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Ecorse, a Michigan community south of Detroit, gained a national reputation in the late 1980s as a town that took privatization seriously. Over a four-year period, Louis Schimmel, court-appointed receiver, privatized most city services, cut the city's work force more than 60 percent, and eliminated a $6 million budget deficit. Daddow's review of the city's efforts to correct its fiscal problems through spending discipline and privatization is a must-read for every city official who wants to learn lessons from a city that's been to the brink and back. 99 pages.
Over the last several decades, the City of Ecorse, Michigan (Ecorse) has experienced radical financial, operating and structural changes. Certain of these changes were not controllable by Ecorse. Operating reductions resulting in the loss of jobs by a major employer and the resultant decline in assessed property values, reductions in State and federal grants, reductions in the overall revenue base, declines in the quality of services provided to its residents, and an ever increasing expenditure requirements were just a few of these changes. By the mid-1980s, a once vibrant Ecorse was teetering on the brink of bankruptcy.
When Wayne County Circuit Court Judge Richard D. Dunn appointed a receiver on December 3, 1986, he set in motion a series of events that would change the history of Ecorse, and potentially the operations of many other fiscally distressed communities. Tired of the City's inability to address its failing operations, Judge Dunn sought out a municipal bond expert, Mr. Louis Schimmel, as Receiver, to correct the fiscal distress of Ecorse and to ensure that the residents received the minimum level of quality services mandated by State statutes.
Black's Law Dictionary defines a receiver as "a trustee or ministerial officer representing court, and all parties in interest in litigation, and property or funds intrusted to him."
The steps taken by Mr. Schimmel as Receiver (Receiver) to resolve Ecorse's fiscal problems may assist other governmental entities in their efforts to improve operations into the 21st century. Declining revenues, increasing expenditures, anti-tax sentiments from residents, increasing needs of residents, and a general decline in the financial health of cities throughout the nation require that the story of Ecorse be told. Ecorse experienced all of these fiscal problems and more.
Locally, the Cities of Detroit, River Rouge, Hamtramck, and Highland Park and Royal Oak Township (and others) are currently experiencing various levels of fiscal distress. Several have recently missed payrolls. Many of Ecorse's fiscal problems are likely being experienced by these governmental units. The manner in which the Receiver resolved these concerns would be of interest to their management.
Many have argued that the Receiver's accomplishments resulted from the backing of the Court system. While in several instances this is true, more often than not the accomplishments arose from the Receiver's stead-fast desire to restructure Ecorse's services because it was the right thing to do. Several Ecorse officials, although publicly outraged at the Receiver's appointment, were privately relieved that the tough decisions required to correct the fiscal ills were finally being addressed.
Failure to restructure Ecorse's services at the time of the Receiver's appointment would have resulted in continued financial condition declines and ultimately the potential restriction of critical services affecting the safety or health of Ecorse's residents. Bond defaults were possible and likely, if the operating trends continued. Delays in Ecorse's preventative repairs and maintenance of its infrastructure (roads, sewers, water transmission lines, etc.) saved Ecorse current cash outlays only to create more severe infrastructure problems subsequently.
The "political will" to change financial and operating patterns was critical to the successful restructuring of Ecorse services. The effort to thwart change was institutionalized at Ecorse, as is the case in many governmental units. The City Council, bargaining groups and others fiercely objected to the loss of autonomy at the outset of the receivership. Various lawsuits and petitions were filed throughout the receivership to either block the Receiver's actions or to challenge the receivership itself. Physical threats by more than one of the receivership opponents occurred. Yet, the Receiver persisted.
Throughout the objections by residents and Ecorse employees, the Receiver continued to implement his program to restructure services, improve financial management and prevent a recurrence of fiscal distress after the receivership's termination. No formal deficit elimination plan was developed by the Receiver. The Report on the Analysis of the Receivership of the City of Ecorse, Michigan (Report) identifies the depth of fiscal distress, the 'informal' deficit elimination plan used by the Receiver, the "plan's" implementation, and the status of Ecorse today.
During the 45 months of receivership, the Receiver set about addressing the many financial and operating issues facing Ecorse. While much has been written about the receivership, this Report assembles as complete a document as can be developed at the current time. The Report is based upon interviews with the parties involved in the receivership, audited financial statements and related account analyses prepared by Ecorse management, and other sources of information.
Many may consider this Report to be informational and of use only to those governmental units facing fiscal distress. However, the financial and operating issues facing governmental managers today are similar to those discussed throughout the Report. It is the enlightened governmental manager who can look past Ecorse's fiscal distress and see similarities in their own communities. The problems facing the Receiver at the inception of the receivership were not unique to Ecorse. The approach and resolution to the problems can be used as a model for improvement in other communities, providing there is the political will to accomplish the necessary tasks.
SCOPE OF REPORT
This Report has been segregated into the following sections:
History preceding the receivership. This section briefly describes Ecorse's size, operations, organizational structure, demographics, and other information useful to an understanding Ecorse, as well as a six year financial history leading up to the receivership.
Fiscal distress at inception of receivership. The depth of fiscal problems at the time the Receiver was appointed by the Court is discussed. An understanding of the nature and extent of the issues addressed during the receivership is critical to an evaluation of its success.
Actions taken by Receiver. This section discusses issues facing the Receiver, alternative solutions explored and final resolution of the problems. To the extent possible, costs and benefits associated with the Receiver's actions have been quantified. This section highlights the actions taken in the first six months of the receivership (through June 30, 1987) and the actions taken through the receivership's termination on August 31, 1990.
Post-receivership status. The actions taken by the Mayor and City Council since August 31, 1990 are discussed, as well as several of the operating issues currently facing Ecorse.
Conclusion. A summary of the Receiver's actions, the applicability to other governmental units and future concerns affecting governmental units facing problems similar to Ecorse is provided.
Comparative operating statements for the General Fund, Water and Sewer Fund, and Police and Fire Pension Plan have been included as Appendices A and B for the pre- and post-receivership periods, respectively. The operations of these funds reflect approximately 95% of Ecorse's financial transactions. Other operations, to the extent necessary, have been reflected in the body of the Report.
In addition to the above comparative analyses, comparative property tax millage rates and State Equalized Valuations for property within Ecorse are included in Appendix C for the 1983 through 1991 fiscal years.
The City of Ecorse, Michigan is located directly south of the City of Detroit and is comprised of approximately 2.98 square miles. With the exception of the rubbish and garbage contract, attorney and outside auditor, substantially all of the other services were provided by full or part-time Ecorse employees. Ecorse's 14,447 residents (based upon 1980 census; 1990 census - 12,180 residents) were provided the following services prior to the receivership:
Legislative – City Council costs, including the Mayor.
Judicial – 26th District Court involving: parking and traffic violations, minor criminal offenses, and certain civil matters.
General government – accounting, purchasing, payroll preparation, water and sewer billing, attorney, audit, treasury, clerk, street lighting, municipal facility costs, assessor, and elections.
Public safety – police and fire protection (including pension contribution to Police and Fire Pension Plan), crossing guards for students at local schools, and civil defense.
Public works – rubbish and garbage disposal; maintenance of roads, streets, signs, parks and vehicles; weed cutting; water meter reading; tree trimming; and engineering.
Health clinic – provided medical services to low-income residents.
Recreational – recreational programs, ice arena, two senior citizen center, community center, boat ramp, and library.
Debt service – payment of principal, interest and other costs related to outstanding debt.
In accordance with the Home Rule Charter (Charter), which was passed in 1942 (and amended periodically since that time), Ecorse uses a "weak mayor" / "strong council" form of government. The mayor, which is a part-time position, is elected at large once every two years and is a functioning Council member. The mayor presides over bi-weekly Council meetings. The remaining six Council members, which are also part-time positions, are elected at large every two years. The election for mayor and council positions occur concurrently. The Mayor and Council were compensated and received certain fringe benefits (workers' compensation and Social Security taxes).
While a strong council form of government without a strong mayor is often accompanied by a city manager, no such position was reflected in Ecorse's Charter. Rather, the City Controller effectively functioned as the city manager. In addition to the city manager role, the City Controller was also responsible for: accounting; grants, risk and contract management; facilities management; investment management; and other tasks as directed by the Mayor and Council. Purchasing was performed by a full-time Purchasing Director and payroll preparation was performed by the Treasurer's Office.
In addition to the Mayor and City Council, the City Clerk, Treasurer, Assessor and Judge were also elected at large every two years. Their responsibilities follow:
Clerk – maintenance of Council minutes, permanent records, collection of certain fees, and maintenance of election data.
Treasurer – with the exception of cash associated with the 26th District Court cash: collection of property taxes and other cash receipts, cash disbursements, and maintenance of property tax records.
Assessor – assessment of real and personal property, preparation of property tax invoices, and coordination with the annual Board of Review and Wayne County Equalization Department.
Court Judge – the 26th District Court responsibilities were discussed previously.
There were two other legal entities related to Ecorse:
City of Ecorse Building Authority – provided operations and debt service associated with Ecorse's municipal office center. Annual rentals of $140,000 were paid to the Authority which funded the outstanding general obligation debt service. The Authority also provided certain operations and maintenance of the municipal office center which was reimbursed by Ecorse's General Fund. A separate debt service millage of approximately 1.00 mills was levied beginning in the 1986 fiscal year.
City of Ecorse Housing Commission – The Housing Commission, which is a low-income housing project, generally operated autonomously from Ecorse. In years prior to the receivership, the payroll and fringe benefits (as Housing commission employees were considered to be part of Ecorse, they received a fringe benefit package similar to other employees) were processed through Ecorse's payroll system and were subsequently invoiced to the Housing Commission. At times, this federally-subsidized project was delinquent in payroll and fringe benefit reimbursements by as much as several years after the employees were paid. In February, 1987, Ecorse stopped processing the Housing Commission payrolls as the Receiver chose to stop financing their operations.
In addition to the municipal office center, which housed the administrative, police and fire services, Ecorse operated a library, ice arena, Department of Public Works' facility, two senior citizen centers, health clinic, and a community center. Ecorse operated the only Secretary of State office using city employees in the entire State of Michigan. The library was operated through the Wayne Oakland Library Federation which invoiced Ecorse based upon operating costs incurred. The remaining facilities were operated with Ecorse personnel. The senior citizen and community centers also drew from the residents for volunteers as deemed necessary.
Throughout the 1960s and 1970s, Ecorse functioned as an employment ‘safety valve’ of Great Lakes Steel Division. When the steel industry was in recession, Great Lakes Steel Division employees often hired by Ecorse. At times, the Ecorse employment rolls ranged from 150 to 250 employees. Substantially a11 of the Ecorse employees were included within one of the following unions at the inception of the receivership:
|
Description |
Approximate |
|
Labor contracts: |
|
|
Police and Fire Administrators |
6 |
|
Police Command Officers |
15 |
|
Police Patrolmen |
17 |
|
Firefighters |
23 |
|
Clerical and Public Service – Note A |
33 |
|
Crossing Guards |
7 |
|
|
101 |
|
Approximate number of non-represented employees |
40 |
|
|
|
|
Total |
141 |
Note A: American Federation of State, County and Municipal Employees (AFSCME).
As described subsequently, Ecorse's failure to fund the Police and Fire Pension Plan in accordance with its labor agreement fostered a hostile relationship between these union groups and Ecorse management. Because of management's often unfulfilled promises, union personnel lacked confidence in management's plans to correct the fiscal distress. This distrust often resulted in litigation and arbitration to resolve labor issues. This poor labor relationship carried over into the receivership.
The principal Ecorse funds, which comprise over 95% of the operations, follow:
General Fund – accounts for the collection of property taxes, State shared revenues, fines and forfeits (principally from the Court), and other revenues. Expenditures include: Council, Court, general government, police, fire, recreational and other services.
Major and Local Streets Funds – these two funds account for repairs and maintenance of roads and streets, including debt service on general obligation debt issued for road repairs. Revenues are principally derived from gas and weight taxes received through the State.
Water and Sewer Fund – accounts for the acquisition costs of water from the Detroit Water and Sewer Department, sewer costs from Wayne County Department of Public Works, maintenance of water and sewer transmission lines, hook-up, meter reading, and other similar services. Amounts are billed to Ecorse residents (including corporations) based on water usage.
Police and Fire Pension Plan – represents Ecorse's retirement system for police and fire personnel. The Plan operates under the direction of the Pension Board which is comprised of three members: one elected representative each from the police and fire departments and an appointee by City Council (generally City Controller).
The fiscal distress which existed at the Receiver's appointment did not arise over night. The financial problems experienced by Ecorse began many years prior. The operating history of the above Ecorse funds for approximately five years prior to the receivership, during the receivership and after the receivership is included in the Appendices A and B. The financial information was principally derived from Ecorse's audited financial statements, with certain adjustments to reflect certain transactions of interest.
Background
Total General Fund revenues declined steadily from $7,673,643 for the fiscal year ended June 30, 1980 to $6,851,223 in the 1986 fiscal year. The principal declines in individual revenue items between 1980 and 1986 arose from property taxes ($4.8 million to $4.1 million) and Comprehensive Employment Training Act (CETA; $554,000 in 1980 to zero by 1982). The revenue declines were somewhat offset by modest increases in other revenues (including State shared revenues) and millage increases in 1986.
At the same time, expenditures steadily increased from $7,633,555 in the 1980 fiscal year to $8,202,273 in the 1986 fiscal year. Although it is apparent that actions were taken to reduce General Fund expenditures in the early 1980s, in the final analysis, the reductions in expenditures were not sufficient to offset the decline in General Fund revenues.
Just prior to the receivership, the principal General Fund revenue sources were property taxes, State shared revenues and Federal Revenue Sharing, which approximated 59%, 22% and 6% of total General Fund revenues, respectively. The remaining 13% of revenues arose from a variety of sources including: fines and forfeits, licenses, permits, investment income, and other items.
Most General Fund revenues were not controllable by the City Council. The Council was assessing almost the maximum millage rate under its Charter. The State shared revenues and Federal Revenue Sharing grants were determined by factors that could not be influenced by Ecorse in the short-term. Other revenues were highly dependent on the use of services by its residents.
