Savaged: Snyder Treasury Appointee Who Implements EM Takeovers Abused City Credit Card, Ignored Auditor Warnings & Plunged Town Into Deep Debt

By Chris Savage

The Peter Principle: In a hierarchy every employee tends to rise to his level of incompetence.

In February of this year, Roger Fraser resigned after nine years as Ann Arbor City Administrator to assume the role of Deputy State Treasurer for Local Government Services working under State Treasurer Andy Dillon (though, as of this week, he still is not listed on the State Treasury website.) In this position, Fraser is responsible for helping to oversee the implementation of Public Act 4 – The Local Government and School District Responsibility Act of 2011, also known as “The Emergency Manager Act.” The new law, passed this past spring, expands the power of Emergency Managers, formerly Emergency Financial Managers, permitting them to essentially sweep away the elected leaders of municipalities and school districts and become one-person governments or school administrations. You can read more about the expanded roles of the EMs HERE.

Since taking his new position Fraser (left) has been a very busy man. For example, when the City of Jackson was reaching out for help to avoid bankruptcy, Roger Fraser was in the thick of it, eventually deciding that Jackson did not warrant an Emergency Manager despite having a score of “9” on a 2009 financial stress test. By way of comparison, Detroit, a city widely thought to be a prime candidate for an Emergency Manager, had a score of only “7.” This week he is a featured speaker at the Michigan Local Government Management Association’s annual summer workshop in St. Joseph, where he will appear on a panel with Benton Harbor EM Joe Harris.

Fraser described his role before taking the job in this way:

“The local government operation there really has a lot to do with overseeing how cities are doing with their finances. The most particular thing they do on an annual basis is to look at debt load and whether or not you have appropriate budgets to pay for debt…What I did basically is say, look, here’s my background, here’s the financial load that you’re taking on, you don’t have a whole lot of people in your organization that have the local government experience, and they determined that they liked what I had to offer.“

That last statement is rather ironic, though most people in Michigan would never know it, though they should.

The day after the 2010 election when Rick Snyder was the new governor-elect, he put up a transitional website where he had this “Letter from the Governor-elect”:

Fellow Michiganders,

Welcome to the Reinvent Michigan website!
First, let me sincerely thank you for your support in my bid to be your Governor. We are beginning an exciting adventure together, one that will move us forward on a path for success and a new Michigan.

Reinventing Michigan – together – is our first and top priority. I am eager to begin working through our challenges and I know you are, too. We have serious issues to address but the people of Michigan are equal to the task. I’m confident that all Michiganders, pulling together, working as a team, can help me get our beloved state back on track.

This website is for you. As you know, I’ll need a new team full of people with fresh, new ideas and a “can-do” attitude to accomplish the goals you elected me to achieve. Reviewing applications submitted here is one of the ways I will choose that team.

We have a big job ahead of us. I need the best and the brightest, the most dedicated and the hardest workers. Together we can and will Reinvent Michigan. Let’s get started.

Thanks for everything you do.

One of the people picked for the “new team full of people with fresh, new ideas” was Roger Fraser. A member of the Ann Arbor SPARK Executive Committee, a group where Snyder was once the chair of the Board of Directors, Fraser was one of at least two SPARK members selected to be part of Snyder’s administration. But how good was the choice of Fraser for this new position? Was he the right choice to “look at debt load and whether or not [cities or school districts] have appropriate budgets to pay for debt?”

The answer, arguably, is absolutely not.

As has previously been reported at A2Politico, for years Roger Fraser told the Ann City Council and the City residents that tax revenues were going down. This turned out NOT to be the case, earning him A2Politico’s “Whopper of the Year” award. Additionally, during his nine-year tenure, Ann Arbor’s debt increased by nearly a half-billion dollars.

In just eight years, Fraser has plunged Ann Arbor almost half a billion dollars into debt, when debt for capital projects and the unfunded pension liabilities are combined. Under Fraser’s administration, the city’s debt load has quadrupled and debt payments have skyrocketed, as well. It’s not the total amount of debt that’s the problem. Ann Arbor could take on loads more debt, legally, as Third Ward Council member Christopher Taylor pointed out in an error-filled email “explaining” the city’s debt—a move that earned him an A2Politico Weekly Whopper award. It’s that the pension/debt payments must be made from the city’s operating funds. Fraser, with Council’s blessing, has taken the city into more debt than the city’s operating fund can accommodate. As a result, citizen services have been cut and backdoor tax hikes have been levied in the form of fee hikes for water, sewer, solid waste, etc.

Bonded debt for capital improvements during Fraser’s time as the City Administrator increased by $221,870,000. In addition to that, actions taken by Fraser were directly responsible for much of the fiscal hole that Ann Arbor is currently in. For example, he advocated for the use of an early retirement program for City employees in 2009 at a cost of $6.7 million. At the December 2009 City audit committee meeting, Karen Lancaster, Accounting Services Manager, told the committee that most of the $8.4 million deficit in the 2009 general fund was due to the early retirement program.

