Innovators in Action (March 2014 edition): Turning Pontiac, Michigan into a Contract City to Solve Financial Emergency

The latest interview in Reason Foundation’s Innovators in Action 2014 series focuses on a municipal financial crisis in Michigan—not the bankruptcy currently being resolved in Detroit, but rather Pontiac’s recent transformation in the face of financial woe.

In 2009, Pontiac joined the list of fiscally distressed Michigan cities that have seen the appointment of emergency managers in recent years, given its high debt load and chronic budget deficits. Louis Schimmel was a natural choice to serve as the third emergency manager in his hometown of Pontiac upon his appointment in 2011, having previously served as a court-appointed receiver in Ecorse in the late 1980s and as the emergency financial manager in Hamtramck in the early 2000s.

Schimmel’s work helped yield a number of notable accomplishments during Pontiac’s time under emergency manager control, including a reduction in the city workforce from over 500 non-court employees down to just 20 (a 96% reduction), the reduction of city debt from $115 million to $28 million, and lowering general fund expenditures to $30 million, which is half what the city was spending six years ago.

Such achievements required Schimmel to implement a variety of government downsizing strategies between 2011 and 2013, including the contracting out of dozens of services through privatization and intergovernmental agreements, the sale of major city assets, the restructuring of the city’s retiree healthcare plan, the elimination of the city’s fire department through merger with an adjacent municipality, and much more. In August 2013, the city’s progress prompted Gov. Rick Snyder to remove Pontiac from emergency manager control.

The Mackinac Center’s Michael LaFaive and I recently interviewed Schimmel on his experience serving as the city’s emergency manager, the role for privatization and asset sales, the city’s financial restructuring moves, lessons learned, and more. Here’s an excerpt:

Gilroy: Overall, private and intergovernmental contracting have played a major role in the dramatic downsizing of the city workforce. As a result, Pontiac is effectively a contract city today. Though there are many contract cities in places like California and Georgia, they usually start that way from their incorporation, as opposed to transitioning from a “traditional” city to a contract city as Pontiac did. Skeptics often claim that a traditional city cannot or should not move in the contract city direction for fear of what would happen to existing employees. How would you respond to those fears, based on Pontiac’s experience?

Schimmel: Let me tell you what I’ve always felt in all of the municipalities I’ve been in. I became aware of how quickly attrition happens in a municipality’s employment force. For example, in police and fire, their careers are pretty short when you think about it—20 or 25 years. The same thing happens in other departments, like public works—there’s just a relatively quick turnover.

So I used attrition and buyouts heavily in the privatization of services of all three municipalities I’ve been in. And as a result of doing that, the layoff of employees have been almost zero. In Pontiac, there were really only two people in the Department of Public Works that lost their jobs. They were simply there too short a period of time, and there wasn’t much I could do for them.

And in the fire department, we had 13 employees that were close to retirement, and I gave them the extra time they needed to give them an early buyout so that they could leave early. There were younger firefighters that lost very little money and were hired by the newly combined fire department, and there were some middle-range workers who kept their jobs, but they did have to take a reduction in wages.

But overall, including police, fire, public service and administration, very few jobs were lost because of contracting. Also, several employees were hired by the contracting companies.

So yes, you have to do some negotiating and work with attrition and buyouts, but becoming a contract city isn’t what people think, in terms of wholesale layoffs and that sort of thing.

Check out the full interview here. Other articles featured in the Innovators in Action 2014 series are available here.