Correspondence between

This email was sent from DWSD to Flint yesterday; TYJT was requested to forward this information to the Treasury. Dave weno Original Message-----

Follow Up Flag: Follow up Flag Status: Flagged Good evening Amy, I just received additional information from DWSD regarding an alternative option we had proposed. {fat all possible it would be easier to go over this information in person rather than over the phone. As | indicated we can meet anywhere if that helps. Please let me know. Otherwise, | will wait for his call. Thank you, Dave xxxEND_PAGE:treasury01_b06_0561_0924_215 9500 (Rev 04-11) STATE OF MICHIGAN RICK SNYDER DEPARTMENT OF TREASURY ANDY DILLON GOVERNOR STATE TREASURER DATE: March 15, 2013 TO: Governor Rick Snyder FROM: Andy Dillon, State Treasurer SUBJECT: Status of Financially Distressed Local Governments FEBRUARY JANUARY Cities Cities | EM/EFM 5 5 | Consent Agreement 3 3 | Watch List 5 5 | __ | Per your request, this memorandum summarizes the status of selected financially distressed units of local government. The following units of local government now are subject to Public Act 72 of 1990, the Local Government Fiscal Responsibility Act. GENERAL ISSUES Cities Close to an Exit by EFM: e Ecorse — While most of the financial issues are resolved, the City Council without the State’s involvement, has the authority, through practice and a loosely worded city charter, to meddle in the day-to-day operations of the City, including selecting and supervising staff and setting their pay. Efforts to obtain a voluntary Inter Local Agreement have been frustrated by the unwillingness of a majority of Council to see the need for the oversight contemplated by the ILA. While we continue to work on a compromise, worst case is that we will impose a tran- sition advisory board (TAB) under PA 436 in late March. e Pontiac — As explained below, Mr. Schimmel has a short list of projects to complete before he leaves this summer. Imposition of a TAB will be recommended. Retiree Health Care — In most of the EFM cities, and certainly in those cities that are struggling but not yet in receivership, the cost of promised retiree health care is a major concern. In Pontiac and Flint where changes in retiree health care were imposed under PA 4, lawsuits are pending leaving the effects of those changes uncertain. In Pontiac, the annual liability is about $6.0 million, which is also the amount of the City’s current annual operating deficit. Allen Park’s annual liability is approxi- weww.mchigan gowireasury xxxEND_PAGE:treasury01_b06_0561_0924_216 Governor Snyder March 15, 2013 Page 2 of 16 mately $2.5 million and Flint’s is nearly $20 million, half of which is in the general fund. While Flint and Pontiac have each taken steps to reduce the annual expense of the health coverage the retirees enjoy, those changes are being challenged. In most of our EFM cities, this issue is a difficult obstruc- tion to fiscal balance. Pontiac, our most extreme case, has 52 current employees in the health care system compared to approximately 1200 retirees receiving health care. Treasury is working to devel- op a standard process to use when addressing retiree health care spending. EFM Exit Strategy — Treasury will be meeting individually with each EFM during the next two months to develop a timeline for them to exit the local unit. This timeline will include the specific financial and operational issues that must be resolved in order to exit; target dates for issue resolu- tion; and a benchmarking component. Additionally, Treasury is crafting a list of criteria for each EFM city which establishes success and serves as benchmarks for returning each unit to local con- trol. EMERGENCY MANAGER - Cities City of Allen Park © Update: Joyce Parker was appointed Emergency Financial Manager by the Emergency Loan Board on October 25, 2012, with duties beginning October 29. She also serves, part- time, as the Emergency Financial Manager for the City of Ecorse. * For fiscal year ending June 30, 2012, the City had an operating surplus of $2,973,862, or 18% of general fund revenues of $16,202,731. However, when transfers out of the general fund are taken into account, the financial picture is much worse. The City transferred $4.7 million (net of transfers in) from the general fund, including a $2.4 million transfer associated with studio debt and a $2.5 million transfer to cover retirement health care. Based on these numbers, the City’s unrestricted accumulated general fund deficit is $1,090,225 or 6.7% of revenues. e Treasury is exploring the potential to restructure the studio debt. The EFM has listed the movie studio property for sale and is preparing a detailed Deficit Elimination Plan. The City’s financial distress is exacerbated by the minimum staffing requirements contained in the public safety collective bargaining agreements and the cost of retiree health care. e The Road Out: With our recent entrance into Allen Park, several general strategies are in play. As noted above, the budget is in deficit primarily because of the movie studio debt and the retiree health care obligations. However, labor contracts have minimum manning provisions that need to be resolved, and there are several areas of ongoing expense that can be reduced. Among other things, the EFM’s draft deficit elimination plan also in- cludes personnel