Property Taxes
A nine-year, detailed history of the property tax millage rates and related State Equalized Valuation (SEV), which represents 50% of the estimated true ("fair market") value of property in Ecorse, has been included as Appendix C. A summary of Ecorse's property tax millage rates and SEV leading up to the receivership follows:
|
Fiscal Year Revenues |
|
Ecorse Property |
|
SEV |
|
|
|
|
|
|
|
1983 |
|
21.75 |
|
$221.0 |
|
1984 |
|
22.75 |
|
$204.8 |
|
1985 |
|
22.75 |
|
$198.4 |
|
1986 |
|
23.40 |
|
$171.3 |
|
1987 |
|
25.93 |
|
$164.3 |
In the 1980s, property tax revenues may have comprised as much as 59% of the General Fund revenues of which the Great Lakes Division of National Steel Corporation (Great Lakes) represented approximately 60% (or more) of the total property taxes paid in Ecorse. The next five highest taxpayers represented an additional 11% of the total property taxes paid. In 1986, these six taxpayers provided approximately $2.9 million of the $6.9 million in total General Fund revenues.
The reliance on one principal taxpayer had a significant influence on Ecorse operations. Over the 15 years leading up to the receivership, Great Lakes had reduced its labor force from a high of 13,000 to 5,600 in 1985. The declines in SEV from the levels assessed in 1983 and prior to those in 1987 arose principally due to property tax assessment reductions in Great Lakes property values. Likewise, increases in SEV in later years arise from Great Lakes' plant additions, some of which involved abated property as an incentive to construct the additions.
The property tax millage rates remained relatively static throughout the early 1980s as Ecorse was perceived to be levying up to its limitation expressed in the Home Rule Charter of 20.00 mills. In connection with the issuance of the $4.0 million judgment bonds in the 1986 fiscal year (discussed subsequently), Ecorse's bond counsel recommended that Ecorse begin levying for certain general obligation bonds issued prior to the Headlee constitutional limitations.
During the late 1980s, Great Lakes increased its investment in its plant and the dependency on this one taxpayer also increased to 67% of all property taxes collected in Ecorse. General Fund expenditures associated with the Great Lakes property tax revenues was nominal and most of these revenues benefited non-corporate taxpayers. In addition to the property taxes paid to Ecorse, a similarly substantial portion of the water and sewer service charges were represented by this one resident as well.
State Shared Revenues
State shared revenues for the General Fund include amounts collected by the State and distributed to local governmental units based upon a fixed formula relating to: sales, single business, income, intangible and other taxes. These revenues are based upon the 1980 (or 1990 census for later years) multiplied by a State predetermined rate per capita.
For income and single business tax distributions, the predetermined State rate would be further influenced by the relative tax effort (principally property taxes for Ecorse). The relative tax effort would increase (or decrease) the State per capita rate when the relative tax effort exceeded (was less than) the average for the entire State.
Given that Ecorse was levying at its then maximum Charter property tax rate, the ability to influence the State shared revenues was largely out of City Council's control. The State predetermined rates were established by the State based upon their estimates of the expected collections for those revenues. Distributions to local governmental units are based upon State statutes.
The State shared revenue of the Major and Local Streets Funds is based upon gas and weight taxes collected by the State and in turn, distributed to local units based upon formulas in the State statutes. These revenues are restricted for road and street repairs and renovations.
Fluctuations between the 1980 and 1986 fiscal years for State shared revenues were not significant.
Federal Revenue Sharing / CETA
Federal Revenue Sharing, which was last received in the first quarter of the 1987 fiscal year in the amount of $74,624, approximated $419,000 annually throughout the 1980s. While some have indicated that the cause of the General Fund deficit was attributed to the loss of Federal Revenue Sharing, this is simply not true. This revenue source was received throughout the early to mid-1980s which was the same time that the General Fund deficits began. With the exception of the one quarterly payment in 1987, no Federal Revenue Sharing amounts were received during the entire receivership.
Ecorse received $554,502 in CETA (federal) grants for the 1980 fiscal year and approximately $145,000 in the 1981 fiscal year. This grant was used for general administration and served to cover General Fund expenditures. The loss of the CETA funds in the early 1980s contributed to the deficit beginning in the 1981 fiscal year.
Water and Sewer Fund Charges for Services
In the early 1980s, the Water and Sewer Fund's cash flow was so poor that it was borrowing from the General Fund to meet its operating needs. Increases in water and sewer rates were approved by the Council for the 1981, 1983 and 1984 fiscal years. The increased cash flow created by the water and sewer rate increases, permitted the repayment of the Water and Sewer Fund's interfund borrowing from the General Fund. By approximately 1984, the General Fund began borrowing from the Water and Sewer Fund to meet its operating needs.
During the 1982 fiscal year, the Detroit Water and Sewer Board (DWSD) computed its invoices for water costs based upon estimated water consumption. In 1982, the actual water consumption used by Ecorse's commercial customers declined significantly. However, these declines were not reflected in the amounts invoiced by DWSD. Further, as the sewer costs invoiced by Wayne County are based upon water consumption identified by DWSD, sewer costs did not decline in a corresponding manner as well. As of June 30, 1982, the estimated amounts of excess water and sewer costs invoiced, which were recorded by Ecorse, approximated $383,000.
General Fund Expenditures
The principal component of expenditures (or expenses) is employee compensation and related fringe benefits, utilities, water and sewer costs, and debt service (principal and interest payments). In all likelihood these costs would exceed 90% of all costs incurred.
The General Fund's deficit steadily increased throughout the early 1980s to June 30, 1985 (and beyond). Vendors were paid sporadically in the early 1980s as cash flow permitted. Beginning in 1982, one of the principal vendor not paid was the Wayne County Department of Public Works (Wayne County) for the purchase of sewer services by the Water and Sewer Fund. Instead, the cash derived from the Water and Sewer Fund revenues was used to repay previous Water and Sewer Fund borrowings from the General Fund and then, to fund the operations of the General Fund.
In addition to the suspension of the sewer payments by the 1983 fiscal year, Ecorse began delaying utility payments to Detroit Edison and withholding certain components of the Police and Fire Pension Plan contributions. As with the sewer costs, the cash withheld was used to fund General Fund operations.
During the early 1980s, Ecorse was continually negotiating and arbitrating with its various unions. Often, contract periods would lapse and retroactive compensation would be required. In June, 1985, Ecorse lost an arbitration award to the Police union which required wage increases through the 1988 fiscal year and the following retroactive payments:
|
To Be Paid |
Fiscal Year Recorded |
Amount |
||
|
July, 1985 |
1985 |
$543,189 |
||
|
July, 1986 |
1986 |
$236,582 |
||
|
July, 1987 |
1987 |
$255,558 |
||
|
TOTAL |
1,035,329 |
The above amounts represent compensation paid and does not include the effect on General Fund operations associated with fringe benefits, including: Social Security taxes, pension, and workers' compensation. The effect of these additional costs could easily exceed $100,000.
In addition to the suspension of the payment of the sewer, utility and certain components of the pension contributions, Ecorse began to use gas and weight taxes received by the Major and Local Street Funds for General Fund purposes as well. While the Major and Local Street Funds' equities were increasing, these Funds had insufficient cash to accomplish their restricted purpose. In addition, property taxes collected by Ecorse on behalf of the Ecorse School District were often not remitted on a timely basis.
The Police and Fire Departments were operated by a five member, semi-autonomous Commission. The appointment of Commission members arose from the Mayor (one member), Council (one member), Police and Fire Departments (one member each) and the fifth member by a consensus of the four appointed members. Due to Ecorse's inability to control the operations of the Police and Fire Departments, the continual budget over-runs, labor disputes, and the failure to fund the pension contributions in accordance with the labor agreement, City Council requested that a receiver be appointed in 1982 by the Wayne County Circuit Court to operate these two departments.
Judge Dunn appointed a receiver to operate the Police and Fire Departments and litigation ensued between the receiver, the commission and Ecorse management. The Police and Fire commission and this receiver were eliminated early in the 1986 fiscal year. At this point, the Police and Fire Departments' operations were returned to the Mayor and City Council.
Water and Sewer Fund
On June 27, 1984, Wayne County and Ecorse entered into a Consent Agreement whereby Ecorse would pay the then owing sewer costs of $1,525,748 in semi-annual payments, plus interest at 8.0%. The principal payments ranged from $93,342 to $132,309 and were due on November 1 and May 1 through November 1, 1990. The payments were to be paid from the revenues generated by the Water and Sewer Fund. No other new revenue source was identified for this obligation.
Pension Plans and Other Post Employment Benefits
Ecorse employees participate in one of two pension plans, as follows:
Police and Fire Pension Plan (Pension Plan) – The Pension Plan, is administered under a three member Police and Fire Pension Board (Pension Board) and covers all of Ecorse's Police and Fire personnel prior to the receivership.
Michigan Municipal Employees Retirement System (MMERS) – MMERS is a State-administered pension plan covering substantially all full-time Ecorse employees other than those employees included in the Pension Plan above.
In addition to pension benefits, Ecorse provided health insurance to its retirees on the basis of paid premiums through an insurance company. Ecorse was self-insured for life insurance for both active personnel and retirees. Active employees' and retirees' beneficiaries received $15,000 and $5,000, respectively, in the event of death.
One of the areas that highlights Ecorse's fiscal distress, both then and currently, is the financial condition of the Pension Plan. While the Pension Plan was significantly underfunded, Ecorse did not receive annual actuarial reports to monitor its financial condition and funding progress. The following is a comparative analysis of the Pension Plan derived from the only available actuarial reports (in thousands):
|
|
Dec. 31, 1986 |
Dec. 31, 1983 |
June 30, 1980 |
|||
|
Actuarial accrued liabilities |
$15,817 |
$11,100 |
$9,300 |
|||
|
Pension Plan assets used by actuary |
($5,132) |
($2,048) |
($1,313) |
|||
|
Unfunded Actuarial Accrued Liabilities |
$10,685 |
$9,052 |
$7,987 |
The 1980 actuarial report used an investment assumption of 6.0% for investment income derived from Pension Plan assets. The 1983 and 1986 actuarial reports used a 7.0% interest rate assumption which has lowered the actuarial accrued liabilities otherwise reflected.
As early as 1978, the Department of Treasury Municipal Finance Commission realized the Pension Plan's depth of fiscal distress. The Municipal Finance Commission ordered Ecorse to "fund the plan properly, adequately, and fully, in accordance with the State of Michigan constitution".
In the early 1980s, the Pension Plan was so badly underfunded that the Police and Fire bargaining group had negotiated an agreement that required the General Fund to pay retiree benefits directly (rather than to the Pension Plan) as well as an additional contribution of $350,000 to the Pension Plan. However, the General Fund's cash flow resulted in the suspension of the $350,000 payments throughout the early to mid-1980s. Several instances occurred in which retirees' benefits were delayed until such time as sufficient cash in the General Fund could be obtained to fund the retiree benefits.
As a result of the failure to adequately fund the Pension Plan, Ecorse's annual pension contribution had grown to over $1.0 million by 1986. Due to the failure to fund the $350,000 payment in addition to the direct retirees' benefits, this component of the pension contribution was increased to $408,000 as part of the $4.0 million judgment bonds issued in 1986 (discussed subsequently).
The unfunded actuarial accrued liability in the Pension Plan of $10.7 million at December 31, 1986 is similar in nature to an unsecured loan (eg. principal portion) in that the loan will grow unless interest on the debt is paid. The interest income assumption included in the actuarial report was 7%. Using this percentage, the interest component to the pension contribution alone approached $750,000 each year. Resolution of the unfunded actuarial accrued liability, the annual interest charge and pension rights accruing for that year ("normal cost") equaled or exceeded the amounts being contributed by the funding mechanism identified in the union agreement.
While the Pension Plan was substantially underfunded, MMERS had a nominal excess of assets:
|
Dec. 31, 1985 |
||
|
Actuarial accrued liabilities |
$5,099,000 |
|
|
MMERS assets used by actuary |
($5,768,000) |
|
|
EXCESS OF ASSETS OVER ACTUARIAL ACCRUED LIABILITIES |
$669,000 |
The financial condition of MMERS resulted in a continuing decline in the MMERS pension contribution throughout the early 1980s as follows:
|
1982 |
|
|
|
|
$342,100 |
|
1983 |
|
|
|
|
$115,200 |
|
1984 |
|
|
|
|
$71,900 |
By 1985, the MMERS actuarial reports suggested that no current contributions would be required. Despite the State allowing Ecorse to forego the funding for MMERS, Ecorse management continued to provide contributions of approximately $39,000 for 1985 and 1986. These contributions continued to be paid to MMERS at the same time that Ecorse was withholding pension contributions to the Pension Plan.
The cost of health insurance and life benefits for Ecorse's retirees were funded on a cash basis as incurred. By 1986, the annual amounts paid for these benefits approximated $334,500. No amounts had been set aside to fund future payments (as is the case in most governmental units). The unfunded vested obligation for these two benefits, which has not been quantified, would likely be substantial. Often, the actuarial accrued liabilities for these benefits would be between 17 and 25 times cash payments, or between $5.0 million and $8.4 million for Ecorse.
The combined pension contribution and health insurance and life benefits for retirees approximated 20% of the total General Fund revenues. These benefit costs were incurred before the residents received any current services as they applied to the cost of services provided in the past.
Financial Recovery Plan
By late winter 1985, Detroit Edison and the Police and Fire Pension Board had filed separate lawsuits seeking payments of amounts then owing. On May 1, 1985, Ecorse failed to pay its third semi-annual payment of $185,233 (including interest) due to Wayne County in accordance with the Consent Agreement. Wayne County filed a separate lawsuit of its own at this time.
In an attempt to fully understand the depth and nature of the fiscal problems facing Ecorse, Judge Dunn commissioned a consulting project in the spring of 1985 to identify the causes leading up to the fiscal distress, recommendations relating to the outstanding lawsuits, and the method to fund the recommendations. The resulting report was entitled "Financial Recovery Plan for the City of Ecorse" (Financial Recovery Plan).
Some of the comments paraphrased from the Financial Recovery Plan follow:
By March 19, 1985, the amount owed the Police and Fire Pension Plan for the 1983, 1984 and 1985 delinquent pension contributions approximated $968,000.
The deteriorating property tax base, which was largely attributed to the Great Lakes Steel Division property tax challenges, declined approximately 40% over a three year period.
Despite declining revenues, Ecorse management failed to take the necessary actions to reduce expenditures.
Concerns were expressed regarding the antiquated Home Rule Charter and the Council's inability to control operations due to various elected officials and boards / commissions, including the Police and Fire Commission.
Labor relations between Ecorse management and its bargaining groups was hostile and filled with distrust.
