It is easy for many individuals to conclude that a receivership would effectively eliminate the fiscal distress faced by the Cities of Detroit, Highland Park, Hamtramck, River Rouge, and Royal Oak Township. However, when the State passed the "Local Government Fiscal Responsibility Act" (P.A. 101 of 1988, and subsequently amended to Act 72 of 1990 - "Act 72"), it stripped the courts of the authority to appoint a receiver. Presently, Act 72 is the only alternative available to correct a fiscally distressed governmental unit. However, Act 72 does not work. At least one of the two governmental units which have entered Act 72, have made promises to correct the fiscal problems, and failed to do so. There is no penalty for failure.
The ability of Act 72 to be an effective tool in addressing a local governmental unit is inhibited by the following issues:
The length of time required before an emergency financial manager is appointed.
Lack of financial information.
Lack of effective loan covenants with penalties.
Inability of the emergency financial manager to obtain proper insurance.
Lack of staff in Department of Treasury, Local Audit Division to monitor fiscally distressed governmental units.
In comparing the receivership and Act 72 requirements, the receivership permits actions to be taken quickly. In addition, the Receiver's actions were taken without regard to political repercussions. Those communities that need financial and operating-direction under Act 72 often face payless paydays, litigation, labor disputes, unpaid vendors, and many more immediate issues. Many of these issues were addressed by the Receiver and his appointed team of professionals within 45 days of appointment.
The most critical problem facing fiscally distressed governmental units is the inability to make the tough decisions necessary to reduce the mounting deficits. The Ecorse Mayor and Council were unable to approve an operating budget for the 1987 fiscal year, despite over six months of effort to do so. Inside two weeks of appointment, the Receiver developed an initial course of action involving the termination of approximately 40 individuals and the elimination of services not mandated by the State. In approximately one month, these services and related staff were terminated and Ecorse began to reap the benefits of these actions.
In contrast with Act 72, an event triggers a preliminary assessment by a team of individuals who determine if there is a financial emergency. Examples of an event that would trigger the assessment would be: failure to cover payrolls for seven days, unpaid vendors and delinquent pension contributions, debt defaults and several others.
The preliminary review is required to be completed within 30 days of the event. The report is submitted to the State and a decision is made as to whether a fiscal emergency exists and whether the governmental unit can address the emergency without State intervention. If there is a fiscal problem that cannot be addressed by the local unit, an "emergency financial manager" (eq. receiver) is sought and hired.
If this process had taken place in Ecorse, it may have taken up to three months to appoint an emergency financial manager, if at all. Had this occurred, the losses in 1987 would have been increased by approximately $1.0 million before actions would have been taken by the appointed emergency financial manager. However, before a financial manager could have been appointed in Ecorse there would have been payless paydays, the Police and Fire Pension Plan (Pension Plan) would not have been funded, and the potential existed for a debt default. Additional litigation would also have been likely.
Act 72 involves a substantial amount of politics. The intervention of a superior governmental authority in the day-to-day operations of a local unit is troublesome for State officials. Efforts to avoid this conflict by not imposing Act 72 continue to this day.
Throughout the 1980s, many of the communities were known to vote consistently within the same political party of the then State administration. Little desire to challenge one's own political party was exhibited time and time again. However, even political parties differed, there is a great reluctance to implement Act 72. Another significant issue contributing to the avoidance of a confrontation involves the potential for racial bias allegations.
The State has repeatedly supported the philosophy that fiscally distressed communities resolve their own financial problems. However, many cannot as they lack the revenue base and in-house financial and managerial expertise to do so. Despite the continued decline experienced by many governmental units in the recent recession, the State continues to be unwilling to address its statutory obligations to use Act 72 as a means to control the fiscal problems of local units.
The City of Detroit recently failed to make in a pension contribution ($73 million) to the Police and Fire Pension Plan that was due on June 30, 1992. One of the events that would trigger Act 72 states:
"Sec. 4. (1). The state treasurer shall conduct a preliminary review to determine the existence of a local government financial problem when 1 or more of the following occur:
(d) The state treasurer receives written notification from the trustee, actuary, or at least 10% of the beneficiaries of a local government pension fund alleging that a local government has not timely deposited its minimum obligation payment to the local government pension fund as required by law."
The pension contribution has still not been made as of early August 1992. Likely, no one has formally notified the state treasurer in accordance with the specific guidance identified in the statutes and the fiscal distress continues.
Local governmental units are equally to blame for the failure of Act 72. In the case of Ecorse, repeated legal attempts by the Mayor and Council to terminate the receivership continued for well over 18 months. The legal costs were staggering, both in terms of legal fees, but also in the time of the receivership directed at the litigation, rather than at resolution of Ecorse's problems.
Numerous requests by Ecorse's Mayor and Council to terminate the receivership were presented to the Court despite not having resolved the problems that contributed the receivership. As there is a desire by the State to remove itself from local governmental operations, simlar requests under Act 72 would provide the State a convenient excuse to eliminate Act 72. If the local government officials acted in a manner similar to Ecorse's officials in their request to have Act 72 terminated, it may be months or years before the damage can be observed and then, addressed properly.
