State Financial Aid to Distressed Municipalities and School Districts

The state can also help local governments raise cash when they are facing financial problems.

Under the emergency municipal loan act, a local government or school district in deficit and with weak growth in tax revenue can borrow up to $20 million from the state during a seven-year period, with additional $4.0 million loans available each year afterward.[42]

In return for the loan, the local unit must do the following: submit a plan to “balance future expenditures with anticipated revenues”;[43] employ “a full-time professional administrator to direct or participate directly in the management of the municipality’s operations until otherwise ordered by the [state emergency loan] board”;[44] file quarterly reports to the board about its finances;[45] and certify that it is meeting its plan and abiding by state accounting rules.[46]

Only the cities of Ecorse, Highland Park and Inkster have outstanding emergency loans.[47]

If a city or county has a deficit that it cannot cover through emergency municipal loans or by selling bonds against future tax revenues, the state can invoke the Fiscal Stabilization Act to authorize the municipality to issue fiscal stabilization bonds.[48] The municipality can raise up to 3 percent of the value of the real and personal property that exists in its boundaries in order to address the deficit.[*]

Essentially, a local municipality or school district faced with the possibility of an emergency manager has already had a number of opportunities to correct its fiscal trajectory. That government unit has also had a number of ways to raise-short term cash to avoid a financial emergency. These alternatives frequently gave the government unit time to make any reforms necessary to eliminate its deficit.

These preliminary options explain one motive behind the emergency manager law. If state requirements of local fiscal discipline and other safeguards have not proved enough to avert a fiscal emergency, the state arguably has little choice but to take a more active approach if it is to avert a local government bankruptcy. In other words, if the local government does not implement a plan to bring its finances into alignment, the state may exercise its authority to appoint someone who can.

[*] The limit is the state equalized value, a governmental measure of property values partially used in property tax millage allocations. The amount that the local unit can raise is also capped at $125 million, though an exception was carved out for Detroit in 2010. See 2010 Public Act 4, Sec. 4(8).