The old emergency financial manager law wasn’t strong enough, as we learned during Robert Bobb’s tenure with Detroit Public Schools. (The Detroit News)
Since Gov. Rick Snyder announced that he will appoint an emergency manager for Detroit, many residents and organizations in the city are probably wondering about the implications of this announcement. Emergency managers have been part of the Michigan legal process since 1990. An emergency manager is appointed when the state government believes that a local municipality or school district is facing an unresolved fiscal crisis and does not have a feasible plan to fix it.
Why should the state care? State government has a vested interest in the fiscal solvency of local governments. Local governments are "creatures of the state" in legal parlance, meaning they are created via constitutional and statutory authority of the state. A bond default or missed payroll by a local government could have widespread ramifications for other governments. A fiscal failure in Southeast Michigan could raise the cost of borrowing for West Michigan local governments. Also, we share a common tax base, such as the state education tax to pay for all of our schools. Each local government is not entirely an entity unto its own. For these reasons, state intervention in local fiscal affairs is necessary and prudent where a crisis with no plan to fix it exists.
Emergency managers have wide and sweeping powers to address a local fiscal crisis. For starters, an emergency manager can request and review all documents and records necessary to assess the financial condition and status of the municipality or school district in his/her purview. Using this information, the EM is required to provide the state treasurer a plan for fixing the crisis. After the review and development of a plan, the EM can move quickly to take action.
Perhaps most importantly, the EM has the power to approve and amend the municipality or school system's budget. Typically, local governments in crisis are not following their budget plans, either because they overestimate revenues, under project spending, or both. EMs will also review and may reject or alter vendor contracts and other local government expenses. Short-term actions will be taken to try to restore immediate solvency. These actions, however, likely won't fix long-term fiscal problems.
For cities and school districts, labor costs are typically the largest part of the budget. They are also a major source of fiscal problems, along with debt. This cost includes not only wages and salaries but benefits such as pensions, employee and retiree healthcare and life insurance. The most controversial and arguably most important power of the emergency manager is the power to terminate, reject and modify collective bargaining agreements. An emergency manager can, under certain conditions, make changes or terminate parts or all of these collectively bargained agreements.
What can't an EM do? An EM can't sell municipal or school assets without state approval. An EM can't terminate or change collectively bargained agreements without state approval. An EM can't raise taxes without voter approval. An EM can't merge two units of local government without the approval of voters from both jurisdictions. An EM can be impeached and removed by the state Legislature for misconduct. In other words, there are limits on the powers of an EM, as there are for all government officials.
How does the EM enforce what he/she wants to accomplish? The EM has the power to sue any local officials in circuit court and have the court order an action to be taken. EMs "speak" by writing up orders that lay out what they wish to do and how they wish to do it. These orders have the force of law.
Some new restrictions will be placed on EMs when the new financial emergency law (P.A. 436 of 2012) goes into place on March 28. Under this new law, city councils and school boards can challenge certain actions that an EM is attempting to take. For example, if an EM proposes to sell a city asset or terminate or change a collective bargaining agreement, a local governing body can propose an alternative measure that would save an equal amount of money. This could be shutting down a specific service, outsourcing an activity or perhaps raising fees. If a city does challenge an EM order, the final decision rests with the Local Emergency Financial Assistance Loan Board. The board will then determine which action is in the best interest of the community.
What is the goal of placing an emergency manager in Detroit? To have the EM undertake actions that will close the deficit and return financial solvency to city government. In each community where an EM has been placed, the unique circumstances of that community have required different actions to be taken to resolve the deficit. Detroit's problems are based on decades of economic decline, suffocating legacy costs and an inability to adjust city services to a declining population. These mismatches must be resolved for the city to regain short- and long-term financial solvency.
An emergency manager does have the power to recommend and, with gubernatorial approval, file for federal bankruptcy protection. The bankruptcy process involves the city putting forward a plan to resolve its fiscal crisis. This is different from just having an emergency manager because a federal judge has broader powers of contract adjustment. These broader powers may be more effective and long-lasting in altering costs than the actions of an EM.
On the other hand, a federal judge can't sell city assets, run city hall or order the police department to restructure. Even with bankruptcy, the city will need all tools at its disposal to restructure and address the short- and long-run fiscal crisis.