRUED LIABILITIES

$669,000

The financial condition of MMERS resulted in a continuing decline in the MMERS pension contribution throughout the early 1980s as follows:

1982

 

 

 

 

$342,100

1983

 

 

 

 

$115,200

1984

 

 

 

 

$71,900

By 1985, the MMERS actuarial reports suggested that no current contributions would be required. Despite the State allowing Ecorse to forego the funding for MMERS, Ecorse management continued to provide contributions of approximately $39,000 for 1985 and 1986. These contributions continued to be paid to MMERS at the same time that Ecorse was withholding pension contributions to the Pension Plan.

The cost of health insurance and life benefits for Ecorse's retirees were funded on a cash basis as incurred. By 1986, the annual amounts paid for these benefits approximated $334,500. No amounts had been set aside to fund future payments (as is the case in most governmental units). The unfunded vested obligation for these two benefits, which has not been quantified, would likely be substantial. Often, the actuarial accrued liabilities for these benefits would be between 17 and 25 times cash payments, or between $5.0 million and $8.4 million for Ecorse.

The combined pension contribution and health insurance and life benefits for retirees approximated 20% of the total General Fund revenues. These benefit costs were incurred before the residents received any current services as they applied to the cost of services provided in the past.