reductions (including police and fire), wage reductions, pension plan changes, active and retiree health care changes, reduction in sick days and holiday pay- outs, and revenue enhancements for rubbish and lights. Ms. Parker believes that it may be possible to balance these financial issues short of bankruptcy. However, that option is also being explored. Allen Park’s exit from Emergency Manager status will likely de- xxxEND_PAGE:treasury01_b06_0561_0924_217 Governor Snyder March 15, 2013 Page 3 of 16 pend on Treasury’s ability to restructure the City’s movie studio debt and make signifi- cant adjustments to the City’s retiree healthcare liabilities. City of Benton Harbor Joe Harris was appointed Emergency Financial Manager on August 8, 2012. The Emer- gency Loan Board terminated Mr. Harris’ contract effective January 31, 2013 and appointed Mr. Tony R. Saunders II as the new EFM effective February 1, 2013. For the fiscal year ending June 30, 2012, Benton Harbor had an operating shortfall of $1,125,798, exceeding general fund revenues of $6,555,653 by 17%. The unrestricted accu- mulated general fund deficit is $2,285,483 or 34% of general fund revenues. The unrestrict- ed deficit increased slightly over 2011 by approximately $56,000. Update: The new EFM has established a working with relationship with the City Commis- sion which has resulted in the Commission approving a resolution of support placing a millage proposal on the May ballot. The millage proposal, if approved, replaces the 10 mill special assessment levied during December 2012, with a 10 mill operating levy. The proposal will also include asking voters for a 3 mill increase . The EFM has requested and received an advancement of the April and June revenue sharing payments to address the cash shortage. A $2.5 million emergency loan application is anticipated during July. The Road Out: Mr. Saunders is reviewing all City operational expenses in an effort to ra- tionalize annual expenses and eliminate deficit spending. The large amount of accounts pay- able is a near-term focus. The water plant is a major liability, particularly since users in Benton and St. Joseph Townships have withdrawn from the system due to ongoing political and financial management concerns. The City charter needs to be updated, the performance of City Council needs to be improved, and ongoing liabilities for retiree health care are also an issue. OFR staff are working with the new EM on the water/sewer system debt, transfer of the pension system to MERS and reductions in staff. Treasury had anticipated that with- drawal from the City would be a near-term possibility if charter issues could be overcome. However, these recent revenue issues and the demise of the water system customer base, make a near-term exit more challenging. The new EM understands our desire to make an ex- it as soon as possible. City of Ecorse Joyce Parker was appointed Emergency Financial Manager on August 8, 2012 by the Emer- gency Loan Board. She was first appointed Emergency Financial Manager on October 30, 2009. She continues to serve Ecorse on a part-time basis while she also serves as Emergency Financial Manager for the City of Allen Park. City Council is cool toward an interlocal agreement proposed by Treasury that would create an advisory board under the Urban Cooperation Act, PA 7 of 1967 (Ex. Session) and create a seamless transition process away from an EFM, allowing Ms. Parker to end xxxEND_PAGE:treasury01_b06_0561_0924_218 Governor Snyder March 15, 2013 Page 4 of 16 her service there. A majority of Council believe such an advisory board is unnecessary. Treasury staff is redrafting the [LA to address some of the suggestions made by the AG. The revised agreement will be reviewed with the Council. For the fiscal year ending June 30, 2012 the City had a general fund balance of $2,419,220 or 18.8% of general fund revenues of $12,904,604 and experienced an operating surplus for the first time in several years. The Road Out: The work of the EFM is essentially done. The remaining concern is with the City Council and the City charter language which allows substantial day-to-day in- volvement of the City Council. Discussions continue on an interlocal agreement to estab- lish a Transition Advisory Board, as explained above. If this voluntary approach is not successful, a TAB can be imposed with the advent of PA 436 in late March. City of Flint Edward Kurtz was appointed Emergency Financial Manager on August 8, 2012 by the Emergency Loan Board. He succeeded Mike Brown who was appointed Emergency Man- ager on November 29, 2011, The Emergency Financial Manager is anticipated to be in Flint for more than one year. Mr. Kurtz is taking a minimal salary as EFM, while Mike Brown now works as City Administrator, appointed by Mr. Kurtz. It is assumed that Mike Brown will be reappointed as EM in late March, and that Mr. Kurtz will be retained until June to consult with the City on the FY 2014 budget. For fiscal year ending June 30, 2012, the City incurred a general fund operating shortfall of $10,169,828 exceeding general fund revenues of $51,497,686 by 20%. This resulted in an unrestricted accumulated general fund deficit of $19,184,850, which is 37% of general fund revenues. Update: The City of Flint has been participating with Genesee County on the feasibility of the City’s use of a planned