In the last six months of the 1987 fiscal year, the Receiver concentrated on revising burdensome labor and other contracts, improving the accounting personnel and systems, developing the 1988 fiscal year operating budget, complying with MMRMA insurance directives, and addressing other operating matters. Privatization and related efforts throughout the receivership are discussed in their entirety later in this section of the Report.
The approval by the Court of the actions taken to reduce Ecorse’s spending patterns was a prerequisite by the State Department of Treasury to obtaining any loans. The Mayor strongly objected to the Receiver’s authority to initiate short-term and long-term debt arrangements on behalf of Ecorse as expressed in a January 1987 newspaper article. The Mayor had failed to recognize, however, that the General Fund’s deficit and unfunded actuarial accrued liabilities in the Pension Plan present at the inception of the receivership was a form of borrowing.
In an effort to provide the necessary cash flow for the remaining portion of the fiscal year, $2.4 million was borrowed. The notes were collateralized by revenue sharing and property tax revenues to be collected in the 1988 fiscal year. These notes were the maximum permitted by State statutes (500 of projected collections) and would permit Ecorse to operate throughout the rest of the 1987 fiscal year.
In addition to this short-term debt, the Receiver approached the State for a loan under the Emergency Loan Board (ELB). This long-term debt, which totaled $1.0 million, bore interest at 8.10 through July 1, 1987 and 5.9% thereafter. The principal would be due in installments of $100,000, plus interest, beginning July 1, 1992.
The proceeds of the ELB debt were used to liquidate the General Fund’s interfund borrowings from the Water and Sewer Fund. When the cash was returned, the Water and Sewer Fund was able to begin negotiations with the Detroit Water and Sewer Department (DWSD).
By early spring 1987, the amounts owed to DWSD approximated $1,467,196. The Receiver negotiated a settlement of the outstanding water invoices for $1.0 million, resulting in a gain of $467,196 to Ecorse residents. This accomplishment of the Receiver alone funded a significant portion of the receivership. DWSD required that future invoices be paid on a prompt basis.
In February 1987, Moody’s reduced Ecorse’s bond rating from A to B, which is less than investment grade.
Discussions with Detroit Edison concerning delinquent utility invoices resulted in the Receiver having approximately $15,000 in penalties and interest waived. However, Detroit Edison also required that future payments be made on a timely basis.
Merger with Surrounding Communities
Discussions were held with each of the surrounding communities to discuss the feasibility of annexing Ecorse into another governmental unit or combine services performed. Alternatively, contracting for primary services, including police, fire and administration, were also discussed. Substantially all of the surrounding governmental units except Wayne County and the City of Detroit flatly denied the Receiver’s request.
The Receiver approached the Wayne County Sheriff’s Office for two reasons: have the County perform the police services in place of the Ecorse Police Department or failing this effort, have the Sheriff provide patrols on the County roads in Ecorse at no cost as a supplement to existing Ecorse police services. An agreement was reached between the Wayne County Sheriff’s Office and the Receiver whereby the Sheriff replace the entire police services.
On March 10, 1987, the Council tabled approval of the matter and on March 11, 1987, the Receiver issued a directive to accept the Sheriff’s services, pending approval by the Wayne County Commission the following week. The distribution of fines collected between Ecorse and the County resulting from the Sheriff’s efforts was an unresolved issue. However, the County Commission failed to approve the contract involving converting the police services to the Wayne County Sheriff’s Office. The Receiver was successful, however, in having the Sheriff’s Office perform supplemental patrols on County roads in Ecorse at no cost to its residents.
The Executive office of the City of Detroit actively pursued the transfer of police and fire services. In addition, annexation discussions were held. The principal benefits of annexation to the City of Detroit arose from incremental revenues expected to be generated from a higher City of Detroit property tax rate and the income taxes collected by Detroit. Upon annexation, income taxes would be effective for both residents and those who worked in Ecorse, principally Great Lakes employees. The Ecorse Police and Fire unions successfully lobbied the Detroit Council and the Detroit Council failed to approve the transfer of services. No further actions were taken.
About the only area of success achieved in the transfer of services to another community involved Ecorse’s animal control officer, who was paid approximately $45,000 annually. The City of River Rouge was willing to perform this service on behalf of Ecorse and in turn, invoice a prorata share of the costs. The arrangement saved Ecorse approximately half of the cost of providing this service independently.
Police and Fire Pension Plan
The $408,000 Pension Plan pension contribution had not been paid at the time of the Receiver’s appointment. The $408,000 portion of the pension contribution is in addition to the direct retirement benefit payments made by the General Fund. With the January 1987 lay-off of certain police and fire personnel and subsequent requests for retirement of higher level police personnel, there would be approximately 11 new retirees entering the retirement rolls in the spring of 1987.
