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.
