When a city or a school district in Michigan runs out of money, the state can appoint an emergency manager to take over the responsibilities of locally elected officials. An emergency manger’s powers are broad—made even more so this year – and are designed to help EMs balance the books and return governance to locally elected officials as quickly as possible.
Today, there are four cities and one school district under the control of an emergency manager:
- Benton Harbor
- Detroit Public Schools
This is the second time around for Flint, which had an “emergency financial manager” from 2002-2006. The cities of Detroit and Inkster and Benton Harbor Public Schools could soon be added to this list.
1. What can an emergency manager do?
An emergency manager can:
- Hire/fire local government employees
- Renegotiate, terminate, modify labor contracts with state treasury approval
- Sell, lease, or privatize local assets with state treasury approval
- Revise contract obligations
- Change local budgets without local legislative approval
- Initiate municipal bankruptcy proceedings
- Hire support staff
An emergency manager cannot raise taxes.
2. Then and now: Emergency financial managers vs. emergency managers
Michigan’s emergency management system has been in place since 1988, when Public Act 101 allowed an emergency financial manager to assess and manage the finances of Hamtramck.
PA 101 was strengthened in 1990, when Public Act 72 gave state government the power to appoint “emergency financial managers” to local government units—such as towns, school districts, or counties—nearing bankruptcy.
Emergency financial managers became “emergency managers” when their powers were strengthened by Public Act 4 in 2011.
The more powerful emergency managers (EMs) can now strip locally elected officials of their power and they can renegotiate, alter, or void union contracts before they expire.
According to Joe Harris, Benton Harbor’s emergency manager, Public Act 4 effectively removes power from local, elected officials once an EM is appointed.
Harris told Michigan Radio in May that, “the only authority that they can have is the authority that's provided to them, or is given to them by the emergency manager.”
Under Public Act 4, past emergency managers have removed the legislative powers of elected officials, suspended their pay, fired city officials, and imposed pay cuts that violate union contracts.
Public Act 4 overrides Public Acts 101 and 72, which are no longer in effect.
Emergency manager decisions are approved by the State Treasurer—the same office that appoints EMs.
3. Emergency management as an alternative to bankruptcy
The emergency management system in Michigan is a bankruptcy workaround.
Municipalities have been able to file for bankruptcy since 1937, a last ditch option for towns that can’t raise taxes to pay off their debt.
Declaring bankruptcy allows local government units to void contracts, restructure debt, and adjust payroll obligations, such as pensions.
Michigan, like most states, requires state approval for a municipality to declare bankruptcy.
When a person defaults on their loans, it destroys their credit rating. The same is true of cities.
By appointing an emergency manager, the state essentially puts a “financially distressed” city or school district into state receivership. It gives state officials many of the special powers granted during bankruptcy proceedings without ruining a district’s credit rating.
An emergency manager can make drastic changes to contracts seen as unsustainable - costs such as union contracts, pensions, and other existing contractual obligations.
These options, powers given to EMs by Public Act 4, are unavailable to local officials.
4. How is an emergency manager appointed?
Towns deemed to be in financial distress go through a review process before they are put under emergency management.
The initial review can be triggered by a failure to pay debts or employee salaries, It can be requested by residents or local officials. And the State Senate, the State House of Representatives, and State Treasurer may also initiate a review.
If any problems are found, the Governor can request a second review before deciding to appoint an emergency manager.
The Local Emergency Financial Assistance Loan Board, which includes the State Treasurer, makes the appointment.
It was announced on Friday that Detroit will undergo a preliminary financial review.
Detroit Mayor Dave Bing and the Detroit City Council say the city doesn’t need state intervention, and some analysts have suggested that bankruptcy is Detroit’s best option.
5. How long does an EM serve for?
EM’s serve without term limits and appointments are controlled by the Loan Board. The exception is school districts, where emergency managers serve 1 year terms and may be reappointed.
6. Major legal challenges to Michigan’s EM law
Michigan Forward is currently circulating a ballot initiative petition to repeal Public Act 4. They have collected 157,000 of the 162,000 signatures required by March 2012 to get the question on the November 2012 ballot.
If the petition is approved, PA 4 will be suspended until the November 2012 vote.
The Sugar Law Center for Economic and Social Justice has filed a lawsuit on behalf of voters saying the emergency manager law violates separation of powers and their right to self-government. Governor Snyder took an unusual step and asked the Michigan Supreme Court to issue an expedited ruling on the case. These cases normally work their way through lower courts before reaching the State Supreme Court. Snyder said the severe financial difficulties facing local governments and school districts require that the questions of constitutionality be resolved quickly. The State Supreme Court has asked for more information from those involved before deciding whether or not to hear the case.
U.S. Congressman John Conyers sent a letter last week to Attorney General Eric Holder, requesting a review of Michigan’s EM law with respect to the 1965 Voting Rights Act, which protects minorities from discriminatory voting and representation practices. “In this case, while the law itself may be facially neutral, it would seem that it is being applied in a discriminatory fashion, as the impacted jurisdictions have very high proportions of African Americans and other minorities,” writes Conyers.
If Detroit is appointed an emergency manager, 49% of African Americans in Michigan will be living in cities run by EMs.
The letter also invokes Article 4, Section 4 of the U.S. Constitution, which guarantees democratically elected representatives.
7. Beyond Michigan
So far, Michigan has been setting its own precedent for emergency management.
The state’s emergency manager process looks a lot like New York City’s Municipal Assistance Corporation, established in 1975 to manage the city’s debt crisis.
One of the earliest state-appointed financial management groups, the MAC functioned as emergency managers do now; overseeing the budget, managing loan procedures, and restructuring personnel to reduce payroll spending.
In Michigan, however, it’s not an oversight board, it’s one person.
While many states now have provisions on the books for the emergency management of local finances, few explicitly grant those powers to individual EMs in the same way PA 4 (2011) does.
The argument for having one manager is expediency and concentrated accountability—that a financial crisis demands flexible and responsive leadership.
The largest district taken over by the state was Flint in 2002 (the city’s population is now lower).
With seven times as many people, Detroit, now under a preliminary financial review, presents an entirely different challenge.
- Meg Cramer, Michigan Radio Newsroom
Inform our coverage. Why are you for, against or indifferent to a Detroit EM?