Direct payments of retirement benefits by a General Fund is an atypical pension funding structure. Usually, pensioners receive retirement benefits directly from the pension plan. The governmental entity would make periodic, actuarially determined pension contributions to a pension plan and when combined with investment income would cover the cost of the retirement benefits. The Receiver chose to transfer the payment responsibility for the retirement benefits from the General Fund to the Pension Plan effective July 1, 1987 and eliminate the $408,000 portion of the pension contribution. Instead, actuarially determined pension contributions would be made.
This transfer of retirement benefit payment responsibility arose for two reasons: paying the actuarially determined contribution would ensure that the Pension Plan ultimately would be properly funded and the increase in the retirement rolls from the laid off and recently retired police and fire personnel would immediately increase the pension contribution (anticipated retirement benefits plus $408,000 exceeded the actuarially determined pension contributions). The transfer of the payment responsibility resulted in an immediate annual savings to the General Fund of approximately $218,000 in 1988 and beyond.
The response to this change by the Pension Board was swift. The Police and Fire Pension Board mailed a letter to pensioners indicating that Ecorse, through the Receiver, ‘would discontinue its obligation and practice of providing funds for the monthly retirement payrolls as it is required to do pursuant to its agreement dating back to at least 1981." The Receiver’s intent was not to discontinue the retirement benefits as was indicated in the letter to the pensioners, but rather to have the Pension Plan pay the benefits directly. In turn, the Pension Plan would be funded through the actuarially determined pension contributions.
The Pension Board also requested legal action against the Receiver to force compliance with the existing labor agreement. Despite threats made to litigate this matter and to withhold pension payments until such time as it was resolved by the court, the Pension Plan paid the retirement benefits, rather than have pensioners forego retirement benefits.
The City Controller was instructed by the Receiver to assemble the necessary data for the completion of the actuarial report for December 31, 1986. Each year thereafter, actuarial reports were prepared and pension contributions indicated in the reports made.
By early March 1987, the Receiver had obtained an in-depth understanding of Ecorse’s operations, staffing, labor agreements, and condition of the accounting records. While the January 1987 staff and service reductions were painful to Ecorse officials, residents and employees, it was becoming increasingly evident that these reductions were insufficient to address the extent of the fiscal problems. Further reductions were required.
By March 1987, the Receiver was considering converting the full-time Fire Department into a volunteer basis. Alternatively, a combined Public Safety Department, which would provide both police and fire services, was also under consideration. However, in accordance with the agreement with Judge Rashid, the Receiver could not abrogate labor contracts and as the Firefighters labor contract was in force through June 30, 1988, little immediate change could be enacted. Other limitations on compensation, fringe benefits and staffing levels would have to be negotiated as well.
Other recommendations made by the Receiver in March and April 1987 included the sale of 10 small parks, ice arena, community center, health clinic and equipment not in use. The sales of real and personal property was estimated by the Receiver to generate approximately $1.0 million in revenues. Accordingly, this revenue was included in the Receiver’s proposed 1988 General Fund operating budget.
By early May 1987, the Receiver had developed a General Fund operating budget for the 1988 fiscal year. The Receiver’s budget was provided to the Mayor and Council and was immediately rejected. Judge Rashid ordered the Mayor and Council to prepare a budget virtually by May 11, 1987. The Mayor and Council responded with a budget identical to the Receiver’s, except that the Receiver’s fee of $60,000 and his attorney fees of $72,000 were eliminated. Judge Rashid rejected the Mayor and Council’s budget and approved the Receiver’s budget.
The Mayor and Council chose to challenge the adoption of the Receiver’s operating budget. Despite the inclusion of approximately $1.0 million in anticipated revenues from the sale of real and personal property, the lack of financial information indicating the size of the General Fund deficit at June 30, 1987, and continued cash flow pressures, the Mayor and Council’s attorney declared in early July 1987 that the budget was balanced. Based on the Mayor’s belief that the budget was balanced, Ecorse had complied with the Uniform Budgeting and Accounting Act and the receivership was unnecessary. The Mayor and Council again petitioned the Court for the elimination of the receivership. The petition was rejected.
The Mayor and Council continued to fail to understand that Ecorse’s actual operations were still not ‘in balance’, let alone resolving the deficits that existed at the time of the Receiver’s appointment. Based on the completed audit of Ecorse’s financial statements on August 13, 1987, the General Fund’s operating expenditures exceeded revenues by $2.8 million for year ended June 30, 1987. The deficit had grown again.