water pipe line from Lake Huron that would serve a large portion of Genesee County as an alternative to water supplied by DWSD. An engineer- ing firm selected by Treasury to conduct an independent evaluation of Flint’s choices for water supply presented their findings on December 18". This is a critical long-term de- cision for Flint and the region. The economics show that but for the excess cost of DWSD water during the three year construction period of the Karegnondi Water Authori- ty (KWA) pipeline, the City will benefit from lower water costs in the long term by us- ing the KWA water and treating the water in Flint at their own, existing, water treatment plant. A recent proposal shows that with cooperative efforts with the County, those ex- cess costs can be further minimized. The Budget for the current fiscal year encompasses both revenue increases and expenditure reductions in an effort to achieve a balanced budget. For example, the budget includes as- sessments for waste collection, for the operation, maintenance, and improvement of street lights, and a 25 percent increase in water and sewer rates. Voters overwhelmingly approved a 6 mill public safety millage in November that will substantially improve the FY 14 budget. xxxEND_PAGE:treasury01_b06_0561_0924_219 Governor Snyder March 15, 2013 Page 5 of 16 On the expenditure reduction side, the budget reduces the City’s workforce by 150 positions (20 percent), and includes employee concessions and a restructuring of employee health care benefits. Retiree health care has been eliminated for future employees. Litigation is pending in federal court to preclude changes to retiree health care. The Emergency Financial Manag- er estimates that retiree health care costs will increase by $3.5 million during the current fis- cal year if he is prevented from implementing the planned changes. The City has recently submitted a five year deficit elimination plan that anticipates submittal of an emergency loan application of $12 million to address the accumulated deficit. The re- mainder of the unrestricted accumulated general fund deficit will be eliminated through $7.1 million in reductions. The City has not yet identified specific cuts but will do so as it works through the development of its fiscal year 2014 budget. The Department is assisting the City with the identification of possible reductions. The City’s first contract with a private a solid waste removal firm was recently implemented. Republic Services hired 20 of the 24 former city employees who provided this service. Re- public also purchased a number of former city waste vehicles and will implement recycling services during the summer of 2013. The transition has progressed smoothly. The Road Out; This is the first year of the EFM’s balanced budget and they are currently on track with the budget. Major remaining issues are resolving public safety staffing and effec- tiveness; establishing new and cooperative approaches to water and sewer services; funding and maintaining infrastructure; defining and sustaining blight eradication strategies; and funding OPEB liabilities. Treasury will be meeting with Flint’s EFM during the next month to develop a timeline for him to exit the local unit. City of Pontiac Lou Schimmel was appointed Emergency Financial Manager by the Emergency Loan Board on August 8, 2012. He was first appointed Emergency Manager on October 6, 2011. The Emergency Financial Manager is anticipated to complete his work by mid-2013, but a viable oversight mechanism, such as a Transition Advisory Board (TAB) under PA 436 of 2012, will be necessary for this to happen. For fiscal year ending June 30, 2012, the City had an operating shortfall of $1,249,049 ex- ceeding general fund revenues of $38,709,018 by 3%. This resulted in an unrestricted accu- mulated general fund deficit of $4,748,117 or 12% of general fund revenues. For fiscal year 2013, the City’s financial position will benefit from the transfer of the Pontiac Wastewater Treatment Plant. From the assets received, $8.4 million was used to pay off a loan to the general fund from the water/sewer fund; $6 million was used for retiree healthcare bringing the 2013 budget into balance; $3.4 million will be applied to the accumulated deficit from fiscal year 2012. The EFM reports that FY2014 would be balanced except for the $6.0 million required for health care costs associated with retired non-public safety employees, and those who are still xxxEND_PAGE:treasury01_b06_0561_0924_220 Governor Snyder March 15, 2013 Page 6 of 16 active employees. Retired public safety employees (there are no active Pontiac public safety employees) are covered by an existing VEBA. The Emergency Financial Manager continues to minimize the number of unused vacant properties in the City that are city-owned. The demolition of the Phoenix Center and sale of land project remains on hold after Oakland County Circuit Court Judge Michael War- ren issued an injunction barring the City from demolishing the Phoenix Center. Settle- ment negotiations are proceeding. The partnership with Oakland County for a restructuring of the ownership of the Pontiac Wastewater Treatment Plant is essentially complete. The capitalization of assets created by the transfer generated approximately $55 million, which was used to reduce bond debt relat- ed to Fiscal Stabilization