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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.
