Responding to Municipal Fiscal Crisis: Bottom Line Lessons from Ecorse, Michigan

Introduction

Michigan's largest city, Detroit, is in a serious fiscal predicament. It faces a budget deficit this year in excess of $100 million and a shortfall in 1993 that could approach $300 million. Financial collapse is no longer remote; indeed, it is highly likely if Detroit does not fundamentally alter its policy direction. The city's crisis, it is important to understand, is for the most part not the consequence of outside intervention. It is a self-inflicted crisis, the consequence of disastrous public policy.

The philosophy which has framed the city's direction for at least three decades is the philosophy that bigger government means a better life for the city's residents. Public sector spending has raced well ahead of either personal income or inflation. Subsidies from state and federal governments have poured into Detroit's coffers, making the Motor City hostage to the whims of distant politicians.

City services are rife with overstaffing, inefficiency and political influence. City government has with almost monotonous routine used its eminent domain authority to oust private people from their property for the benefit of other private interests. Faced with one of the most onerous tax and regulatory burdens in the nation, fourteen percent of Detroit's population between 1980 and 1990 fled the city and took their businesses and earning power with them.

To solve its problems, Detroit does not have to consult textbooks or indulge in ivory tower theories. It must learn from the successes and failures of other communities, and it only has to look a few miles south to learn some valuable lessons about saving a city.

Ecorse, a small city of 12,100 people among the seventeen communities in the "Downriver Detroit" area, has been through the economic ringer in recent years. Paralleling Detroit's decline, it was a city on a spending spree throughout the 1970s and 1980s. Tax burdens soared as corruption and inefficiency reigned in public sector services. That all came to a head in 1986, when Ecorse – facing a massive budget deficit – became the first Michigan community to be placed in receivership. A remarkable man by the name of Louis Schimmel became the court-appointed receiver. His mission: turn the city around and get its fiscal house in order.

As this report by Mackinac Center Privatization Policy Analyst Robert J. Daddow shows, Schimmel met the challenge through an aggressive policy of privatization of city services. Though the principal focus of this report is on the Department of Public Works, Schimmel's approach encompassed every aspect of city services. He cut waste and abuse from budgets, fired political appointees, renegotiated labor and other contracts, and exerted the kind of forceful leadership in selling assets and contracting services that eventually eliminated a gaping $6 million deficit.

Daddow conservatively estimates that the privatization of Ecorse's Department of Public Works has saved the city more than $400,000 per year. Few people have questioned the level of quality of the privatized services. Indeed, both Schimmel and the City Controller believe that the quality provided by the private sector is superior to what was once delivered by an insulated, indifferent and politicized city bureaucracy.

The numbers Daddow provides show conclusively that privatization can be made to work It ought to be the centerpiece of any city's effort to streamline its operations, save taxpayers money, and assure quality service. For that reason, Detroit must take a cue from this small, nearby community and put privatization to work for it too.

Joseph Overton
Vice President
The Mackinac Center for Public Policy

Scope of Report

The purpose of this report is to identify the cost savings relating to the privatization efforts of the City of Ecorse, Michigan, with special focus on that city's Department of Public Works (DPW). The period of study is from 1986 to 1991 – encompassing all of the time the city was in receivership as well as a full year beyond.

While the Receiver, Louis H. Schimmel, had considered the DPW to be an area of substantial potential cost savings, no formal analysis of the actual costs to be saved was developed prior to privatizing this service. No analysis was undertaken at the time because the overall fiscal situation of the City was extremely serious and required swift and decisive action.

The DPW was responsible for maintenance of buildings and grounds, water and sewer infrastructure, and roads. In addition to the City's DPW operations, this report briefly addresses the privatization efforts of services similar to the DPW operations, including rubbish disposal, engineering, and parks and recreation maintenance.

This report is broken into the following two sections:

Discussion of the fiscal background of the City, the City's privatization and related efforts, and observations arising from the compilation of financial information of the DPW operations for the fiscal years 1986 through 1991. A summary of the costs incurred and saved is contained at the conclusion of this section of the report.
An important Appendix, which is a schedule of expenditures of the DPW for each of the fiscal years ended June 30,1986 through 1991, including explanatory footnotes.

