Correspondence among

Good afternoon, Please find attached an electronic communication and documentation from Ed Kurtz. Thank you. 1/22/2016 xxxEND_PAGE:treasury01_b08_1053_1162_018 RE: JWC - Northwest Pump Station - Koryzno, Edward (Treasury) Maxine Murray Executive Assistant to Mayor Dayne Walling Edward J. Kurtz, Emergency Manager Michael K. Brown, City Administrator 1101 §. Saginaw Street Flint, MI] 48502 810.237.2035 Telephone 810.766.7218 Fax Page 2 of 2 1/22/2016 xxxEND_PAGE:treasury01_b08_1053_1162_019 CITY OF FLINT OFFICE OF EMERGENCY MANAGER EDWARD J. KURTZ June 19, 2013 Mr. Andy Dillon, State Treasurer Michigan Department of Treasury Lansing, MI 48922 Re: JWC— Northwest Pump Station Dear Treasurer Dillon: This is to request your approva! to enter into a no bid contract with JWC for emergency repairs to Flint’s northwest pump station. As described in the attached memorandum from Robert J. Case, Water Pollution Control Supervisor, these repairs are critical for the proper function of the main sewage pumps at the northwest pump station. The City recently made similar repairs at the Third Avenue pump station, and the low-bid vendor was JWC. The needed equipment is customized for each installation, and its design and fabrication will take approximately 12 - 16 weeks. On that basis, and due to the emergency nature of the necessary repairs, | recommend a no-bid contract with JWC to perform the repair work at the northwest pump station. The estimated cost is $275,000. The Local Financial Stability and Choice Act (Public Act 436 of 20{2) states that “[e]xcept as otherwise provided in this subsection, any contract involving a cumulative value of $50,000.00 or more is subject to competitive bidding by an emergency manager. However, if a potential contract involves a cumulative value of $ 50,000.00 or more, the emergency manager may submit the potential contract to the state {reasurer for review and the state treasurer may authorize that the potential contract is not subject to competitive bidding.” MCL 141.1552(3). 1 am requesting your approval of a no bid contact with JWC to perform emergency repairs to the northwest pump station at an estimated cost of $275,000. If you need any further information concerning this request, please jet me know. Otherwise, thank you for your consideration of this matter. Very-ruly you ward J. Kurtz Emergency Manager City Hail 1101 S, Saginaw Street - Flint, Michigan 48502 810-766-7346 FAX: 810-766-7218 = www.cityofllint.com xxxEND_PAGE:treasury01_b08_1053_1162_020 CITY OF FLINT OFFICE OF EMERGENCY MANAGER EDWARD J. KURTZ June 28, 2013 Mr. Andy Dillon, State Treasurer Michigan Department of Treasury 4th Floor Treasury Building 430 West Allegan Street Lansing, MI 48922 Dear Mr. Dillon: Attached please find Update 3 for the City of Flint Financial and Operating Plan. This update will also serve as my closing memorandum as specified in the Emergency Manager's contract with the State of Michigan. This report includes a summary of the financial conditions and goals for the City of Flint, the plan to conduct the operations of the City and the on-going actions being taken to resolve the financial emergency. This update will be posted on the City’s website: www.cityofflint.com . Respectfully submitted, Aw No — Edward Kurtz Emergency Manager ce: Governor Rick Snyder |. Brown, Clerk of the City of Flint E. Koryzno, Dept. of Treasury City Hall 1101 S, Saginaw Street - Flint, Michigan 48502 810-766-7346 FAX: 810-766-7218 | www.cityofflint.com xxxEND_PAGE:treasury01_b08_1053_1162_021 City of Flint Financial and Operating Plan — FY 2013 — Third Update June 30, 2013 Introduction This update to the Financial and Operating Plan for the City of Flint is submitted by the Emergency Manager for the City of Flint to Governor Rick Snyder, through the Department of Treasury for the State of Michigan, in accordance with Public Act 436, Section 11. The City of Flint had previously submitted a Financial and Operating Plan under PA 72 and was not required under PA 436 to submit a new plan. However, as this is the end of the 2013 fiscal year and end of the service of Emergency Manager Kurtz, the City felt it was appropriate to prepare an update to the current plan. This is also the end of the first full fiscal year under the administration of the Emergency Manager. The FY 2014 Budget and Five Year Strategic Plan has been adopted and in October, 2013 a City Wide Master Plan will also be adopted. This update will also serve as Emergency Manager Kurtz’ closing memorandum as specified in the Emergency Manager’s contract with the State of Michigan. On June 26, 2013 former EM Michael K. Brown has been reappointed by Governor Snyder as Emergency Manager for the City of Flint. This report includes a summary of the financial conditions and goals for the City of Flint, the plan to conduct the