Taking Steps to Avert Municipal Bankruptcty

eBlog

April 28, 2015
Visit the project blog: The Municipal Sustainability Project

Avoiding Municipal Bankruptcy. Wayne County Executive Warren Evans yesterday proposed a “recovery plan” to address the dire fiscal sustainability crisis in the county which surrounds Detroit, proposing cuts of $230 million over four years. He warned: “The county is in a very dire financial situation…(The plan), in my opinion, represents the most equitable and efficient attempt to eliminate the county’s unsustainable fiscal future: If we go on with business as usual, the money is going to run out in 2016…This plan will prevent bankruptcy even though in some areas we are worse off [than when] Detroit was pre-bankruptcy.” Since 2008, the county has plugged its general fund shortfall by shifting funds from its pooled cash fund, a move that has amounted to what the County Exec termed “robbing Peter to pay Paul.” By next summer, the county will not be liquid enough to rely on fund transfers anymore and will be entirely out of money, he warned: “This is a plan that will fix it if we come together as Wayne County…If not, it will come to the next level, whether that’s an emergency manager or a bankruptcy; trust me, it’s going to get fixed.” He blamed many of Wayne County’s problems on a loss of property tax revenue and “fiscal and managerial mismanagement:” The county receives 60% of its general fund revenue from property taxes, which fell nearly 33% to $289 million by FY2013 from $408 million in FY2008. Under his proposal, he said he assumes no increase in property tax revenue until 2018, and then only a $4 million boost.

Mr. Wayne’s proposed plan projects it would eliminate the county’s $52 million structural deficit; it does not address a $200 million, bond-funded jail project in downtown Detroit that the county abandoned half built due to lack of money. Mr. Evans said those problems would be tackled within a broader deficit elimination plan, but erasing the County’s structural deficit was the first step toward recovery: “We’re not going to be to do any of the projects we’ve talked about; we’re not in a position to borrow money or to do anything new until we get rid of the structural deficit.” Over the past six years, Wayne County has transferred millions of dollars from the county treasurer’s delinquent tax revolving fund to bolster the general fund. In 2014 and 2015, respectively, $91.6 million and $78.9 million was moved from the delinquent tax fund to the general fund, covering the county’s operating deficit for each year. Without the cash from the delinquent tax fund, however, which is dwindling, Wayne County has a structural deficit that has averaged nearly $52 million each of the last four years, according to Mr. Evans, so that adding to the deficit, the county has taken about $20 million from its general fund each year to help buck up its public pension system. But with the measures in his recovery plan, Mr. Evans projects annual general fund surpluses totaling $36.8 million from 2016-19.

Nevertheless, a key union leader deemed the proposal “essentially a nonstarter.” Under his proposal, the County Executive’s package proposes: pay and benefit cuts for current employees: All county employees would see 5% salary cuts; the end of post-retirement health care benefits for future retirees; and a restructured pension system. Mr. Evans described his proposed plan as “strong medicine” \which is necessary to fix an annual structural deficit that has grown to $70 million and a public pension fund that is funded at less than 50 percent. Absent action, he warned, Wayne County will be insolvent by August of next year. Under his proposal, there would be a 5 percent wage cut for most union and nonunion county workers, except for police officers; prosecutors, and nurses, would be exempt. He proposed changing labor agreements to allow work performed by county employees to be outsourced; cutting health care benefits for employees, as well as retirees, with retirees who retired before 2007 offered stipends to received health care. The county projects the health care cuts would save the county $28.4 million in 2015, with savings growing every year and hitting $49.8 million by 2020. Mr. Evans proposed restructuring Wayne County’s pension system, including cuts in future benefits and raising the minimum retirement age to 62 (currently, employees can retire at age 50 with 25 years of service, or 60 with five years of service). In response, Al Garrett, president of AFSCME Council 25, said the County Executive’s plan leaves out possible sources of new revenue, such as a millage request, and it unfairly exempts employees of the sheriff’s and prosecutor’s offices from cutbacks. Mr. Garrett also noted that he wished AFSCME had been asked for its input while the County Executive developed the plan, instead of being presented with it and then asked for suggestions; nevertheless, he allowed that the union had suggested a couple of ideas yesterday during its briefing with Mr. Evans and officials “seemed to be interested in them.”

Governance Issues. While the County Executive reported that his plan does not require approval by the Wayne County Commission, provisions, such as those related to collective bargaining agreements, would require board approval. Those provisions could be submitted to the board within a few weeks, depending on whether the county’s unions accept the plan. County Executive Evans warned that Wayne County’s pension fund is less than 50 percent funded and needs $910 million to become fully funded—even as, since 2008, property tax revenues have dropped $100 million annually. Thus, he warned: “Health care costs have to be significantly reduced for employees and retirees: For example, we have to eliminate health care for future retirees. And we’re going to have to move to high-deductible plans for employees and some retirees.” Since he took office this year, the County Executive has proposed a series of initiatives aimed at shrinking the county’s unsustainable fiscal situation, including the consolidation of three departments and a division, and a countywide spending and hiring freeze―all measures which are incorporated as part of the recovery plan. He added that last week, the county had offered AFSCME Council 25 a four-year contract with the 5 percent wage cut, the elimination of vision coverage, and an increase in employee contributions for health care insurance. He reported the union plans to file an unfair labor practice charge against him with regard to the proposed wage and benefit cuts; AFSCME’s local president Al Garrett said Wayne County workers have already taken 20 percent wage cuts and furloughs, and have gone six years without raises. The plan would eliminate health care for future retirees. It would move most employees and some retirees to high-deductible insurance plans and provide retirees with fixed and limited subsidies for the purchase of supplemental insurance, likely under the new federal health care law, similar to a move Detroit made in its plan of debt adjustment, shifting retirees to the national exchange. Mr. Evan’s plan would lift the retirement age to 62 and reduce future pension benefits by changing the pension multiplier, as well as increase the number of years used to determine compensation to 10 years from the current three- to five-year level. Altogether the cuts would mean $60.3 million in savings for the county’s funds, including $53.4 million in the general fund. Mr. Evans noted that county officials are working on revenue-generating ideas, but that he will not rely on them to balance the budget. Finally, the County Executive stated that he had delivered the plan to unions and elected officials yesterday prior to the press conference, making clear he expects a “lot of dialogue…But at the end of the day, the numbers have to total $52 million, and if they don’t, it’s a nonstarter.”

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