The financial information obtained for this analysis was compiled from the City's audited financial statements, related City account analysis and records, discussions with the Receiver and City personnel, and other sources. The historical financial information contained on the Schedule of Department of Public Works Costs (Appendix) for the years ended June 30,1986 through 1991 should be read in connection with this section of the report.

Fiscal Background of City of Ecorse

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).

Privatization of DPW Operations

In the spring of 1988, the American Federation of State, County and Municipal Employees (AFSCME) and the City were in arbitration over the bargaining group's contract. By June 1988, the Receiver had negotiated a settlement which included, among others, provisions which:

Allowed the Receiver to privatize the DPW.
Eliminated the linkage ("me too" clause) of AFSCME compensation increases to other bargaining union agreements.
Provided pay increases to remaining AFSCME clerical employees.
Limited sick and vacation pay.
Enhanced retirement benefits.

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 then eliminated from future AFSCME contracts. The payment of the retroactive pay increases was obtained in exchange for AFSCME's approval to eliminate the DPW.

The City's employees ceased operations of the DPW services effective June 30, 1988. A contract was entered into effective July 1, 1988 with a private company – Central Installation Co. – to provide the DPW services. Shortly thereafter, the DPW facilities and related equipment were sold at auction

Cost Comparison — Before and After

The following is a comparison of the salaries, fringe benefits and other costs for the three years preceding privatization and the three years after (without adjustment for the effects of inflation):

	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
	$4,276,252	$3,629,435

The above table, which was developed based upon the accompanying Schedule of Department of Public Works Costs (see Appendix,), excludes costs associatedwith engineering, garbage disposal, and parks and recreation maintenance which are discussed below. The table is not meant to indicate the cost savings generated from the DPW privatization, which is discussed subsequently.

NOTE: The following discussions of operating and fiscal concerns applicable to the General, Local Streets, Major Streets, and Water and Sewer Funds should be read in connection with the Appendix.

General Fund. During the years preceding the Receivership, City management had borrowed substantially all cash of the special revenue (including Local and Major Street Funds) and the Water and Sewer Funds for General Fund operations. As reflected in the City's June 30, 1986 audited financial statements, the cash and investment balances of the Local Street, Major Street, and Water and Sewer Funds was $110,356. These three Funds had advanced the General Fund $2.6 million through June 30,1986. As of June 30,1986, the General Fund owed $3.8 million to all of its funds.

The General Fund DPW costs for the six years ended June 30,1991 contain no significant or unusual construction projects. All of the activities of the General Fund for the six years is considered to be routine maintenance.

Local and Major Street Funds. Substantially all of the equity of the Local and Major Street Funds on June 30, 1986 of $311,700 was represented by a receivable from the City's General Fund. The cash received by these Funds is restricted by State statutes for the maintenance of roads and similar projects and is not intended to fund the operations of the General Fund. As a result of the interfund borrowing, the Local and Major Street Funds were unable to provide services beyond normal repair and maintenance.

The General Fund's fiscal distress prevented the repayment of this interfund borrowing until mid-1989. As such, expenditures in the fiscal years 1986 through 1988 reflect only minimal repair and maintenance. Preventative repairs and maintenance prior to 1989 were almost nonexistent.

By mid-1989, the interfund borrowings had been substantially repaid and there were sufficient cash reserves to begin a significant street renovation program. The contractor costs for 1989 and 1990 reflect this major renovation program. The renovation was completed in the 1990 fiscal year.

It is presently not possible to separate the costs of normal road maintenance from these construction costs. However, the 1986 through 1988 and 1991 Fiscal years are reasonably representative of normal, required maintenance. The average annual cost of road maintenance, based upon these years, would approximate $69,500. Assuming the 1989 and 1990 fiscal years had similar cost levels for normal, required maintenance, the estimated renovation costs for the 1989 and 1990 project was $761,000.

Water and Sewer Fund. As with the Local and Major Street Funds, the Water and Sewer Fund cash had been borrowed by the General Fund, preventing the Fund from performing any significant repair and maintenance for the period 1986 through 1988. The physical condition of the water and sewer system is believed to be such that substantial repairs continue to be required. In addition, the U.S. Environmental Protection Agency (EPA) continues to increase water standards, which have contributed to cost increases into the early 1990s.