In an article in Crains Detroit Business for the week of July 20-26 1992, Detroit's Mayor was cited as having sent a letter to Gov. John Engler (who was one of the authors of Act 72 when he was in the Senate). Detroit's Mayor "offered personal assurance that I will do all in my power to keep the city of Detroit budget in balance throughout the 1992-3 fiscal year, and I will take those difficult actions necessary to produce the same results during my future years as mayor." As the City of Detroit has had an accumulated deficit for the past several years and is continuing to exhibit fiscal distress, the State should be asking the Mayor why earlier efforts were not taken to resolve the problem, rather than waiting until the situation became critical.
Often, fiscally distressed communities have not recognized the importance of timely, accurate financial information in assisting management's ability to make informed decisions, including ensuring compliance with adopted budgets. Ecorse was no exception. The 1986 audited financial statements required over six months to produce. Substantial errors were detected in these financial statements in connection with the 1987 audit effort. The Receiver required the 1987 financial statements to be produced within 60 days of year end. The 1987 financial statements were completed on August 13, 1987, just 44 days after year end.
In each of the years leading up to the receivership, Ecorse's Mayor and Council adopted a balanced budget. However, throughout the early to mid-1980s, actual operations were not in balance as actual expenditures consistently exceeded revenues. Yet, there was the mistaken belief by the Mayor and Council that the adoption of a balanced budget, without correcting actual operations, complied with State statutes. The ultimate failure to finally adopt a budget in 1987 was one of the primary factors leading to the receivership.
Financial information is critical in attempting to initially assess the financial condition of a governmental unit. The lack of financial information inhibits the receivership and would also inhibit the State's ability to truly identify and assess a fiscal emergency under Act 72.
Shortly into the receivership, the State provided Ecorse an Emergency Loan Board (ELB) note of $1 million to Ecorse. The note proceeds of which were used to satisfy one of many creditors. Similar borrowings are possible by an emergency financial manager or even governmental units not formally under Act 72. Usually, there are debt covenants associated with this debt. However, officials and management of a fiscally distressed governmental unit are not concerned about covenants on debt not due for many years.
Ecorse's Receiver has recently suggested that provisions be included within the ELB notes that require the use of an emergency financial manager so long as the debt is outstanding. In addition, State distributions can be withheld for the payment of delinquent ELB debt. However, the State is reluctant to do so. The mandatory requirement of an emergency financial manager and statutes requiring that State distributions be withheld would ensure that the ELB debt is repaid.
Some have indicated that it is foolish to repay the ELB debt early, if at all. However, Ecorse was successful in repaying $100,000 of the ELB note principal in each of the 1991 and 1992 fiscal years. These payments were earlier than the required debt maturity schedule. In July 1992, the Ecorse Mayor and Council paid an additional $50,000 in principal, also in advance of the debt's due date.
A critical administrative matter existing at the inception of the receivership was the need in the Receiver to obtain insurance to avoid potential personal losses. The Receiver was able to obtain insurance during the receivership and beyond from Michigan Municipal Risk Management Authority (MMRMA). MMRMA was reluctant to terminate Ecorse's insurance as it is an insurance pool for governmental entities.
Before the receivership, Ecorse officials and management ignored MMRMA's request to reduce insurance risks. MMRMA, however, could not continue without a substantial reduction in risk. Ultimately, MMRMA felt that it was better to insure the Receiver than to continue on with Ecorse.
Similar insurance avenues are not present under Act 72. The emergency financial manager is required to obtain commercial insurance. However, this policy does not address many of the potential insurable conditions that may be precipated by the difficult decisions that the emergency financial manager will have to make.
Discussions with representatives of the State Attorney General's Office have provided the secondary line of defense for the emergency- financial manager functioning under Act 72, namely that the emergency financial manager's "conduct in office" will protect him from losing a lawsuit. Essentially, if none of the politically difficult decisions are made by an emergency financial manager, no one can win a lawsuit. However, if the emergency financial manager chooses to be effective and reduces staff and / or services and / or increases revenues, then the he may be sued. No one wins in a lawsuit; legal fees are costly and the potential for personal loss may result in individuals avoiding the position of emergency financial manager. Adequate insurance avenues must be addressed for emergency financial managers.
In Ecorse's case, the Receiver was constantly fighting with the Mayor and Council over the authority of the receivership the actions taken by the Receiver and other matters. Had the Receiver's assets been personally exposed, as is the case in many instances under Act 72, many of the tough decisions that ultimately lead Ecorse out of the fiscal distress would not have been made.
Staff Reductions - Department of Treasury
The Local Audit Division within the State Department of Treasury is responsible for the review of all governmental unit's audited financial statements, reviewing and approving deficit elimination plans, providing technical assistance to fiscally distressed governmental units, and other tasks. Over the past several years, the Division's staff has been reduced to approximately one-third of the personnel present when Act 72 was initially passed in 1988. Presently, the ability to provide any significant levels of technical assistance to fiscally distressed governmental units is difficult, if not impossible.