citizen research council of michigan emergency financial manager law report

8/7/2019 Citizen Research Council of Michigan Emergency Financial Manager Law Report

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Board of DirectorsChairman Vice Chairman Treasurer

Eugene A. Gargaro, Jr. Jeffrey D. Bergeron Nick A. Khouri

Eugene A. Gargaro, Jr.Manoogian Foundation

John J. GasparovicBorgWarner Inc.

Ingrid A. GreggEarhart Foundation

Marybeth S. HoweWells Fargo Bank

Nick A. KhouriDTE Energy Company

Daniel T. LisKelly Services, Inc.

Sarah L. M cClel landJPMorgan Chase & Co.

Aleksandra A. MiziolekDykema Gossett PLLC

Cathleen H. NashCitizens Bank

Joseph R. AngileriDeloitte.

Jeffrey D. BergeronErnst & Young LLP

Michael G. BickersPNC Financial Services Group

Beth ChappellDetroit Economic Club

Rick DiBartolomeoTerence M. DonnellyDickinson Wright PLLC

Randall W. EbertsW. E. Upjohn Institute

David O. EgnerHudson-Webber Foundation

Laura FournierCompuware

Paul R. ObermeyerComerica Incorporated

Kevin ProkopRockbridge Growth Equity, LLC

Lynda RossiBlue Cross Blue Shield of Michigan

Jerry E. RushMeritor, Inc.

Michael A. SemancoHennessey Capital LLC

Terence A. Thomas, Sr.Amanda Van DusenMiller, Canfield, Paddock and

Stone, PLC

Kent J. VanaVarnum

Advisory DirectorLouis Betanzos

Board of TrusteesTerence E. AdderleyKelly Services, Inc.

Jeffrey D. BergeronErnst & Young LLP

Stephanie W. BergeronWalsh College

David P. BoylePNC

Beth ChappellDetroit Economic Club

Mary Sue ColemanUniversity of Michigan

Matthew P . Cul lenRock Ventures LLC

Tarik DaoudLong Family Service Center

Stephen R. DArcyDetroit Medical Center

James N. De Boer, Jr.Varnum

John M. DunnWestern Michigan University

David O. EgnerHudson-Webber Foundation

New Economy Initiative

David L. EislerFerris State University

David G. FreyFrey Foundation

Mark GaffneyMichigan State AFL-CIO

Eugene A. Gargaro, Jr.Manoogian Foundation

Ralph J. GersonGuardian Industries Corporation

Eric R. GilbertsonSaginaw Valley State University

Allan D. GilmourWayne State University

Alfred R. Glancy IIIUnico Investment Group LLC

Thomas J. HaasGrand Valley State University

James S. Hi lboldtThe Connable Office, Inc.

Paul C. Hi l legondsDTE Energy Company

Daniel J. Kel lyDeloitte. Retired

David B. KennedyEarhart Foundation

Mary KramerCrain Communications, Inc.

David LeitchFord Motor Company

Edward C. Levy, Jr.Edw. C. Levy Co.

Daniel Litt leUniversity of Michigan-Dearborn

Sam LoganMichigan Chronicle

Arend D. LubbersGrand Valley State University, Emeritus

Alphonse S. LucarelliErnst & Young LLP, Retired

Susan W. MartinEastern Michigan University

Will iam L. Matthew sPlante & Moran PLLC

Sarah L. M cClel landJPMorgan Chase & Co.

Paul W. McCrackenUniversity of Michigan, Emeritus

Patrick M. McQueenThe PrivateBank

Robert MilewskiBlue Cross Blue Shield

of Michigan

Glenn D. MrozMichigan Technological University

Mark A. MurrayMeijer Inc.

Cathy H. NashCitizens Bank

James M. NicholsonPVS Chemicals

Donald R. ParfetApjohn Group LLC

Sandra E. PierceCharter One

Phil ip H. PowerThe Center for Michigan

Keith A. PrettyNorthwood University

John Rakolta Jr.Walbridge

Douglas B. RobertsIPPSR- Michigan State University

Irving RoseEdward Rose & Sons

George E. RossCentral Michigan University

Gary D. RussiOakland University

Nancy M. Schl ichtingHenry Ford Health System

John M. SchreuderFirst National Bank of Michigan

Lloyd A. SempleDykema

Lou Anna K. SimonMichigan State University

S. Martin TaylorAmanda Van DusenMiller, Canfield, Paddock

and Stone PLC

Kent J. VanaVarnum

Theodore J. VogelCMS Energy Corporation

Gail L. WardenHenry Ford Health System,

EmeritusJeffrey K. Wil lemainDeloitte.

Leslie E. WongNorthern Michigan University

Citizens Research Council of Michigan is a tax deductible 501(c)(3) organization


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C I T I Z E N S R E S E A R C H C O U N C I L O F M I C H I G A N

M A I N O F F I C E 38777 Six Mile Road, Suite 208 Livonia, MI 48152-3974 734-542-8001 Fax 734-542-8004

L A N S I N G O F F I C E 124 West Allegan, Suite 620 Lansing, MI 48933-1738 517-485-9444 Fax 517-485-0423

CRCMICH.ORG

Citizens ResearCitizens ResearCitizens ResearCitizens ResearCitizens Research Cch Cch Cch Cch Councilouncilouncilouncilouncil of Michiganof Michiganof Michiganof Michiganof Michigan

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FFFFFISCISCISCISCISCALALALALAL AAAAACCCCCCCCCCOUNTOUNTOUNTOUNTOUNTABILITABILITABILITABILITABILITYYYYY AAAAACCCCCTTTTTPPPPPUBLICUBLICUBLICUBLICUBLIC AAAAACCCCCTTTTT44444 OFOFOFOFOF 20112011201120112011




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C i t i z e n s R e s e a r c h C o u n c i l o f M i c h i g a n iii

TTTTTHEHEHEHEHE LLLLLOCOCOCOCOCALALALALAL GGGGGOVERNMENTOVERNMENTOVERNMENTOVERNMENTOVERNMENTANDANDANDANDAND SSSSSCHOOLCHOOLCHOOLCHOOLCHOOL DDDDDISTRICISTRICISTRICISTRICISTRICTTTTTFFFFFISCISCISCISCISCALALALALAL AAAAACCCCCCCCCCOUNTOUNTOUNTOUNTOUNTABILITABILITABILITABILITABILITYYYYY AAAAACCCCCTTTTTPPPPPUBLICUBLICUBLICUBLICUBLIC AAAAACCCCCTTTTT44444 OFOFOFOFOF 20112011201120112011

