Financial Recovery Plan

By late winter 1985, Detroit Edison and the Police and Fire Pension Board had filed separate lawsuits seeking payments of amounts then owing. On May 1, 1985, Ecorse failed to pay its third semi-annual payment of $185,233 (including interest) due to Wayne County in accordance with the Consent Agreement. Wayne County filed a separate lawsuit of its own at this time.

In an attempt to fully understand the depth and nature of the fiscal problems facing Ecorse, Judge Dunn commissioned a consulting project in the spring of 1985 to identify the causes leading up to the fiscal distress, recommendations relating to the outstanding lawsuits, and the method to fund the recommendations. The resulting report was entitled "Financial Recovery Plan for the City of Ecorse" (Financial Recovery Plan).

Some of the comments paraphrased from the Financial Recovery Plan follow:

  • By March 19, 1985, the amount owed the Police and Fire Pension Plan for the 1983, 1984 and 1985 delinquent pension contributions approximated $968,000.

  • The deteriorating property tax base, which was largely attributed to the Great Lakes Steel Division property tax challenges, declined approximately 40% over a three year period.

  • Despite declining revenues, Ecorse management failed to take the necessary actions to reduce expenditures.

  • Concerns were expressed regarding the antiquated Home Rule Charter and the Council's inability to control operations due to various elected officials and boards / commissions, including the Police and Fire Commission.

  • Labor relations between Ecorse management and its bargaining groups was hostile and filled with distrust.

The Financial Recovery Plan first explored the possible results of the appointment of a receiver for the entire City (beyond the receiver appointed to operate the Police and Fire Departments). This report indicated that "the City of Ecorse is not permitted by Michigan law to seek protection in federal bankruptcy courts and therefore any attempt to seek protection of the courts would have to be made under Michigan law - permitting the appointment of a receiver".

Several outcomes of a full receivership at Ecorse were cited in the Financial Recovery Plan:

  • Operate Ecorse – The receiver would be given the power to operate Ecorse and hire attorneys and others to assist in running the receivership. The earlier receivership involving the Police and Fire Departments would be combined with this receivership. Legal and other costs associated with the combined receivership were estimated to "probably exceed one-half million dollars a year".

  • No access to borrowings – The author of the Financial Recovery Plan was Ecorse's then bond counsel who believed that the appointment of a receiver would prevent Ecorse from entering the investment community. Essentially, Ecorse would be unable to borrow funds to operate.

  • Affect credit rating of neighboring municipalities – The Financial Recovery Plan suggested that "the impact of such a receivership on surrounding municipalities and on the general downriver area would be devastating...".

  • Cancellation of labor agreements – The Financial Recovery Plan contemplated that the receiver would set aside labor agreements similar to a federal bankruptcy. In doing so, additional legal costs would be incurred as the unions would challenge this decision.

  • Long receivership – The Financial Recovery Plan contemplated that the receivership would require between two and three years.

The tone of the Financial Recovery Plan discussions indicated that there was little or no need for the immediate appointment of a receiver for the entire City. A second alternative was an increase in the millage by over 9.0 mills to address the operating and debt service requirements. If this alternative proved unsuccessful, then a receiver would be appointed. This second alternative was also not recommended in the Financial Recovery Plan.

The alternative actually recommended in the Financial Recovery Plan included two parts:

  • Consolidate the three separate lawsuits with Wayne County, Detroit Edison and the Police and Fire Pension Board and issue a general obligation judgment bond to liquidate these obligations. The related debt service would be funded by an earmarked property tax judgment levy.

  • Begin levying property taxes for the Building Authority and certain Water and Sewer Fund bonds issued prior to the Headlee constitutional amendment which currently require a vote of the residents before debt service millages could be levied.