The Financial Recovery Plan first explored the possible results of the appointment of a receiver for the entire City (beyond the receiver appointed to operate the Police and Fire Departments). This report indicated that "the City of Ecorse is not permitted by Michigan law to seek protection in federal bankruptcy courts and therefore any attempt to seek protection of the courts would have to be made under Michigan law - permitting the appointment of a receiver".
Several outcomes of a full receivership at Ecorse were cited in the Financial Recovery Plan:
Operate Ecorse – The receiver would be given the power to operate Ecorse and hire attorneys and others to assist in running the receivership. The earlier receivership involving the Police and Fire Departments would be combined with this receivership. Legal and other costs associated with the combined receivership were estimated to "probably exceed one-half million dollars a year".
No access to borrowings – The author of the Financial Recovery Plan was Ecorse's then bond counsel who believed that the appointment of a receiver would prevent Ecorse from entering the investment community. Essentially, Ecorse would be unable to borrow funds to operate.
Affect credit rating of neighboring municipalities – The Financial Recovery Plan suggested that "the impact of such a receivership on surrounding municipalities and on the general downriver area would be devastating...".
Cancellation of labor agreements – The Financial Recovery Plan contemplated that the receiver would set aside labor agreements similar to a federal bankruptcy. In doing so, additional legal costs would be incurred as the unions would challenge this decision.
Long receivership – The Financial Recovery Plan contemplated that the receivership would require between two and three years.
The tone of the Financial Recovery Plan discussions indicated that there was little or no need for the immediate appointment of a receiver for the entire City. A second alternative was an increase in the millage by over 9.0 mills to address the operating and debt service requirements. If this alternative proved unsuccessful, then a receiver would be appointed. This second alternative was also not recommended in the Financial Recovery Plan.
The alternative actually recommended in the Financial Recovery Plan included two parts:
Consolidate the three separate lawsuits with Wayne County, Detroit Edison and the Police and Fire Pension Board and issue a general obligation judgment bond to liquidate these obligations. The related debt service would be funded by an earmarked property tax judgment levy.
Begin levying property taxes for the Building Authority and certain Water and Sewer Fund bonds issued prior to the Headlee constitutional amendment which currently require a vote of the residents before debt service millages could be levied.
The Financial Recovery Plan did not address the poor condition of the overall accounting system (including personnel), labor agreement issues, financial condition of the Police and Fire Pension Plan, and many other operating matters that could have reduced costs. The Financial Recovery Plan implied, but did not specifically state, that the issuance of the judgment bonds and levying the above debt service millages would address Ecorse's overall fiscal distress.
While the Financial Recovery Plan identified several of the immediate operating issues facing Ecorse, it failed to address the underlying structural causes contributing to the deficits and cash flow pressures. The operating recommendations provided would not have resulted in any substantive structural changes and few would have either increased overall revenues or reduced costs by any significant amount.
Judgment Bonds Issued
On June 25, 1986, Judge Dunn ordered Ecorse to issue $4.0 million in general obligation judgment bonds to liquidate the obligations owing to Wayne County, Detroit Edison, and the Police and Fire Pension Plan. In addition, Judge Dunn ordered that Ecorse include sufficient property tax levies to ensure that these bonds would be paid. Specifically, the Court Order stated:
"The City of Ecorse is hereby ordered to levy an additional ad valorem tax in the amount of 1.65 mills on the 1985 tax rolls for the purpose of paying interest coming due on said Bonds in the year 1986, and is further ordered to levy an ad valorem tax unlimited as to rate or amount (in addition to all other taxes authorized by the City Charter or State law to be levied) sufficient to allow the Trustee to promptly pay the principal of premium, if any and interest on said Judgment Bonds when due in the years 1986 through 2000."
The bonds, which were issued in October, 1985, liquidated the following obligations then outstanding:
|
Sewer costs owed to Wayne County |
$1,793,000 |
|
|
Utility costs owed to Detroit Edison |
$365,000 |
|
|
Pension contributions owed to the Police and Fire Pension Plan for the 1983 through 1986 fiscal years |
$1,559,480 |
|
|
Net Bond Proceeds |
$3,717,480 |
|
|
Bond issuance, consulting and other costs |
$282,520 |
|
|
TOTAL BONDS ISSUED |
$4,000,000 |
The bond proceeds were recorded in the following funds:
|
General Fund |
$2,648,051 |
|
Police and Fire Pension Fund |
1,069,429 |
|
NET BOND PROCEEDS |
3,717,480 |
In addition to the delinquent 1983 through 1985 pension contributions, the judgment bonds included amounts sufficient to fund a portion of the 1986 pension contribution. The bond proceeds transferred directly to the Police and Fire Pension Plan relate to those delinquent pension contributions for the 1983 through 1985 fiscal years. The 1986 pension contribution included within the bond proceeds was transferred to the General Fund and in turn, paid to the Pension Plan shortly after the issuance of the bonds.
The bond proceeds did not address the then mounting problem of the General Fund's use of gas and weight taxes which were restricted for use in the Major and Local Streets Funds.
While the portion of the proceeds applicable to the General Fund ($2.6 million) resolved a substantial portion of the General Fund deficit as of June 30, 1985 (deficit was $3.3 million), no structural changes were made in Ecorse's operations. As Ecorse had not closed its accounting records for the 1985 fiscal year at the time the judgment bonds were sold, it was not possible to have known that the judgment bonds would be insufficient to address the full amount of the deficit. As a result, the cash flow pressures began to increase even as these bonds were sold.
Despite Ecorse management's inability to address its fiscal problems, it appears that there was a substantial reliance on the Court Order which required Ecorse's Council to adopt a recommended balanced budget. Specifically, the Court Order stated:
"The City of Ecorse is ordered to approve the proposed budget (which is balanced by law) ... and not to appropriate or spend in any quarter more than authorized by said budget for said quarter and, if revenues are reduced below projections on any quarter to reduce expenditures for such quarter by a like amount; and the City is further ordered for the period while said Judgement Bonds are outstanding to continue to operate each quarter within its revenues for such quarter as budgeted."
The above language included in the Court Order is similar to the requirements specified in State statutes. Yet, Ecorse was unable to address its fiscal problems under the State statutes. Ecorse's Council passed the proposed budget in accordance with the above Court Order, but failed to comply with the Court Order reducing expenditures when necessary. The fiscal distress continued.
In addition to the Pension Plan and retiree benefits, the labor agreements had three costly provisions:
"Me Too" clause – Each of the union agreements had provisions that automatically reopened the contract in the event that any other Ecorse bargaining group received compensation and fringe benefit increases. This provision, more than any other, resulted in labor strife and ever escalating payroll costs. Throughout the mid-1980s, Ecorse was continually required to adjust pay rates and fringe benefits for increases provided to its unions or was in costly arbitration arising from this problem.
Sick and vacation pay – The sick and vacation pay provisions provided virtually no limitations as to the number of days that could be accrued and paid at retirement, death or termination. In addition, the pay rates in effect at termination were used for the final payment. Further, the final payout for sick and vacation obligations accrued at termination were a component in the calculation of final average compensation in determining retirement benefits.
Staffing levels – The labor agreements applicable to the Police and Fire Departments had minimum staffing requirements. While the Police Department generally exceeded the agreed-upon staffing levels, the Fire Department was below the amount specified in the labor agreement. At the time of the receivership, the Fire Department had approximately six fewer personnel than was required by the labor agreement.
Several of Ecorse's departments were often used to provide patronage positions, most notably the Department of Public Works. It is not presently possible to estimate the number of positions or overall financial affect that practice had on Ecorse's financial condition. However, it is interesting to note that the Water and Sewer Fund payroll costs generally increased when the water and sewer rates were increased.
Accounting Personnel and Systems
The need for accurate and timely financial information is a critical need long recognized in the commercial sector. Yet, in many instances, the need for this same financial information in the governmental sector is not given the priority it deserves. In this case, Ecorse was no exception.
Despite representing one of the more critical administrative deficiencies existing at Ecorse in the early to mid-1980s, there was no mention of the matter in the Financial Recovery Plan. In addition, the outside auditors did not provide sufficient discussion in their reports covering internal accounting and administrative controls to enable City Council, grantors and the State Department of Treasury to fully understand the depth of the accounting record deficiencies. Essentially, the financial records were in shambles and no internal actions were taken to correct the problem.
At the time of the receivership, the City Controller had no formal training in accounting and relied heavily on the outside auditors to fulfill the role of both accountants and auditors. The use of outside auditors was costly both in additional fees and limiting Ecorse management's ability to identify operating issues and budget short-falls as they arose.
Routine accounting tasks are the responsibility of a properly functioning accounting department. Examples of these tasks, which were performed by the outside auditors and billed as an incremental cost, follow:
Reconciliation of the then 35 bank accounts (several of which were not recorded on the general ledger), interfund transactions, and other account detail to the general ledger control accounts.
Cash receipts were generally recorded in one of three funds (General, Current Tax Collection, or Water and Sewer Funds) during the year by Ecorse personnel. After year end, these transactions would be analyzed by outside auditors and distributed to their appropriate funds and accounts. This process involved a substantial amount of duplicative effort.
Preparation of analyses of general ledger accounts, including: accounts payable, property taxes, accounts receivable and others.
Preparation of several hundred adjusting entries to close the accounting records after year end.
Preparation of Ecorse's financial statements.
To identify a sense of the costs associated with the accounting assistance in routine management tasks provided by the outside auditors, an article in the local newspaper in fiscal 1986 indicated the following comparisons of fees paid to outside auditors among many downriver communities for the 1985 fiscal year:
|
Ecorse |
$90,000+ |
|
River Rouge |
47,550 |
|
Taylor |
38,500 |
|
Lincoln Park |
29,300 |
|
Allen Park |
17,500 |
|
Wyandotte |
18,500 |
|
Southgate |
25,000 |
|
Melvindale |
14,000 |
The newspaper article did not specifically cite the actual costs paid to Ecorse's outside auditors. Rather, it referenced that the fees exceeded $90,000. It is likely that this amount excludes the Water and Sewer Fund and Building Authority Fund fees which were normally billed separately. In 1986, these separately billed fees were $35,000 and $7,500, respectively.
A review of the auditor's workpapers engaged for the 1986 audit of Ecorse's financial statements and accounting assistance reflected total hours incurred of approximately 3,800 and total fees of over $148,500.
In addition to the substantial "audit" fees above, Ecorse's audited financial statements were often issued six months or more after year end. By the time that Ecorse management, including Council, was informed that they had a deficit for the prior year, Ecorse was a full six months or more into the next fiscal year.
Thus, the ability to mitigate the accumulating deficits was, in part, attributed to the inability of the Accounting Department to account for Ecorse's operations on a timely basis.
The lack of an on-site skilled accountant created a void in the ability to analyze routine and critical financial transactions. One of the most critical events surrounding a governmental unit is the need for a proper analysis of potential labor alternatives during the negotiation of contracts. Failure to properly identify the financial status and impact of proposals on Ecorse's operations also contributed to the fiscal distress.
In addition to the need to properly analyze labor proposals during negotiations, poor accounting practices can and did manifest themselves in various losses, including:
Grant disallowances – Ecorse failed to properly bid certain contracts in 1985 which resulted in disallowed costs paid back to the grantor of $13,062. At the inception of the receivership, over $19,000 of unsubstantiated costs were also not billable to the grantor and were charged to the General Fund. Other failures to comply with grant provisions resulted in the withholding of grants until such time as Ecorse was able to demonstrate compliance to the grantor.
Cash flow analysis – The number of bank accounts, failure to properly record all cash transactions and reliance on outside auditors in the performance of bank reconciliations resulted in the inability to accurately project cash flow needs and maximize investment opportunities.
Bank reconciliations – At the inception of the receivership, there were unlocated differences of almost $8,000 in the general bank account and almost $19,000 in the payroll accounts. Fortunately, the bank balances exceeded the recorded book balances and these differences resulted in "gains".
Improper use of restricted assets – The Major and Local Streets Funds' cash was used to fund the operations of the General Fund. In addition, Water and Sewer Fund cash was also used. Ultimately, the General Fund was required to return these borrowed funds. While no loss of principal resulted, the Major and Local Streets Funds were unable to accomplish their primary objective of street maintenance. The Water and Sewer Fund deferred repairs and maintenance and similar efforts. Finally, none of these Funds received the investment income on the otherwise idle cash they would have had to invest.
Budget – Throughout the early 1980s, Ecorse's Council passed balanced budgets for its General Fund, but failed to adjust its actual operations to reflect the level of funding. It is presently difficult to determine what actions would have been taken by the Mayor and Council had proper financial information been presented for action. However, the annual financial statements, once received, clearly demonstrated over-expenditures against the budget. The Mayor and Council were not given the opportunity to take action on budget over-runs as timely budget to actual comparisons were not prepared on an interim basis.
Sick and vacation Day obligations – The sick and vacation pay obligation, which was $1,367,420 at June 30, 1986, was based upon various departmentally maintained manual accounting records. The accuracy of these records, which were used as a basis for the final payouts upon employee termination, was suspect.
26th District Court
The 26th District Court cash receipts and disbursements were not recorded in Ecorse's computerized general ledger. Rather, a manual cash receipts and disbursements journal was maintained. Often, fines were paid in cash as many residents and others did not have personal checking accounts. Examples of accounting system deficiencies follow:
There was no listing of amounts owing to individuals who had posted cash bonds. As a result, it was difficult, if not impossible, to determine whether the separate bank account maintained for these transactions had the appropriate amount of cash. In addition, the return of cash held may not have been the same as the amounts posted as bail.
The condition of the manual records inhibited the preparation of bank reconciliations. The bank reconciliations were generally prepared by the outside auditors on an annual basis several months after year end.
There was no attempt to identify parking and moving violation ticket numbers to ensure that all cash receipts were deposited and those tickets not paid properly pursued.
Deposits were not made intact, nor on a timely basis.
No efforts were expended in attempting to provide appropriate segregation of duties to ensure that errors and / or irregularities would be detected by management.
Distributions for fines collected were not made to the State or Ecorse for months after collection, despite Ecorse's cash flow pressures.
Nepotism
Finally, many of the positions involving accounting and related activities were filled with relatives. At the time of the receivership, the following examples are cited:
Treasurer's Office – The Treasurer was the son of the Deputy Treasurer. In addition, the Cashier was the sister to the Treasurer.
Accounting Department – Included within the four person Department were a mother and daughter.
Assessor's Office – The Assessor was the son of the Deputy Assessor (mother).