Contents

Summary ..................................................................................................................... v

Introduct ion ................................................................................................................ 1

History ......................................................................................................................... 2

The Process ................................................................................................................. 4

Preliminary Review ....................................................................................................... 4

Review Team................................................................................................................ 5

Members ................................................................................................................ 5

Report .................................................................................................................... 6

Conclusions ............................................................................................................ 8

Consent Agreement ...................................................................................................... 8

Continuing Operations Plan ...................................................................................... 8

Recovery Plan ......................................................................................................... 8

Other New Provisions .............................................................................................. 9

Determination ............................................................................................................ 10

Emergency Manager ................................................................................................... 10

Financial and Operating Plan .................................................................................. 11

Reports ................................................................................................................ 16

Liability................................................................................................................. 17

Bankruptcy ........................................................................................................... 17

Termination of Receivership ................................................................................... 17

Changing Roles ......................................................................................................... 18

Governor.................................................................................................................... 18

State Legislature......................................................................................................... 18

State Treasurer and Superintendent of Public Instruction ............................................... 19

State Attorney General ................................................................................................ 20

Local Chief Administrative Officer ................................................................................. 20

Local Government Officials and Employees ................................................................... 21

Under a Review Team ............................................................................................ 21

Under a Consent Agreement .................................................................................. 21

Under an Emergency Manager ............................................................................... 21

Concl usion .................................................................................................................23

Appendi x ................................................................................................................... 25

Diagrams

Diagram 1: The Pub li c Ac t 4 Process .......................................................................... 7


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CRC Report

C i t i z e n s R e s e a r c h C o u n c i l o f M i c h i g a niv


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C i t i z e n s R e s e a r c h C o u n c i l o f M i c h i g a n v

TTTTTHEHEHEHEHE LLLLLOCOCOCOCOCALALALALAL GGGGGOVERNMENTOVERNMENTOVERNMENTOVERNMENTOVERNMENTANDANDANDANDAND SSSSSCHOOLCHOOLCHOOLCHOOLCHOOL DDDDDISTRICISTRICISTRICISTRICISTRICTTTTTFFFFFISCISCISCISCISCALALALALAL AAAAACCCCCCCCCCOUNTOUNTOUNTOUNTOUNTABILITABILITABILITABILITABILITYYYYY AAAAACCCCCTTTTTPPPPPUBLICUBLICUBLICUBLICUBLIC AAAAACCCCCTTTTT44444 OFOFOFOFOF 20112011201120112011

Summary

The local government is not in financial stress or isin a condition of mild financial stress.

The local government is in a condition of severe fi-nancial stress, but a consent agreement containinga plan to resolve the problem has been adopted.

The local government is in a condition of severe fi-nancial stress and a consent agreement has not beenadopted.

A financial emergency exists and there is no satis-factory plan to resolve the emergency.

The new act provides greater direction and specificityin the development of consent agreements, whichmay grant one or more powers of an emergencymanager to one or more local officials (only the powerto reject, modify, or terminate a collective bargainingagreement cannot be granted to a local official undera consent agreement). The consent agreement maycontain either a continuing operations plan developedby the local government, or a more demanding re-covery plan developed by the state financial author-ity. Beginning 30 days after the consent agreementis approved, the local government is exempted from

collective bargaining requirements for the term of theagreement, unless the state treasurer determinesotherwise. A companion statute, PA 9, amends thepublic employment relations act and provides that alocal unit that enters into a consent agreement is ex-empt from the requirement to collectively bargain andto enter collective bargaining agreements for the du-ration of the consent agreement.

The state financial authority (the state treasurer, orthe superintendent of public instruction for schooldistricts) determines when the conditions of the con-sent agreement have been met.

The governor is required to make a determinationwithin ten days of receiving the review teams rec-ommendation. If a consent agreement is not adoptedor is materially breached, the governor may declarethat a financial emergency exists. The unit may re-quest a hearing, and if, after the hearing, the gover-

The Local Government and School District Fiscal Ac-countability Act (PA 4 of 2011) is the third iteration ofstatutes that authorize the state to intervene directlyin the financial affairs of local governments. By pro-viding for earlier state intervention and the takeoverof a local government or school district by a stateappointed emergency manager who would assumeall of the authority and responsibility of local officials,as well as have power to terminate collective bar-gaining agreements and contracts, and even to dis-solve the unit of government, the state hopes to en-courage local officials to resolve financial problemspromptly. PA 4 retains the essential process estab-lished in earlier statutes (trigger events and prelimi-nary review; appointment of a review team autho-rized to negotiate a consent agreement and with alimited set of possible recommendations; local gov-ernment right of review and appeal; state appoint-ment of a financial manager with specified powersand duties) but this act provides much greater pow-ers to the state and to the emergency manager.

PA 4 lowers the threshold for state intervention byexpanding the list of initiating events and allowingfor a preliminary review at the discretion of the statetreasurer. The preliminary investigation may lead toappointment of a review team, which conducts amore thorough review to determine whether any ofthe events specified in the act, or any other facts orcircumstances indicative of financial stress or of afinancial emergency, exist. The review team is re-quired to meet with the local government and isempowered to examine the books and records ofthe local government and to utilize the services of

other state agencies and employees. The state de-partment of treasury is to provide staff support tothe review team. If the state financial authorityapproves, the review team may appoint an individualor firm to perform the review and submit a report.The review team must complete the review within60 days, unless a 30 day extension is granted, andmust make one of four possible recommendations.


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CRC Report

C i t i z e n s R e s e a r c h C o u n c i l o f M i c h i g a nvi

nor confirms the emergency, the unit may appealthe decision to the Ingham County circuit court. Ifthe determination is not set aside, or if the determi-nation is not appealed, the governor declares theunit to be in receivership and appoints an individualto serve as emergency manager. That individual,

who serves at the pleasure of the governor, may ormay not be an official or employee of the local gov-ernment and may or may not be a resident of thelocal government, but must have at least five yearsexperience and demonstrable expertise in business,financial, or local or state budgetary matters. Thegovernor may delegate his or her duties under theact, including the appointment of an emergencymanager, to the state treasurer.

PA 4 expands the authority of emergency managersin school districts, general purpose local govern-ments, special authorities, and publicly owned utili-ties. The emergency manager is paid by the localgovernment, according to a contract that must beapproved by the state treasurer and posted on thestate Department of Treasurys website. At the timean emergency manager is appointed, the powersand duties of the chief administrative officer andgoverning body are transferred to the emergencymanager.