Also, when Fraser took his position in 2002, the City’s pension plan was overfunded. However, when he left it was underfunded by nearly 10 percent, substantially more than at any time over the past decade. Part of the reason for this underfunding was that, during this time, the City transferred funds from the pension plan to the City’s retiree healthcare plan (VEBA) to cover the influx of new participants resulting from the early retirement program. Because of how actuarial calculations are done, this shift of funds was not immediately apparent in the City’s accounting reports. However, the net effect was to move the financial obligation down the road to be paid by future taxpayers.

The shifting of funds from the pension program to the VEBA accounts had another unfortunate impact on the City’s budget. In 2009, an audit revealed that the amount moved out of the pension plant into the retiree healthcare account exceeded the legal limit imposed by the IRS by $17.1 million. This money will be paid back to the pension fund in annual payments through 2013, essentially putting an additional burden on the City’s finances.

It’s important to note that the issues with the funding of the VEBA program were addressed by a Blue Ribbon committee in 2005 that made a number of recommendations in their final report regarding the composition of the boards of trustees of the retirement and VEBA programs as well as specific changes to the programs themselves. They specifically recommended that the pension program be funded in excess of 100 percent (it is currently at just over 90 percent (pdf).)

Although the funded status of the Retirement System, that is, the ratio of valuation assets to liabilities, is in excess of 110%, the contribution rate is likely to increase over each of the next four years if the investment returns are less than the assumed investment returns.

While the dedicated millage makes the long-term viability of the retirement system, with its current census composition and an assumed rate of investment return, reasonably sustainable, the Committee believes that funding to an amount greater than 100% of liabilities is prudent given general market volatility.

None of these recommendations of the Blue Ribbon committee was ever adopted and, in 2008, a Citizen Trustee on both boards, Robert Pollock, Jr., resigned as a result.

Another example of questionable fiscal oversight by Fraser during his tenure involved sloppy record-keeping and hiring practices. In the 2006 state audit (pdf), the auditors dinged the City for a number of items. For example, they recommended the implementation of a fraud risk management program to root out fraudulent City transactions. The also recommended adopting a policy of doing background checks on employees in sensitive departments like accounting and information technology (computers and computer networks). They also pointed out that the City was inappropriately spending monies in excess of budgeted amounts without formal approval or adjustment of the budgets involved. Most importantly, they found multiple irregularities involving the use of City credit cards. Roger Fraser himself was involved in some of these irregularities according to documents obtained in an FOIA request by Ann Arbor resident and CPA Karen Sidney.

In 2008, the state audit (pdf) found inappropriate purchases of eleven flat screen televisions and associated equipment by Maintenance facility staff using City credit cards and in the 2010 audit (pdf) irregularities were found in the use of City purchasing cards. In fact, they appeared to be in violation of the law.

2010-1 USE OF CITY PURCHASING CARDS
During our analysis of internal controls over the purchase card process we noted that the City does not appear to be in compliance with established administrative policy and financial management procedures or applicable laws of the State of Michigan. It was specifically noted that five of the twenty transactions sampled contained no purchasing card statement listing the details of the transactions that occurred during the month. The receipts detailing the purchases and the appropriate business purpose pertaining to these statements were also missing. Credit card payments are made by the City on a monthly basis so the City has paid for these transactions without ever reviewing the statement or any supporting receipt to authorize the purchase and determine that there was a business purpose for the transaction.

There’s no question that many, if not most, cities in Michigan are facing financial problems these days. The economic downturn has impacted our state more profoundly than most and budget deficits are being dealt with all over the state. The imposition of an Emergency Manager (EM) under the new rules set forth in Public Act 4 is the final step, in most cases, in ensuring that cities do not go into bankruptcy. The Snyder administration’s 2010 budget makes matters worse for local municipalities and school districts because revenue sharing (tax monies being sent back to the municipalities) has been reduced and funding for schools has been slashed to pay for an 86 percent tax break for businesses. The role of the EM, whose efforts are overseen, and in many cases, approved by Treasurer Andy Dillon and Deputy Treasurer Roger Fraser, is to put the municipality’s financial house in order.

However, the choice of Roger Fraser for this very important role stands out as highly questionable at best. The fact is that the City of Ann Arbor was nearly a half billion dollars more in debt after his time as City Administrator. This should be enough to raise some red flags. However, when you dig into the details of how these debts arose, the red flags begin to flap more vigorously. The shifting of funds, sloppy record keeping and irregularities associated with the use of credit and purchasing cards, some by Roger Fraser himself, call his credentials into serious question. Under Fraser’s guidance, the City of Ann Arbor was guilty of some of the very actions that the cities of Benton Harbor and Pontiac, both of which now have EMs, have been criticized for.

When Rick Snyder was elected governor of Michigan, he promised to bring in a “new team full of people with fresh, new ideas.” One of these people was Roger Fraser, an associate of his during his time as the leader of SPARK. He has put a man with a questionable past regarding the financial oversight of Michigan’s sixth largest city in a position of responsibility for the financial well-being of Michigan’s most hard hit cities.

The Peter Principle says that “in a hierarchy every employee tends to rise to his level of incompetence.” The more you consider Roger Fraser as Deputy State Treasurer for Local Government Services, given his track record in Ann Arbor, the more it seems that he has become the embodiment of the Peter Principle in the state government of Michigan. He’s the last person Michigan residents should have expected to see evaluating which cities in our state will be taken over under the auspices of Public Act 4.