Generally, these functions are incompatible in an internal control system and should not be filled with relatives as the ability to detect errors and / or irregularities is diminished, if not totally eliminated. Other examples of nepotism existed in Ecorse, however, it did not involve accounting functions.
The financial problems experienced by Ecorse in the early to mid-1980s are summarized into the following categories:
Declining or static revenue base with little or no actions taken by Ecorse management or Council to curtail spending patterns resulting in litigation, labor disputes and mounting deficits.
A severely underfunded Police and Fire Pension Plan arising from years of failing to properly make pension contributions.
Labor agreements which were costly. Excess personnel were on staff arising, in part, from patronage positions.
Accounting personnel and systems that did not provide the necessary, timely financial information upon which the Mayor, City Council and management could take action.
The above problems continued up to the decision by Judge Dunn to appoint the Receiver on December 3, 1986.
This section of the Report addresses the period of time from the issuance of the $4.0 million general obligation judgment bonds in October 1985 through Judge Dunn's decision to appoint a Receiver on December 3, 1986. Ecorse's financial condition at the inception of the receivership and continued cash flow pressures, failures of management to address spending patterns and lack of accurate financial information are also discussed.
The condition of the accounting records up through the Receiver's appointment prevents any accurate assessment of the actual fiscal distress at December 3, 1986. As a second consideration, the errors discovered in the audited financial statements as of June 30, 1986 were substantial and it was difficult to correct the 1986 amounts in 1987. Attempts by Ernst & Whinney (now Ernst & Young), who was appointed by the Receiver in early January 1986, to prepare a balance sheet at December 31, 1986 proved unsuccessful.
Accordingly, in an effort to assess the financial condition as of the Receiver's appointment, financial information prepared in connection with this Report is based upon estimates. The revised audited financial statements as of June 30, 1986 and for the year then ended and the 1987 audited financial statements have been used as indicators of the fiscal distress as of December 3, 1986. Often, estimated December 31, 1986 balances were used as it represents the half-way point in the fiscal year. In addition, the Receiver's budget message was based upon the January 1, 1987 through June 30, 1987 period.
While Ecorse was ordered by Judge Dunn on June 25, 1985 to issue $4.0 million in judgment bonds, the proceeds did not cover the entire General Fund deficit as of June 30, 1985. The bond proceeds recorded in the General Fund was $2,648,051 (after considering the direct deposits to the Pension Plan of $1.1 million). The General Fund deficit at June 30, 1985 before the bond issuance was $3,270,903. Despite the now heavy burden of an additional property tax levy that would soon exceed 3.00 mills, the bonds fell short of eliminating the deficit by $622,852.
While it is possible in retrospect to accurately evaluate the size of the bonds, the June 30, 1985 General Fund deficit was not known at the time the bonds were issued. Ecorse's accounting records and ability to internally manage its financial affairs was deficient. The 1985 audited financial statements were not issued until February 1986. The level of the General Fund deficit at the time of the judgment bonds' issuance could only be estimated based upon the prior year losses. Ultimately, the mounting Ecorse deficits were far greater than anticipated.
In addition to the judgement bonds, the Court Order also included a requirement of Ecorse Council to pass a balanced operating budget for the 1986 (and beyond) fiscal years. The Court Order essentially emphasized the existing State statutes (Uniform Budgeting and Accounting Act). In addition, the Court Order further required that Ecorse analyze its actual operations on a quarterly basis and adjust its operations when expenditures were exceeding the operating budget. As the accounting system and related personnel were incapable of performing this quarterly (or annual) analysis, no analysis was performed in compliance with this Court Order.
Shortly after the issuance of the $4.0 million judgment bonds in the fall of 1985, Ecorse began withholding the payment of its water, sewer and utility invoices to the Detroit Water and Sewer Board, Wayne County, and Detroit Edison, respectively. The withholding of the vendor payments was a principal cause for the issuance of the judgment bonds. Ecorse's General Fund continued to use the cash applicable to other operations even as the judgment bonds were issued.
The withholding of pension contributions, which had been an issue throughout the early 1980s, was not an immediate problem throughout the 1986 fiscal year as the $408,000 portion of the pension contribution (which was in addition to the actual retiree benefits paid directly by the General Fund) had been included in the $4.0 judgment bonds.
In addition, the Ecorse School District had filed a lawsuit alleging that the District was owed between $200,000 and $400,000 in interest arising from Ecorse's untimely remittances of School District property taxes collected. Interfund borrowings from restricted revenue sources again began to be used as a mechanism to fund the General Fund's operations.
While the initial cash flow crisis was somewhat mitigated through the issuance of the judgment bonds, the underlying operating causes of the fiscal problems had not been addressed.
1986 Operating Results
Despite having adopted a balanced operating budget ordered by Judge Dunn, Ecorse did not take the necessary actions to address its excessive spending patterns throughout the 1986 fiscal year. The revised audited financial statements for the year ended June 30, 1986 reflecting General Fund amended budget and actual operations follows (in thousands):
|
Budget |
Actual |
|||
|
REVENUES |
||||
|
Property taxes |
$3,903 |
$4,057 |
||
|
State shared revenues |
$1,442 |
$1,516 |
||
|
Federal Revenue Sharing |
$209 |
$412 |
||
|
All other |
$1,909 |
$866 |
||
|
$7,463 |
$6,851 |
|||
|
EXPENDITURES |
||||
|
General government |
$1,687 |
$2,154 |
||
|
Public safety |
$3,562 |
$3,695 |
||
|
Public works |
$1,491 |
$1,558 |
||
|
All other |
$723 |
$795 |
||
|
$7,463 |
$8,202 |
|||
|
Expenditures over revenues |
– |
($1,351) |
||
|
OTHER FINANCING SOURCES - Judgment |
||||
|
bond proceeds |
– |
$2,648 |
||
|
– |
$1,297 |
|||
|
Fund deficit at July 1, 1985 |
($3,271) |
($3,271) |
||
|
FUND DEFICIT AT JUNE 30, 1986 |
($3,271) |
($1,974) |
Comments regarding the 1986 General Fund budget to actual comparison follow:
Included within the ‘all other revenue’ amounts are $1,109,404 and $79,122 for amended budget and actual operations identified under the "miscellaneous" line item. The short-fall of actual revenue is so severe as to suggest that this account may have been used, in part, to balance the operating budget.
The ‘general government expenditure’ amounts include $334,503 of retiree health and life benefits for which the budget was zero.
The ‘public safety’ amounts include Police and Fire Pension Plan contribution (budget – $550,000; actual – $1,194,478). The budget was substantially underfunded and did not contemplate the $408,000 pension contribution component being paid.
Had Ecorse not issued the judgment bonds, the General Fund deficit of $3,270,903 at June 30, 1985 would have grown to $4,567,904 by June 30, 1986. The judgment bond proceeds were not reflected in the budget.
Statutory Requirements
The Uniform Budgeting and Accounting Act, which is enforced by the State Department of Treasury, states:
Section 16 (1) – "Unless another method for adopting a budget is provided by a charter provision in effect on April 1, 1980, the legislative body of each local unit shall pass a general appropriations act for all funds except trust or agency, intragovernmental service, enterprise, public improvement or building and site,...".
The effect of the above provision in the State statutes is to require that local units adopt annual operating budgets for the General, Special Revenue and Debt Service Funds. Ecorse failed to adopt an annual operating budget for its Special Revenue and Debt Service Funds. No actions to correct this statutory deficiency were taken by the Court, Department of Treasury or State Attorney General. The deficiency was not identified in most of the audited financial statements throughout the early to mid-1980s or the Financial Recovery Plan.
The required amendments to the General Fund's budget in accordance with State statutes were also not addressed by the Department of Treasury or Attorney General. The General Fund revenues were consistently over-budgeted and expenditures under-budgeted in an effort to reflect a "balanced budget" throughout the early to mid-1980s. However, the Uniform Budgeting and Accounting Act states:
Section 17 – "...If, during a fiscal year, it appears ... that the actual and probable revenues from taxes and other sources ... are less than the estimated revenues ... the chief administrative officer or fiscal officer shall present to the legislative body recommendations which, if adopted, would prevent expenditures from exceeding available revenues...".
Section 18 (i) – "A member of the legislative body, chief administrative officer, fiscal officer ... of the local unit shall not create a debt or incur a financial obligation on behalf of the local unit unless the debt or obligation is permitted by law."
Section 20 – "Violations of sections 17 to 19 by the chief administrative officer, the fiscal officer, ... or member of the legislative body ... shall be filed with the state treasurer and reported by the state treasurer to the attorney general ... The attorney general shall review the report and initiate appropriate action against the chief administrative officer, fiscal officer, ... or member of the legislative body. ...the attorney general or prosecuting attorney may institute a civil action in a court ... for the recovery of funds of a local unit ...".
The State statutes further reflect Ecorse's requirement to prepare and approve a deficit elimination plan to correct the deficit in the General Fund. The Department of Treasury is required to review and approve that plan. No such plan was prepared. The only effort expended to identify the causes and potential solutions of Ecorse's fiscal distress was the Financial Recovery Plan.
Deficit at the Inception of Receivership
In accordance with State statutes and Ecorse's Charter, the General Fund operating budget for the 1987 fiscal year should have been approved prior to July 1, 1986. The Court Order issued by Judge Dunn further reinforced this requirement. Despite these requirements, however, the Mayor and Council were unable to prepare and adopt a General Fund operating budget prior to the start of the 1987 fiscal year. Throughout the summer and fall of 1986, the Mayor and Council struggled with the budget document.
By late November 1986, the preliminary operating results for the fiscal year ended June 30, 1986 became known. With the exception of the effect of the judgment bond proceeds, the General Fund deficit had increased by $1.3 million. Cash flow pressures were also increasing due to the mounting deficits.
While the actual deficit at December 31, 1986 remains a mystery, quick and decisive actions were required to ensure that Ecorse residents received the minimum services required by State statutes to ensure public safety and health.
Facing payless paydays, Ecorse management continued to use restricted funds for General Fund operations throughout the 1986 fiscal year and into the 1987 fiscal year. These interfund borrowings can be seen in the 1986 and 1987 audited financial statements. A summary of the interfund borrowings by the General Fund as of June 30, 1986 as compared to the equity of the respective fund follow (in thousands):
|
Fund |
Amount Owed
By General Fund |
Other Fund's Equity |
||
|
Major Streets |
$533 |
$244 |
||
|
Local Streets |
$226 |
$67 |
||
|
Debt Service |
$542 |
$814 |
||
|
Water and Sewer |
$1,860 |
$44 |
||
|
Longevity |
$221 |
$286 |
||
|
Current Tax Collections |
$265 |
— |
||
|
Other funds |
$77 |
|||
TOTAL OWED TO ALL FUNDS BY GENERAL FUND |
$3,877 |
|
The General Fund borrowing from the Current Tax Collections Fund arose from the collections of property taxes withheld from other governmental units, principally the Ecorse School District.
The amounts due to other funds by the General Fund generally represented a significant component of the equity of the fund. Virtually all of the cash and investments included in the Major and Local Streets, Debt Service, Water and Sewer, and Longevity Funds had been used by the General Fund by June 30, 1986 for its operations. While the amounts owed to these funds was $3,382,246 by the General Fund, the General Fund had only $17,100 in cash and investments as of June 30, 1986 (much of which represented the Treasurer's change fund). The interfund borrowings increased up to the receivership and would continue to plague the Receiver throughout the first several years of the receivership.
By December 1986 Ecorse had withheld vendor payments of approximately $1.5 million from the Detroit Water and Sewer Department for water costs and $.4 million from the Wayne County Department of Public Works for sewer costs in the Water and Sewer Fund. Payments to Detroit Edison were also delinquent. While the Police and Fire Pension Plan retirees were receiving retirement benefits directly from the General Fund, the required $408,000 of additional pension contributions for 1987 in accordance with the labor agreement had not been paid.
Restatement of 1986 Equities
The accounting personnel and systems present before the issuance of the judgment bonds continued through the Receiver's appointment. While Ecorse acquired certain computer hardware and software in March 1986, it had little or no affect on improving the timeliness or accuracy of the financial information.
The 1987 financial statement audit discovered the following errors as of June 30, 1986 in the General Fund, Water and Sewer Fund, and Police and Fire Pension Plan (among other funds) equity (in thousands):
|
As Presented |
Corrections |
Revised |
||||
|
General Fund (deficit) |
|
$(4,586) |
|
|
|
|
|
Water and Sewer judgment |
|
|
|
|
|
|
|
bond proceeds |
|
|
|
$1,793 |
|
|
|
Property taxes - net |
|
|
|
$189 |
|
|
|
Special revenue fund deficit |
|
|
|
$(18) |
|
|
|
Overstatement of Pension |
|
|
|
|
|
|
|
contribution |
|
|
|
$675 |
|
|
|
Other |
|
|
|
$(27) |
|
$(1,974) |
|
|
|
|
|
|
|
|
Water and Sewer Fund |
|
|
|
|
|
|
|
surplus |
|
$2,898 |
|
|
|
|
|
Judgment bond proceeds |
|
|
|
$(1,793) |
|
|
|
Overstatement of accounts |
|
|
|
|
|
|
|
receivable |
|
|
|
$(397) |
|
|
|
Sewer debt misclassified |
|
|
|
$(575) |
|
|
|
Deficit misclassified |
|
|
|
$(89) |
|
$44 |
|
|
|
|
|
|
|
|
Police and Fire Pension Plan |
|
|
|
|
|
|
|
surplus |
|
$5,417 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension contribution |
|
– |
|
$(675) |
|
$4,742 |
|
COMBINED |
|
$3,729 |
|
$(917) |
|
$2,812 |
The corrections to the 1986 audited financial statements are important to understand as the financial information available to Judge Dunn at the time the receivership decision was made was based, in part, on the draft financial statements arising from the 1986 audit.
The correction to the 1986 financial information did not arise until six months into the receivership. Thus, the apparent General Fund deficit at June 30, 1986 was $4,586,000, when in fact the actual deficit was $1,974,000, a net difference of $2,612,000. However, the three principal operating funds' equities were collectively overstated by $917,000.
In addition, the uncorrected 1986 audited financial statements were used by the Receiver in the first six months of the receivership. No other credible financial information was prepared until the 1987 audited financial statements were completed in August, 1987.