The emergency manager must develop a financial

and operating plan for the local government. Theplan must provide for the following:

(a) Conducting the operations of the local governmentwithin the resources available.

(b) The payment in full of scheduled debt service and allother uncontested legal obligations.

(c) The modification, rejection, termination, and rene-gotiation of contracts (a new provision).

(d) Timely deposit of required payments to the pensionfund.

(e) For school districts, an academic and educational plan(a new provision).

(f) Any other actions considered necessary by the emer-gency manager to achieve the objectives of the fi-nancial and operating plan, alleviate the financialemergency, and remove the local government fromreceivership.

The object of the financial and operating plan is toassure that governmental services essential to the

public health, safety, and welfare will be providedand to assure the fiscal accountability of the localgovernment. The emergency manager must sub-mit the plan to the state treasurer, to the superin-tendent of public instruction if the unit is a schooldistrict, and to the local CAO and governing body,

within 45 days after the emergency managers ap-pointment. The plan must be in the form requiredby the state treasurer, and may be modified as nec-essary by the emergency manager with notice tothe state treasurer. The financial and operating planmay serve as a deficit elimination plan. Within 30days of submitting the financial and operating planto the state financial authority, the emergency man-ager is required to conduct a public informationalmeeting on the plan, but no local or public approvalof the plan is required. The emergency manager is

authorized to issue orders necessary to implementthe financial and operating plan and those ordersare binding on local elected and appointed officials,employees, agents, and contractors.

The emergency manager may hire staff and secureprofessional assistance as he or she considers nec-essary. Emergency managers for school districts aregranted unequivocal authority over academic andoperational matters. An emergency manager mayenter into contracts, but any contract with a cumu-lative value of $50,000 or more is subject to com-

petitive bidding. However, the emergency managermay submit the issue to the state treasurer, whomay exempt that potential contract from competi-tive bidding.

Although the financial and operating plan must in-clude provision for payment in full of scheduled debtservice on all bonds, notes, municipal securities andall other uncontested legal obligations, emergencymanagers have the ability to reject, modify, or ter-minate non-labor contracts, such as service or pur-chasing contracts. This is a power that has been

available only under federal bankruptcy provisions.

The emergency manager acts as sole agent of thelocal government in collective bargaining with em-ployees or representatives and approves any con-tract or agreement. PA 4 authorizes an emergencymanager to overrule minimum staffing requirementsin charters and contracts. Furthermore, emergency


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THE LOCAL GOVERNMENTAND SCHOOL DISTRICTFISCAL ACCOUNTABILITY ACT

C i t i z e n s R e s e a r c h C o u n c i l o f M i c h i g a n

managers are authorized to reject, modify, and ter-minate collective bargaining agreements after meet-ing and conferring with the bargaining unit and de-termining (in the emergency managers solediscretion) that no satisfactory agreement can beobtained. One exemption is provided: an emergency

manager cannot change a collective bargaining pro-vision for the payment of a benefit on the death of apolice officer or firefighter in the line of duty.

Emergency managers may be empowered to assumecontrol of pension funds that are not at least 80percent actuarially funded

The emergency manager may recommend consoli-dation with another municipal corporation, or may,with the governors approval, dissolve the municipalcorporation. The emergency manager may requestthat the local unit be allowed to file under federalbankruptcy provisions, and the governor makes thatdecision.

The act provides more explicit protections for emer-gency managers and those hired by emergencymanagers and makes local governments responsiblefor the costs associated with lawsuits and claimsagainst the emergency manager and his or her

agents. Also, under this act, an emergency man-ager can be removed by a two-thirds vote of thelegislature.

PA 4 contains a severability clause, which would pro-tect other provisions of the act even if some sec-

tions are rejected by the courts.

A local government remains in receivership until theemergency manager declares the financial emer-gency to be rectified and the state treasurer (andthe superintendent of public instruction if the localgovernment is a school district) concurs. Before thetermination of receivership, the emergency managermust adopt and implement a two-year budget, in-cluding all contractual and employment agreements,to start at the end of the receivership. The localgovernment is prohibited from amending that bud-get without the approval of the state treasurer, andfrom revising any order or ordinance implementedby the emergency manager for a period of one year.

These changes are intended to address problems andfrustrations encountered by emergency financial man-agers and state officials under PA 72, and to providethe governor with more options to empower localelected officials with extraordinary powers.


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C i t i z e n s R e s e a r c h C o u n c i l o f M i c h i g a n 1

With declining revenues, unsustainable cost struc-tures, unfunded liabilities, and increasing demandsfor services, Michigans local governments and schooldistricts are struggling to provide essential services.Reductions in state funding and constitutional limitson property taxes portend extended problems forcounties, cities, villages, townships, school districts,and special authorities.

One state response to the increasing number of lo-cal governments and school districts facing deficitshas been a series of new statutes that dramatically

increase the powers of state-appointed emergencymanagers and reduce or eliminate local control.These managers were defined as emergency finan-cial managers under the repealed Public Act 72;the new nomenclature, emergency manager, re-flects the unequivocal expansion of authority to op-erations. The increased powers are intended to pro-vide additional incentives for local governments toavoid a state takeover. According to the State Trea-surer1, the goal of the legislation is to give localexecutives and their partners the tools and incen-

tives they need to avoid financial emergencies andmaintain local control. By providing for the take-over of a local government or school district by astate appointed emergency manager who is empow-ered to assume the authority and responsibility oflocal officials, to reject, modify, or terminate collec-tive bargaining agreements as well as other con-tracts, and to dissolve the unit of government, thestate hopes to encourage unions to compromise thebenefits they have negotiated or hope to obtain.

In preparation for those takeovers, training sessions

have been organized for aspiring emergency man-agers: a February training session attracted 65 par-ticipants and 300 are scheduled to attend a trainingsession in April.

Public Act 4 of 2011 (PA 4) strengthens the provi-sions of earlier statutes to allow state interventionin financially distressed local governments includingschool districts. The act increases accountability bylowering the threshold for intervention and elimi-nating the role of the Local Emergency Financial

Assistance Loan Board, placing greater responsibil-ity directly on the governor, treasurer, and state su-perintendent of public instruction. It provides greaterdirection and specificity in the development of con-sent agreements, which may grant one or more pow-ers of an emergency manager to one or more localofficials. Beginning 30 days after the consent agree-ment is approved, the local government is exemptedfrom collective bargaining requirements for the termof the agreement, unless the state treasurer deter-mines otherwise.

