The Department of Public Works (DPW), which includes the Engineering Department, was responsible for the maintenance of: buildings and grounds, water and sewer infrastructure, and roads. In addition to DPW operations, other privatization efforts accomplished by the Receiver relate to: garbage and rubbish disposal, engineering, parks and recreation maintenance, boat ramp, and ambulance services.

The Receiver’s privatization efforts were directed at reducing overall costs and improving the delivery of services and consisted of the following tasks:

  • Privatization of DPW Operations. Effective July 1, 1988, the Receiver appointed an outside contractor, Central Installation Co., to perform the DPW services.

  • Renegotiation of Existing Garbage Contract. Ecorse had a long-standing contract for the removal of rubbish. Shortly after being appointed, the Receiver renegotiated this contract as the contract had not been competitively bid for many years.

  • Water Meters. New water meters were installed in all residences and businesses for Water and Sewer Fund operations. The installation reduced the effort required to read the meters, improved the billing process (accuracy, efficiency and timeliness), and replaced meters that had long been malfunctioning (resulting in increased revenues).

  • Boat Ramp. The boat ramp, which was operated by seasonal Ecorse employees lost approximately $25,000 annually. The right to operate the boat ramp was leased to a contractor for a net annual gain of $25,000.

  • Other Efforts. Prior to the receivership, auditors, attorneys and engineers were paid retainers in addition to fees for services. The Receiver eliminated retainers and acquired these services on an ‘as needed’ basis.

Privatization of DPW Operations

Since the inception of the receivership, the Receiver was responsible for quantifying the AFSCME arbitration award and paying the employees. The Receiver delayed in quantifying this loss until it became necessary to address the problem in connection with the privatization of the DPW operations. AFSCME represented the DPW and administrative employees. By June 1988, the Receiver had negotiated a settlement with AFSCME including provisions, which among others:

  • Agreed to the amount to be paid in connection with the arbitration award and subsequently paid it.

  • Allowed the Receiver to privatize the DPW.

  • Eliminated the linkage of AFSCME compensation increases to other bargaining union agreements.

  • Provided pay increases to the remaining AFSCME employees.

  • Limited sick and vacation pay.

  • Guaranteed that the remaining AFSCME employees would not be laid-off throughout the receivership.

In connection with the settlement, AFSCME employees received $669,650 (including related fringe benefits) of retroactive pay increases linked to other bargaining group contracts ("Me Too" clause). The "Me Too" clause was eliminated from future AFSCME contracts. The payment of the retroactive pay increases was obtained in exchange for approval from AFSCME to eliminate the DPW.

Effective June 30, 1988, the DPW ceased operations. A contract was entered into effective July 1, 1988 with a private company to provide DPW services. Shortly thereafter, the DPW facilities and related equipment were sold in an auction.

Cost Comparison – Before and After

The table below excludes costs associated with engineering, garbage disposal, and parks and recreation maintenance (discussed below). The following is a comparison of the actual salaries, fringe benefits and other costs for the three years preceding privatization and the three years after:

 

 

Before

 

After

 

 

 

 

 

General Fund – DPW

 

$2,638,904

 

$1,015,578

Local Street Fund

 

$146,571

 

$453,282

Major Street Fund

 

$70,945

 

$507,538

Water and Sewer Fund

 

$1,419,832

 

$1,653,037

Subtotal

 

$4,276,252

 

$3,629,435

 

 

 

 

 

Less:

 

 

 

 

Water and Sewer Fund costs

 

 

 

($525,000)

Local and Major Street Fund

renovation project in 1989

and 1990 – estimated

 

 

 

 

 

($761,000)

 

 

 

 

 

 

 

$4,276,252

 

$2,343,435

The after cost of services for the Water and Sewer and Local Street and Major Street Funds has been adjusted to address unique cost items.  As a result of increased cash flow in 1989 arising from earlier actions taken by the Receiver, maintenance and renovations on roads, sewers, and water transmission lines (which had previously been delayed) began. The reductions of costs in the ‘after’ column eliminates the estimated effect of these construction costs.

A calculation of the minimum average annual cost savings arising from the conversion of the DPW operations to a privatized environment is reflected below. The adjustments are used to eliminate the one-time effect of conversion costs included in 1988 operations, and reflect costs and benefits not included in the 1989 through 1991 fiscal year amounts reflected below:

DPW costs incurred for in 1986-88

 

$4,276,252

DPW costs incurred for in 1989-91

 

$2,343,535

Unadjusted reduction in costs

 

$1,932,817

Adjustments for one-time costs in 1988:

 

 

Vested vacation and sick pay

 

($150,000)

Severance payments

 

($ 21,812)

Adjustments for recurring costs and

benefits not included in above:

 

 

Longevity payments

 

$60,000

Retiree health and life insurance costs

 

($300,000)

Property taxes

 

$7,350

 

 

 

SAVINGS OVER A THREE YEAR PERIOD

 

$1,523,355

 

 

 

MINIMUM ANNUAL SAVINGS

 

$509,451

The annual costs savings of approximately $509,451 does not consider cost increases related to inflation between the 1986-88 and the 1989-91 fiscal years. Assuming a modest inflation rate of 3.0%, the annual costs saved would increase by an additional $20,000 to $35,000.

