When local government units begin to experience fiscal stress, they can raise money and reform their operations without direct state assistance. In the vast majority of cases, this is precisely what happens.
In some cases, local officials may fail, however — and this is not just hypothetical. The question in Michigan has not been whether state-appointed managers or court-appointed receivers may replace local elected officials in running a local unit of government; they have been able to do so for decades. The only question is whether state government will participate in the effort to avoid local fiscal insolvency and how it will do so.
As pointed out by Louis Schimmel, currently Pontiac’s emergency financial manager, the state ultimately has four options for addressing potential local government unit insolvency:
- The state can do nothing and let the local units work out their fiscal problems by themselves. Some local units may not address these problems and may face court-ordered receivership, as Ecorse did.
- The state can allow governments to file for bankruptcy more readily. This may have secondary consequences for the rest of the state by raising the cost of municipal borrowing, but it would avoid having state government imposing an emergency manager or emergency financial manager on local government. A bankruptcy judge is entrusted with some powers similar to an emergency manager’s, though.
- The state can provide money or allow more borrowing. The state is already doing this to a limited extent under the Fiscal Stabilization Act and the Emergency Municipal Loan Act. However, the local government may wind up facing bankruptcy or receivership regardless if it does not repay the borrowing or fails to address core spending issues.
- The state can mandate and provide fiscal reforms directly through state-appointed managers. This is the state’s current policy under Public Act 72 of 1990, and it will be regardless of whether Proposal 1 (Public Act 4) is accepted or rejected.
Public Act 4 is concerned with preventing insolvency — that is, with avoiding a situation where a judge has to cut back a government’s financial obligations, with all the potential ramifications for the city’s (and perhaps the state’s) future financial relationship with creditors and contractors.
To that effect, both the emergency financial managers of Public Act 72 and the emergency managers of Public Act 4 are a next-to-last resort. The state already has basic rules meant to keep the government solvent. The state requires its local governments to keep balanced budgets and to plan to eliminate deficits where they arise. There are punishments for disregarding these rules. There are opportunities to receive emergency cash directly from the state when an emergency arises. There are also opportunities to float bonds to cover immediate expenses. And with any opportunity for local governments to receive cash, the state can attach — and has attached — “strings” to ensure better fiscal management.
But if all these fail to address spending problems and revenue gaps, then the state government has provided for cost reductions through Public Act 72 and through Public Act 4.
Michigan voters are not being asked to judge the entirety of the state’s policy in preventing local government insolvency. Moreover, voters are not being asked whether their local elected officials should remain in control in a financial emergency. If local government units become insolvent, these local officials will be lose control to state judges, if to no one else.
Instead, Michigan voters are being asked to judge whether Public Act 72 is superior to Public Act 4. Public Act 4 contains numerous clarifications to the powers of the emergency financial managers in Public Act 72. Public Act 4 also allows an emergency manager to request permission from the state to amend existing collective bargaining agreements. This power is not trivial, but it is not easily exercised, either, and it has already saved a total of approximately $100 million annually in Flint, Pontiac and the Detroit Public Schools.
These expanded powers and clarifications strengthen the ability of an emergency manager to resolve the local government’s financial crisis. Rejecting them raises the likelihood of insolvency, court-appointed receivership and even bankruptcy.