In November, state voters will get to decide whether to approve Proposal 1, which would allow them to accept or reject the Local Government and School District Fiscal Accountability Act.[1] This act, Public Act 4 of 2011, created a new early warning system for local governments and school districts that approach “a condition of financial stress or financial emergency.”[2] Public Act 4 also prescribed a process to identify and resolve the financial difficulties, possibly culminating in the appointment of an “emergency manager” with special powers to resolve the government’s fiscal problems.

As a description of legislative intent, the act states:

The legislature hereby determines that the health, safety, and welfare of the citizens of this state would be materially and adversely affected by the insolvency of local governments and that the fiscal accountability of local governments is vitally necessary to the interests of the citizens of this state to assure the provision of necessary governmental services essential to public health, safety, and welfare. The legislature further determines that it is vitally necessary to protect the credit of this state and its political subdivisions and that it is necessary for the public good and it is a valid public purpose for this state to take action and to assist a local government in a condition of financial stress or financial emergency so as to remedy the stress or emergency by requiring prudent fiscal management and efficient provision of services, permitting the restructuring of contractual obligations, and prescribing the powers and duties of state and local government officials and emergency managers. The legislature, therefore, determines that the authority and powers conferred by this act constitute a necessary program and serve a valid public purpose.[3]

The idea is to ensure that local governments honor commitments to employees, retirees, bondholders, creditors, contractors and other stakeholders. This would keep local governments away from local government bankruptcy, known as “Chapter 9,” or from court-appointed receivership, in which a judge attempts to resolve financial commitments and has the power to cancel a monetary claim on a government.

The state has long had the ability to authorize a manager to take charge of a troubled local government or local school district. In 1988, with the approval of Public Act 101, the Michigan Legislature enabled the appointment of emergency financial managers for struggling municipal governments — that is, cities, villages, townships and counties. In 1990, the Legislature passed Public Act 72, which allowed similar appointments for school districts.

If Public Act 4 is nullified by voters in November, the state would return to the legal situation prior to the passage of that act — in other words, to the provisions of Public Act 72 of 1990.[*], [4] Indeed, as soon as the state referendum on Public Act 4 was certified for the ballot, the law was put on hold, and Public Act 72 took effect.

A discussion of the history of court-appointed receivers and state-appointed emergency financial managers in Michigan illustrates the problems Public Act 4 attempts to resolve. This history also clarifies the role of the state in averting local government fiscal crises and in identifying emergency financial management weaknesses that Public Act 4 is meant to resolve.

Proposal 1’s petition language lists Public Act 4 provisions that the petition’s drafters believe are problematic:

[Public Act 4 of 2011] allows the governor to declare a local government or school district in receivership and appoint an emergency manager to take control with the following powers, among others: to assume the powers of local elected officials; to take control of revenue and spending; to terminate, modify and renegotiate contracts; to refuse to bargain with employee representatives; to take control of employee pension funds under certain circumstances; and with the governor’s approval, to sell public assets or dissolve a city, township or county.[5]

Some of these powers preceded the passage of Public Act 4. For instance, the ability to place a financial manager in control of local government was part of both Public Act 101 of 1988 and Public Act 72 of 1990. Public Act 4 tweaked the emergency manager law in a handful of areas, but the most substantial difference was granting an emergency manager the ability to adjust the government unit’s[†] contracts and its collective bargaining agreements with its employees.[‡]

Proponents of repealing Public Act 4 argue that the state should never strip local, democratically elected school boards, city councils, mayors, townships or county commissioners of their power.[6]

But the history of the emergency manager law suggests that its authors intended to prevent control from being taken from local elected officials and to ensure that problems are solved before a crisis. While this view may seem contradicted by the legislation’s provision for the appointment of an unelected official, Michigan’s experience showed that local government elected officials control can be subverted without state assistance as well.

[*] A lawsuit has been filed arguing that a nullification of Public Act 4 by state voters in November would not restore Public Act 72. (See Watkins et al v Dillon et al, Ingham Circuit Court Case No. 12-1056C2.) The plaintiffs rely, however, on a statute that applies to acts of the Legislature, not to voter referenda (see MCL § 8.4). While there may be significant litigation over this issue if voters nullify Public Act 4, the better legal argument is that Public Act 72 would be restored by Public Act 4’s nullification.

It should also be noted that if Proposal 1 is defeated and the courts rule Public Act 72 is not restored, it may be that the only two statutes authorizing a municipality or school district to file for Chapter 9 bankruptcy will no longer be in force. If so, municipal and school district bankruptcy would not be an option in Michigan until the Legislature created another enabling statute.

[†] Throughout this study, the phrases “a local unit of government” or “a government unit” will be used to refer to cities, villages, townships, counties or school districts. The phrases are also interchangeable with “a municipal government or school district.”

[‡] For instance, Public Act 4 also lowered one threshold for triggering some of the act’s provisions by requiring a letter signed by only 5 percent of voters, instead of 10 percent. For a full list of the emergency manager powers and Public Act 4’s alterations, see “Appendix A: The Effect of Michigan’s Public Act 4 on Municipal and School District Emergency Manager Powers.”