The following is a summary of the one-time conversion costs incurred and benefits received:

 

 

Costs/(Benefits)

 

 

 

Vested vacation and sick pay

 

$150,000

Severance pay

 

$21,812

Workers’ compensation

 

-

Unemployment costs

 

$( 86,000)

Sale of facility and equipment

 

$(296,452)

 

 

 

NET BENEFITS FROM CONVERSION

 

$( 38,640)

Vested vacation and sick pay represents an acceleration, rather than incremental cost. However, for purposes of this analysis, it has been treated as if it were an incremental conversion cost.

Fund Operations

During the years preceding the Receivership, Ecorse management had borrowed substantially all of the special revenue (including Local and Major Street Funds) and Water and Sewer Funds’ cash for General Fund operations. As a result, these operating funds were unable to provide the necessary repairs and maintenance on Ecorse’s roads, streets, sewers and water transmission lines.

By 1989, the Water and Sewer Fund and Local and Major Streets Funds (General Fund repaid the amounts borrowed) had sufficient cash to enable these operations to enter into major renovation programs. The renovations were conducted by the outside contractor hired to perform the DPW services and others. In order for the costs to be comparable for the analysis of the cost savings, the estimated costs expended on the Water and Sewer and Major and Local Streets Funds’ renovation program have been removed from the ‘after’ column.

Conversion Costs

The conversion of the DPW operations and similar services to private firms did not come without a price. one-time conversion costs were incurred. Incidental benefits beyond the improvement of services to the public and reductions in overall costs were also obtained. However, it is not presently possible to assess the efficiency and effectiveness of the services provided before and after the privatization of the DPW.

The following costs and benefits, which are reflected in the above table, resulted from the conversion:

Costs:

  • Vested vacation and sick pay was paid to DPW personnel.

  • A two week severance was paid to terminated DPW employees.

  • Unemployment costs increased.

  • Retiree health and life insurance costs for DPW employees eligible for retirement at the date of conversion increased, offset by reductions in active DPW employees health and life insurance costs.

Benefits:

  • Longevity costs declined after the conversion date.

  • Sale of DPW facilities and equipment, resulting in placing the facility and equipment on the tax rolls.

No affect:

  • No increase in workers’ compensation costs. In fact, the conversion to a private company ultimately would reduce these costs.

In addition, several other costs and benefits which cannot be presently quantified, include:

  • Reduction of central service costs arising from the transfer of DPW to private firm, such as: purchasing, preparation of payrolls, accounting and similar administrative costs.

  • Reduction of utility and insurance costs attributed to the DPW facilities.

  • Increased (or potentially decreased) pension costs associated with the termination of DPW personnel.

Meter Reading

The replacement of water meters throughout 1989, at a cost approximately $400,000, resulted in a reduction of the labor required to read the meters as a reading device was placed on the outside of residences. The new meters would be read by a hand-held device. The information captured from the reading process was input directly into the computer for billing purposes. Previously, the reading process captured the information on manual cards which were keypunched for input into the computer system. Frequent keypunch errors increased the labor requirements to review and correct the invoices prepared. These errors also contributed to delays in billing.

One of the Council members refused to allow the contractor hired to replace the meters into his residence. As a result, the Receiver estimated the water and sewer usage of this individual. When the individual failed to pay the invoices due to the %excessive charges’, the delinquent Water and Sewer Fund receivable was placed on the property tax rolls. Ultimately, the invoices were paid and the meter, which was broken, replaced.

Overall, the meter reading effort required one full-time position prior to the new meter installations. After installation, the meter reading effort was reduced to one week per month. In 1989, an outside contractor assumed these responsibilities.

Renegotiation of Garbage Contract

Ecorse had been using an outside contractor for the disposal of its rubbish prior to the receivership. At the time of the Receiver’B appointment, the annual cost of rubbish disposal approximated $350,000, or $29,000 per month. Regular bidding of this contract had not been performed and the contractor’s fees were suspected to be in excess of the market.

In March 1987, the Receiver notified the rubbish contractor that its contract was not binding as Ecorse had not publicly solicited bids prior to entering the agreement. Negotiations between the contractor and the Receiver ensued which resulted in concessions from the rubbish contractor. The revised agreement called for fees of $25,000 per month for the period from April 1987 through August 1987, and $20,000 thereafter through August 1989.

At the conclusion of the revised agreement, the Receiver requested quotations from four contractors. The revised monthly charge for rubbish pick-up was reduced to $13,440 beginning September 1989.

As most of the benefits of the renegotiation process did not begin until the 1988 fiscal year, the comparison of cost savings is presumed to start at this point. The analysis follows:

Pro forma costs of rubbish contract for 1988-91

(at $350,000 per year)

 

$1,400,000

Actual costs incurred for 1988-91

 

$( 831,967)

ESTIMATED COST SAVINGS FROM

RENEGOTIATED CONTRACT                                

 

 

$568,033

 

 

 

ANNUAL COST SAVINGS - ACTUAL

 

$189,611

Elimination of Inefficient Services

At the inception of the Receivership, all retainers paid for professional services were eliminated, including those paid to: attorneys, auditors, and the engineering firm. The Receiver chose to obtain professional services on an ‘as-needed’ basis.

The annual retainers paid to the engineering and attorney firms prior to the receivership were $14,400 and $15,100, respectively. The audit retainer can not be identified.

The cost of engineering services previously centralized in the accounting system was allocated to departmental cost centers when engineering services were purchased by the Receiver. As a result, an accurate assessment of engineering savings is difficult. However, reductions in the overall engineering costs may have resulted in average annual estimated costs savings of approximately $150,000.