Early in the 1989 fiscal year, the Receiver initiated a project to replace all of the City's water meters. Prior to this time, most of these meters were located in residents' basements resulting in a high-cost, labor-intensive system to read the meters. Many meters were so old they were non-functional.

The replacement of the meters throughout 1989 resulted in a reduction of the time required to read the meters by placing a reading device on the outside of residents' homes. The new meters could 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 into the computer system. Overall, the meter reading effort required one full-time position prior to the installations. After the installation of the new meters, the reading effort was reduced to one week per month. In 1990, an outside contractor assumed these responsibilities.

During 1990 and 1991, the City began addressing several EPA matters and previously deferred maintenance. Neither the costs of normal and routine repairs and maintenance had the system been well maintained, nor the cost of present maintenance on the City's system can be readily determined.

The General Fund's improved cash flow by fiscal 1989, largely attributable to the DPW privatization, permitted the Receiver to resume normal repairs and maintenance, including certain major projects, in 1989 and beyond.

Conversion Costs and Benefits

The conversion of the DPW operations and similar services to private firms did not come without a price. One-time and necessary conversion costs were incurred. However, many incidental benefits were also obtained, beyond the improvement of services to the public and reductions in overall costs.

The following costs resulted from the conversion:

Vested Vacation and Sick Pay. In connection with the elimination of the DPW, the City paid former DPW employees vested sick and vacation pay in the approximate amount of $150,000. While the amount was not paid until July, 1988, it was included in 1988 operations and reflected as DPW salaries and fringe benefits in the accompanying Schedule of Department of Public Works Costs.

This payment resulted in the acceleration of amounts that were already due to DPW employees and should not be considered an incremental cost of the decision to privatize the DPW. However, cash was required to fund this obligation in 1988, whereas such costs would have originally not required payment until the DPW employee retired or died. No attempts have been made to quantify the effect on the costs of conversion related to the acceleration of cash payments (time value of money).

Severance Pay. In accordance with the agreement to eliminate the DPW, two weeks' severance was paid to terminated employees amounting to $21,812 The severance costs were included in the 1988 fiscal year operations and reflected as salaries and fringe benefits in the accompanying Schedule of Department of Public Works Costs.

Workers' Compensation. The following is the detail of workers' compensation costs, which are not included in the accompanying Schedule of Department of Public Works Costs, to the extent that the information is available:

1986	Not available
1987	Not available
1988	$101,497
1989	66,263
1990	101,798
1991	132,224

Discussions with City personnel and the above information indicate that there has been no increase in workers' compensation claims as a result of the employee terminations. Over the long-term, however, the aggregate workers' compensation costs is expected to decline as a result of the elimination of the DPW. No estimate of the effects on the workers' compensation claims in years beyond 1988, if any, was performed for this Report.

Unemployment Costs. The following are the unemployment compensation costs (excluded from the accompanying Schedule of Department of Public Works Costs) paid prior to and after the conversion date of June 30, 1988:

Quarter Ended	Amount
March 31, 1988	$5,110
June 30, 1988	4,501
September 30, 1988	33,752
December 31, 1988	39,450
March 31, 1989	12,804
Period from April 1,1989
to December 31, 1989	1,501

At the time of the conversion, terminated City employees were entitled to 26 weeks of unemployment compensation in accordance with the State regulations in effect. The costs incurred by the City for the period from July 1, 1988 through January, 1989 resulted in a cost of $86,000. No attempts have been made to identify any potential non-DPW costs for this period, although it is dear that some level of costs were incurred in the two quarters preceding the conversion. In all likelihood, substantially all of these costs were directly related to the DPW employee terminations.

Retiree Health and Life Insurance. As with most municipalities and commercial entities, the City funds health and life insurance benefits of its retirees on a "pay-as-you-go" basis. No funds had been set aside for the payment of these benefits.

Health insurance was acquired on the basis of paid premiums through an insurance company. The City was self-insured for life insurance provided in the event of death. Active employees' and retirees' beneficiaries received $15,000 and $5,000, respectively, in the event of death. Most of the costs reflected below, which are not included in the Schedule of Department of Public Works Costs, represent retiree health costs (rather than life insurance payments):

1986	$334,500
1987	315,000
1988	318,700
1989	447,900
1990	564,300
1991	583,600

Several DPW workers retired at the time of the conversion. As a result, the City began to incur costs in providing health insurance to these retirees. In the three years prior to the conversion, the City paid an average of $322,000 per year for retiree benefits. However, in the 1989, 1990 and 1991 fiscal years, the costs increased significantly.

