Thursday, June 24, 2010

City of Pontiac, Michigan
Office of the Emergency Financial Manager
Fred P. Leeb

To:          Michael Stampfler
From:      Fred Leeb, Emergency Financial Manager
Subject:   Status Report and Recommendations
Date:       June 24, 2010

First, I would like to thank the many good citizens of Pontiac for their support and assistance in trying to improve the financial health of the City during very difficult economic times.  It has been a pleasure and very fulfilling to work in a positive manner with the City’s staff, other professionals and the citizens to accomplish many tangible achievements over the last 15 months.  Without constant communication, teamwork and sharing the workload and responsibilities with many others, we could not have a accomplished:

  •  Generating a $1.4 million surplus last year (with a very favorable outside audit report having no significant negative findings),
  • Developing a $3.0 million surplus for the first nine months of this year despite a revenue decline of almost $5 million this year as compared to last year,
  •  Obtaining numerous opinions from the circuit court that were completely in the City’s favor regarding the Silverdome sale and management conduct,
  • Receiving multiple letters from the State Treasurer complimenting our work and
  • Achieving from an unbiased outside agency a significant upgrade in the City’s bond ratings and an improvement in the financial outlook for the City from “negative watch” to “stable”, during an era when the same agency is downgrading many other governmental units due to the economy.  

The purpose of this letter is twofold: 1) provide a brief status report on many of the significant projects either recently completed or underway and 2) begin to discuss major strategic options for the financial health of the City going forward.

Status Report of Significant Projects Recently Completed or Underway

     1.        Signed an agreement with the Teamsters for them to contribute 20% to their health care costs.  A full contract is being finalized.
     2.        Reached tentative agreement with American Federation of State County and Municipal Employees to have them contribute approximately 20% to their health care expense.
     3.        Attempting to finalize a new contract with the Pontiac Police Officers Association causing them to contribute the equivalent of 20% to their health care expense.
     4.        Completed previously agreements with the Firefighters, the Supervisors and Administrative Employees Association, the Pontiac Professional Management Association and the non-union personnel requiring approximately a 20% contribution to their health care expense.
     5.        Beginning additional negotiations with the Firefighters to reduce cost further.
     6.        Now operating without furlough days for almost all employees.
     7.        Completed negotiations with Blue Cross Blue Shield to provide health care coverage to active employees and pre-65 retirees at a savings of approximately $500,000 for the coming year in comparison to Humana.
     8.        Finalizing negotiations with health care providers for coverage for post-65 retirees; expecting minimal cost increases from the current year.
     9.        Held actual medical insurance cost about $3 million below the expected budgeted cost.
  10.        Signed new property, casualty and liability insurance policy which will be at a cost of about $150,000 less than the current year due to lower than expected actual claim costs and favorable negotiations on the settlements of claims.
  11.        Signed new long-term agreement with Detroit to reduce the cost of drinking water for Pontiac by approximately $1.4 million/year.
  12.        Hired United Water to provide one person for on-site professional management of the drinking water facilities and the waste water treatment plants; processes are being modernized and upgraded, overtime is being reduced significantly.  An RFP should be issued soon to obtain additional management expertise to achieve operating savings of at least $1-2 million/year.
  13.        Working to finalize an agreement with an outside professional promoter to manage Phoenix Plaza to bring in events on a regular basis and promote downtown businesses.
  14.        Working to collect large past due amounts (a total of over $1 million being loaned without interest charges) from the Housing Commission, the Police & Fire VEBA and the pension funds; have already collected about $343,000 from the Housing Commission.
  15.        Negotiating with Veolia to reduce costs of garbage pickup due to lower numbers of households in Pontiac.
  16.        Negotiating with General Electric to reduce large lease payments (possibly by over $100,000/year) by extending the lease on heavy equipment such as trucks and police vehicles.
  17.        Discussing the sale of the tower fire truck to a consortium of nearby communities (including Pontiac) to obtain cash and to share the remaining cost of the lease of approximately $500,000.
  18.        Hired an outside law firm on a contingent basis to pursue banks and other lenders who have obtained foreclosed property in Pontiac and who have not paid their property taxes.
  19.        Signed a new contract with the Michigan Prisoner Release Initiative (MPRI) to have them pay the full cost of a Pontiac Police Officer to patrol the downtown area.
  20.        Working on finalizing an agreement with MPRI for them to provide free supervised labor (10-20 people) and equipment to help clean and mow City-owned vacant lots and parks.  [Pontiac is currently able to afford only two people to cut grass on vacant lots and two other people to cut and clean boulevards and parks.
  21.        Working with the new movie studio to facilitate construction and bring new jobs to Pontiac.
  22.        Facilitating efforts to improve and enable operations at the Silverdome which is now operational.
  23.        Selecting professional developers to manage home rehabilitation efforts and new home construction (for Home and NSP programs) using Pontiac contractors as much as possible.
  24.        Hired a professional consultant to evaluate a new telephone system which could save the City up to $12,000/month and provide greater capability.
  25.        Considering hiring an IT consultant to provide a second opinion on the City’s technology needs before moving ahead on major expenditures.
  26.        Finalizing new proposals to provide basic security (cameras, mirrors, panic buttons, etc.) at City Hall.
  27.        Going ahead on the FY11 budget with the understanding that certain changes will be required: a) to reduce the payment for retiree medical benefits from the General Employee Retirement System from approximately $6.8 million to $3.9 million, b) after receiving an upcoming actuarial report on GERS, c) after obtaining more precise insurance claim expense estimates, d) to incorporate possible revisions from the City Council and/or the Mayor as well as the new Emergency Financial Manager, and e) other necessary changes.
  28.        Structuring a payment in lieu of tax program regarding the water and sewer facilities to charge them for City services such police, fire and streetlights.
  29.        Working on a program to pay off the remaining approximate $5 million related to the failed DOCO project near Great Lakes Crossing.
  30.        Beginning to work on preparation for the FY10 audit.
  31.        Considering hiring up to 16 interns under a new program through Baker College to help in various City departments.
  32.        Purchasing sorely needed new breathing apparatus and ambulances for the Fire Department, equipment for DPW and personal computers for other departments.
  33.        Obtaining 28 new laptop computers for the City Clerk for the upcoming elections.
  34.        Continuing work on the leasing of the Ewalt, Hayes Jones and Howard Dell community centers.
  35.        Preparing for the upcoming Dream Cruise.
  36.        Facilitating the construction of the new Pontiac Transit Center and the new monument on Woodward welcoming people to Pontiac.
  37.        Working with the State of Michigan Land Bank so that it would take over the maintenance of certain properties that are held for development.
  38.        Collaborating with Oakland County to manage Pontiac funds for micro-lending in the City.
  39.        Working to obtain certification for the City through the Main Street Program.
  40.        Developing a new plan to reduce manning costs for parking.
  41.        Developing a new plan for water meter reading.
  42.        Developing a centralized collection unit for all tax, parking and water collections.
  43.        Working to collect Fire Insurance Withholding Account reimbursements for the City.
  44.        Applying for up to $400,000 of funding from the federal government to reimburse the City for retiree medical benefits.
  45.        Negotiating on outside management of the two City’s cemeteries.
  46.        Working on the possible sales of 8 Saginaw, business incubator property on Orchard Lake, and 500 Huron.
  47.        Coordinating with General Motors on their cleanup of their abandoned properties.
  48.        Improving and speeding up home demolition processes.
  49.        Analyzing the reorganization of the Building and Safety and Finance Departments to improve efficiencies.
  50.        Finalizing the City-wide capital expenditure plan.