PA 4 expands the authority of emergency managersin school districts, general purpose local govern-ments, special authorities, and publicly owned utili-ties: emergency managers for school districts aregranted unequivocal authority over academic mat-

ters; emergency managers are authorized to termi-nate contracts and collective bargaining agreements;emergency managers are empowered to assumecontrol of pension funds. This expanded authoritycomes at the expense of local charters, local ordi-nances, local elected officials, contracts, unions andcollective bargaining agreements. Emergency man-agers are given the power to reject, modify, andterminate contracts, and this power may be in con-flict with provisions in both the state and federalconstitutions. The act provides more explicit pro-tections for emergency managers and those hired

by emergency managers and makes local govern-ments responsible for the costs associated with law-suits and claims against the emergency manager andhis or her agents.

This report will compare the new act to the statuteit replaced, describe the process for state interven-tion, and analyze the role and responsibilities of keyactors in the intervention process.



Introduction

1 Andy Dillon, letter to The Detroit Free Press, Emergencyfinancial manager would be put in place only if necessary,March 20, 2011.


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CRC Report

C i t i z e n s R e s e a r c h C o u n c i l o f M i c h i g a n2

History

First introduced as House Bill 4214 on February 9,2011 and signed into law by Governor Rick Snyderon March 16, 2011, the Local Government and SchoolDistrict Fiscal Accountability Act (PA 4 of 2011) is

the third iteration of statutes that authorize the stateto intervene in the financial affairs of local govern-ments in a financial emergency. This iteration ex-pands the authority of a state appointed emergencymanager to all operations, including the academiccomponent of a school district. HB 4214 was tiebarred to SB 158, which became PA 9 of 2011, andwhich amends the Public Employment Relations Act(PA 336 of 1947).

The first of the laws allowing state intervention, PublicAct 101 of 1988 (PA 101), which was adopted inresponse to court appointment of a receiver for theCity of Ecorse, established a defined statewide ap-proach to the challenge of extreme local financialdistress in general purpose local governments. PA101 was revised by PA 72 of 1990, the Local Gov-ernment Fiscal Responsibility Act, (PA 72) whichextended essential provisions to school districts. PA72, which was itself amended in 1992, 2002, 2003,and 2009, was used to appoint emergency financialmanagers in the following governments:

City of Hamtramck, 2000City of Highland Park, 2001

City of Flint, 2002

Inkster Public Schools 2002

Village of Three Oaks, 2008

City of Ecorse, 2009

City of Pontiac, 2009

City of Benton Harbor, 2010

Detroit Public Schools, 2009

At the time PA 72 was replaced, there were emer-

gency financial managers in Ecorse, Pontiac, BentonHarbor, and Detroit Public Schools, and a financialemergency remained in place in Highland Park andThree Oaks. The City of River Rouge is currentlyoperating under a consent agreement approved un-der PA 72. CRC has described the repealed PA 72 inseveral reports, the most recent being FinancialEmergencies in Michigan Local Governments, Report362, published in April, 2010.

PA 4 retains the essential process established in theearlier statutes: trigger events and preliminary re-view; appointment of a review team authorized tonegotiate a consent agreement and with a limitedset of possible recommendations; local governmentright of review and appeal; state appointment of a

financial manager with specified powers and duties.

The act increases the number of trigger events toallow state intervention earlier in the process of lo-cal financial deterioration, presumably when lesssevere corrective measures may be effective, andfurther allows the state financial authority (SFA) (thesuperintendent of public instruction for school dis-tricts; the state treasurer for all other units) com-plete discretion in initiating a preliminary review ifthere are facts or circumstances, other than the trig-ger events described, that are indicative of financialstress. The Michigan Department of Treasury scoresand ranks local governments based on criteria de-signed to indicate the financial condition of the gov-ernment, and these fiscal indicator scores may alsobe considered in initiating preliminary reviews.

PA 4 provides much greater direction for the devel-opment and implementation of consent agreements,which may include granting extraordinary power toa local official. Consent agreements will contain ei-ther a continuing operations plan developed by the

local government of a recovery plan developed bythe state financial authority.

PA 4 also expands the powers of the appointedemergency manager to include modifying or termi-nating contracts and, with the approval of the gov-ernor, dissolving the municipal corporation or rec-ommending consolidation with another municipalcorporation. If the local pension fund is not at least80 percent actuarially funded (80 percent is theminimum standard of adequacy for public pensionfunds), net of pension bonds or other indebted-

ness, the emergency manager may be appointedsole trustee. In that case, the emergency man-ager has authority to set actuarial assumptions andto transfer funds to the statewide Municipal Em-ployees Retirement System. Also, under this act,an emergency manager could be removed by a two-thirds vote of the legislature.


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These changes are designed to make the implica-tions of state intervention so significant that localelected officials and employee bargaining units aremore motivated to address financial problems beforethose problems become an emergency. Furthermore,

the changes are intended to address problems andfrustrations encountered by emergency financial man-agers and state officials under PA 72, and to providethe governor with more options to empower localelected officials with extraordinary powers.

Fiscal Indicator Scores

The Michigan Department of Treasury reviews fiscal indicators for 1,856 units of local government and assigns anumerical rating to each city, village, township, and county. Ratings are based on key factors from nine categories:

Population growth

Real taxable valuation growth

Large real taxable value decrease

General fund expenditure as a percent of taxable valuation

General fund operating deficits

Prior general fund operating deficits

Size of general fund balance

Fund deficits in current or previous years

General long term debt as a percent of taxable value

According to the Department of Treasury website, other considerations in making an evaluation of the financialcondition of a local government include dependence on a major taxpayer, pending litigation, ability to fund longterm commitments such as retiree health care, deferred capital outlay or maintenance, millage capacity, andpercent developed.

In the state ranking, a score of zero through four indicates that the unit is managing its finances appropriately. A

score of five through seven indicates a cause for concern, and the unit is placed on fiscal watch. A score of eightthrough ten indicates fiscal stress: Assistance and potentially intervention by the Department of Treasury isexpected for local units scoring in this category.

In the most recent ranking, the City of Jackson and Genesee Township received a score of nine; the Village ofElberta and the cities of Flint, St. Ignace, and Standish received a score of eight. Fifteen units received a scoreof seven, including Ecorse, Highland Park, Benton Harbor, and Detroit. Pontiac, which has an emergency managerappointed under PA 72, received a score of six; the Village of Three Oaks received a score of four.

Although the correlation between fiscal indicator scores and intervention under the previous local governmentfiscal accountability act was weak, the state may use the existing scores, or some modified version of the scoresthat anticipates the trigger events in PA 4, to provide the closer monitoring and earlier intervention that proponentsof the act support.