The increases in the three years after the conversion, however, cannot be attributed solely to the conversion. The cost of health care services for all employers have increased significantly in the past three years. The City's accounting records do not readily permit the analysis of the effect of the retirement of DPW workers on the increased health care costs, if any.

Finally, the retirement of DPW personnel at the time of the conversion increased the cost of retiree benefits, such health insurance benefits were previously being incurred from an active employee status. Thus, the overall costs of providing the health insurance benefits for these individuals was merely transferred from active to the retiree category and remained unchanged as a result of the conversion. Because of these retirements, the City has reduced its exposure for death benefits from $15,000 to $5,000 per incident. As noted previously, however, the costs associated with this benefit were not significant.

To determine the savings for health insurance premiums, the overall reduction in the active DPW employee costs must be offset against the increase in the retiree health insurance. Actual cost savings would result for premiums paid to terminated DPW personnel not eligible to receive retirement benefits and retired. DPW personnel upon death.

Consequently, the ability to reconstruct the health and life insurance cost savings is difficult. However, for purposes of the cost analysis, this report has assumed 80 percent of the increase in retiree health and life insurance costs between the 1988 and 1989 fiscal years of $129,000 (or $100,000) was incurred beginning in 1989 related to terminated DPW personnel who retired.

The following benefits resulted from the conversion:

Longevity Costs. Employees were entitled to longevity payments based upon length of service with the City. The annual longevity payments averaged $52,700 for the three years just prior to the conversion and $26,000 for the three years thereafter. A substantial portion of this decline is attributable to the reduction in the DPW staff.

Sale of DPW Facilities and Equipment. Shortly after the conversion, the City sold the DP'W facilities and equipment. Certain of the equipment was being purchased through leasing transactions. Prior to providing clear title to the equipment, the City was required to pay the remaining principal amounts then due under the equipment lease. The following is the net benefit derived from the sale of the facilities and equipment:

Proceeds derived from the sale of the DPW facilities and equipment, net of auction and related fees

$384,400

Less: amounts relating to the final payoff of the equipment capital lease

(75,900)

NET PROCEEDS

$308,500

Once the facilities were sold, they were placed on the City's tax rolls. The City's tax rolls reflect a State Equalized Value for the facilities of approximately $93,000. Accordingly, the City is deriving annual property tax revenues of approximately $2,450.

Other Costs and Benefits. It is not presently possible to determine with precision all the efficiencies gained from the conversion of the DPW services themselves. It is worthy of note that the private contractor, unlike the city in pre-privatization days, is not encumbered by any of the old AFSCME work rules and staffing requirements which adversely affected the DPW operation. Furthermore, the contractor knows that he must keep his costs under control and perform functions well or the contract might go to another bidder when it comes up for renewal. The market-based power of competition is now at work, replacing the inherent inefficiencies of an unresponsive, often unaccountable, public sector bureaucracy.

The evidence suggests that a variety of administrative costs have, in effect, been reduced aspart of the delivery of services once provided by the city's DPW. Those costs are associated with purchasing, preparation of payrolls, and accounting. There has also been some reduction in costs for utilities and insurance.

All other Privatization Efforts

The City had been using an outside contractor for the disposal of its rubbish At the time of the appointment of the Receiver, 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 with the City was not binding because the City did not publicly solicit 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, 1989, 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 $13,440 beginning September 1, 1989.

In 1986 and prior, the City operated a boat ramp using its employees at a net estimated annual cost to the City of $25,000. The Receiver terminated the personnel assigned to the boat ramp and leased the boat ramp to a private company, for net revenues of approximately $25,000. The net overall gain of privatizing the boat ramp approximated $50,000 annually.

At the inception of the Receivership, all retainers paid for professional services were eliminated, including those paid to attorneys, auditors, and the City's engineering firm. The Receiver chose to obtain professional services on an "as-needed" basis. The approximate monthly retainer paid to the engineering firm prior to the Receivership was $1,200. The cost of engineering services previously centralized in the City's accounting system was allocated to various cost centers when engineering services were purchased.