The errors, which have been corrected in the Appendices, are described as follows:
The 1986 financial statements reflected the judgment bond proceeds as increasing the equity of the Water and Sewer Fund. The General Fund had borrowed the cash from Fund, but this transaction did not have any impact on the Water and Sewer Fund's operations. The bond proceeds arose because of the General Fund's operating losses.
There were numerous errors applicable to property taxes including amounts recorded in the wrong funds, wrong basis of accounting used, and other errors.
A Special Revenue Fund had a deficit of approximately $18,000. This fund did not have any operations for several years prior to the receivership.
Most of the 1986 Pension Plan contribution was funded through the judgment bond proceeds. Yet, a second adjusting entry was recorded just prior to the preparation of the 1986 financial statements resulting in doubling the pension contribution for 1986.
A clerical error was made in the calculation of the unbilled accounts receivable for the Water and Sewer Fund as of June 30, 1986 resulting in an overstatement of revenues of $397,000.
At the time that Ecorse decided to levy certain general obligation debt associated with the Glenwood sewer project (as recommended in the Financial Recovery Plan), the debt was removed from the Water and Sewer Fund. The proper presentation was to reflect the debt in the Water and Sewer Fund, as well as any subsequently issued property tax levies.
IRC 457 Deferred Compensation Plan
No mention of the Deferred Compensation Plan was made in the 1986 audited financial statements. The assets and related liability, which are estimated to be $250,000 at June 30, 1986, have been withheld from employee wages and deposited with an outside investment agent. However, these assets remain the property of Ecorse until such time as the employee is entitled to withdraw the amounts (generally at retirement). Given Ecorse's uncertain financial future, the omission of these assets understated the amounts available to creditors in the event of a bankruptcy proceeding.
The Ecorse Building Authority was established to construct the municipal offices through a debt issue and then, fund the operations and debt service from reimbursements and lease payments received from the, General Fund. At June 30, 1986, the Building Authority had $255,000 in equity which was comprised of cash, investments and a delinquent receivable of $210,000 due from the General Fund. Ecorse had failed to pay the Building Authority the required $70,000 lease payments due on June 1, 1985, December 1, 1985 and June 1, 1986.
The suspension of the lease payments violated the bond covenants, but had not affected the Building Authority's debt service responsibilities. The Building Authority had sufficient cash on
hand to fund the January 1, 1987 interest payment, but would not have been able to pay the July 1, 1987 principal and interest payment absent the payment of the deliquent lease payments.
Ecorse's 1986 audited financial statements erroneously excluded the $1.1 million in outstanding Building Authority debt.
At the inception of the receivership, there were approximately thirty to forty lawsuits filed against Ecorse for various matters, including: labor disputes, slip and fall, false arrest, discrimination and other matters. Two of the more significant lawsuits involved the allegation that Ecorse had withheld property taxes collected on behalf of the Ecorse School District (including interest) and the AFSCME "Me Too" labor dispute.
Ecorse School District
The lawsuit claimed that Ecorse was not remitting the property tax collections to the Ecorse School District on a timely basis over the six years prior to the receivership. At about the same time, Grand Rapids School District had just won a similar lawsuit against a local city that resulted in defining that the cities were responsible for paying interest income earned on property tax collections to school districts.
While the condition of the accounting records prevented an accurate assessment of the potential exposure on this lawsuit, the School District had estimated that the amount of interest they were due would be between $200,000 and $400,000. The School District was also seeking a formalized arrangement or commitment to remit future property tax collections and interest derived therefrom in accordance with the State statutes.
AFSCME "Me Too" Claim
The American Federation of State, County and Municipal Employees' (AFSCME) labor agreement with Ecorse contained a provision concerning the right of AFSCME to benefit from compensation increases provided to other Ecorse bargaining groups ("me too" clause). As a result of a recent resolution of the police and fire contracts, AFSCME claimed that they were entitled to receive an increase under this "me too" clause. At the time of the Receiver's appointment AFSCME had won this arbitration, but no amounts had been quantified in order to pay employees.
By the summer of 1987, an estimate of as high as $500,000 to resolve the arbitration award was estimated.
Ecorse was a participant in the Michigan Municipal Risk Management Authority (MMRMA) insurance risk pool for substantially all of its insurance needs, other than workers' compensation insurance. During the early to mid-1980s, Ecorse had continually failed to address insurance related matters that would expose Ecorse to insurance risks. At the inception of the receivership, MMRMA was considering the cancellation of Ecorse's insurance. MMRMA is a governmental risk pool and there was substantial political pressure to continue insuring Ecorse despite the insurance risks.
As a result of the use of cash to sustain the General Fund's operations, repairs and maintenance of Ecorse's infrastructure (roads, streets, sewers, water transmission lines, municipal facilities, etc.) had been suspended. Repairs would be performed only when a critical need arose.
In the three years leading up to the receivership, the 26th District Court revenues for the 1984, 1985 and 1986 fiscal years were $79,400, $138,400 and $158,200, respectively. However, Court expenditures were $149,700, $151,600 and $174,500 (exclusive of central service costs) for the same periods. Over this three year period, the total 26th District Court operating losses, which were included in the General Fund approached $100,000.
The deficit in Ecorse's General Fund arose because Ecorse management failed to take the necessary actions to reduce expenditures in line with a declining revenue. As property assessments declined throughout the 1960s through the mid-1980s, property tax rates were increased to compensate. The General Fund deficit, which is a form of borrowing against future revenues, would eventually have to be resolved. The higher the deficit became, the deeper the reductions in staff or higher the judgment levies would have to be in the future.
At December 3, 1986, Ecorse's operations were such that immediate action was required. No 1987 fiscal year budget had been adopted by the Mayor and Council. When the deficit was discovered to have grown for the fiscal year ended June 30, 1986 in early December 1986, and the Council approved travel expenses for three Council members to attend a conference in San Antonio, Texas, Judge Dunn took bold actions to correct the problem. He appointed Mr. Louis Schimmel as Receiver over the entire Ecorse operations on December 3, 1986. The appointment was for a three year period.
Late on December 2, 1986, Mr. Louis Schimmel was contacted by Judge Dunn and asked whether he would be willing to accept the position of Receiver for the City of Ecorse. Mr. Schimmel indicated an interest in the position, but requested the opportunity to consider the position and its time commitments over the next several days.
The following morning, Judge Dunn summoned Mr. Schimmel to the Court for a 10:00 a.m. meeting. By 10:15 a.m., Judge Dunn had appointed Mr. Schimmel as Receiver and the Receiver was answering questions posed by the media. The media’s questions centered on the nature of the powers and authority of a receiver and his plans to correct Ecorse’s fiscal distress.
As Mr. Schimmel had not yet expended any efforts towards understanding the depth of Ecorse’s problems, no specific answers could be given. In addition, as there had not been a receiver appointed to operate a governmental unit in Michigan, or the nation for that matter, the Receiver’s powers and authority were not defined. Over the course of the next several weeks, meetings were held with various Ecorse department heads and others at the municipal offices in an effort to understand the underlying causes of the fiscal distress.
Having formulated actions to be taken to mitigate the immediate fiscal problems after approximately two weeks, the Receiver returned to the Circuit Court to discuss the staff and service reductions and other issues with Judge Dunn. Instead, he found Judge Dunn had retired and was not available. The receivership had been turned over to a newly elected judge who would be in training for the first several weeks of January 1987.
Although Judge Rashid, 32, who was elected in November 1986, was no stranger to the political arena (he had been a Wayne County commissioner and his father held the position of a Wayne County judge for 25 years), he had inherited a politically-sensitive lawsuit without any specific guidance in legal precedent.
At the inception of the receivership, Ecorse did not have sufficient cash on hand to make its projected February 1987 payrolls. Vendor payments had already been suspended. Even the restricted cash applicable to other fund operations used to sustain the General Fund’s operations was inadequate. Borrowing, which would have to be approved by the State Department of Treasury and likely the Court, was not possible because of the failure by the Mayor and Council to adopt the 1987 operating budget and formally address the deficit in a written plan.
At the time of the Receiver’s appointment, the estimated annual operating loss of the General Fund was believed to be as high as $4.0 million by the Receiver and City Controller. Credible financial information was unavailable. Ecorse was living well beyond its means to finance both discretionary and required services.
Powers and Authority
After discovering that Judge Dunn had retired, the Receiver became increasingly concerned that the recommended staff and service reductions developed in December 1986 would not be approved by the Court. The initial contact with Judge Rashid did not result in actions necessary to implement the recommended reductions. The Receiver established a deadline of February 1, 1987 for Court approval of the recommendations. If not approved by February 1, 1987, he would submit his resignation. On January 22, 1987, the Receiver and Judge met and the reductions were approved.
By late January 1987, the Receiver and Judge Rashid had agreed on the Receiver’s powers and authority related to most operating matters. Generally, every effort would be expended to obtain consensus from the Mayor and Council in all operating, contractual and labor matters. The Receiver’s actions would, to the extent possible, be approved by Council. The Receiver would be required to negotiate with collective bargaining units, rather than abrogate labor contracts. Court Orders would be issued to resolve matters only when no other resolution could be found and only as the last resort. With these ground rules defined, the Receiver went forward.
Receiver’s Objectives
The Receiver’s objectives were:
Reduce waste, duplication of effort and inefficiency. The Receiver would concentrate his efforts on reducing operating costs without sacrificing required services. Discretionary spending from unrestricted revenue sources (principally General Fund) would be significantly reduced, if not eliminated. Only those services necessary to ensure public safety and health of its residents would be continued.
No new taxes would be imposed.
Provide Ecorse management with the ability to manage the finances at the end of the receivership.
Structurally change the operations in such a manner as to prevent Ecorse management from digressing to the same fiscal distress after the receivership.
The objectives were never specifically identified by the Receiver in any written plan. On numerous occasions, representatives of the Department of Treasury requested that a formal deficit elimination plan be assembled and submitted for their approval in accordance with State statutes. The Receiver resisted these requests on the basis that he reported to the Courts, not the State. Only minimum information necessary for understanding the progress being made was submitted to the State.
While a formal deficit elimination plan was never assembled, the actions taken by the Receiver demonstrated that his efforts were expended to comply with the above objectives. The objectives are consistent with the State statutes. Some objectives were met, while others were never attained.
Insurance
One of the more difficult initial negotiations involved insuring the Receiver against the many anticipated lawsuits arising from the affected parties in interest (Mayor, Council, elected officials, unions, and residents). Ecorse’s insurer, the Michigan Municipal Risk Management Authority (MMRMA), had been dissatisfied with Ecorse’s efforts to minimize insurable risks. MMRMA was considering the termination of Ecorse’s insurance policy. However, the Receiver and his actions were an unknown, resulting in MMRMA’s inability to accurately assess its insurable risk.
In comparing Ecorse’s insurance policy against the risk that would be caused by insuring the Receiver, MMRMA concluded that insurable risks were less with the Receiver than relying on Ecorse. After much discussion, MMRMA provided Ecorse and the Receiver with the necessary insurance coverage. The rates, however, were based upon the high risk category.
The insurance for Ecorse and Receiver, which required a $100,000 payment in February, 1987, was conditioned on the resolution of numerous unresolved risk problems, including bringing the parks and recreation equipment, park areas and jail facilities up to standard. The new insurance policy was directly linked to Mr. Louis Schimmel, as Receiver. Should he resign, the insurance policy would terminate immediately.
Because of a need to comply with MMRMA’s requirements, the Receiver was immediately forced to either make costly park improvements and replace equipment entirely. The required improvements were so significant that the equipment replacement would mitigate much of the park area improvement cost. As no funds were available for this project, the equipment was removed and other problems resolved at a nominal cost.
Reductions in January, 1987
By late December 1986, the Receiver had prepared a list of the initial staff and service reductions to be imposed on Ecorse. As may be expected, none of the reductions were well received by the Council, other elected officials, management, unions and residents. A listing of the reductions approved on January 22, 1987 by Judge Rashid, along with estimates of the annual cost savings, has been provided below:
Closing of the health clinic, two senior citizen centers, community center, library, and ice arena. In addition, the Receiver eliminated school crossing guards and civil defense. He closed the Secretary of State’s Office in the municipal office center. This office was staffed with Ecorse employees. In the 1986 fiscal year, these activities incurred $333,000 in expenditures and generated only nominal revenues. These costs were substantially funded by the General Fund.
Layoffs of approximately 40 employees, including 11 police officers and 5 firemen. The 16 police and fire personnel laid-off would save Ecorse approximately $672,000 annually. The personnel costs of the remaining individuals were included in the costs of closed departments and eliminated services. The affect on the pension contribution and future retiree health and life insurance benefits cannot be presently determined; however, it would be reduced.
The Mayor and Council, which were part-time positions, received: salaries of $8,500 and $6,500 each, respectively, certain associated fringe benefits (principally Social Security taxes and workers’ compensation), and the city-paid leased car for the Mayor. All of these benefits, which cost approximately $86,000 in the 1986 fiscal year, were eliminated by the Receiver.
The salaries of the Assessor, Treasurer, and Clerk, who received $3,666, $6,900 and $10,000 for part-time positions (along with nominal fringe benefits) were eliminated.
As the Housing Commission was not reimbursing its payroll and fringe benefit costs on a timely basis, the payroll processing service was terminated. The Housing Commission continued to be included in the fringe benefit packages of Ecorse and would be periodically billed for these costs throughout the receivership. The reimbursements, however, were now made on a timely basis under threat of termination by the Receiver.
Other reductions were also negotiated with the unions, but did not become effective. The Receiver and Police union had negotiated a limitation on sick and vacation pay and overtime pay. However, this agreement was terminated prior to the January 22, 1987 meeting with Judge Rashid as the Police believed the Fire union received a more generous arrangement. This would be the first instance in which the parity ("Me Too") clause would impact labor negotiations.
As the resources became more scarce and staff reductions were enacted, parity came to the forefront of the labor negotiations. One example of the rivalry between the Police and Fire personnel was the April 1987 harassment lawsuit brought by the president of the Ecorse Firefighters Association against the president of the Ecorse Police Officers. The Firefighters president alleged that the Police president made threats and wrongly ticketed him and other fire personnel.
Taking into account the savings associated with the aforementioned staff and service reductions, a formal General Fund operating budget for the period from January 1, 1987 to June 30, 1987 was prepared. The staff and service reductions, which took effect in mid-January 1987 and the operating budget, were approved by Judge Rashid on January 22, 1987. These operating reductions were initially believed to have resolved a substantial portion of the fiscal distress.