Despite the poor condition of the accounting records, little improvement in the accounting system was implemented during the first six months. Cash flow needs, compliance with MMRMA insurance directives and other operating issues were more pressing than the immediate resolution of the accounting system deficiencies. The hiring of Mr. Richard Eva, as City Controller, provided Ecorse with a professional accountant.
The hiring of Mr. Eva would prove to be a critical decision in the management of Ecorse over the remaining portion of the receivership and beyond.
The accounting system improvements in the six months ended June 30, 1987, were principally limited to the closing of approximately 30 bank accounts. By doing this, the projected cash flow needs could be better managed.
In an effort to effectuate collection, municipalities have the right to include delinquent water and sewer invoices on the property tax rolls. While Ecorse was performing this procedure, the City Controller reviewed the collection history of the Water and Sewer Fund accounts receivable and placed over $300,000 of delinquent accounts receivable on the July 1, 1987 property tax rolls. The delinquent accounts receivable placed on the July 1, 1987 rolls were more than twice the amount in the prior year.
One of the activities assumed by the City Controller was a more active role in closing the accounting records in connection with the audit of the financial statements for the year ended June 30, 1987 than was the case with the previous Controller. Due in large part to Mr. Eva’s efforts, the 1987 audited financial statements were issued less than 45 days after the year end. The 1986 audited financial statements, which involved substantial reliance on outside auditors for routine accounting assistance by Ecorse management, took over 6 months to produce.
The initial Court order included the Ecorse Building Authority within the scope of the receivership. However, upon further Court review, it was discovered that the Authority was a separate legal entity and was not in fiscal distress. However, Ecorse had failed to make three semi-annual lease payments of $70,000. The Receiver was ordered to make the then delinquent payments and the receivership of the Authority was withdrawn.
The Authority’s excess cash was used to acquire $100,000 of outstanding debt in the open market. The bonds were acquired at a cost of $92,000 resulting in a gain of $8,000. During the remaining receivership, additional attempts were made to acquire the Authority bonds in the open market, but no significant bond purchases were made as no sellers could be located. The Authority’s cash position was insufficient to risk a tender offer for the payment of all outstanding debt that may have been surrendered.
The Authority’s municipal office operations, which primarily included _janitorial and maintenance services, were transferred to the General Fund as a direct responsibility. Previously, the Authority would perform these services and would be reimbursed by the General Fund. At this time, there was no need for the Authority Board to meet. Effectively, the Authority became the Receiver’s responsibility anyway.
Rentals paid by the General Fund to the Authority were made on a timely basis throughout the receivership and beyond. The annual rentals paid, however, were reduced from the required $140,000 (as specified in the Authority bond covenants) to approximately $125,000.
The early payment of the bonds and the excess Authority cash were used by the Receiver to justify the reduced rental payments. At June 30, 1990, the cash and investments on hand (including a receivable from the General Fund paid in early July 1990) were $186,000. Bonds outstanding at that time were $610,000.
State Meeting - Summer 1987
State Treasurer Robert Bowman, interviewed in late January 1987 concerning actions of the Receiver, indicated: "It’s accurate to say we’d prefer not to get involved in this kind of situation.
If there were no alternative, we’d certainly assume the responsibility. But we have a lot of things on our platter, and we prefer to have someone there who can concentrate on that one problem alone." Until the Receiver’s appointment, little or no State actions were expended to enforce compliance with State statutes. Once the Receiver was in place, the State began to request financial information, including a formal deficit elimination plan.
In a meeting held with representatives of the Department of Treasury, Receiver, City Controller, and Ernst & Young, the State outlined its anticipated involvement in the receivership. It was the State’s position that the local unit had failed to properly address its operations and it would be its financial responsibility to resolve the matter. No grants or other similar forms of assistance would be provided by the State. The State, however, promised not to interfere with the Receiver’s actions. The Receiver was requested by the State to periodically inform the State of progress made during the receivership.
Shortly before this meeting, the Village of Merrill, Michigan had filed for bankruptcy in a federal court. Mr. Bowman indicated that it was likely that the State would oppose this action. In August 1987, the Attorney General issued an opinion that governmental units could not file for bankruptcy with the federal courts under existing State statutes.
Reaction to Receivership
The reaction to the actions taken by the Receiver were both vocal and litigious, both by Ecorse’s Mayor and Council and residents. The State of Michigan reacted to the receivership as well. Given the Receiver’s objectives and the actions taken to reduce staff and services, he was destined to be challenged. Essentially, within a short period of time, his actions had affected virtually all of Ecorse’s parties in interest.
