Highlights: (emphasis added)
City officials had adopted budgets, or budget amendments, or both, that do not comply with Public Act 2 of 1968, the Uniform Budgeting and Accounting Act. For example, for the 2012 fiscal year, City officials adopted a General Fund budget that had a net negative $1.7 million change in fund balance due primarily to a $1 million over estimation of property tax revenues and expenditures exceeding budgeted revenues for fire services by $427,360 and for public works by $457,828. This same budget resulted in an actual unrestricted General Fund deficit of $753,733. Similarly, City officials amended the 2013 fiscal year budget in November of 2012, without addressing an operating deficit of $2.7 million. In short, City officials made little effort to address a revenue shortfall by reducing expenditures as required by Public Act 2 of 1968.
Subsequently, officials submitted a deficit elimination plan that was deemed unacceptable by the Department of Treasury. For the 2013 fiscal year, the deficit elimination plan included significant revenue enhancements, amounting to $781,231, and $241,500 in expenditure reductions. Yet, City officials provided no evidence that the revenue enhancements were realistic or that the expenditure reductions could be made. However, even if the revenue enhancements and expenditure reductions were fully realized, City officials projected expenditures to exceed revenues by over $1.7 million. In other words, the deficit elimination plan failed to provide any reasonable assurance that the City is adequately addressing its structural deficit. Furthermore, while the request for a preliminary review by City officials noted an inability to achieve concessions from employee unions, the deficit elimination plan included $2.5 million in labor concessions for the 2015 fiscal year when existing labor contracts expire at the end of the 2014 fiscal year. However, the deficit elimination plan provided no detail concerning the probability of attaining the concessions or how the City anticipates achieving them.
City officials utilized assets from other City funds to increase cash flow in the General Fund. Among the more significant transactions were $110,206 from the Water and Sewer Fund and $500,000 from the Local Streets Fund. Borrowing from other funds is indicative of cash flow issues. As indicated in Table 1 on the next page, for the City’s 2009 fiscal year, General Fund revenues exceeded General Fund expenditures by more than $1.3 million. However, in the 2010 fiscal year, the opposite occurred, with expenditures exceeding revenues by almost $1.2 million. The 2011 fiscal year realized an increase in property taxes because of a one-time payment from the City of Detroit and an increase in fund balance because of a $2 million transfer from the City’s Budget Stabilization Fund. However, the overall trend of the City’s financial condition reflected a decline in revenues during this period. Had the City paid attention to the decline in property tax revenue, and made the necessary cuts in fiscal year 2011, it could have potentially avoided a General Fund deficit while preserving the one-time payment and Budget Stabilization Fund transfer. However, failing to make reductions in expenditures created overall fund deficits.
City officials had delayed making approximately $2.2 million in required pension contributions in order to manage cash flow. At the time of the preliminary review, it was anticipated that the City could deplete its cash by April 2013, unless City officials continued to forego required pension contributions, thus increasing the $2.2 million arrearage by an estimated $295,000 for each additional month of delayed payments. It was anticipated that City officials also would need to delay repayment of $500,000 to the Local Streets Fund and other accounts payable.
According to the City’s 2012 fiscal year financial audit, the ending balance in the General Fund decreased from $2,721,020 as of June 30, 2011 to a negative $582,365 as of June 30, 2012. This one-year negative net change in fund balance of $3,303,385 resulted from an operating deficit (i.e., expenditures in excess of revenues) of the same amount.
The Review Team found it noteworthy that there was essentially unanimous acknowledgement from every City and union official with whom the Review Team met that a financial emergency exists within the City of Hamtramck. Likewise, there was essentially unanimous acknowledgement that the economic conditions which contributed to the financial emergency were neither precipitous nor unforeseen. In other words, it appears that the City’s worsening financial condition was obvious to City officials, but that they were either unwilling or incapable of taking resolute action to address the matter.
During the course of our discussions with various individuals, two key themes emerged as contributing factors to the inability of City officials to address the City’s decaying financial condition: frequent turnover in the City Manager position and significant dysfunction within the City Council. Neither of these deficiencies is, in itself financial in nature, but each appears to have contributed to the City’s financial emergency.
