Emergency manager or emperor? Why Michigan’s law stirs contempt

Flint has gone through a state takeover of its finances twice now. The city’s emergency manager knows he must handle power differently this time.

When the state’s first emergency takeover of Flint ended in 2004, the elected officials who returned to power quickly replaced the department heads who had worked with the state to balance the city’s budget.

Flint’s finances would soon again suffer the stress of low revenues and higher spending. So in 2011, the state took over Flint’s busted budget – again.

Darnell Earley is now the state-appointed emergency manager, working from the same office he used when he was the city administrator in Flint during the first state takeover.

Flint cannot afford to fail again. It could lead to bankruptcy, Earley warns. Knowing this, he has started to engage the city’s elected officials in the city’s transition plan before his term ends next April. It is not easy. Many still view him as the state’s henchman, the enemy. On July 1, he transferred the day-to-day operations of the Planning and Development and Public Works departments to the elected mayor, while retaining final say. The city council, meanwhile, has started regular meetings that take on policy issues just as any city council would do.

Earley said easing the elected officials into power will help sustain the city’s positive financial course once he’s gone. The key, Earley said, is making sure that the people in charge after the emergency manager leaves aren’t so sore about the process that they interfere with recovery.

“If we’re going to fix this thing and going to remain solvent, they are going to have to deal with some things – learn to ride without training wheels,” Earley said of Flint’s elected leaders. “Everyone should be thinking, ‘How do we avoid going down this road again?’...“You want them at the table, but you don’t want them to flip over the table.”

Earley may be onto something, according to a study by the Pew Charitable Trusts.

While Michigan’s aggressive emergency manager law is mired in litigation and some acrimony, other states – notably, North Carolina and Rhode Island – have succeeded with more proactive and inclusive approaches in distressed cities. Experts say Michigan should pay more attention to monitoring fragile cities before they are in crisis and, if emergency intervention is needed, give local leaders a role in the path toward recovery.

“The reason why some (receiverships) succeed and others don’t, I believe is if you don’t have buy-in it’ll never get through it,” said James Spiotto, a municipal bankruptcy expert and co-author of “Municipalities in Distress?: How States and Investors Deal with Local Government Financial Emergencies.”

“Nobody likes being told what to do from on high. It has to be on the city because they’re the ones who will have to live with it.”

“The reason why some (receiverships) succeed and others don’t, I believe, is if you don’t have buy-in it’ll never get through it. Nobody likes being told what to do from on high.” – James Spiotto, a municipal bankruptcy expert.

Two years ago, only a half dozen Michigan cities and school districts were being managed by the state. But the number is growing as more cities face hard times and the state puts its new law to work. Today, 17 are in some phase of receivership, with the governor appointing an emergency manager for Lincoln Park just last week.

Nationwide, at least 23 states have laws that allow them to intervene with municipalities and schools that fall into financial pits, according to Spiotto’s research. They allow for everything from debt supervision to receivership and bankruptcy filing. None of those laws are considered to give as much unbridled power to a state-appointed financial overseer as the law Gov. Rick Snyder successfully pushed through. Michigan’s law gives EM’s near-total power to reshape union contracts, sideline elected officials and sell city assets.

A racial component

And with big power comes big controversy.

In Michigan, there is an unmistakable racial cast to the raw feelings engendered by the EM law, with civil rights groups contending African-American communities have been disproportionately targeted for intervention.

The Detroit Branch and Michigan State Conference NAACP chapters filed a federal lawsuit to repeal the Michigan emergency manager law, Public Act 436, calling it a violation of voting rights because elected officials are stripped of authority when the state appoints an emergency manager. U.S. Bankruptcy Judge Steven Rhodes denied the NAACP challenge last fall, saying it would disrupt the Detroit bankruptcy case if Detroit’s EM were to be removed.

The NAACP filed an appeal with the U.S. Court of Appeals for the Sixth Circuit. No hearing has been scheduled, said Chui Karega, an attorney for the NAACP.

The NAACP and many of the critics of Michigan’s law note that state-appointed emergency managers now control the budgets in municipalities where a majority of the state’s African Americans live, including Detroit.

Karega also noted that Michigan residents voted down the emergency manager law by ballot referendum in 2012, only for the legislature and governor to approve another emergency manager law weeks later.

