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Throughout the last several decades prior to the Receivership, which began December 3, 1986, the City experienced declining levels of commercial activity and resident population which adversely affected property tax revenues (the General Fund's principal source of revenue). Expenditures for City services, which are principally comprised of payroll and related fringe benefit costs, increased steadily over the same period. Overall, expenditures were increasing faster than revenues, producing a structural deficit of substantial and growing proportion.
During the early to mid 1980s, the City experienced severe fiscal distress. In 1984, the City failed to pay its Police and Fire Pension Plan contribution, utility bills and other vendors. Ultimately, the City was forced to fund these costs through the issuance of judgment bonds ($4.0 million). The Wayne County Circuit Courtordered the Cityto impose a judgment levy against its real and personal property to fund the judgment bonds' debt service.
Shortly after the issuance of the 1984 judgment bonds, the City failed to make its then current pension contributions and pay its utility bills and other vendors. The City'saudited financial statements for fiscal year 1986 (ending June 30, 1986) show a General Fund deficit of $4.6 million, over 61 % of that year's General Fund revenues of $7.5 million. In addition, the General Fund's actual 1986 expenditures exceeded its revenues by $2.6 million.
By the fall of 1986, the Cityhad not adopted a budget for the 1987 fiscal year. In addition, the cash flow deficiency was so severe as to jeopardize the payment of its future payrolls, substantial litigation was outstanding, vendors were not being paid, and interim financial information was not in existence. The poor condition of the accounting records could not provide City management with the necessary financial information to make informed decisions.
The City is required by its Home Rule Charter and State statutes, specifically Public Act 2 of 1968 and Public Act 275 of 1980 (as amended), to operate under a plan to eliminate its General Fund deficit. In connection with this requirement, the Wayne County Circuit Court appointed a Receiver to develop and implement a fund-balance deficit reduction program and perform such other necessary efforts to improve the City's overall financial condition.
During the first three months of the Receivership, the Receiver obtained various short and long-term loans enabling the City to meet its operating requirements through the end of the 1987 fiscal year. The Receiver immediately prepared a deficit reduction plan and implemented a variety of emergency measures including a reduction in the number of City employees, elimination of several discretionary programs (a library and a senior citizen's center, for example), and the hiring of a professional controller. He also began challenging all contractual relationships in a deliberate effort to justify and, wherever possible, reduce their costs to the city.
Despite the actions taken by the Receiver during those first six months of the 1987 fiscal year, the excess of General Fund operating expenditures over revenues continued to increase from 1986 levels. The 1987 excess of operating expenditures over revenues (loss) were $2.9 million, as compared to $2.6 million in the previous year. Although the Receiver's initial expenditure reductions mitigated the General Fund's 1987 loss, it only slowed the increase in the loss. Further significant initiatives were required.
In total, Mr. Schimmel accomplished the following during his Receivership, which helped to eliminate the General Fund deficit, improved City operations, and assisted in alleviating cash flow short-falls:
Obtained a long-term, low interest, emergency loan in the amount of $1.0 million in 1987 from the State of Michigan. The City has repaid $200,000 of this debtthrough December 31, 1991, well in advance of its due date. The Receiver paid $100,000 in 1991 and the City paid another $100,000 early in the 1992 fiscal year.
Obtained property tax and State revenue sharing anticipation notes to help fund the City's operations. By the end of the Receivership, no anticipation notes were either outstanding or required.
Sold idle property and equipment, including the DPW facilities and a city ice arena.
Settled or resolved all significant litigation which had been outstanding at the inception of the Receivership.
Renegotiated various service contracts.
Revised and settled labor agreements relating to the Police Department, Fire Department and American Federation of State, County and Municipal Employees, generally resulting in a reduction of fringe benefits (including limiting sick and vacation pay rates) and staffing levels. The costly contractual provision requiring the linkage of compensation and fringe benefit rates among all of the City's bargaining group contracts was eliminated.
Obtained an annual assessment of 6.0 mills in additional property taxes (judgment levy generating $1.1 million annually) for the payment of delinquent Police and Fire Pension Plan contributions. The judgment levy is effective until such time as the unfunded pension benefit obligation ($10.4 million at December 31, 1989 representing the latest actuarial information available) is eliminated.
Improved the accuracy and timeliness of interim financial information, as well as the system of internal controls.
Installed water meters throughout the City, resulting in improved water and sewer billing practices and increased revenues.
Made substantial infrastructure (roads, sewers, streets) repairs and improvements.
Negotiated a forgiveness of debt of $467,000 relating to water charges from the Detroit Water Board.
The Receivership existed from December 3,1986 until August 31, 1990, at which time the Wayne County Circuit Court abolished it, based upon the surplus reflected in the City's June 30, 1990 audited financial statements. While it is difficult to assess the actual General Fund deficit at the time that the Receiver was appointed (given the condition of the accounting records), the 1986 audited financial statements would suggest that the deficit could have approached $6.0 million as of the time of appointment.
After approximately three and one-half years under the Receivership, the City's General Fund reflected an actual surplus of $95,700 at June 30, 1990. City Council and management have since increased the General Fund's surplus to $148,500 at June 30,1991, based upon the operating budget prepared by the Receiver.
This reversal of a calamitous financial situation stands as a remarkable tribute to both the leadership of Mr. Schimmel and the effectiveness of prudent cost-cutting and privatization efforts.
SUMMARY OF PRIVATIZATION EFFORTS
The Receiver's privatization efforts were directed at reducing overall costs and improving the delivery of services to City residents.
Privatization of DPW Operations. Effective July 1, 1988, the Receiver appointed Central Installation Co. to perform the DPW services previously performed by City personnel.
All Other Privatization Efforts. The City had a longstanding 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.
The auditors, attorneys and engineers used by the City had been paid retainers in addition to fees for service. The Receiver eliminated retainers and acquired these services on an "as needed" basis throughout the remainder of the Receivership.
New water meters were installed in all City residences and businesses in connection with the City's Water and Sewer Fund operations. The installation allowed the City to reduce the effort required to read the City's meters, improved the billing process (both as to accuracy and timeliness), and replaced meters that had long been malfunctioning (resulting in increased revenues).