Budgets for Special Revenue and Debt Service Funds, which were required by State statutes, were not prepared for the remaining portion of the 1987 fiscal year. These budgets would not be prepared throughout the receivership. Prior to the termination of the receivership on August 31, 1990, Judge Rashid ordered budgets prepared for the 1991 fiscal year.
In an effort to have the receivership terminated in January 1987, the Mayor and Council passed their own version of the General Fund operating budget for the six months ended June 30, 1987. Once passed, it was the position of the Mayor and Council that a Receiver was no longer required. Judge Rashid, however, refused to terminate the receivership.
In January 1987, Ecorse’s labor agreements were reviewed and were determined to be beyond Ecorse’s ability to fund. While little action beyond the initial lay-offs was taken, the Receiver began to formulate a plan to resolve the American Federation of State, County and Municipal Employees (AFSCME) arbitration award and address concerns related to other bargaining group contracts. No attempts were expended to quantify the effect of the AFSCME award by the Receiver and no payments were made until the summer of 1988 (see subsequent privatization discussions). The initial position developed in January 1987 was to reduce wage rates and fringe benefit packages provided to these employees.
The initial layoffs did not result in any significant tests of the Receiver’s powers as the labor agreements remained intact. Amending the labor agreements would require years of tough negotiations. While the unions were dissatisfied with the required lay-offs, they took no actions to challenge the decision. Layoffs had been the right of management, and in this case, the Receiver.
The financial benefits of staff reductions are often not immediately realized. At termination, employees are entitled to vested sick and vacation pay, unemployment compensation, may file for workers’ compensation, and if retired, begin to draw on retiree health insurance and life benefits. All of these costs would continue beyond termination. Thus, there was no immediate cash flow savings.
Workers’ compensation costs are determined at the inception of the fiscal year based upon projected payroll costs. During the following fiscal year, a payroll audit is performed to ascertain actual payroll costs. The excess workers’ compensation premiums paid arising from a reduced payroll would not be refunded until the 1988 fiscal year.
Similarly, MMERS is funded on the basis of a lump-sum contribution determined at the inception of the fiscal year. Staff reductions will reduce future pension contribution after the completion of the next actuarial report some time in the future.
As a result, personnel reductions generally did not result in any immediate cost savings. The savings resulting from personnel reductions arises from the reduction in the cash flow associated with future compensation and fringe benefit costs. Thus, benefits derived from the terminations would not begin to be fully realized until the 1988 fiscal year.
Receiver’s Team
Realizing that the accounting records were in shambles and that the staff and service reductions would result in numerous lawsuits, the Receiver sought a replacement for the existing city Controller, audit firm and attorney. Mr. Richard Eva, former Deputy Chief Finance Officer for Wayne County and professional accountant, replaced the former City Controller who resigned effective March 16, 1987.
Ernst & Whinney (now Ernst & Young) replaced the former local accounting firm in an audit and consulting capacity. Finally, Mr. Douglas Dahn, labor attorney, was hired to represent the Receiver in various labor negotiations and other legal matters.
The former accounting firm objected to the termination of their contract and was provided a small consulting project involving the completion of the bank reconciliations through January 31, 1987 for a fee of $5,000. While the audit firm indicated that the project was completed in March 1987, differences in various bank accounts remained unresolved. The City Controller resolved these unlocated differences and the fee was paid in an effort to terminate the prior audit firm’s contract.
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.
Borrowings
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.
Detroit Edison
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.
1988 Budget
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.
Accounting Records
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.
Building Authority
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.
Discussions by the Receiver with the Judge Ciungan of the 26th District Court resulted in emphasizing the need for the Court to be self-funding through increases in the fines and forfeits. In the 1984 through 1986 fiscal years, the Court lost almost $100,000. Through the efforts of Judge Ciungan, the 1987 fiscal year operations made a profit of $3,000. Most of this profit occurred in the last six months of the 1987 fiscal year. The combined 1988 through 1990 fiscal year profit of the Court was $266,000 arising from Judge Ciungan’s efforts. All of this profit benefitted the General Fund.
In 1987 and 1988, the auditors cited the poor condition of the manual accounting records maintained by Court personnel. In 1988, the Receiver commissioned a study to determine which computer system should be acquired to efficiently assist the Court in maintaining its accounting records, docketing cases and assisting in other administrative matters.
The computer system was acquired in the fall of 1988 and by spring 1989, the accounting issues observed by the auditors were virtually eliminated. The computer significantly aided in the administration of the Court offices. It is not possible to quantify the computer’s benefits on Court operations. However, it did contribute to the Court’s profitability.
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.
Judgment Levy
As a result of the completion of the 1988 General Fund operating budget, which relied heavily on the sale of real and personal property, the Receiver began to realize that a judgment levy for the severely underfunded Pension Plan would be required. Effective December 1, 1987, the Receiver requested that Judge Rashid order a judgment levy of 2.5 mills be assessed. The judgment levy generated approximately $433,000 in additional 1988 General Fund property tax revenues.
Substantial discussions and litigation initiated by the Pension Board continued to occur throughout the first several years of the receivership. While the Pension Board reluctantly accepted the Receiver’s pension contribution funding structure and payments of retirement benefits from Pension Plan assets, actuarial assumptions used in calculating the pension contribution were challenged.
By fall 1988, the Pension Board and Receiver had reached an agreement in the actuarial assumptions to be used. In addition, all police and fire personnel hired from that point on would be included in the Michigan Municipal Employees Retirement System (MMERS) and the Pension Plan would be effectively closed to new hires.
Those active and retired Pension Plan participants choosing to transfer their pension rights to MMERS could do so. Employee contributions for active employees, which had been paid from the time of the employees hiring, would be refunded. The total refunds paid were $417,544 for the 1989 and 1990 fiscal years. Many Pension Plan participants chose to transfer from the Pension Plan to MMERS. No Pension Plan assets were transferred to cover the obligations assumed by MMERS, thereby strengthening the financial condition of the Pension Plan and using the excess MMERS assets over actuarial accrued liabilities to their fullest.
In exchange for deferring a portion of the 1989 fiscal year Pension Plan contribution in the amount of $844,000, the Receiver requested that Judge Rashid order a permanent judgment levy of 6.0 mills, which would generate $1.1 million in property tax revenues for pension contributions, to be assessed on December 1 of each year until such time as the unfunded pension benefit obligation would be eliminated. The pension contribution deferral was a form of long-term borrowing.
The poor financial condition of the Pension Plan may require that the judgment levy be in effect for as long as 28 years. In addition, the ability to resolve the unfunded actuarial accrued liabilities is contingent upon the ability to negotiate settlements with active participants that are within the assumptions used by the actuary. Also, since Great Lakes Steel’s property assessments are a significant component of property taxes, it presumes that the plant will be functioning during the 28 year period.
Efforts were expended by the Receiver to convince individuals to transfer to MMERS as this is a State administered pension plan. Should Ecorse fail to make its pension contributions to MMERS after the receivership, the State could withhold the pension contributions from the State distributions. No such guarantees exist for the Pension Plan participants despite earmarked revenues.
Transamerica T-2 Bond Fund
The final Pension Plan issue involves the investment of $1.3 million in a mutual fund called Transamerica T-2 Bond Fund (T-2 Fund). In 1985, the Pension Board purchased the T-2 Fund investment from an investment agent, a close friend of a Pension Board member. The investment agent indicated that this mutual fund consistently exceeded annual returns of over 12%.
Throughout the receivership the Pension Plan trustee was unable to obtain reliable or timely financial information concerning this investment. After many requests, it was discovered that the investment agent was receiving an annual management fee of approximately $4,500. As the fee was deducted from the investment income before the financial information was submitted to the Pension Plan trustee, Ecorse management was unable to initially determine the amount paid for these services.
Repeated requests for financial information in 1990 resulted in inconsistent data being presented. The investment performance was poor and ultimately, this investment was sold in the 1991 fiscal year. No significant gain or loss was experienced at the date of sale.
The labor negotiations involved substantial involvement between the Receiver, Mr. Douglas Dahn (Receiver’s labor attorney) and the City Controller. The principal contracts resolved during the receivership included: AFSCME, Firefighters and Police Officers unions.
AFSCME
At the inception of the receivership, AFSCME had received an arbitration award under the "Me Too" clause with Ecorse concerning an earlier resolution of the police and fire contracts. The Receiver took no significant action to quantify the AFSCME arbitration award for over a year. However, in the summer of 1987, an estimate of the maximum exposure to loss should AFSCME win the arbitration was as high as $500,000, plus the affect on fringe benefits.
Throughout the 1988 fiscal year, the Receiver continued to discuss the award with AFSCME. By June 1988, the Receiver had decided to privatize the Department of Public Works (DPW). As discussed previously, the AFSCME membership approved the revised contract allowing the Receiver to privatize the DPW, eliminating the "Me Too" clause, and providing pay increases and limited sick and vacation pay to the remaining AFSCME employees.
The AFSCME contract settlement, however, resulted in the payment of $669,650 (including fringe benefits) to AFSCME employees. This settlement was recorded in the 1988 fiscal year.
Firefighters Union
A budget to actual comparison of the Fire Department expenditures (exclusive of pension contributions) for the three years leading up to the receivership follows:
|
Budget |
Actual |
|
|
1984 |
$901,778 |
$925,172 |
|
1985 |
$915,318 |
$1,228,772 |
|
1986 |
$1,257,370 |
$1,322,841 |
Included within these escalating costs was overtime of $50,168, $85,345 and $212,121 for the 1984, 1985 and 1986 fiscal years, respectively. In each of the 1984, 1985 and 1986 fiscal years, the Fire Department exceeded its operating budget by $23,394, $313,454 and $65,471, respectively. The 1987 fiscal year expenditures, which declined largely resulting from the January 1987 lay-off, were $1,184,292. The Receiver was convinced that reversing this three year trend of increasing fire service costs was critical to Ecorse’s long-term survival.
As early as spring 1987, the Receiver began to explore alternatives to providing fire services, including contracting with other surrounding communities to provide this service. No community would provide this service on Ecorse’s behalf, in part, due to Ecorse’s financial condition. Ultimately, the problem had to be resolved through the utilization of a combination of full-time Ecorse fire personnel and part-time reservists. However, the Receiver would be unable to immediately institute changes to the labor agreement as the Firefighters agreement was effective through June 30, 1988.
One of the most significant components in the settlement of the Fire Department labor contract for the fiscal year beginning July 1, 1988 involved the use of part-time reservists paid at $5.00 per hour, in lieu of more expensive full-time personnel. Reservists also did not receive fringe benefits. The use of reservists would also contribute to the control of excessive overtime. Other significant concessions in the Firefighters settlement included the removal of the "Me Too" clause and minimum staffing requirements from the labor agreement and the limitation of sick and vacation pay.
The ability to obtain these concessions resulted in an increase in compensation and pension benefits paid to the existing full-time Fire Department personnel. In addition, the Receiver assured the Firefighters Association of no reductions in existing full-time fire personnel. However, part-time reservists would replace those positions vacated by normal attrition.
The reduction of Fire Department costs arising from these concessions is demonstrated in the following table:
|
Budget |
Actual |
|||
|
Pre-receivership – 1986 Receivership: |
$1,257,370 |
$1,322,841 |
||
|
1989 |
$933,200 |
$954,825 |
||
|
1990 |
$1,034,350 |
$1,113,331 |
||
|
Post-receivership – 1991 |
$955,215 |
$1,075,977 |
While the Fire Department has continued to consistently exceed its operating budget since 1989, the actual amounts expended for these services has declined almost 28% between the 1986 and 1989 fiscal years.
Police Officers
The Police Officers contract, which also expired on June 30, 1988, was settled at the same time as the Firefighters contract. The provisions were similar in nature to those of the Firefighters, except that there was no provision for police reservists. Instead, the Police Officers accepted a two-tier pay structure whereby newly hired police officers would be paid $16,500, substantially below the then lowest grade officers in the Department.
The Police Officers’ contract also eliminated the "Me Too" clause and minimum staffing requirements and limited sick and vacation pay. Increases in compensation and pension benefits were provided.
Health Insurance
The Receiver was successful in revising the health insurance programs provided by Ecorse. Previously, all health insurance costs were paid by Ecorse. As a result of the labor negotiations, if traditional Blue Cross / Blue Shield health insurance (which was more costly) would be retained by the employee, a co-pay arrangement was required. Should employees chose to participate in a health maintenance organization, which was less costly, Ecorse would pay for all health insurance costs.
Sick and Vacation Pay
One Receiver’s concerns involved the virtually unlimited amount of sick and vacation pay, both as to rates and days accumulated, that Ecorse personnel could accrue. The following is a table presenting the outstanding, vested sick and vacation pay recorded in the General Long-term Debt Account Group at various year ends:
|
June 30 |
Balance Outstanding | |
|
1985 |
$1,242,489 |
|
|
1986 |
$1,288,548 |
|
|
1987 |
$1,182,331 |
|
|
1988 |
$871,500 |
|
|
1989 |
$574,314 |
|
|
1990 |
$495,942 |
|
|
1991 |
$494,000 |
Through negotiations with the various bargaining groups, the Receiver obtained limitations on the pay rates to be used and number of days that could be accumulated. In addition, a regular payment schedule was instituted whereby a portion of the excess sick and vacation accruals would be paid each year.
The sick and vacation pay obligations were reduced from $1.3 million to $.5 million over a period of four years. The reductions in the obligation were generally charged to General Fund operations when paid. In addition, the accuracy of the obligation in the later years improved as the controls over the maintenance of the records were instituted.
Prior to the receivership, Ecorse School District filed a lawsuit alleging that Ecorse was withholding property tax collections and interest of between $200,000 and $400,000. In 1988, this litigation was settled for $40,000. In addition, a separate interest bearing bank account was established for all Ecorse School District property tax collections. Subsequent to the resolution of this litigation, Ecorse remitted all School District property tax collections and related interest on a timely basis.
Throughout the receivership, the accounting system and personnel improved. By the end of the receivership, account analyses were prepared on a regular basis, the general ledger closed on a monthly basis, billings were timely, monthly bank reconciliations were prepared, interfund accounts were balanced, and reliable financial information was provided to Ecorse management and the Receiver. Problems with grants resulting in disallowed costs at the inception of the receivership were eliminated through the Controller’s efforts.
The significant internal control concerns of the 26th District Court observed at the inception of the receivership were resolved through the City Controller’s and Court efforts and the acquisition of a new computer. Cash receipts were deposited with the Ecorse Treasurer and periodically recorded on the general ledger. The Court bank accounts were closed.