First, we address the City Manager position. Since the City was released from emergency financial management in November 2007, it has had six different individuals serve in the City Manager position, in either a permanent or acting capacity. In fact, five of those individuals have served within approximately the last 12 months. Many City officials interviewed by the Review Team indicated that the frequent turnover in this key managerial and administrative position resulted in an ever-changing strategic direction within the City which, in turn, had a profound impact upon day-to-day City operations.
It also was noted by several City officials that the frequent turnover in the City Manager position posed a considerable challenge to City staff seeking to adapt to changes in management styles and resulted in ineffective communication. For example, City and union officials expressed considerable differences of opinions regarding the amount of labor concession that had been requested and the amount of such concession that had been offered in response.
Second, we address the dysfunction within the City Council. While several City Councilmembers we interviewed seemed individually knowledgeable regarding the City’s financial condition, the members of that body seemed unable to function collectively in a coherent manner. City Councilmembers themselves indicated that financial leadership by that body has been demonstrated only in the breach. With that assessment, we concur. Furthermore, we include the Mayor in our assessment. While the Mayor is separately elected, the office is so inextricably linked to the City Council as to be part of the local governing body. For example, the Mayor attends City Council meetings and is responsible for presiding at them.
The Review Team was informed that City Council meetings are chaotic, protracted, and produce little in the way of tangible results. In such an environment, rational financial management is not likely to be forthcoming. Illustrative of this point is the fact that when Review Team members inquired of City Councilmembers regarding a proposed plan to address the City’s financial condition, the response from most City Councilmembers was that they intended to request an emergency manager. Indeed, the prevailing attitude among several City Councilmembers was that an emergency manager would quickly remedy the City’s financial condition (by which they meant that an emergency manager would relieve them of the financial burdens of collective bargaining agreements into which they now believe they improvidently entered) and that just as quickly State officials would remove the City from receivership and return it to local control. Certainly, some of the collective bargaining agreements would benefit from an independent review.(see note 4 – HC)
However, even if the City’s financial condition is successfully resolved, there will remain the matter of its operational and managerial dysfunction. Therefore, if a financial emergency is determined to exist within the City, if that determination subsequently is confirmed, and if City officials then select the statutory option of an emergency manager, before the City is removed from receivership, serious consideration should be given to appointing a Receivership Transition Advisory Board pursuant to Section 23 of the Act, as well as imposing the conditions authorized by Section 22(4) of the Act.
Note 4: Several of those collective bargaining agreements provide for comparatively generous compensation given the City’s geographic area and population. The City of Hamtramck consists of 2.09 square miles and has a population of 22,423 (based on the 2010 decennial census), while the City of Flint, for example, consists of 34.06 square miles and has a population of 102,436. Nevertheless, the maximum salary for a police lieutenant in the City of Hamtramck is $77,705 compared to $63,447 in the City of Flint, while the maximum salary for a police sergeant in the City of Hamtramck is $70,641 compared to $56,309 in the City of Flint.
Similarly, the existing collective bargaining agreement with the Hamtramck Firefighters Association, which expires on June 30, 2014, provides for a 16 percent increase in wages over the term of the agreement. Under the agreement, firefighters received a four percent increase on July 1, 2009; a three percent increase on July 1, 2010; a three percent increase on July 1, 2011; a three percent increase on July 1, 2012; and are scheduled to receive a three percent increase on July 1, 2013.
Finally, the collective bargaining agreements with both the Hamtramck Ranking Police Officers Association and the Hamtramck Fraternal Order of Police allow for up to 32 hours of overtime per pay period for police personnel to write traffic tickets for purposes of a traffic safety program. It might be argued that writing traffic tickets, when appropriate, is a routine part of daily police work that should be performed during a regular shift as opposed to on an overtime basis. Given the City’s perilous financial condition, the justification for collective bargaining agreement provisions that reward or incentivize overtime is not readily apparent.