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CRC Report


Preliminary Review

Whereas the previous law required the state trea-surer to conduct a preliminary review if one of 14events occurred, the new law provides that a pre-liminary review may be initiated in one of two ways.The state financial authority may, but is not requiredto, conduct a preliminary review of the financial con-dition of a local unit of government if one or more of17 specific events described in the act occur. Even ifnone of those events occur, the state financial au-thority may initiate a preliminary review if there areother facts or circumstances that, in the sole discre-tion of the state treasurer or superintendent of pub-lic education, indicate financial stress. The specific

conditions are as follows:

(a) A written request by the local governing body or thelocal chief administrative officer (CAO). (same as PA72)

(b) A written request from a creditor with an undisputedclaim that remains unpaid six months after its duedate and that exceeds the greater of $10,000.00 orone percent of the annual general fund budget ofthe local government. (same as PA 72)

(c) A petition containing specific allegations of local gov-ernment financial distress signed by a specified num-ber of registered voters. (The number of voters re-

quired to sign the petition is reduced from ten percentin PA 72 to five percent of the total vote cast for allcandidate for governor in the last election.)

(d) Written notification that a local government has notmade its minimum required payment to its pensionfund as required by law. (same as PA 72)

(e) Written notification that the local government hasfailed to pay wages, salaries, or other compensationowed to employees or benefits owed to retirees forat least seven days after the due date (the inclusionof benefits paid to retirees is new in PA 4).

(f) Written notification from a trustee, paying agent,

bondholder, or auditor of a default in a bond or notepayment or a violation of one or more bond or notecovenants. (same as PA 72)

(g) A request from either the senate or the house ofrepresentatives. (same as PA 72)

(h) Violation of specified state laws by the local govern-ment. (same as PA 72)

(i) Violation of the conditions of an order issued by thelocal emergency financial assistance loan board pur-suant to the emergency municipal loan act. (sameas PA 72)

(j) Violation of the uniform budgeting and accountingact. (same as PA 72)

(k) Failure to timely file an annual financial report oraudit. (same as PA 72)

(l) A request by a taxing unit for which a municipal gov-ernment has collected, but has failed to distribute,tax revenues. (same as PA 72)

(m) Breach of obligations under a deficit elimination planor an agreement entered into pursuant to a deficitelimination plan (this is a new condition).

(n) A court orders an additional tax levy without the priorapproval of the governing body of the local govern-

ment. (same as PA 72)(o) A municipal government ends a fiscal year in a defi-

cit condition or fails to comply with requirements forfiling or instituting a financial plan to correct the deficitcondition. (same as PA 72)

(p) A school district with a deficit fails to submit a deficitelimination plan within 30 days after the districtsdeadline for submission of its annual financial state-ment. (the deadline is shortened from three monthsin PA 72)

(q) A local government is assigned a long-term debt rat-ing at or below the BBB category or its equivalent (anew provision).

(r) The existence of other facts or circumstances that,in the state financial authoritys sole discretion, areindicative of financial stress (a new provision withpotentially far reaching consequences).

The written notification provision in several criteriais important in that the transgression event itselfmay not trigger a preliminary review if the local gov-ernment is able to resolve the issue. For example, adefault is generally cured by refinancing or renego-tiating the debt, in which case the creditor may de-cide not to notify the state.

The state financial authority must notify the localunit that it will perform a preliminary review, andlocal officials are required to provide any informa-tion and assistance requested. The preliminary re-view must be completed within 30 days.

The Process


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Review Team

If the preliminary review finds probable financialstress, the governor is required to appoint a reviewteam.

Members

The review team for a municipal government con-sists of the following members:

The state treasurer or his or her designee;

The director of the Department of Technology,Management, and Budget or his or her designee;

A nominee of the senate majority leader;

A nominee of the speaker of the house of repre-sentatives; and

Other state officials or other persons with rel-

evant professional experience as the governormay determine.

The superintendent of public instruction or hisor her designee serves on a review team for aschool district, in addition to the members listedabove.

Under PA 72, the review team for a general gov-ernment consisted of the state treasurer, auditorgeneral, a nominee of the senate majority leader;a nominee of the speaker of the house of repre-sentatives; and other state officials or other per-sons with relevant professional experience. Under

PA 72, the review team for a school district con-sisted of the superintendent of public instruction,state treasurer, director of the Department of Man-agement and Budget, a nominee of the senatemajority leader; and a nominee of the speaker ofthe house of representatives.

The review team is required to meet with the localgovernment and is empowered to examine the booksand records of the local government and to utilizethe services of other state agencies and employees.The state department of treasury is to provide staff

support to the review team. If the state financialauthority approves, the review team may appointan individual or firm to perform the review and sub-mit a report (a new provision).

Credit Ratings

Private and public sector entities, including local governments, issue debt in the form of bonds and certificateswhich contain a promise by the issuer to repay the principle and interest at specific rates and times. Creditratings are estimates issued by rating agencies such as Standard and Poors, Moodys, and Fitch, that are based

on established criteria and methodologies that attempt to assess the probability of repayment of debt. BBB isa rating used by Standard and Poors and Fitch, and is equivalent to the rating of Baa2 used by Moodys. BBB isthe lowest investment grade rating that may be assigned to an issuer or obligor (the highest rating is AAA).

According to the Bankers Almanac, An obligor rated BBB has adequate capacity to meet its financial commitments.However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacityof the obligor to meet its financial commitments.

Obligors rated BB, B, CCC and C are regarded as having significant speculative characteristics. BB indicatesthe least degree of speculation and CC the highest. While such obligors will likely have some quality andprotective characteristics, these may be outweighed by large uncertainties or major exposures to adverseconditions.*

Detroit is among the Michigan cities that have below investment grade credit ratings.

* Bankers Almanac at www.bankersalmanac.com/addcon/onfobank/credit_ratings/standardand poors.aspx.


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Report

The review team must deliver its report within 60days, or earlier if required by the governor. (Thegovernor may grant one 30-day extension of this60-day time limit.) The report must include the exist-

ence, or an indication of the likely occurrence, ofany of the following:

(a) A default in the payment of bonds, notes, or othermunicipal securities for which no funds or insuffi-cient funds are on hand and, if required, segregatedin a special trust fund.

(b) Failure for a period of 30 days or more beyond thedue date to transfer employee income taxes; taxescollected for another taxing unit; or a required pay-ment to a pension, retirement, or benefit plan fund,to the appropriate agency.

(c) Failure to pay wages and salaries or other compen-

sation owed to employees, or benefits owed to retir-ees, for a period of 7 days or more (the time periodis shortened from 30 day in PA 72).

