continued on page 16
Iwas the state-appointed emergency manager for the City of Lincoln Park, Michigan, from July 2014
to December 2015. Lincoln Park is a
built-out inner ring suburb of Detroit
with a population of 38,000. It is
primarily a low to moderate income
residential community with little
industry and a modest amount of retail.
The city fell into financial distress after
the 2009 recession when housing
values fell by 34 percent and grossly
underfunded retiree obligations soared
to 40 percent of the $22 million annual
general fund operating budget.
Michigan’s law for dealing with
distressed municipalities and school
districts is unique. Public Act 436 is
modeled on the U.S. Bankruptcy Code
and gives the governor authority to
name an emergency manager to run
a financially distressed city, county, or
school district. Emergency managers
have authority to modify contracts;
sell assets, regardless of charter
restrictions; hire and fire; and assume
all powers of government. The only
major restrictions on an emergency
manager’s powers are the inability
to modify earned pension benefits
or debt obligations. These liabilities
can only be modified if the governor
allows the entity to file for bankruptcy.
For Lincoln Park, bankruptcy was
not a politically viable option.
Michigan cities get most of their
operating revenue from property taxes.
In Lincoln Park, 60 percent of general
fund revenue came from property taxes.
As a result, protecting property values,
on which property taxes are calculated,
is key to any successful municipal
turnaround, as that’s the main source of
a community’s revenue. Other sources of
revenue, such as state revenue sharing,
are not under a city’s control or are too
small to make a material difference.
With Lincoln Park property values in
continual decline from 2009 to 2014,
my first priority as emergency manager
was to stabilize property values and,
by extension, property tax revenue.
As in any turnaround, cost-cutting was
also a priority. Lincoln Park had done
quite a bit of the heavy lifting along
those lines before I was appointed.
Headcount had been reduced from
148 full-time employees in 2009 to 83
in 2015. Employees had not received
pay raises for more than eight years
and had incurred a 10 percent pay
reduction in 2014. Staffing had been
cut to the point that the city was barely
providing adequate public safety
or infrastructure maintenance.
The city had no appreciable bond debt,
but unfunded retiree healthcare and
pension obligations totaled almost
$200 million. Yearly spending on
retiree obligations was on an upward
trajectory and had increased from 18
percent of general fund revenue in 2004
to 40 percent in 2014. In other words,
300 retirees received 40 percent of
the general fund budget, while 38,000
residents made due with the remaining
60 percent. A healthy city has a
maximum range of 10 to 15 percent of its
general fund dedicated to retiree costs.
Two issues were driving retiree costs
to unsustainable levels. First, the city
had instituted an early retirement
program in 2004 and allowed 61
employees, most of whom were in
their 40s, to retire with full benefits.
When I came in, the city had just
under 300 retirees, 20 percent of
whom had taken advantage of the
early retirement program in 2004. As
Figure 1 (page 16) shows, before the
early retirement program the city’s two
pension systems were close to fully
funded and were therefore extremely
healthy. After the early retirement
program went into effect, even
with ever-increasing contribution
rates, the funding levels declined
for 10 straight years. By the time I
took over as emergency manager,
Lincoln Park had the worst-funded
pension systems in the state.
The second issue driving up spending
devoted to retirees was spiraling
on Property Values, Retiree Costs
Were Key in Michigan City’s Turnaround
BY BRAD COULTER, CTP, PRESIDENT & CEO, MATRIX HUMAN SERVICES