The Michigan Legislature has passed House Bill 4214, which reforms the process that prevents local governments from going bankrupt. Ultimately, the process can end with the state appointing an emergency financial manager who has the power to implement a plan to ensure that the government can pay its bills. The Mackinac Center in January highlighted four ways that the law needed to be improved. The new law implements all of them, but only to an extent.

  • Protect emergency manager from litigation:

An emergency financial manager has a target on his or her back the minute the position is accepted. Anyone who might get their compensation package scrutinized by the manager will be tempted to fight. Currently, the manager can be sued personally and may be subject to out-of-pocket fees for mistakes made on the job. The new bill offers the same legal protections offered to government agencies and authorizes the emergency financial manager to buy insurance at government expense against other risks. The EFM would also be represented by the attorney general’s office in the event of a lawsuit and the legal fees would also be borne by the local government.

  • Increase scope of the manager’s authority to cover all areas:

Currently, an emergency financial manager is limited to dealing with the financial crisis. This still leaves the local decision-makers with some authority that may impede the manager’s ability to deal with the emergency. In the new legislation, the powers that the local officials can exercise must be authorized by the manager.

  • Allow the manager to move around charter provisions:

An emergency financial manager is subject to a city’s charter and this can bind their ability to adjust government finances. Requirements in city charters, for instance, may be a hindrance to cutting government expenses. The new law specifically targets minimum staffing levels and states that the manager can use his or her power “notwithstanding and charter provision to the contrary.”

  • Give the manager more opportunity to reform union agreements:

Unlike a family’s contract with their cell phone service provider, local government services don’t get stopped when their contract expires. Most local government contracts are automatically extended. This is good for ensuring continuity of services, but bad if there’s a financial emergency that requires lower costs, or to seek bids from other service providers.

Union agreements can be altered at the EFM’s discretion, given four conditions: that it is necessary to serve a public purpose, that the changes are reasonable and necessary to deal with a “broad, generalized economic problem,” that it was designed to address the financial emergency, and that it did not “target specific classes of employees.”  

The new law gives the manager the option to walk away from the bargaining table after the contracts expire. Before returning control of government to local officials, the manager may approve collective bargaining agreements and must have a two-year budget adopted and implemented.

There are other good additions made to the law, including more objective criteria for declaring a fiscal emergency.

Giving the manager the power to call for a tax increase vote, however, may be subject to abuse since it will be popular for local officials to call on the manager to exercise this power alone.

Right now, the state is not prescriptive in the policies that guide the local government out of financial stress. In the steps leading up to receivership — the law still considers a state-appointed manager to be a last resort and provides some assistance in averting an emergency — the idea of an efficient local government is largely subject to the opinions of the state’s review team. The law neglects to recommend that the manager reduce administrative overhead, offer competitive compensation, or to take advantage of opportunities where the private-sector may provide savings to the local government.

Overall, this is an improved way to make sure that local municipalities and school districts continue to pay their bills and to deal with financial emergencies. But governments should also have the tools to control their finances before emergencies arise. Michigan residents will have to wait until April to hear the governor’s emergency prevention recommendations.

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James Hohman is a fiscal policy analyst at the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Mich. Permission to reprint in whole or in part is hereby granted provided that the author and the Center are properly cited.