Major Strategic Options

Pontiac must deal with a number of years of declines in tax revenues.  The financial future for the City is likely to be extremely difficult.  For example, one of the City’s major taxpayers is attempting to reduce the property value for just one of their parcels from $52 million to $10 million.  Due to these economic factors, the City will run out of cash if nothing is done. 

For example, there is at least a $4 million gap in the General Fund in FY11 unless major actions are taken as described below.  There are only about 280 active employees in the General Fund of which about 80 are in the Fire Department and not subject to layoff.  If $4 million would have to be cut from the City’s personnel costs there would need to be a layoff of 35-60 people very early in the fiscal year.  This would represent a huge cut of 17-30% in the General Fund headcount, leading to an extremely difficult situation.

Potential strategic options are as follows:
     1.        Request a millage increase for the Police Department in the upcoming fall election.  This will be desperately needed to hold headcount in place.  Long lead times, however, are necessary to accomplish this and the impact will not be felt until tax collections come in FY12 (July 2011) even if this initiative is successful.
     2.        Obtain needed cash through the successful settlement of a multi-million dollar ongoing lawsuit.  This is unpredictable as to whether it will be successful, the amount and the timing.
     3.        Work to grow downtown Pontiac as an educational campus for nursing and for new R&D facilities.  This also is likely to be difficult to predict as to the timing and the extent of the prospective program.
     4.        Conduct successful negotiations to regionalize Pontiac waste water treatment facilities to bring cash from this enterprise fund into the General Fund.  This has the potential for generating many tens of millions of dollars for Pontiac but is also likely to be a slow and unpredictable process.  If a fire sale process is utilized, the proceeds are likely to reduce by a large amount.
     5.        Work to withdraw $1.5 million from the General VEBA this year and possibly a larger amount next year.  This VEBA has about $5-6 million at the present time but is inadequate to generate enough income to generate meaningful amounts of income for paying retiree medical benefits.  The principal should be withdrawn and used during these difficult years for retiree medical benefits.
     6.        The General Employees Retirement System has excess funding, provided by the City’s taxpayers, of approximately $50-$100 million (an actuarial study is currently being prepared) even after all potential pension liabilities and risks are covered.  Even though an attorney has stated that this withdrawal is illegal, I have obtained other legal advise from the City’s outside attorneys that it is legal under certain circumstances.  I believe, however, that this is only likely to be accomplished if people put aside their infighting and work together as a team.  If one side digs in its heels it is likely to result in a massive unnecessary layoff.  The City should take advantage of this fresh start with a new EFM to enable this necessary withdrawal to be successful.

Success is highly unlikely if there are personality cults.


Fred Leeb
Emergency Financial Manager
City of Pontiac   

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