operations of the City and the on-going actions being taken to resolve the financial emergency. This update will be posted on the City’s website: www. cityofflint.com . Summary of the EM/EFM Appointment Sequence and Development of the Operating and Financial Plan The Flint Financial Review Team determined in November 2011 that the City of Flint was in a financial emergency. See Attachment #1. On December 1, 2011 Governor Rick Snyder appointed Michael K. Brown as Emergency Manager. EM Brown developed the Financial and Operating Plan utilizing the resources of a five person Advisory Committee as well as five additional advisory committees. EM Brown sought broad expertise to ensure public engagement and to maintain a sense of continuity with the Mayor and City Council. In fact, all nine City Council members and over fifty other citizens participated in the advisory committees. EM Brown's original Financial and Operating Plan (45 Day Plan) was submitted to the State Treasurer on January 15, 2012; the first update to the Plan was submitted on June 1, 2012. On August 8, 2012, PA 4 was suspended and Edward J. Kurtz was appointed Emergency Financial Manager under PA 72. (Mr. Brown stepped aside as he was prohibited from serving as EFM due to his recent service as Interim Mayor for the City of Flint.) xxxEND_PAGE:treasury01_b08_1053_1162_022 EFM Kurtz established a new Advisory Committee in accordance with the requirements of PA 72, Utilizing the Advisory Committee and the City of Flint management team, EFM Kurtz presented a second update to the Financial and Operating Plan and submitted this to the State Treasurer on February 8, 2013. Operations of the City of Flint Shortly after his appointment as EM, Michael Brown took steps to reorganize the city government operations including: elimination of departments, consolidation of departments, elimination of management level positions, adjustment of the compensation of elected and appointed officials, elimination of the Civil Service operation and the Office of Ombudsman. Management appointments were made to ensure that the essential services necessary for the public’s health, safety and welfare are provided and to continue conducting all aspects of the City of Flint’s operation within the resources available. Necessary employment contracts were extended with the approval of the Treasury Department. Department management reconfigurations were completed in anticipation of reductions in staffing levels as provided in the FY 13 Budget (See Attachment # 2 Organizational Chart FY 13). Subsequently, as part of the FY 14 Budget process a Strategic Plan was adopted and more changes in the organizational structure occurred. The primary change was the inclusion of a new Planning and Development Department (See Attachment #3 Organizational Chart FY 14). When PA 436 became effective in March 2013 the City Council members’ and Mayor’s compensation was eliminated. EM Kurtz partially restored compensation for Mayor and Council through Orders 1 and 2. These orders also defined specific responsibilities and requirements. For example, the City Council members must complete Level One of the Michigan Municipal League (MML) core course for municipal government and must receive the MML education award with in one year. All Orders and Directives issued by the Emergency Financial Manager (under PA 72) and Orders issued by the Emergency Manager (under PA 436) are listed in Attachment #4; Orders and Directives of the EFM and EM. Financial Status The financial condition of the City of Flint has begun to improve, with revenues and expenses generally tracking with budget projections. While the FY12 results showed an increase in the accumulated deficit, that increase was anticipated, due to a decision early on to focus efforts on developing and implementing a budget for FY13 that would maintain essential services while moving the City toward long term Update 3 Final June 28, 2013 2 xxxEND_PAGE:treasury01_b08_1053_1162_023 financial solvency. These efforts are proving successful. To-date, the FY13 budget was balanced without increasing the deficit; and revenues and expenses have been generally in line with expectations. The budget for FY 14 has been adopted, with anticipated revenues and expenses balanced. In both FY13 and FY14, difficult decisions have been made with regards to staffing, fringe benefits, organizational structure, levels of service, and increases in fees and taxes. Development of the FY14 budget was done in the context of developing budgetary projections through FY 18, and recognizing the need to eliminate the City’s accumulated deficit. With a desire to develop and maintain a multi-year perspective on city resources and operations, the development of the FY15 budget is now beginning. While FY15 will be extremely challenging due to continued property value declines and the