The Financial Recovery Plan did not address the poor condition of the overall accounting system (including personnel), labor agreement issues, financial condition of the Police and Fire Pension Plan, and many other operating matters that could have reduced costs. The Financial Recovery Plan implied, but did not specifically state, that the issuance of the judgment bonds and levying the above debt service millages would address Ecorse's overall fiscal distress.

While the Financial Recovery Plan identified several of the immediate operating issues facing Ecorse, it failed to address the underlying structural causes contributing to the deficits and cash flow pressures. The operating recommendations provided would not have resulted in any substantive structural changes and few would have either increased overall revenues or reduced costs by any significant amount.

Judgment Bonds Issued

On June 25, 1986, Judge Dunn ordered Ecorse to issue $4.0 million in general obligation judgment bonds to liquidate the obligations owing to Wayne County, Detroit Edison, and the Police and Fire Pension Plan. In addition, Judge Dunn ordered that Ecorse include sufficient property tax levies to ensure that these bonds would be paid. Specifically, the Court Order stated:

"The City of Ecorse is hereby ordered to levy an additional ad valorem tax in the amount of 1.65 mills on the 1985 tax rolls for the purpose of paying interest coming due on said Bonds in the year 1986, and is further ordered to levy an ad valorem tax unlimited as to rate or amount (in addition to all other taxes authorized by the City Charter or State law to be levied) sufficient to allow the Trustee to promptly pay the principal of premium, if any and interest on said Judgment Bonds when due in the years 1986 through 2000."

The bonds, which were issued in October, 1985, liquidated the following obligations then outstanding:

Sewer costs owed to Wayne County

$1,793,000

Utility costs owed to Detroit Edison

$365,000

Pension contributions owed to the Police and Fire Pension Plan for the 1983 through 1986 fiscal years

$1,559,480

Net Bond Proceeds

$3,717,480

Bond issuance, consulting and other costs

$282,520

TOTAL BONDS ISSUED

$4,000,000

The bond proceeds were recorded in the following funds:

General Fund

$2,648,051

Police and Fire Pension Fund

1,069,429

NET BOND PROCEEDS

3,717,480

In addition to the delinquent 1983 through 1985 pension contributions, the judgment bonds included amounts sufficient to fund a portion of the 1986 pension contribution. The bond proceeds transferred directly to the Police and Fire Pension Plan relate to those delinquent pension contributions for the 1983 through 1985 fiscal years. The 1986 pension contribution included within the bond proceeds was transferred to the General Fund and in turn, paid to the Pension Plan shortly after the issuance of the bonds.

The bond proceeds did not address the then mounting problem of the General Fund's use of gas and weight taxes which were restricted for use in the Major and Local Streets Funds.

While the portion of the proceeds applicable to the General Fund ($2.6 million) resolved a substantial portion of the General Fund deficit as of June 30, 1985 (deficit was $3.3 million), no structural changes were made in Ecorse's operations. As Ecorse had not closed its accounting records for the 1985 fiscal year at the time the judgment bonds were sold, it was not possible to have known that the judgment bonds would be insufficient to address the full amount of the deficit. As a result, the cash flow pressures began to increase even as these bonds were sold.

Despite Ecorse management's inability to address its fiscal problems, it appears that there was a substantial reliance on the Court Order which required Ecorse's Council to adopt a recommended balanced budget. Specifically, the Court Order stated:

"The City of Ecorse is ordered to approve the proposed budget (which is balanced by law) ... and not to appropriate or spend in any quarter more than authorized by said budget for said quarter and, if revenues are reduced below projections on any quarter to reduce expenditures for such quarter by a like amount; and the City is further ordered for the period while said Judgement Bonds are outstanding to continue to operate each quarter within its revenues for such quarter as budgeted."

The above language included in the Court Order is similar to the requirements specified in State statutes. Yet, Ecorse was unable to address its fiscal problems under the State statutes. Ecorse's Council passed the proposed budget in accordance with the above Court Order, but failed to comply with the Court Order reducing expenditures when necessary. The fiscal distress continued.