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.
Lack of financial information.
Lack of effective loan covenants with penalties.
Inability of the emergency financial manager to obtain
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.
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.
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
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
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
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.
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.
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.
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
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