anticipated loss of some major grants, the budget for FY15 will be realistically balanced. Finally, as a result of analyzing projected revenues and expenses for the next five years, it has become clear that the City will continue to face a structural deficit in the area of $3 million to $5 million annually, More than anything, the City’s stagnant revenue streams (no growth projected over the next 5 years) and its high amount of legacy costs ($37 million for FY 14) have created this situation. This structural deficit essentially precludes the City from stabilizing service levels even at minimal levels, and prevents it from addressing significant unmet capital needs (currently estimated at more than $300 million). Without structural change, this situation is not sustainable and the City will not achieve even a minimal level of financial solvency in the long term. While bankruptcy has been mentioned as a possible solution to this, investigation of the alternative shows it to be expensive, slow, and with outcomes that are far from certain. However, investigation of an alternative which focuses on improving the City’s revenue stream while continuing to reduce legacy costs shows promise. For example, an increase in the local income tax rate to the levels afforded other urban centers, coupled with significant additional changes in health care and pensions for active employees and retirees appears to bave the potential to overcome the $3-$5 million structural deficit while providing a similar amount for stabilizing services and beginning to address capital needs. Cash Flow as of June 30, 2013 Cash flow has improved with the receipt of revenues from the public safety millage, street light assessment, and waste collection fees. Pooled cash on hand is now in excess of $25 million, compared to $13 million as of December, 2011. However, the General Fund still relies heavily on borrowed cash as a result of its $19 million accumulated deficit. This cannot be resolved without borrowing, as stated in the Draft Deficit Elimination Plan submitted to Treasury in January 2013. As of this date, Treasury has not approved the Deficit Elimination Plan. Update 3 Final June 28, 2013 3 xxxEND_PAGE:treasury01_b08_1053_1162_024 FY13 Budget — Preliminary Year End Projection As of June 1, 2013, revenues and expenses are generally on target. The budget was amended in December to reflect some adjustments to revenues and expenses, including the proceeds of the voter approved millage for police and fire protection, projected revenues and expenses for the operation of the City lock-up; and the extension of a public safety grant from the Mott Foundation which provided continued funding for 11 law enforcement officers. Additional Budget amendments were adopted based on an unplanned special election, the proceeds from two auctions, utility refunds and other minor issues. Income tax revenues appear to be slightly less than projections, and over expenditures in Fire Department overtime have been addressed. Absent any catastrophic event, such as an adverse decision on modifications of retiree health care, FY13 is projected to end with revenues slightly exceeding expenses. FY13 Budget Decisions The FY 13 budget was balanced realistically, and encompassed significant revenue increases and expenditure reductions. The FY13 budget process started with a projected gap of $25 million between projected revenues and projected expenses. The result was a total budget of $192 million, of which $82 million is sewer and water; $58 million is General Fund and $30 million is Federal CDBG. The budget encompassed expenditure reductions which included the elimination of nearly 150 positions (20% of the workforce); employee concessions including a restructuring of health and pension benefits and employee costs; and various organizational changes. The budget also recognized the implementation of new health care plans and pensions benefits for active employees, as well changes in healthcare plans for retirees. These changes reduced the City’s OPEB liability from nearly $900 million to less than $400 million. The change in retiree health care is the subject of litigation in Federal District Court, where a temporary restraining order has been issued and is being appealed. Should the City be precluded from implementing these changes in health care for retirees, there will be a projected (unbudgeted) increase in expenses of $1.7 million in FY13 and more than that in FY14 and beyond, this will be devastating to efforts to return Flint to financial solvency. On June 25, 2013, the court denied the City’s request to stay the order and in fact, applied the injunctive order to all retirees as a class (without actually certifying a class). The City’s legal counsel has recommended the City immediately comply with the court’s order. The City has authorized legal