“Michigan citizens should be making decisions about their future and not a single dictator – that’s what an emergency manager is, a dictator,” Karega said. “The voice of the people ought to be heard. The governor and legislature should listen to the people.”

It’s beyond dispute that Michigan communities under state control are poor and predominantly black. But Gov. Snyder and Republican legislative leaders have said the law was motivated by a desire to help, not control, chronically financially struggling cities and the people who live there.

“There has to be a culture of (knowing) there isn’t an endless pot of money. You can’t fix it with people with the same mindset as the people who were there in the first place.” – Veteran EM Lou Schimmel, on the limits of involving local officials.

Sen. Phil Pavlov, R-St. Clair Township, sponsor of the emergency manager law (Public Act 436), added that while protestors and litigants feel they are looking out for their best interests, the state has to step in to protect taxpayers across Michigan when a city or school district can’t pay its bills.

“We really need to think about what’s best financially,” he said.

Sara Wurfel, spokeswoman for Gov. Rick Snyder, defended the state's actions, saying the extreme nature of financial emergencies dictates state intervention in a municipality, not the skin color of its residents.

"The communities or schools currently with an EM or going through part of the process are because of financial facts and crises, not because of the makeup of their populations," she said.

Nationwide, almost every recent financial emergency can be traced to a one-time blow or a structural problem that worsened over time such as the disaster in Detroit, said Stephen Fehr, a researcher for the Pew Charitable Trusts. State officials should provide technical assistance - in addition to warnings - when signs of stress surface, instead of waiting until distress sets in.

“Our big take away: good monitoring upfront,” Fehr said.

Experts cite North Carolina as a model for financial monitoring to prevent crisis.

The North Carolina way - An ounce of prevention

After the Great Depression, so many local governments were in or near bankruptcy in North Carolina that the state created a powerful agency – the Local Government Commission. The commission monitors finances of cities and towns, requires a minimum 8% fund balance cushion in municipal budgets, and makes onsite visits to cities and districts.

The commission’s close attention to local financial health has resulted in communities there getting bond ratings higher than most in the U.S.

“Other states have formal and informal tools to assist local governments, but none has the same reach as North Carolina’s Commission which imposes budget controls and advises troubled communities,” according the Pew study.

Rob Shepherd, manager of member relations and education for the North Carolina League of Municipalities, said some local government staff and elected officials view the commission negatively because of its oversight role. If problems occur, the commission can take over the spending for a city and act as finance officer until the financial issues have been corrected.

In 2012, for example, the commission rejected the town of Navassa’s request to seek a loan to complete a sewer project. The state instead insisted that the town first address a budget gap.

Pew calls North Carolina’s system “relatively trouble-free,” noting that the state is one of only eight nationally with a top bond grade from all three credit rating agencies. It is a testament to how proactive monitoring can avoid problems down the road, said Fehr, the Pew researcher.

The commission provides “a tremendous benefit to North Carolina local governments and the citizens of North Carolina that is often underappreciated or goes unnoticed until there is a problem,” added Shepherd, of that state’s municipal league.

Wurfel, Snyder's spokeswoman, said the governor has taken steps toward better monitoring to prevent emergencies. In late 2012, an Office of Fiscal Responsibility was created within the treasury department to help local hits of government. Snyder also signed bills last year that created temporary work groups tasked with identifying early warning signs to stem crises.

"Treasury has beefed up their proactive work on this front – from staff who can and do work with local units on budgeting and accounting best practices in municipal finance," Wurfel said. "But we believe still more work is necessary on these fronts."

In Rhode Island, a 5-year plan

Central Falls, R.I., a tiny, poor, congested little town of 19,000 near Providence, had a debt of $21 million when it zoomed in and out of a state takeover and municipal bankruptcy. It was the quickest municipal bankruptcy in the nation, ending in 2012 after 13 months.

Hard feelings were part of the entire process.

“The town council, mayor, state senators and reps were basically opposed to some unelected person coming in from outside the city who assumes all powers of the elected officials and displaced them, and goes about firing their friends and closing the library and the senior center all because the city can’t afford it,” said Robert Flanders, a former state supreme court justice who was the state-appointed receiver in Central Falls.

The local elected officials lost their authority during the receivership and bankruptcy.