bonds, Water Supply system, Sewage Disposal system, and Build- ing Authority. The transaction has dramatically improved the City’s cash position while also eliminating most of the City’s outstanding debt, and preserving a reasonable fund for infra- structure maintenance within the City. It is also projected that Pontiac users of the system will enjoy significant reductions in their costs for sewer services in future years. Update: The EFM continues to reduce general fund expenses. He has successfully negotiat- ed cost reductions with the City's waste pickup contractor; secured agreement from the Chief Judge to control the City's subsidy to the 50th District Court by having the Court process its own employee payroll and pay court employees out of its own account instead of the City's general fund account; and he contracted out all remaining DPW services in- cluding the snow plowing of major streets with the Oakland County Road Commission. The Road Out: Mr. Schimmel expects to leave this summer and strongly supports the use of a transition advisory board. His list of tasks remaining are: Phoenix Center Demoli- tion; sale of DPW building to Consumers Energy; auction of surplus stuff; provide for the redevelopment of the Hayes Jones Community Center; sale of various properties, includ- ing golf course; and substantially reduce the $6.0 million annual deficit related to retiree health care. Mr. Schimmel recently presented to Treasury a concept plan for utilizing ap- parent overfunding in two retirement plans to eliminate or dramatically reduce City costs for retiree health care. Treasury encouraged further refinement of the plan subject to cer- tain conditions being addressed. CONSENT AGREEMENT - CITIES City of Detroit For fiscal year ending June 30, 2012, the City had an operating surplus of $105,842,769. However, when transfers out of the general fund are taken into account, the City’s financial position is much worse. The City transferred $236,542,790 with the largest transfer going to the transportation fund for $87.2 million, $61.2 million to the debt service fund, and $80.9 million for interest payments on the pension obligation certificates. This resulted in an unre- xxxEND_PAGE:treasury01_b06_0561_0924_221 Governor Snyder March 15, 2013 Page 7 of 16 stricted accumulated deficit of $327,956,700 or 30% of general fund revenues of $1,100,342,313. « The City continues to implement the “countermeasures” developed in order to net approxi- mately $117 million in cash improvements by June 30 and allow the City to maintain a posi- tive (though minimal) cash position through the end of the fiscal year. Much of the cash savings are realized by deferring required payments into the next fiscal year. ® On February 1, a first draft of the 5 year plan for the City was presented to the Review Team. The plan would eliminate the deficit within 5 years by significantly lowering em- ployee costs. Changes include a reduction of an additional 500 FTEs, freezing all pension vesting for one year, moving all employees to a defined contribution plan after that, and capping health care expenditures at $125 million a year (compared to a current spend of roughly $190 million). Other potential savings being considered include additional head- count reductions/furloughs, asset sales, debt restructuring, and revenues. Update: As of early March, this has been expanded into a draft 10 year plan. e Update: Information provided by the City (but as yet unverified) indicates that the Gen- era] Retirement System Pension Board has set aside $3 million of pension funds to fund a lawsuit against an Emergency Financial Manager, if one is named. « Update: The Detroit Public Lighting Authority board held its first meeting on March 1. While the authority cannot draw utility tax revenues until bonds are issued, the immediate focus is on getting a loan from the general fund to replace 10-15,000 lights that are out due to operational issues (as opposed to underlying infrastructure issues). e Update: Judge Cox, who currently oversees the Detroit Water and Sewerage Department (DWSD), has expressed an interest in ending federal oversight. Although non-binding, this will require initial agreement among stakeholders about the path going for- ward. Treasury generally supports a proposal to move DWSD to a semiautonomous au- thority. This course may significantly benefit the City however; it is also Treasury’s position that the City’s investment banker (Miller Buckfire) conduct a thorough analysis of the various options available, so that no action would be taken that would foreclose on any possibility. The “Root Cause Committee” (consisting of members from the City’s Administration, City Council and the Water Board), has drafted a non-binding report to be presented to Judge Cox in support of the authority option. The Judge had set a March 15 deadline for completion of the report. City of Inkster e The City of Inkster operates under a Consent Agreement which was implemented effec- tive February 28, 2012. e For fiscal year ending June 30, 2012, the City had a general fund operating shortfall of $3,171,524 or 19% of general find revenues of $15,859,971. The FY12 shortfall increased xxxEND_PAGE:treasury01_b06_0561_0924_222 Governor Snyder March 15, 2013 Page 8 of 16 the City’s general fund unrestricted accumulated deficit to $3,604,783 or 22% of