Executive Summary*

On the Nov. 6 state ballot, voters will be asked decide Proposal 1, which would either approve or nullify Public Act 4 of 2011, the Local Government and School District Fiscal Accountability Act. This law, passed last year by the Michigan Legislature, provided expanded powers to state-appointed emergency managers of local governments and school districts that are in a state of serious “fiscal stress or fiscal emergency.”

Emergency managers with these additional powers were subsequently appointed in seven local government entities. The state has more than 2,000 counties, cities, villages, townships, school districts and other units of local government.

The law has been temporarily suspended pending the outcome of Proposal 1. Voting “yes” on Proposal 1 would reinstate Public Act 4, while voting “no” would nullify it. Nullifying the law would re-establish the state’s previous local government emergency manager law — Public Act 72 of 1990, which was repealed by Public Act 4. Public Act 72 still allowed the state to appoint managers — called “emergency financial managers” — but they lacked several of the powers included in Public Act 4.

Thus, while supporters of nullifying Public Act 4 often argue that the state should not appoint a manager to assume control of a local government unit from its elected officials, state law would still allow this under Public Act 72 even if Public Act 4 were nullified. And even without either Public Act 4 of 2011 or Public Act 72 of 1990, Michigan governments facing insolvency may be subject to court-appointed receivers, as the city of Ecorse was in 1986. A court-appointed receiver assumes control of local government and is entrusted with powers similar to those of emergency financial managers.

The state has placed emergency managers in local governments only after those governments have fallen through other state safety nets meant to prevent insolvency. First, the state requires all governments to balance their budgets. The state requires those that fail at this to submit a plan to resolve any fund deficits that arise. The state also assists governments in raising cash through extra borrowing when deficits arise.

These rules, coupled with responsible fiscal management by local officials, help government units in Michigan avoid reaching the point where they can’t pay their bills. A small percentage of governments still develop financial problems, however.

Both Public Act 4 of 2011 and Public Act 72 of 1990 are the last step in helping Michigan’s local governments and school districts remain solvent prior to declaring bankruptcy. Both acts set up a review team to certify that the government is in fact at serious financial risk, and they both allow the state administration to appoint a manager to control the government unit if the situation is dire.

There were numerous clarifications to the powers and duties of a state-appointed manager in Public Act 4. There were also new powers extended to state-appointed managers in Public Act 4. Perhaps the most material was the ability of a manager to amend the government’s collective bargaining agreements with its employee unions in certain situations. This is a significant tool because local government personnel costs tend to represent the majority of expenses in local governments, and Michigan’s government workforce is highly unionized.

Emergency managers have exercised this power in only three places — the Detroit Public Schools and the cities of Flint and Pontiac. The amendments to government-employee union contracts in these government units are expected to save a total of $100 million annually — a substantial sum.

Rejecting this power, as well as the additional powers and clarifications of powers offered to state-appointed emergency managers in Public Act 4, will increase the likelihood that local governments nearing insolvency will end up in court-appointed receivership or in federal bankruptcy proceedings.

* Citations are provided in the main text.