At the inception of the Receivership, the City's insurance carrier had threatened to terminate its coverage unless the City took specific actions to reduce risks. One of the actions requested was to replace or remove the City's park equipment. As the City was unable to acquire new equipment, the Receiver ordered it removed.

Concurrent with the equipment removal, the Parks and Recreation Department and much of the related maintenance were eliminated.

Summary

The final analysis of costs incurred and costs saved in the privatization efforts during the Ecorse Receivership are summarized in this section of the Report. The summary is broken down into two sections: privatization of the DPW operations, and all other privatization efforts directed at similar services.

Privatization of DPW Operations

This section reflects a calculation of the average annual cost savings arising from the conversion of the DPW operations to a privatized environment. 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 the1989 through1991 fiscal year amounts reflected below.

DPW costs incurred for in 1986-88	$2,856,420
DPW costs incurred for in 1989-91	1,215,398
Unadjusted reductions in costs	1,641,022
Adjustments for one-time costs in above:
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	$1,236,560
MINIMUM ANNUAL SAVINGS	$412,187

The annual cost savings of approximately $412,000 does not consider inflation in the costs 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$15,000 to $30,000.

In addition, the minimum annual savings does not include amounts attributable to the Water and Sewer Fund operations. Presently, it is not possible to segregate the costs associated with a significant increase in service levels requested of the contractor in1989 through1991 from normal repairs and maintenance. As such, the Water and Sewer DPW Fund expenditures (and potential savings) have been excluded from the above table. The likely savings in the DPW operations function may be significant.

Finally, the cost savings associated with the items below, which could not be quantified, are excluded from the above table:

Central service costs
Facility insurance and utilities
Workers' compensation claims
Retiree health and life insurance benefits that would have been paid in future years for terminated DPW employees

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	(308,500)
NET BENEFITS FROM CONVERSION	$(50,688)

*Vested vacation and sick pay was really only accelerated, rather than incremental costs.

All Other Privatization Efforts

The Receiver renegotiated the rubbish disposal contract and then in 1989 put it out for competitive bids. The average annual cost of providing this service prior to the Receiver's appointment was $350,000, or approximately $29,000 per month. The best way to determine the cost savings to the City from these efforts is to compare the average costs the City would have continued to incur under this contract had no negotiations taken place (no effect has been given to inflation).

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

Pro forma costs of a 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	$189,611

Reductions in the engineering and parks and recreation areas resulted in the average annual estimated costs savings of approximately $150,000 and 125,000, respectively. As discussed previously, the annual net gain to the City in privatizing the boat ramp approximated $50,000.

Conclusion

It is certainly true that the extensive and successful privatization experience in Ecorse, Michigan was the result of an extraordinary situation, namely, the bankruptcy of the city. Mr. Schimmel was given broad authority by the Court to implement what, in light of past practices in Ecorse, amounted to radical, emergency measures.

Some might argue that this circumstance diminishes the lessons to be learned, or at least limits the applicability of privatization (and other cost-reduction initiatives) to other municipalities. Those who make that argument, however, are missing the point.

Actually, the Ecorse experience underscores and strengthens the case for privatization and public sector cost-reduction.

A city or other governmental unit in financial trouble can employ these initiatives as the means to recover, while other governments headed toward trouble can avoid a calamity by putting them in place now. The fact that it took bankruptcy for privatization and cost reduction to occur in Ecorse is a testimony to poor fiscal stewardship; these things ought to be serious front-burner considerations for all governments at all times.

Furthermore, the Ecorse experience teaches that there is both a right way and a wrong way to privatize. Doing it right means carefully written contracts; aggressive efforts by local government to encourage many contractors to bid; open, competitive bidding; subjecting contracts to periodic renewal; and careful monitoring of contractor performance. When these ingredients are excluded, what passes for "privatization" is really nothing more than cozy deals between sloppy private providers with political connections and self-interested public officials and bureaucrats with little regard for their responsibility to the citizens.

From Detroit to Ironwood, Michigan municipalities must learn from both the mistakes of Ecorse and its inspiring renewal.

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Appendix

View PDF of Appendix.

Proceeds derived from the sale of the DPW facilities and equipment, net of auction and related fees	$384,400

Less: amounts relating to the final payoff of the equipment capital lease	(75,900)

NET PROCEEDS	$308,500