general fund revenues. For FY13, the City reduced staffing by 20% and made other expenditure reductions. Current budget forecasts suggest a year end deficit of $1.7 million, consistent with the DEP. The most current budget to actual report shows the City’s general fund breaking even instead of generating a $600,000 surplus as budgeted. The City is preparing FY 2012-13 budget amendments which include proposed reductions of $500,000. The pro- jected loss in property value in the city for FY 2013-14 is 9.2%.The City’s deficit elimi- nation plan anticipates the FY14 budget will be balanced. Treasury is concerned about ongoing cooperation between the City Council and the city administration . City coun- cil’s consideration of FY 2012-13 budget amendments at their 3/18/2013 meeting will be enlightening. Staff from OFR regularly visits Inkster. City of River Rouge The City of River Rouge operates under a consent agreement which was implemented ef- fective December 15, 2009. For fiscal year ending June 30, 2012, the City had a general fund operating surplus of $1,302,690 or 11% of general fund revenues of $11,989,601. The surplus has reduced the unrestricted accumulated general fund deficit to $1,039,067 or 8.6% of general fund revenues of $11,989,601. The 2012 accumulated deficit is approximately half of the previous year’s deficit so progress is evident. However. the 2012 operating surplus is a result of the re- ceipt of approximately $1.9 million in legal settlements. Had the legal settlements not occurred, the 2012 accumulated deficit would be an estimated $2,900,000. OFR staff visits with River Rouge and feels comfortable that their ongoing efforts to reduce costs, such as the recent implementation of a public safety officer model for combined police and fire services will help the City achieve its FY14 budget objective of balanced reve- nues and expenditures. Implementation of the Personal Property Tax reductions is antici- pated to negatively impact the city. Efforts are underway to prepare more specific estimates of the impacts on both River Rouge and Ecorse, which have relied heavily on the PPT revenues from the Great Lakes steel mill. LOCAL UNITS OF INTEREST City of Hamtramck For fiscal year ending June 30, 2012, the City had a general fund operating shortfall of $3,303,385 which is 22% of general fund revenues of $14,827,148. This deficit eliminated the general fund balance and resulted in an unrestricted accumulated deficit of $753,733 or 5% of general fund revenues. The cause of the imbalance was the result of the loss of reve~ nue due to the expiration of the Poletown tax increment financing agreement and the failure of the City to reduce its expenditures accordingly. xxxEND_PAGE:treasury01_b06_0561_0924_223 Governor Snyder March 15, 2013 Page 9 of 16 e The City has submitted an application for an emergency loan for $3 million. The Depart- ment is reviewing the application to determine if the City qualifies. In addition to the emergency loan, the City is pursuing the issuance of a tax anticipation note to address its cash shortage expected to occur during March 2013. e Late last year, the City Council voted to request a financial review by the State. Prior to initiating the requested review, Treasury asked for and the City has submitted a deficit elimination plan (DEP). The plan relies heavily on the receipt of an emergency loan, an increase in rental inspection fees, and an increase in traffic violation revenues. Given the inadequacy of the DEP, Treasury initiated a preliminary review on Monday; February l1land staff has completed the report. City of Highland Park! e For fiscal year ending June 30, 2012, the City had a general fund operating surplus of $1,293,462 or 12% of general fund revenues of $10,718,332. This increased the City’s unre- stricted general fund balance to $2,199,762 or 20% of general fund revenues. The positive fund balance is a result of the restatement of accrued state revenue from the fiscal year 2011 fi- nancial statements and, in large part, the forgiveness of a $4 million payable due to DTE in 2011. Also a concern is the deficit in the water/sewer fund of approximately $6.7 million and the unfunded pension liability of $13.1 million. The unfunded liability for other post- employment benefits is $26 million. e The City’s updated general fund projections indicate the City will reach a deficit situation during FY 2018. However, these forecasts do not address the possible consequences of var- ious debt coming due within the next two years. Office of Fiscal Responsibility staff is work- ing with local officials to develop and implement cost savings. « Update: The City has discontinued using their water treatment plant after attempting to im- plement MDEQ mandated improvements to the plant. Initial improvements were estimated. at $340,000, but escalated to an estimated $5.9 million after valves and other essential parts of the system were found to be inoperable. The estimated cost to demolish the facility is $3.6 million. Currently, the City is purchasing water from DWSD. Negotiations continue be- tween the City and DWSD with the intent of DWSD operating the City’s water and sewer utility systems. One challenge to finalizing this arrangement is the $8 million the City owes DWSD for sewage treatment. Treasury and City officials expect a proposal during April