By the end of the receivership, the outside audit fees, which included a substantial component of accounting assistance due to the poor condition of the accounting records, had been reduced from $148,500 paid for the 1986 fiscal year audit, to approximately $55,000. The substantial reduction in fees is largely attributed to the improvements in the condition of the accounting records through the efforts of the City’s Controller.
When funds became available in the later half of the receivership, efforts to improve roads, street lighting, municipal office facilities and equipment were initiated. Some of the significant capital outlay included:
Substantial expenditures incurred in the repair and renovation of roads in the 1989 and 1990 fiscal years, potentially approaching $761,000 paid out of the Local and Major Streets Funds.
Similarly, as much as $525,000 was expended in the Water and Sewer Fund for repairs and maintenance of sewer and water transmission lines and additional amounts in the installation of new water meters in each residence and business.
The acquisition of a new fire truck in 1990 through the use of Community Development Block Grant funds.
Six new police cars in July 1989.
Over $25,000 in repairs to improve the garage floor in the municipal offices.
Computer equipment and related software approaching $75,000 for the 26th District Court operations.
Subsequent to the attempts in spring 1987 to revise the Home Rule Charter, a Charter Commission was established. This Commission, which was comprised of Ecorse residents, prepared a Charter that provided for a "strong council" / City manager form of government. In addition, residency for employees was also eliminated in the Charter proposal.
The proposed Charter revisions, which were supported by the Receiver, were defeated in an election held on April 18, 1989.
No recent efforts have been expended to attempt passage of a revised Charter.
In November 1989, Mayor James Tassis was elected, along with several new council members. Shortly thereafter, a meeting was held between the new Council, Mayor, Receiver, Controller and Ernst & Young to discuss the history leading up to the receivership, actions taken by the Receiver and Ecorse’s financial condition in January 1990.
Despite concerns expressed during the meeting related to the actions which created the fiscal distress, a Council member requested that an individual who had assisted the Council member in the election be hired. The Receiver refused.
Throughout the receivership, short-term notes (collateralized by property tax and State revenue sharing distributions) were borrowed to enable Ecorse to meet its operating requirements. The reliance on these notes as a means of financing operations subsided as the fiscal distress was resolved. A summary of the short-term notes outstanding at various year ends follow:
|
June 30 |
Principle Balances Outstanding |
|
|
1986 |
None |
|
|
1987 |
$2,430,000 |
|
|
1988 |
$2,400,000 |
|
|
1989 |
$1,600,000 |
|
|
1990 |
$800,000 |
|
|
1991 |
None |
At June 30, 1986, which preceded the receivership, no short-term notes were outstanding from the banks. However, Ecorse had used restricted funds and withheld payments from vendors and the Pension Plan to sustain the General Fund’s operations. By the end of the receivership, the level of the short-term borrowing requirements had been reduced to $800,000. The Receiver assigned the October 1990 property tax collection from Great Lakes of approximately $1.3 million to an escrow account for the payment of the $800,000 and related interest due in November 1990. After the debt was liquidated, the excess property taxes were remitted to Ecorse.
At the time of the Receiver’s resignation on August 31, 1990, cash projections reflected no need for further borrowings throughout the 1991 fiscal year. At June 30, 1991, no short-term notes were required.
The amount due to other funds in the General Fund and cash on hand at June 30, 1990, which was for normal operations, was $387,000 and $1,470,000, respectively. The General Fund amounts owed to other funds and cash on hand at June 30, 1986, which preceded the receivership, was $3,877,000 and $17,000, respectively. Interfund borrowing of restricted cash and investments by the General Fund had been resolved at the end of the receivership.
Prior to resigning on August 31, 1990, the Receiver and Controller were satisfied that the cash flow was sufficient to enable Ecorse to pay $100,000 towards the Emergency Loan Board notes. This principal payment, which was paid two years prior to its due date, was one of few principal payments by a governmental entity of such debt since the State established the Emergency Loan Board.
1988 General Fund Operations
Despite the Mayor and Council’s attempt to have their proposed 1988 budget approved by the Court (and the receivership terminated), the Council refused to approve the sale of real and personal property throughout the 1988 fiscal year. Ultimately, many of these facilities and equipment were sold in the 1989 fiscal year and beyond.
The costs of litigation in 1988 continued to be excessive as the Receiver negotiated labor agreements and fought several of the Mayor and Council’s objections to his actions. The AFSCME settlement of $669,650 was charged to the 1988 fiscal year. Finally, the equity of several terminated funds was transferred to the General Fund.
After considering the above matters, the General Fund operating expenditures exceeded the related revenues by $2.2 million for the year ended June 30, 1988. After considering an operating transfer from the Water and Sewer Fund of $1.3 million, the General Fund’s ending deficit at June 30, 1987 had increased from $2,217,147 to $2,872,704 at June 30, 1988.
1989 General Fund Operations
By July 1, 1988, many of the legal costs, litigation, labor agreements, receivership challenges and other issues were resolved. The December 1, 1987 pension judgment levy of 2.5 mills (generated $433,000 in additional property taxes) had assisted the receiver in funding the pension contribution for the 1988 fiscal year. By fall 1988, the disputes with the Pension Board were substantially settled and the permanent 6.0 mill pension judgment levy (would generate approximately $1.1 million in additional property tax revenues) would be levied on December 1, 1988.
By 1989, the General Fund operating revenues exceeded the expenditures by $55,000. After considering an operating transfer from the Water and Sewer Fund of $1,550,000, the deficit of $2,872,704 at June 30, 1988 had been reduced to $1,245,359 by June 30, 1989.
The receivership was scheduled to end in December 1989. However, the deficit reported in Ecorse’s financial statements for the year ended June 30, 1989 prevented the receivership’s termination.
1990 General Fund Operations
By 1990, virtually all of the issues causing the fiscal distress had been addressed by the Receiver. The General Fund operating revenues exceeded the expenditures by $464,000. The Pension Plan disputes had been finally resolved, allowing for deferral of a portion of the 1990 pension contribution of $844,000. In addition, no operating transfer from the Water and Sewer Fund was required to assist in alleviating the General Fund deficit in 1990.
After considering the above, the General Fund deficit of $1,245,359 at June 30, 1989 had been eliminated by June 30, 1990. As the General Fund reflected a surplus at June 30, 1990 of $95,700, Judge Rashid ordered the receivership ended effective August 31, 1990. Objections to terminating the receivership were filed by the Pension Board as they were concerned that the Mayor and Council would fail to make the pension contributions. Judge Rashid denied this petition.
Concerns were expressed by the Mayor and Council in the need to fill the position of City Controller. While they performed a search for a replacement of Mr. Eva, he was encouraged to remain beyond the end of the receivership.
Pension Plan
A comparison of the financial condition of the Police and Fire Pension Plan at the inception of the receivership and at its conclusion is provided below (in thousands):
|
|
|
Inception |
|
August 31, 1990 |
|
|
|
|
|
|
|
Actuarial accrued liabilities |
|
$15,817 |
|
$15,391 |
|
Pension Plan assets |
|
$( 5,132) |
|
$( 5,040) |
|
UNFUNDED ACTUARIAL ACCRUED LIABILITIES |
|
$10,685 |
|
$10,350 |
While the Receiver was unable to significantly reduce the Pension Plan’s unfunded actuarial accrued liabilities, its increase was stopped. The unfunded actuarial accrued liabilities was effectively a form of borrowing that eventually would have to be funded. Prior to the receivership, this obligation was increasing at a rate of over 6.0% annually due to Ecorse’s failure to properly fund the Pension Plan. Regular pension contributions in accordance with the actuarial reports assisted in stopping the downward spiral of the Pension Plan’s financial condition.
With the resignation of the Receiver effective August 31, 1990, Judge Rashid returned control over the operations of Ecorse to the Mayor and Council. Concerns were expressed by Mr. Schimmel as to the ability and willingness of Ecorse officials and management to maintain its operations in a fiscally sound manner.
On August 31, 1990, Judge Rashid ordered the termination of Ecorse's receivership based upon the surplus of $95,700 as reflected in the audited financial statement for the year ended June 30, 1990. Unlike its inception, the receivership ended quietly. The reigns of government were turned back to the Mayor and Council.
Mr. Louis Schimmel, former Receiver, was appointed by Judge Rashid to be the Monitor for as long as the $4.0 million judgment bonds are outstanding. As Monitor, Mr. Schimmel is responsible for reviewing Ecorse's quarterly operating results and reporting his findings to the Court. The Monitor has no authority or power to affect operations.
At the time that Mr. Schimmel resigned, he warned that unless the diligence of the Receiver was continued by Ecorse officials and management, the potential existed to digress to the same operating problems that created the need for the receivership, including: excessive overtime, hiring a full-time Department of Public Works, eliminating the part-time Fire reservists, failing to make Pension Plan contributions, and letting contracts for projects to other than the lowest qualified bidder.
The audited financial statements for the year ended June 30, 1991 reflected that the General Fund's operating revenues exceeded expenditures by $178,000. No long-term debt was borrowed and no transfers-were necessary from the Water and Sewer Fund to assist in balancing the General Fund operations. In addition, the 1991 operations included the accelerated Emergency Loan Board note principal payment of $100,000. After considering a transfer of $125,000 made by the General Fund to another fund, the $95,700 surplus at June 30, 1990 increased to $148,500.
In short, Ecorse's operations during the first 10 months under the Mayor and Council demonstrated that this Mayor and Council could operate effectively beyond the receivership. No additional short-term or long-term borrowing was required through June 30, 1992 to meet operating needs. The Pension Plan contribution of $1.1 million was paid in accordance with the Court order for the 1991 and 1992 fiscal years.
Given the surplus at June 30, 1991, the Mayor and Council approved an additional payment of $100,000 towards the payment of the Emergency Loan Board notes. This second $100,000 principal payment is in advance of the original note payment schedule.
There were several lawsuits, however, reflected in the 1991 audited financial statements, as follows:
Pension Plan. The Pension Plan retirees filed a lawsuit challenging the calculation of the final average compensation. It was the retirees contention that many of the fringe benefits and allowances (health, clothing, etc.) recently received should have been defined as compensation. Once defined as compensation, the calculation of the retirement benefits would increase. Retroactive and prospective increases in retirement benefits were sought.
Downriver Sewage Disposal System. The Wayne County Downriver Sewage Disposal System (System), of which Ecorse is a member, has been sued by the Environmental Protection Agency (EPA) to improve the sewer system. The EPA is not satisfied with the combined sewer system and believes that it does not comply with the Clean Water Act of 1989. The EPA is seeking compliance by the System, either through sewer separation or other means.
Great Lakes' property tax challenge. Great Lakes has petitioned the State of Michigan Tax Tribunal to reduce the December 31, 1990 State equalized valuation of its real and personal property taxes from $119 million to $72 million. This reduction would affect the 1992 fiscal year property tax revenues. Should Great Lakes be successful, the annual reduction in Ecorse property tax revenues would approximate $1.5 million.
The Pension Plan litigation was recently settled with the Police and Fire unions and retirees. The language in the labor contract concerning the inclusion of fringe benefits and allowances has been improved. No immediate costs to the Pension Plan were incurred. In turn, certain sick and vacation pay can now be included in the calculation of the final average compensation. The Receiver eliminated the use of sick and vacation pay in the calculation of final average compensation in the labor contracts effective July 1, 1988.
The Downriver Sewage Disposal System litigation is being contested by Wayne County on behalf of all downriver communities. Over the past several years, the System has been upgrading the sewers and treatment plant with available funds. However, should the System not be successful in defending its position, a significant level of expenditures may be required by the downriver communities. The result may be the issuance of debt by the communities or system, state and federal grants, and / or to significantly increase the fees associated with the processing of sewage.
The Great Lakes' property tax challenge may not be solved for several years. Normally, such litigation would affect the year of petition and any subsequent years absent a specific agreement to the contrary negotiated as part of a settlement. The effect on the Ecorse operations would be significant. The challenge is still pending.
All labor agreements expired June 30, 1991 and were unsettled throughout much of the 1992 fiscal year. Recently, both the Police and AFSCME agreements have been settled, but negotiations with the Fire Department continue. The Firefighters are now seeking arbitration.
Over the 1992 fiscal year, the time incurred on a weekly basis for the part-time Fire reservists has increased to the point enabling them to enter the union. Essentially, the once part-time reservists may become full-time personnel. They are currently paid $5.00 per hour, but are seeking increases in compensation and a fringe benefit package as part of the settlement. Should the reservists' system negotiated by the Receiver be eliminated, a substantial General Fund operating benefit will be lost.
Shortly after the Receiver's resignation, the Mayor and Council issued a request for proposal for DPW services as the contract signed under the receivership had expired. The Mayor and Council requested several qualified vendors to propose. The vendor with the lowest quotation was selected.
The improvement of Ecorse's operations and management under the receivership and beyond, enabled the passage of a new earmarked property tax (.25 mills) devoted to reopening the library which had been closed at the inception of the receivership. The .25 mills is expected to generate approximately $46,000 in annual property tax revenues.
Because of the recent reductions in interest rates, Ecorse chose to refinance the outstanding principal on the judgment bonds. The actions taken by the Mayor and Council should result in lower debt service in future years.
In November 1991, two of the Council members present during the receivership were replaced. The racial balance of the prior Council was four whites (including the Mayor) and three blacks. At present, the racial make-up of the Council is three whites (including the Mayor) and four blacks.
Often, voting is along racial lines and the requirement to demonstrate minority involvement in contracts has increased. One of the initial actions taken by the Council elected in November 1991 was to terminate Ernst & Young, the auditors present throughout the receivership and the 1991 fiscal year. Jack Martin & Company, a minority-owned accounting firm, was hired to perform the 1992 audit effort. As of the date of this Report, the audit for the year ended June 30, 1992 was incomplete.
In the fall of 1991, Wayne County provided an individual to assist Ecorse in community and economic development efforts. One of the recent economic development successes was the opening of a retail drug store in the downtown area.
The receivership was successful in eliminating Ecorse's accumulated deficits and fiscal distress in December 1986. The Receiver reduced excess staff, eliminated discretionary unfunded operations, restructured operations, and revised contracts to inhibit the Mayor, Council, elected officials, unions and Ecorse management from digressing back to the same problems experienced at the inception of the receivership.