In spring 1987, Ecorse’s Council filed a lawsuit challenging the constitutionality of the Receiver’s appointment. The challenge and defense of this litigation would prove to be costly as Ecorse was paying for all legal time incurred, including the Receiver’s. This litigation also proved to be a distraction from the Receiver’s ability to address Ecorse’s fiscal distress. After a lengthy challenge, the case was dismissed on a technicality in January 1988. The then newly elected Mayor and council chose not to pursue the matter further.
Numerous attacks on the Receiver’s approach and fees ($100 per hour) by the Mayor and others were included in the newspapers. These individuals generally failed to acknowledge the fiscal distress and actions taken by the Receiver to resolve the problems. The settlement with the DWSD alone was in excess of the Receiver’s fees for the entire receivership.
In March 1987, the Mayor and Council filed a lawsuit to reinstate their compensation and related fringe benefits retroactively to the inception of the receivership. The unions responded that their compliance with the Receiver’s staff and service reductions were reluctantly accepted based on a concession package, including the Mayor and Council’s compensation and fringe benefit reductions. Again, the parity issue was raised. Ultimately, the Receiver included the compensation and related fringe benefits in the 1988 General Fund budget. The lawsuit was dismissed by the Mayor and Council.
In March 1987, the Receiver began to organize a committee to revise Ecorse’s Home Rule Charter. The Ecorse Blue Ribbon Committee for a Better Government, which was initially unable to obtain the planned 11 members, required a vote of the electors to be established. No such voter approval was obtained in 1987 and the initial Charter revision efforts stalled. Later in the receivership, a vote to seat a Commission would prove to be successful and a revised Charter drafted. A prior attempt to change the Charter in 1982 had been defeated.
In addition to the concerns expressed by Ecorse management and residents, the State began to realize that the existing statutes concerning fiscally distressed communities were insufficient. In addition, they watched as control over these governmental entities was transferred from the Department of Treasury to the court system. Further, Wayne County was experiencing fiscal distress far greater than that of Ecorse. Wayne County and the specter of the receivership caused the State legislature to formulate a statute necessary to address fiscally distressed communities. Future receiverships would not be permitted in this legislation.
The State began to work on the "Local Government Fiscal Responsibility Act" (Act 101, now Act 72 with the inclusion of school districts) shortly after the actions taken by the Receiver. This Act, which has been instituted twice since its passage (City of River Rouge and Royal Oak Township), now provides the statutory authority to put a financial manager in place in certain circumstances.
After the adoption of Act 101, Ecorse’s Mayor and Council sought State protection under Act 101. Judge Rashid rejected this request.
Completion of the 1987 Audit
The audit of Ecorse’s financial statements for the year ended June 30, 1987 was completed in mid-August 1987, approximately five months earlier than prior years. The timely completion of the 1987 audit, including addressing numerous errors in the 1986 audit report, enabled the Receiver and City Controller to understand the continued fiscal distress of Ecorse. The General Fund operating results, continued to exhibit a need for further staff and service reductions.
Despite the actions taken by the Receiver in January 1987, the operating expenditures exceeded revenues by $2,843,245, up from an operating loss of $1,351,050 for the 1986 fiscal year. Several of the major causes for the increased loss can be cited:
Litigation costs had increased significantly. Prior to the receivership in the 1987 fiscal year, Ecorse paid $43,000 in legal fees involving charges against the Mayor and other legal settlements of over $80,000. Total Receiver, attorney fees and legal settlements approached $450,000 in 1987. Similar costs for the 1986 fiscal year were approximately $123,000.
Unemployment and workers’ compensation costs of almost $300,000 and an undetermined amount associated with the payment of sick and vacation pay to terminated employees were charged to 1987 operations. The approximate amount of the sick and vacation pay is associated with the reductions in the related liabilities in the General Long-term Debt Account Group of $106,000 in 1987.
In order to retain insurance, an additional payment of $100.,000 was required as Ecorse was classified in the high risk pool by MMRMA.
A reserve of $159,000 relating to the repayment of delinquent real property taxes received from the County for 1987 and prior years was established. Approximately $100,000 was charged to 1987 operations.
Almost $50,000 of workers’ compensation costs were incurred for an unfavorable payroll audit in 1987.
The Federal Revenue Sharing distributions had been eliminated after the first quarter receipt. In 1986, this revenue was $411,961 and in 1987 it was reduced to $74,624.
The 1987 operating loss of $2.8 million was partially offset by the revenues generated from the issuance of the Emergency Loan Board notes of $1.0 million. In addition, an operating transfer of $1.6 million from the Water and Sewer Fund was ordered by the Receiver. After considering the above, the General Fund deficit at June 30, 1986 of $1,973,902 had increased to $2,217,147 by June 30, 1987. While it is difficult to currently determine which period (pre- or post-receivership) that the $2.8 million operating loss occurred, much more than half of it occurred in the pre-receivership period.