Stateline Story

New Michigan Law Increases State Role in Local Government

  • March 31, 2011
  • By Melissa Maynard
Amid all the pleas being expressed around the country for drastic change to cope with state and local fiscal emergencies, one state has launched something pretty radical: Michigan has a new law dramatically expediting the process by which financially distressed localities can be taken over by a state-appointed emergency financial manager. 

Michigan has been using a version of this procedure since 1990, but the recent revision makes it much more powerful, granting emergency managers the power to undo union contracts and even dissolve whole units of government.
 
The goal of the legislation isn't to put numerous local governments under state control; in fact, it's the opposite. The idea is to decrease the number of localities headed toward state intervention by recognizing potential fiscal debacles earlier — and providing an incentive for local officials to make difficult decisions themselves so that state intervention never becomes necessary. The legislation "gives local authorities a roadmap to find their own success without resorting to more extreme steps," says the bill's sponsor, state Representative Al Pscholka.
Local unions do not like the new law. But former state Treasurer Robert Kleine, who oversaw the milder version in effect from 2006 to 2010, says some of the revisions are necessary. "A number of years ago no one would have even considered the changes to arbitration and collective bargaining, but I think they really are needed," he says.

The earlier law produced some dramatic successes. A state-appointed manager turned around the finances of the village of Three Rivers in less than nine months simply by implementing basic budget and accounting practices. "Their fiscal management was just a complete mess," Kleine says. "Their budget was basically a suggestion rather than any kind of management document." 

But there were missteps as well: The state had to dismiss the emergency financial manager of Highland Park, a small city near Detroit. The emergency manager was accused of embezzlement in a case that is still working its way through the courts.

Now the stakes will be quite a bit higher. Emergency managers will have additional fiduciary power over municipal pension funds. And much of the emergency management will be done without immediate public participation, because there isn't a great deal of transparency written into the law.

Different approaches
States vary dramatically in how they get involved in the affairs of distressed localities, and how bad a situation has to become before they will do so. In the past, it's been "so seldom that local governments actually get into this sort of fiscal difficulty that it's often hard to tell until the situation occurs what involvement there will be from the state," says Jacqueline Byers, director of research for the National Association of Counties.

Observers are watching closely to see whether Alabama, a state that lacks any statewide law or program for distressed localities, will get involved in Jefferson County (Birmingham), which is poised to file the largest municipal bankruptcy in U.S. history. Governor Robert Bentley has signaled that he would like to leave the decision about whether to file for bankruptcy protection to county officials, who met with state legislators yesterday to discuss potential options. Jefferson County lacks the ability to raise taxes or fees without state approval.

Some states have statewide laws that automatically trigger intervention processes when certain conditions are met, while others leave localities entirely to their own devices. Others tend to tailor legislation toward specific local governments that are in trouble, or recognize distressed local governments but provide assistance only when situations become truly dire. Michigan's will be the most serious experiment yet when it comes to pre-emptive action.

New York still has a control board that was created in 1975 as New York City appeared to be careening toward bankruptcy. It has played only a limited role since then. A similar state control board was created to oversee Long Island's Nassau County in 2000 and brought back in this past January, in the wake of serious fiscal imbalance. But the control board's powers are far short of the ones newly enacted in Michigan.
Pennsylvania has a so-called "Act 47" program for financially distressed cities, but local officials retain a significant level of control. The city of Harrisburg was taken under Act 47 jurisdiction earlier this year as a result of budget shortfalls caused by a bankrupt local waste control facility. The plan that the state will present to Harrisburg in a few weeks will be subject to approval by the city council and the mayor, and is widely viewed as the city's last remaining option before filing for bankruptcy protection.

The Rhode Island legislature rushed through a fairly sweeping state intervention law last June in response to the city of Central Falls' decision to file for bankruptcy protection without first consulting state officials. Worried about the potential financial impact on neighboring communities and the state as a whole, the legislature created a new process that prohibits localities from filing for bankruptcy independently.

The Rhode Island process starts with a collaborative effort similar to Pennsylvania's. Failing resolution, it ends with a state-appointed "receiver" who assumes most of the powers of city officials but unlike in Michigan, isn't allowed to alter collective bargaining agreements, the real driver of most local budget crises, critics say. The receiver who was appointed to lead Central Falls last year banished the mayor from City Hall and placed him in an advisory role, and told the city council that it was to be only advisory as well. The mayor and city council challenged the law, but the state Supreme Court ruled in favor of the receiver on March 29.
 
History of mismanagement
 
Former Michigan Treasurer Kleine, who has overseen most of that state's interventions up to now, says the problem isn't usually corruption or mismanagement so much as simply "not having enough revenue to provide the services they need to provide."
 
The city of Benton Harbor, however, did have a management problem. It had gone through 15 different city managers in 28 years. Most of these changes in the Michigan city's leadership had come at the behest of the elected commissioners, after the managers challenged their way of doing business. By last April, the city of 11,182 was running a deficit of more than $3 million. An expensive sanitation contract had been awarded to a single company for years under questionable bidding practices.
 
This year, Joseph Harris, a newly arrived state-appointed manager, came in and awarded the waste management contract to a different company that was the low bidder. Now, with the new law in place, he will be able to tackle personnel costs, such as shifting to a 401(k) system and reducing public safety expenses, which currently comprise 150 percent of the city's total revenue.
 
The commission isn't happy with Harris' performance and protested against the new law at the state capitol in Lansing. "They wanted an advisor," Harris says, "not someone to actually do what had to be done. That advice cost 15 former city managers their jobs." Under the new law, Harris will be isolated from that sort of pressure.