Union agreements were revised which lowered the costs of providing services. Patronage and other employee positions were eliminated. Services were privatized to the extent possible. Service alternatives were explored whereever possible, such as contracting services from other governmental units and annexation. Finally, when all other alternatives were exhausted in reducing costs to the bare minimum, a specific judgment levy for pension contributions to the underfunded Police and Fire Pension Plan (Pension Plan) was raised by the Court. Before this permanent tax went into effect, however, the Pension Plan was closed to new hires and many of the active employees were transferred to the State-administered Michigan Municipal Employees Retirement System.
Other municipalities can benefit from the efforts discussed in this Report. Many of the issues addressed by the Receiver may require other municipal officials and management to take tough stands on often politically sensitive issues. These municipal officials and management need the "political will" to resist the various parties who would prevent change. Unfortunately, too few elected officials have this political will.
In the City of Warren, for example, the Mayor recently attempted to privatize the garbage and rubbish disposal services. By his estimates, privatization would have saved Warren taxpayers $2 million annually. However, the union mounted a campaign which included having over 300 garbage disposal representatives, their families and others present at a Council meeting. The Warren Council voted unanimously against privatization.
While it is likely that the Warren Council recognized that privatization would benefit their taxpayers, they did not have the political will to resist those who opposed change. Several individuals cited problems in the delivery of services by a contractor hired over 15 years ago as the reason for retaining these services. Presently, approximately six municipalities in the Metro area perform garbage and rubbish disposal internally.
The union did agree to concessions in the existing contract. It is likely, however, that the concessions will not approach the $2 million savings cited by the Warren Mayor had this service been privatized. The Mayor had wanted to provide these services in a cost-efficient manner, but was denied this opportunity by a Council which did not have the political will to tell 300 individuals that the costs incurred to provide this service internally were greater than the market would bear. Effectively, the Council indirectly voted an increase in taxes on Warren residents by failing to obtain these services in the most cost-effective manner possible.
The City of Detroit is experiencing substantial fiscal distress. Facing increasing losses and accumulating deficits, Detroit's Mayor issued an order that reduced the compensation of non-unionized personnel by 10%. After ordering these reductions, the Mayor pursued similar reductions from the Detroit's unions. Before receiving the benefits of the reductions from the non-unionized personnel or receiving any significant union reductions, the Council reduced the concessions of the non-unionized personnel to 2% and challenged the Mayor in court. The court sustained the Council's position, with comments that the entire matter could have been resolved if the Mayor and Council worked together for a common solution, rather than at odds with one another.
The Detroit AFSCME union reacted to the reduced concessions of non-unionized personnel by not agreeing to accept the reductions proposed by the Mayor. Instead, the Mayor laid-off approximately 100 AFSCME employees, which at approximately $40,000 in compensation and fringe benefits each, would save the City approximately $4 million over the next year. As the City is facing over $100 million or more in operating losses over the next year, these lay-offs will address approximately 4 days of the fiscal distress. Only now are there discussions coming from city hall for the need to seriously consider privatization.
In a second example of Detroit's inability to improve services to their fullest, the mayor received concessions from the garbage and rubbish union of 10%. Presently, the City has estimated that the monthly garbage and rubbish pick-up cost per household to be $6.85. If the full 10% savings is realized, the cost per household will decline to approximately $6.17 per month. A Detroit-based company has prepared an informal proposal to provide these services for $4.92 per month. As there are approximately 347,000 households in Detroit, the failure to privatize these services may have resulted in an annual indirect tax increase of $5.2 million. Again, the political will is not present to change. The current services have been justified by the Mayor's administration declaring that the services are 'already efficient'.
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.
Politics.
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.
Timinq
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.
Politics
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.
Financial Information
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.
Loans
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.
Insurance
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.
The willingness of governmental unit officials to address privatization as a viable service delivery alternative are few and far between. Many may investigate this avenue as an alternative, but few will have the political will to actually vote to eliminate the governmental unit's employees. Governmental officials will resign themselves to the politically easy position of avoiding this alternative. When avoided, the potential for an indirect tax increase (though the avoidance of reduced expenses) is enacted into law without voter approval.
Governmental officials must be willing to address the labor issue directly. Too often, the desires of labor overshadow the ability of a governmental unit to pay for the services. The Michigan Employee Relations commission, which oversees all labor arbitration awards, must truly take this matter into consideration when decisions are made. Presently, although it may be considered, it is not the driving force in the final resolution of a labor dispute.
The governmental officials of the 1990s will have to be creative in providing more services with less dollars than ever before. The "tax wail" has been met by most governmental units and the likelihood of simply increasing taxes to address ever increasing service needs will no longer be possible. Not until the governmental officials review, challenge and demonstrate to the public that the services are being provided in the most cost effective manner will the public continue to grant increases in taxes.
NOTE A – BASIS OF FINANCIAL INFORMATION
The Comparative Operating Statements in Appendix A, which represent approximately 95% of Ecorse's entire operations, include:
General Fund.
Combined Major and Local Streets Funds – these two funds have been combined as the services and fiscal distress discussions are similar in nature.
Water and Sewer Fund.
Police and Fire Pension Plan.
After an exhaustive search, a copy of the 1981 audited financial statements could not be located. As such, certain of the 1981 Comparative Operating Statements could not be presented.
The Comparative Operating Statements were derived from the audited financial statements for the respective period. Adjustments have been incorporated into the financial statements for restatements (generally errors observed in subsequent audits) and other matters, including:
The Federal Revenue Sharing grant has been presented as having been received directly in the General Fund as the grant was used for General Fund purposes. Actually, the grant was recorded in a separate Special Revenue Fund and amounts periodically transferred to the General Fund.
The Comprehensive Employment Training Act (CETA) grant has also been presented as having been received by the General Fund as it was used for General Fund purposes.
Throughout the early to mid-1980s, there were many restatements discovered by outside auditors in the succeeding year. A restatement is generally an error observed in the prior years financial statements. The accounting personnel and related systems were such that errors were often not detected for a long time or were difficult to discover.
NOTE B – GENERAL FUND
Recognizing that Ecorse would likely lose its dispute relating to the Police and Fire Pension Plan and other litigation, provisions were charged to operations. Generally, these amounts have been charged to the general 'government', as follows:
|
|
|
Provision |
Balance At June 30 |
|
1982 |
|
$166,000 |
$166,000 |
|
1983 |
|
422,000 |
588,000 |
|
1984 |
|
463,000 |
1,051,000 |
The 1984 financial statements refers to $816,000 related to the delinquent Pension Plan contributions. It is difficult to ascertain the final disposition of this accrual based upon a review of the 1985 financial statements. However, it appears that the following occurred:
Ecorse restated its June 30, 1984 General Fund equity as the accrued liabilities were overstated by $182,595. The treatment of restating the prior year financial statements for this matter is incorrect. However, the Comparative Operating Statements have not been corrected for this matter as the effect on the statements cannot readily be determined.
The accrued liabilities at June 30, 1985 declined to $219,502 and are no longer include a reference to delinquent Pension Plan contributions.
Included within the accruals at June 30, 1985 is an amount of $543,189 relating to a portion of a retroactive pay increase for Police labor settlements during the year.
Overall, it appears that the accrual established, in part, for delinquent Pension Plan contributions was ultimately used for retroactive pay increases in 1985. As a result, the potential exists that the General Fund deficit of $2,311,535 at June 30, 1985 may have been understated by as much as $1.0 million. However, as the delinquent Pension contributions were addressed through the issuance of the judgment bonds in the fall of 1985, the General Fund equity at June 30, 1986 is unaffected.
In 1983 and prior, health insurance and certain other fringe benefit costs were charged to the 'general government' line item. By 1983, these costs exceeded $895,000. Subsequent to 1983, these costs were distributed to the various operating departments.
NOTE C – WATER AND SEWER FUND
The significant decrease in revenues in the 1982 fiscal year resulted from the significant decline in water usage by major commercial customers. Water usage is the basis for billing water and sewer services.
Water and sewer costs, however, did not decline in proportion to the reduced billings due to the method of billing costs based on estimates by the Detroit Water and Sewer Department (DWSD). The DWSD billing method was challenged by Ecorse resulting in the resolution of the matter through a Consent Agreement in June, 1984.
Water and sewer rate increases were instituted for the 1981, 1983 and 1984 fiscal years. In doing so, repairs to the water and sewer system began in the 1982 and 1983 fiscal years, as reflected in the sharp increase in 'supplies, maintenance and utilities'. However, by 1984, repairs were suspended as substantially all of the Water and Sewer Fund's cash had been transferred to the General Fund for operating purposes.
NOTE D – POLICE AND FIRE PENSION PLAN
The following is a comparison of the actuarially determined liabilities and the related assets of the Police and Fire Pension Plan as prepared by an outside actuary as of December 31, 1986, December 31, 1983 and June 30, 1980 (in thousands):
|
|
1986 |
1983 |
1980 |
|
Actuarial accrued liabilities |
$15,817 |
$11,100 |
$9,300 |
|
Pension Plan assets used by the actuary |
(5,132) |
(2,048) |
(1,313) |
|
UNFUNDED ACTUARIAL ACCRUEDLIABILITIES |
$10,685 |
$9,052 |
$7,987 |
The 1980 actuarial report used an assumption of 6.0% for investment return. The 1983 and 1986 actuarial reports used a 7.0% investment return assumption. This change in assumptions has lowered the actuarial accrued liabilities for 1983 and 1986 otherwise reflected by an indeterminable amount.
NOTE A – BASIS OF FINANCIAL INFORMATION
The Comparative Operating Statements in Appendix A, which represent approximately 95% of Ecorse's entire operations, include:
General Fund.
Combined Major and Local Streets Funds – these two funds have been combined as the services and fiscal distress discussions are similar in nature.
Water and Sewer Fund.
Police and Fire Pension Plan.
After an exhaustive search, a copy of the 1981 audited financial statements could not be located. As such, certain of the 1981 Comparative Operating Statements could not be presented.
The Comparative Operating Statements were derived from the audited financial statements for the respective period. Adjustments have been incorporated into the financial statements for restatements (generally errors observed in subsequent audits) and other matters, including:
The Federal Revenue Sharing grant has been presented as having been received directly in the General Fund as the grant was used for General Fund purposes. Actually, the grant was recorded in a separate Special Revenue Fund and amounts periodically transferred to the General Fund.
The Comprehensive Employment Training Act (CETA) grant has also been presented as having been received by the General Fund as it was used for General Fund purposes.
Throughout the early to mid-1980s, there were many restatements discovered by outside auditors in the succeeding year. A restatement is generally an error observed in the prior years financial statements. The accounting personnel and related systems were such that errors were often not detected for a long time or were difficult to discover.
NOTE B – GENERAL FUND
Recognizing that Ecorse would likely lose its dispute relating to the Police and Fire Pension Plan and other litigation, provisions were charged to operations. Generally, these amounts have been charged to the general 'government', as follows:
|
|
|
Provision |
Balance At June 30 |
|
1982 |
|
$166,000 |
$166,000 |
|
1983 |
|
422,000 |
588,000 |
|
1984 |
|
463,000 |
1,051,000 |
The 1984 financial statements refers to $816,000 related to the delinquent Pension Plan contributions. It is difficult to ascertain the final disposition of this accrual based upon a review of the 1985 financial statements. However, it appears that the following occurred:
Ecorse restated its June 30, 1984 General Fund equity as the accrued liabilities were overstated by $182,595. The treatment of restating the prior year financial statements for this matter is incorrect. However, the Comparative Operating Statements have not been corrected for this matter as the effect on the statements cannot readily be determined.
The accrued liabilities at June 30, 1985 declined to $219,502 and are no longer include a reference to delinquent Pension Plan contributions.
Included within the accruals at June 30, 1985 is an amount of $543,189 relating to a portion of a retroactive pay increase for Police labor settlements during the year.
Overall, it appears that the accrual established, in part, for delinquent Pension Plan contributions was ultimately used for retroactive pay increases in 1985. As a result, the potential exists that the General Fund deficit of $2,311,535 at June 30, 1985 may have been understated by as much as $1.0 million. However, as the delinquent Pension contributions were addressed through the issuance of the judgment bonds in the fall of 1985, the General Fund equity at June 30, 1986 is unaffected.
In 1983 and prior, health insurance and certain other fringe benefit costs were charged to the 'general government' line item. By 1983, these costs exceeded $895,000. Subsequent to 1983, these costs were distributed to the various operating departments.
NOTE C – WATER AND SEWER FUND
The significant decrease in revenues in the 1982 fiscal year resulted from the significant decline in water usage by major commercial customers. Water usage is the basis for billing water and sewer services.
Water and sewer costs, however, did not decline in proportion to the reduced billings due to the method of billing costs based on estimates by the Detroit Water and Sewer Department (DWSD). The DWSD billing method was challenged by Ecorse resulting in the resolution of the matter through a Consent Agreement in June, 1984.
Water and sewer rate increases were instituted for the 1981, 1983 and 1984 fiscal years. In doing so, repairs to the water and sewer system began in the 1982 and 1983 fiscal years, as reflected in the sharp increase in 'supplies, maintenance and utilities'. However, by 1984, repairs were suspended as substantially all of the Water and Sewer Fund's cash had been transferred to the General Fund for operating purposes.
NOTE D – POLICE AND FIRE PENSION PLAN
The following is a comparison of the actuarially determined liabilities and the related assets of the Police and Fire Pension Plan as prepared by an outside actuary as of December 31, 1986, December 31, 1983 and June 30, 1980 (in thousands):
|
|
1986 |
1983 |
1980 |
|
Actuarial accrued liabilities |
$15,817 |
$11,100 |
$9,300 |
|
Pension Plan assets used by the actuary |
(5,132) |
(2,048) |
(1,313) |
|
UNFUNDED ACTUARIAL ACCRUEDLIABILITIES |
$10,685 |
$9,052 |
$7,987 |
The 1980 actuarial report used an assumption of 6.0% for investment return. The 1983 and 1986 actuarial reports used a 7.0% investment return assumption. This change in assumptions has lowered the actuarial accrued liabilities for 1983 and 1986 otherwise reflected by an indeterminable amount.
NOTE: The State Equalized Valuation is based upon assessed values of property within Ecorse as of the December 31 preceding the applicable fiscal year and is 50% of the estimated true ("fair market") value.
The operations, Police and Fire Pension Plan, and longevity millages are subject to a limitation of 20.0 mills in accordance with Ecorse's Home Rule Charter. The rubbish millage is subject to a State limitation of 3.00 mills. All other millage rates have no limitation.
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