In 2005 municipal finance expert Lou Schimmel
weighed in on a topic for the Mackinac Center that needs to be of interest to
Gov. Rick Snyder and Michigan legislators. The topic involves making necessary
changes to Michigan Public Act 72 of 1990. This act provides for emergency
financial oversight for struggling local units of government.
These changes and others are all the more
important today as the financial positions of many municipalities have only
gotten worse since 2005 thanks to declines in tax revenue due to the last and
very painful recession among other reasons. Public Act 312 mandates arbitration
in labor disputes with police and fire units and has made financial reform of
these units exceedingly difficult.
Another potential fiscal wild card for local
units of government is whether or not the state will trim revenue sharing
payments to municipalities as it tries to balance its own budget. (The state
puts the next budget deficit at $1.85 billion, but Mackinac Center analysts
believe it exceeds $2 billion.) Less money for local units means it will be
even harder for them to make ends meet.
The state’s policy prescription for fiscally
floundering cities should be to appointment far more powerful emergency financial
managers than they have in the past. Schimmel outlines changes that could — and
perhaps should — be made to the EFM law that would give these appointees more
power. His center of reference is Detroit, but it could apply to any
municipality in need of state fiscal management.
adjunct scholar with the Center, has served as an emergency financial manager
for the city of Hamtramck and as a court-appointed receiver for the city of
Ecorse. We reprint his 2005
work directly below.
Can Detroit’s Problems Be
Corrected by an Emergency Financial Manager?
Michigan Public Act 72 of 1990, as amended,
provides for the appointment of an Emergency Financial Manager if it is
determined that a serious financial problem exists in a municipality or school
district. The appointment of an EFM for the city of Detroit is often discussed
as a possible solution for dealing with the city’s continual mismanagement and
If it were ever determined by the state that
an EFM should be appointed for the city of Detroit, under current law the EFM
would not have all of the necessary tools to be successful. There are four
major problems that would have to be resolved by amending Act 72 prior to the appointment
of an EFM.
Making changes to
Act 72 would be essential for an EFM to have the necessary tools to deal with
the city of Detroit’s management and fiscal problems.
The changes needed are as follows:
- Under current law, the EFM can be sued personally. Given that
actions by an EFM will almost certainly be controversial, and harassing
lawsuits are likely, it is essential that an EFM’s personal assets be
protected. Making the EFM an employee of the state treasury department
with access to the legal staff of the attorney general would make the
present lack of indemnification for an EFM largely moot. Harassing
lawsuits by local bargaining units or other affected entities or
individuals would be defended by the state — an entity that has the depth
of financial resources to discourage the filing of frivolous lawsuits.
- The present Act lists the powers of an EFM, which are extensive
but are not all-inclusive. This can allow the governing body to impede the
overall effort of the EFM to deal with the municipality’s fiscal crisis.
The Act should state that the EFM replaces and takes on the powers of the
governing body (mayor and council or school board.)
- Charter provisions, especially in old charters, can prevent or
make it difficult for an EFM to make necessary structural changes to
address financial problems. The EFM should have the power to review
charter provisions that frustrate the process of cleaning up and
streamlining a municipality’s financial functions.
- Presently, most labor contracts provide for mandatory continuation
of an expired contract until a new one is negotiated. This means
municipalities have no opportunity to take advantage of lower-cost service
providers. Additionally, in the case of public safety unions,
municipalities must adhere to the provisions of Act 312, which mandates
that when a municipality and union cannot agree on the terms of a new
contract they must go to binding arbitration. In most cases, it takes
nearly two years or longer to complete the process, and the legal costs
are substantial. Furthermore, municipalities rarely reduce costs by going
through the Act 312 process but rather, at best, limit the amount of
increased expenses. Act 312 should be repealed in its entirety.
Making the above changes to Act 72 would be
essential for an EFM to have the necessary tools to deal with the city of
Detroit’s management and fiscal problems.
If Michigan is sincerely interested in
keeping and attracting new business it needs to face rather than ignore the
issue of the state’s excessively high, non-competitive municipal labor costs.
High labor costs for municipalities result in high municipal taxes, which in
turn make municipalities unattractive and create major fiscal problems.
Currently the auto, airlines and other
private sector industries are being forced to deal with their high labor costs
in order to stay in business and become competitive. However, Michigan
municipalities are handcuffed from dealing with their high labor costs by labor
contracts that cannot be terminated. Such contracts prevent the possibility of
purchasing municipal services at the lowest possible cost. Unlike the private
sector, municipalities can’t move their operations to a market with lower labor
costs. Also, unlike the private sector, municipalities can’t go out of business
or declare bankruptcy and reorganize to reduce pension, health care, and labor
Michigan needs to remove the shackles
preventing the purchase of municipal services at the lowest cost — not only for
the few municipalities that fall into the position of having an EFM – but for
all Michigan municipalities. Repealing Act 312 would be a giant step in the