(d) The total amount of accounts payable for the cur-rent fiscal year is more than 10% of the total expen-ditures of the local government.

(e) Failure to eliminate an existing deficit in any fundwithin the immediately preceding two-year period.

(f) Projection of a deficit in the general fund of the localgovernment for the current fiscal year in excess offive percent of the budgeted revenues for the gen-eral fund (the amount is reduced from ten percent in

PA 72).

(g) Failure to comply with the terms of an approved deficitelimination plan (a new provision).

(h) Existence of material loans to the general fund fromother local government funds that are not regularlysettled between the funds or that are increasing inscope (a new provision)

(i) Existence after the close of the fiscal year of mate-rial recurring unbudgeted subsidies from the generalfund to other major funds (a new provision).

(j) Existence of a structural operating deficit (a new pro-vision).

(k) Use of restricted revenues for purposes not autho-rized by law (a new provision).

(l) Any other facts and circumstances indicative of localgovernment financial stress or financial emergency(a new provision).

Although the conditions indicative of financial stresshave been expanded from those listed in PA 72, itshould be noted that violation of the more limited

conditions indicative of a serious financial problemin the previous act did not uniformly result in stateintervention. For example, the City of Detroit gen-eral fund has been in deficit every year since 2003,but neither a review team nor an emergency finan-cial manager was appointed. It remains to be seenhow the very general language in the last item, anyother facts and circumstances indicative of local gov-ernment financial stress or financial emergency, maybe interpreted.

Structural Deficit

A structural deficit is one in which revenues grow more slowly than spending pressures, even when the economyis growing.

It could be argued that state constitutional provisions (Proposal A and Headlee), combined with the implosion ofproperty values, have placed many if not most of the general purpose local governments in Michigan that providepensions and health care to employees in a structural operating deficit, or very close to a structural deficit.Growth in the taxable value of each parcel is limited to the lesser of five percent or inflation, until the sale of that

property, and increases in the value of the total tax base greater than inflation (excluding new construction, butincluding that caused by the sale of property) results in tax rate rollbacks. Of course, expenses for pensions,health care, and other necessities purchased by local government are not constitutionally limited, and in the caseof pensions are constitutionally protected.

School districts are also facing spending pressures that outpace revenues, as pension and health care costsincrease at greater than the rate of inflation, per pupil funding is reduced, and the school aid fund is stretched tosupport community colleges and universities.


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Trigger Event

Preliminary Review

No Problem Governor AppointsReview Team

Investigation & Recommendation

No or Little Stress Severe Stress andConsent Agreement (CA)

Severe Stress & NoConsent Agreement

Financial Emergency

Local OfficialsImplement CA

Local Officials DoNot Implement CA

State FinancialAuthority ReleasesLocal Unit from CA

Governor May Find aFinancial Emergency Exists

Hearing No Hearing Request

Governor RevokesDeclaration

Governor AffirmsDeclaration

No AppealAppeal to Circuit Court

Court Sets Aside

Determination

Court Does Not Set Aside

Determination

Governor AppointsEmergency Manager (EM)

EM Resolves theFinancial Emergency

EM Disincorporates orConsolidates Government

EM Requests Authorization tofile under Chapter 11

EM Recommends &SFA Concurs thatReceivership End

EM Recommends & SFAConcurs thatReceivership End

Governor Rejects Request Governor Approves Request

Bankruptcy

EM Resolves Emergency EM Disincorporates orConsolidates Government

EM Recommends & SFAConcurs that Receivership End EM Recommends & SFA

Concurs that Receivership End

Trigger Event

Preliminary Review

No Problem Governor AppointsReview Team

Investigation & Recommendation

No or Little Stress Severe Stress andConsent Agreement (CA)


Financial EmergencyNo or Little Stress Severe Stress andConsent Agreement (CA)


Financial Emergency

Local OfficialsImplement CA

Local Officials DoNot Implement CA

State FinancialAuthority ReleasesLocal Unit from CA

Governor May Find aFinancial Emergency Exists

Hearing No Hearing Request

Governor RevokesDeclaration

Governor AffirmsDeclaration

No AppealAppeal to Circuit Court

Court Sets Aside

Determination

Court Does Not Set Aside

Determination

Governor AppointsEmergency Manager (EM)







EM Recommends &SFA Concurs thatReceivership End

EM Recommends & SFAConcurs thatReceivership End

Governor Rejects Request Governor Approves Request

Bankruptcy

EM Resolves Emergency EM Disincorporates orConsolidates Government

EM Recommends & SFAConcurs that Receivership End EM Recommends & SFA

Concurs that Receivership End

Diagram 1The Public Act 4 Process


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Conclusions

The review team is limited to four conclusions (therewere only three in PA 72, and those three lacked thedetailed descriptions in PA 4):

1. The local government is not in financial stress or isin a condition of mild financial stress (none of thefactors listed above are threats to the governmentscapacity).

2. The local government is in a condition of severe fi-nancial stress (one or more of the factors exist orare likely and may threaten the governments capac-ity, or the local CAO recommends the finding), but aconsent agreement containing a plan to resolve theproblem has been adopted.

3. The local government is in a condition of severe fi-nancial stress (same definition as in 2), and a con-sent agreement has not been adopted.

4. A financial emergency exists and there is no satis-factory plan to resolve the emergency. A financialemergency occurs when two or more of the factorsoccur or are likely and threaten the governmentscapacity; the local government has not providedtimely and accurate information to the review team;the local government has not complied with a con-sent agreement or deficit elimination plan; the localgovernment is in a condition of severe financial stressand a consent agreement has not been adopted; orthe local CAO recommends the finding and the statetreasurer concurs.

Consent Agreement

As in the replaced PA 72, the review team may ne-gotiate a consent agreement with the CAO of thelocal government, and that consent agreement mustbe approved by resolution of the local governingbody. Under a consent agreement, the CAO andgoverning body remain in control, and that controlmay even be enhanced. PA 4 provides much moredetail about the consent agreement, and providesthat the state treasurer determines whether the con-sent agreement will include either a continuing op-erations plan or a recovery plan, either of which mustbe approved by resolution of the local governing bodyand by the state financial authority. The consentagreement may require that the local governmenthire a consultant to assist it in achieving the goalsand objectives of the consent agreement.

Continuing Operations Plan

A continuing operations plan is prepared by the lo-cal government, and must include the following:

1. A detailed projected budget of revenues and expen-ditures over at least three fiscal years which demon-

strates that expenditures will not exceed revenuesand that any existing deficits will be eliminated.