Like other cities operating under a state takeover, the state pushed to get Central Falls’ employees and retirees to cut their pay. In bankruptcy, the city pushed to cut retirees’ payments by over 50%. Bondholders faced no cuts because the state had passed a law protecting bondholders if a municipality filed bankruptcy.

But the discord did not logjam the Central Falls process because the state emphasized negotiation over confrontation. After the bankruptcy ended, an oversight board was appointed to monitor the city’s five-year budget.

Limiting the oversight board’s powers to five years was welcomed by locally elected politicians who resent the oversight process, Flanders said. “The politics is the hardest part,” Flanders said. “There are no guarantees. Ultimately if you live in a democracy, you have to depend on elected officials to do the right thing.”

Local buy-in or bust

Spiotto, the municipal turnaround expert, said state takeovers will fail – municipalities will revert to oversepnding or a state will be stuck in an oversight role in perpetuity – unless local officials and experts have a hand in crafting a recovery.

Michigan lawmakers passed Public Act 436, the 2012 law that re-established emergency managers after voters struck down the prior emergency manager law. The new law allows for a transition advisory board, or TAB, to be appointed to monitor and approve local elected officials’ decisions after the emergency manager leaves.

The TAB is similar to the oversight board in Rhode Island and control boards that have operated in cities such as in New York, Philadelphia, and Washington, DC. By Michigan law, a TAB serves until the governor determines the municipality is out of the woods and dismisses the board.

A TAB (or the financial review board that will soon monitor the City of Detroit), should truly act as an advisor, not an emperor, and allow city officials to do the work, said Spiotto, managing director at Chapman Strategic Advisors in Chicago.

If the city officials take part in crafting a recovery plan, they have skin in the game. If the state dictates too much, the pitch and fever of politics will sap progress, Spiotto said.

As has certainly been the case in Michigan, Pew’s research shows state takeovers are “often viewed as a usurping of local democracy because unelected state officials make decisions usually left up to local mayors and councils.”

Pew urges states to "design interventions to involve all stakeholders in discussions, to be transparent with financial information, and to return control to local officials quickly. This promotes better cooperation between all concerned parties as a local government recovers from a crisis."

Inclusion in Allen Park

Joyce Parker, who has served as emergency manager over Highland Park schools, the city Ecorse and the city of Allen Park, near Detroit, agrees.

Since Parker took over Allen Park in 2012, she has attended the city council meetings, provided written updates and held a retreat with the council about operations.

Her goal?

“When I transition out, they’re ready to step in,” she said.

Parker said she has recruited locals to serve voluntarily on an advisory panel and act as a liaison between the community and the emergency manager.

Cheryl Stan, finance director of Cass Community Social Services, a nonprofit organization, is on Parker’s volunteer advisory committee. Stan said there’s two camps in the city of 28,000. One faction believes the state takeover was the best thing that could’ve happened because the city couldn’t get itself together. The other believes the process is part of The Evil Empire.

Even with a team of resident advisors, the state takeover period is not all kumbaya and olive branches. A regular band of critics and dissenters attend public meetings, Stan said.

A transition advisory board will ultimately oversee Allen Park’s finances after Parker leaves, a process that Stan says she backs. “I think without a transition group there are a lot of people that would forget all of the lessons we learned this time around,” she said

But locals must be a part of that team, she said. “If you don’t have some local voice in that transition committee, then it’s going to make it harder to get things done,” Stan said. “You give the opponents the perfect soap box.”

Cooperation, not chaos

In 1986, a circuit court named Lou Schimmel receiver for Ecorse. In 2000, he became emergency financial manager over Hamtramck’s budget. Both cities required a second round of state oversight since he left.

Who is to blame for the cities’ reversals is subject to debate. Was it local officials undoing the cost-cutting reforms Schimmel enacted? Or the other factors at play - a flagging Michigan economy, perhaps? A drop in tax revenues? Increased municipal health care and retirement costs that are bedeviling communities across Michigan? Or maybe it was the state’s cutback in revenue sharing?

Whatever the cause, Schimmel was not left wanting for work. In 2011, he was appointed emergency manager in Pontiac.

Schimmel said that while it’s important to include local officials in turnaround plans, having too many divisive locals can cause in-fighting, dragging out the recovery. Schimmel should know. A native of Pontiac, he is now on the Pontiac transition advisory board.

“It’s all about management,” Schimmel said. “There has to be a culture of (knowing) there’s isn’t an endless pot of money.”