counsel to immediately apply for relief in the 6" Circuit Court. For future employees, city retiree health care will no longer be an option, and the traditional defined benefit pension plan for non-police and fire employees will be replaced with a hybrid pension plan. There are also numerous changes which increase management flexibility and reduce other employee costs. Note: The City of Flint basically is operating a Medicare system for retirees from the time they retire (as early as Update 3 Final June 28, 2013 4 xxxEND_PAGE:treasury01_b08_1053_1162_025 their mid-forties to early fifties) at the same cost as regular employees ($5,000 to $17,000) which is unsustainable. The FY 13 budget also implemented new revenues in order to provide the level of revenues still required — in spite of expense reductions — to continue the marginal level of city funded public safety personnel and basic city services. These revenues include numerous fee increases; a $143 annual fee for waste collection (replacing a dedicated 3 mill tax levy); a $62 special assessment fee for operation, maintenance, and improvement of street lights (in the past this was a $2.85 million general fund expense); and an overall 25% increase in water and sewer rates (12.5% water; 45% sewer). Unfortunately, the reliance on fees and assessments will create hardship for many of the City’s residents. However, the choices for increasing revenues at this time were limited. For those homeowners who qualify for the property tax exemption, the City recently will waive the street light assessment ($62) and the ready to serve charge on the water bill ($52 approximately). In November 2012, a 6 mill Police and Fire Protection Millage was approved by Flint voters. The first year of this millage is expected to generate $5.3 million. The Emergency Manager also issued a resolution (2012EFM101) on October 17, 2012 as a charter revision requiring that the new millage revenue would be in addition to the 55.5% of unrestricted General Fund dedicated to Police and Fire departments. The percent dedicated to police and fire will increase to 60% in Fiscal 14. Though the FY13 budget was been implemented as planned, the City still faces several legal challenges. While the challenges may not be sustained in the long term, any impediments to implementing the budget will have severe financial impacts. For example, legal challenges which prohibit the City from implementing revenue increases or expenditure decreases will require immediate actions to further reduce spending — including public safety — and may impact the City’s ability to function at an adequate level, particularly in light of the marginal cash flow. Potential challenges the City may face from budgetary perspective include ones associated with the numerous rate increases incorporated into the budget, changes in retiree health care, and the unilateral implementation of changes to three collective bargaining agreements. It should be noted that through the Emergency Manager the City of Flint was able to reach tentative agreements with three of the six bargaining units. To this point, the City was sued over the implementation of increased water and sewer rates, by the President of the City Council et al. This is a prime example of litigation that could impede the COF’s ability to maintain fiscal solvency. With regard to this lawsuit, the City filed a motion to dismiss and in late June 2013 the court dismissed this suit. Two additional law suits were filed: in late May 2013 AFSCME Local 1600 is seeking to repeal the contract imposed by the EM in April of 2012, and URGE (a retiree organization) is seeking to negate the transfer of the pension plan from FERS to MERS. Update 3 Final June 28, 2013 5 xxxEND_PAGE:treasury01_b08_1053_1162_026 FY 12 Audit The Comprehensive Annual Financial Report (CAFR) for FY12 was completed and was filed with the state in a timely manner. The results were as expected, with fewer auditor comments than in past years. Deficits exist in the General Fund ($19.1 million) and in the Water Fund ($8.8 million). In the FY 13 budget document, prepared in April 2012, the accumulated deficit for the FY 12 General Fund was projected to be $18.1 million. However, this projection did not include the $1.54 million write down for the value of Genesee Towers. Adding the write down to the projected deficit of $18.1 million would have resulted in a total of $19.7 million. In the FY12 CAFR, the amended budget projected a deficit of $16.3 million. However, this projection did not include the $1.54 million write down for Genesee Towers. It also included $739,406 in federal grant revenues and $602,192 in local revenues which did not materialize. Taking these items into consideration, the deficit projection would have been $19.2 million. The $19.1 million accumulated deficit reflected an excess of expenditures