2. A cash flow projection for the three year budget pe-riod.

3. An operating plan that assures fiscal accountability.

4. A plan for reasonable and necessary maintenanceand capital expenditures.

5. An evaluation of the costs associated with pensionand postemployment health care obligations and aplan for how those costs will be addressed withinthe budget period.

6. A provision for submitting quarterly compliance re-

ports to the state financial authority demonstratingcompliance with the continuing operations plan.

The local government must amend its budget andappropriations authorization to reflect the continu-ing operations plan, must maintain operations con-sistent with the plan, and must file annual updateswith the state.

It will be a very demanding task for a distressedlocal government to prepare the required compo-nents of the continuing operations plan, especially a

credible three-year budget and cash flow projection.If a local government is unable to produce a con-tinuing operations plan that the state financial au-thority can approve, in the form and within thetimeframe allowed, the local government is in viola-tion of the consent agreement. A material breachof a consent agreement may result in a declarationof a financial emergency.

Recovery Plan

The state financial authority may require that the

consent agreement contain a recovery plan, whichis developed by the state financial authority ratherthan by the local government. The state treasurermay require specific provisions, including, but notlimited to, any of the provisions required for a con-tinuing operations plan, procedures for cash controland cash management, and quarterly compliance


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CRC Report


ployees and the provision that allows the employerto enter collective bargaining agreements), unlessthe state treasurer determines otherwise. PA 9(which began as SB 158, tie barred to the bill thatbecame PA 4) amends the public employment rela-tions act and provides that a local unit that enters

into a consent agreement is exempt from the re-quirement to collectively bargain and to enter col-lective bargaining agreements for the duration ofthe consent agreement.

The state financial authority determines when theconditions of the consent agreement have been met.If the consent agreement is violated, the state trea-surer is authorized to place the local government inreceivership.

Determination

The governor is required to make a determinationwithin ten days of receiving the review teams rec-ommendation. That determination is limited to oneof four choices:

1. The local government is not in a condition of severefinancial stress.

2. The local government is in a condition of severe fi-nancial stress, but no consent agreement containinga plan to resolve the financial stress has beenadopted.

3. A local government financial emergency exists andthere is no satisfactory plan to resolve the emergency.

4. The local government entered into a consent agree-ment, but materially breached that agreement.

If the governor determines that a financial emer-gency exists, he or she must provide the governingbody and CAO of the local government with a writ-ten notification of the determination, findings of factthat the determination was based on, a concise state-ment of the facts supporting the findings, and no-tice that the chief administrative officer or the gov-

erning body of the local government has seven daysto request a hearing conducted by the state finan-cial authority or the state financial authoritys desig-nee. Following the hearing or the deadline for re-questing a hearing, the governor, in his or her solediscretion based upon the record, either confirms orrevokes the determination. If he or she confirms thedetermination, the governor must provide a written

report to the governing body and chief administra-tive officer of the local government stating the facts,conditions, or events on which the confirmation isbased.

A local government has ten business days to appeal

a determination of a financial emergency; the ap-peal must be adopted by a two-thirds vote of thelocal governing body. The appeal is made to theIngham County circuit court, which cannot set asidethe determination unless it finds that the determi-nation is either of the following:

Not supported by competent, material, and sub-stantial evidence on the whole record, or

Arbitrary, capricious, or clearly an abuse or un-warranted exercise of discretion.

The governor may delegate his or her duties underthis section, as well as the appointment of an emer-gency manager, to the state treasurer.

Emergency Manager

If the governor confirms a financial emergency, thegovernor (not the Local Emergency Financial Assis-tance Loan Board, as under PA 72) declares that thelocal government is in receivership and appoints anemergency manager (EM), and that individual (itmust be an individual) may or may not be a currentor former official, appointee, or employee of the lo-cal government. The person appointed must haveat least five years experience and demonstrable ex-pertise in business, financial, local or state budget-ary matters. The appointee may or may not be aresident of the local unit of government. (PA 72 speci-fied that an emergency financial manager be cho-sen solely on the basis of competency and that heor she could not have been an elected or appointedofficial or employee of the local government for fiveyears before the appointment. Critics of PA 72

thought that the prohibition on appointing anyonewho had worked for the unit for the past five yearsmay have prohibited appointment of experts withspecific and very useful knowledge.)

The emergency manager is paid by the local gov-ernment, according to a contract that must be ap-proved by the state treasurer and posted on


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treasurys website. The emergency manager mayhire staff and secure professional assistance as heor she considers necessary. The EM serves at thepleasure of the governor, though subject to impeach-ment and removal by a two-thirds vote of the statelegislature (a new provision in PA 4).

Critics of PA 72 referred to emergency financial man-agers as a czars or dictators. Under PA 4, emer-gency managers have even broader powers to rec-tify the financial emergency and to assure the fiscalaccountability of the local government and the localgovernments capacity to provide or cause to be pro-vided necessary governmental services essential tothe public health, safety, and welfare.

During of the receivership, the authority and respon-sibility of the CAO and governing body is suspendedand that authority and responsibility is vested in theemergency manager. The governing body and theCAO may not exercise any of the powers of thoseoffices except as specifically authorized in writingby the emergency manager; they are subject to anyconditions required by the emergency manager. Thesalary, wages, or other compensation, including theaccrual of postemployment benefits, and other ben-efits of the chief administrative officer and membersof the governing body of the local government areeliminated, although vested pension benefits are not

impaired. The emergency manager may restore anyof the salary, wages, other compensation, or ben-efits of the CAO and members of the governing bodyat his or her discretion.

The emergency manager is authorized to issue or-ders necessary to implement the financial and oper-ating plan and those orders are binding on localelected and appointed officials, employees, agents,and contractors. If the failure of a local official,employee, agent, or contractor to implement an or-der is disrupting the emergency managers ability to

manage, the emergency manager may deny thatperson access to facilities, electronic mail, and in-ternal information systems. The emergency man-ager (and the review team) can issue subpoenasand administer oaths to obtain answers to questions,documents, and records. The emergency managermay also initiate court proceedings to enforce com-pliance with his or her orders. Failure of a local

official to abide by the requirements in PA 4 is con-sidered gross neglect of duty, which a review teamor emergency manager may report to the state fi-nancial authority and the state attorney general.

After a review and hearing, the state financial au-thority may recommend to the governor that the

local official be removed from office, and the gover-nor may remove that local official.