in the General Fund for FY12 of $11.1 million. This was anticipated by the Emergency Manager shortly after being appointed, which was almost six months into the FY12 year. Given that FY12 was nearly half over, and that significant unplanned reductions in services, primarily public safety, would need to occur if the projected deficit were to be immediately eliminated, the decision of the Emergency Manager, in consultation with Treasury, was to contain costs as much as possible but without significantly reducing services — especially public safety - for the balance of the year. Instead, focus was concentrated on developing a budget for FY13 which would move towards restoring Flint to long term financial solvency. It was projected that as a result of this decision, the deficit for FY 12 could have been as much as $12 million, resulting in an accumulated deficit of $20 million. The deficits identified in the City’s Comprehensive Annual Financial Report for FY12, the year ended June 30, 2012, are follows: General Fund - $ 19,184,850 Water Supply Division - $ 8,758,091 Economic Development Corporation $ 119,439 FY 11 Deficit Financing In April 2012 the Emergency Manager filed a 2011 Deficit Elimination Plan focused on the accumulated deficit as of June 30, 2011. That plan indicated the City’s intent to request authorization to borrow approximately $9 million in Fiscal Stabilization Bonds in order to address the accumulated General Fund deficit once a credible FY13 budget was in place. The 2011 Deficit Elimination Plan was approved by the State. On May 24, 2012 the City filed an application for borrowing with the State Administrative Board, and the Department of Treasury has issued a memorandum stating that the request satisfies the Update 3 Final June 28, 2013 6 xxxEND_PAGE:treasury01_b08_1053_1162_027 necessary statutory requirements. However, Treasury did not authorize the borrowing as proposed and approved in the 2011 Deficit Elimination Plan. While this borrowing request addressed the accumulated FY11 deficit, there was an additional deficit at the end of FY12 of approximately $10 million. It is estimated at this time that an additional $10 million will need to be financed in order to address the FY12 deficit. However, the FY13 budget as adopted should create no additional General Fund deficit. There will be ongoing deficits in the water and sewer funds, but only as related to unfunded OPEB liabilities. Deficit Financing 2012 FY12 ended with an accumulated $19.1 million deficit in the General Fund. The City has shared with Treasury a draft plan to eliminate the deficit over the next five years. The draft plan proposes a mixture of borrowing ($12 million) and dedicating future revenues ($7 million) over the next five years (FY14 to FY18). The deficit of $8.8 million in the Water Fund is less than the unfunded OPEB liability. Since the City is not in the position to address OPEB liabilities throughout the City, there is little reason to increase water rates to eliminate this deficit. Additionally, the City’s approach to containing its OPEB liabilities has been to restructure its active and retiree health care benefits, and to eliminate the promise of retiree health care for new employees. The changes have had a significant impact on the City’s OPEB liabilities, reducing the total unfunded liability from nearly $900 million to less than $400 million, and reducing the Annual Required Contribution (ARC) from $60 million to $22 million. To the extent these efforts are successful; the deficit in the Water Fund will be lessened. Treasury has not responded to this draft plan. Revenue Enhancement Activity As noted in “FY13 Budget Decisions” section, several new revenue actions were implemented for the FY13 Budget: waste collection 3 mils eliminated and fee established, Street Lighting Assessment established, new 6 mil Police and Fire Protection approved by voters, also fees for licenses and permits were adjusted. The EFM via Order No. 8 established the Poverty Exemption to the Street Lighting Assessment. Individuals who qualify for relief from property taxes may apply for an exemption from the street lighting assessment as well. Also, through EFM Order No. 11, water service procedures were modified. The City’s procedures and rate structure for the provision of water service has a substantial financial impact on the City. The Emergency Financial Manager has determined that it is necessary to make a number of changes to these procedures. The following new procedures were adopted regarding water service: 1. Property owners who apply for and are granted the annual poverty tax exemption will also be exermpted from the monthly ready to serve charge for Update 3 Final June 28, 2013 a xxxEND_PAGE:treasury01_b08_1053_1162_028 water service. Exemptions will be for the period of July 1 to June 30. Exemptions