Financial and Operating Plan

The emergency manager must develop a financial andoperating plan for the local government. The objectof the financial and operating plan is to assure thatgovernmental services essential to the public health,safety, and welfare will be provided and to assure thefiscal accountability of the local government. The

plan must provide for the following:

(a) Conducting the operations of the local governmentwithin the resources available.

(b) The payment in full of scheduled debt service and allother uncontested legal obligations.

(c) The modification, rejection, termination, and rene-gotiation of contracts (a new provision).

(d) Timely deposit of required payments to the pensionfund.

(e) For school districts, an academic and educational plan(a new provision).

(f) Any other actions considered necessary by the emer-gency manager to achieve the objectives of the fi-nancial and operating plan, alleviate the financialemergency, and remove the local government fromreceivership.

The emergency manager must submit the plan tothe state treasurer, to the superintendent of publicinstruction if the unit is a school district, and to thelocal CAO and governing body, within 45 days afterthe emergency managers appointment. The planmust be in the form required by the state treasurer,and may be modified as necessary by the emergency

manager with notice to the state treasurer. The fi-nancial and operating plan may serve as a deficitelimination plan. Within 30 days of submitting thefinancial and operating plan to the state financialauthority, the emergency manager is required toconduct a public informational meeting on the plan,but no local or public approval of the plan is required.


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The EM is vested with all of the powers of the CAOand governing body and is empowered to take ac-tions specified in the statute regardless of local char-ter provisions. In addition to powers granted underthe replaced PA 72, the new statute grants a number

of specific new powers. These powers are coordi-nated with provisions of other state legislative andbudgetary initiatives that reflect a coordinated vision.

Staffing Levels. Over the years, petition drives haveresulted in amendment of several Michigan citiescharters to include minimum staffing levels. PA 4authorizes an emergency manager to overrule mini-mum staffing requirements in charters and contracts.The Governor has proposed amendments to variousacts to prohibit such requirements in new charters oras new amendments to existing charters.

Contracts and Collective Bargaining. Possiblythe most contentious changes are those that grantemergency managers the ability to modify or termi-nate existing contracts and collective bargainingagreements. Article 1, Section 10 of the MichiganConstitution of 1963 states: No bill of attainder, expost facto law or law impairing the obligation of con-tract shall be enacted. This has long been inter-

preted to protect contracts that are in force, althoughit was understood that future contract terms couldbe restricted.

Contracts An emergency manager may enter intocontracts, but any contract with a cumulative valueof $50,000 or more is subject to competitive bid-ding. However, the emergency manager may sub-mit the issue to the state treasurer for review andthe state treasurer may exempt that potential con-tract from competitive bidding.

Although the financial and operating plan must in-clude provision for payment in full of scheduled debtservice on all bonds, notes, municipal securities andall other uncontested legal obligations, emergencymanagers would be granted the ability to reject,

modify, or terminate non-labor contracts, such asservice or purchasing contracts. This is a powerthat is available under federal bankruptcy provisions.

The enforceability of contracts is one of the essen-tial bases of the modern economy. A contract isdefined as an agreement creating obligations en-forceable by law. The basic elements of a contractare mutual assent, consideration, capacity, and le-

TheUnited States and Michigan ConstitutionsArticle I, Section 10 of the United States Constitution places limits on states and includes a prohibition on statespassing any Law impairing the Obligation of Contracts.

No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal;coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts;pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant anyTitle of Nobility*

Article I, Section 10 of the 1963 Michigan Constitutions reflects the federal Constitution in prohibiting the enactmentof a law that impairs the obligation of contracts:

No bill of attainder, ex post facto law or law impairing the obligation of contracts shall be enacted.

In anticipation of legal challenges, PA 4 does contain a severability clause: If any portion of this act or theapplication of this act to any person or circumstances is found to be invalid by a court, the invalidity shall notaffect the remaining portions or applications of the act which can be given effect without the invalid portion or

application. The provisions of this act are severable.

* U.S. Government, Constitution of the United States, www.senate.gov/civics/constitution_item/constitution.htm .


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gality. Possible remedies for breach of contract in-clude general damages, consequential damages,reliance damages, and specific performance.2

As a practical matter, if any contract for goods orservices could be broken by a state appointed finan-

cial manager, the vendors risks associated with thatagreement would be dramatically increased, poten-tially raising the cost of doing business for everymunicipality and school district in the state.

PA 4 contains a severability clause, which would pro-tect other provisions of the act even if sections al-lowing the rejection, modification, or termination ofcontracts is rejected by the courts.

Collective Bargaining PA 4 (Section 19(1)(l)) pro-vides that the emergency manager acts as sole agent

of the local government in collective bargaining withemployees or representatives and approves any con-tract or agreement (as did PA 72).

A companion statute, PA 9 of 2011, addresses theissue of collective bargaining in two new ways, byrequiring that all new public collective bargainingagreements include a provision allowing an emer-gency manager to reject, modify, or terminate theagreement, and by providing that existing collectivebargaining agreements may be rejected, modified,or terminated under PA 4.

The grant of power to reject, modify, or terminate acollective bargaining agreement occurs only in theevent of a declared financial emergency and receiv-ership, and this power cannot be granted in a con-sent agreement. PA 4 provides that an emergencymanager could reject, modify, or terminate a collec-tive bargaining agreement only after meeting andconferring with the bargaining unit and determining(in the emergency managers sole discretion) thatno satisfactory agreement could be obtained. One

exemption is provided: an emergency manager wouldnot be able to change a collective bargaining provi-sion for the payment of a benefit on the death of apolice officer or firefighter in the line of duty.

Seemingly acknowledging the potential for a courtchallenge, language in the act attempts to set con-ditions for abrogating collective bargaining contractsthat justify the legitimate exercise of the statessovereign powers. While the language ofSec. 19.(1)(k)(i) through (iii) is vague (reasonable and neces-

sary for the benefit of the public as a whole), thelanguage ofSec. 19.(1) (k)(iv) (Any plan involvingthe rejection, modification, or termination of 1 ormore terms and conditions of an existing collectivebargaining agreement is temporary and does nottarget specific classes of employees) imposes morerestraints, especially where the collective bargain-ing contract covers specific classes of employees,such as police officers or firefighters (although thedefinition of temporary may be problematical).

The act also exempts the designated local govern-ment from collective bargaining requirements for fiveyears or until the receivership is terminated, so if acontract is terminated, there is no requirement thata new contract be negotiated by the emergencymanager and the union.

These provisions are consistent with other recentstate efforts to reduce the compensation costs ofpublic employees. The Governor proposed changesto the state revenue sharing distribution that wouldreward communities that require employees to pay

20 percent of insurance costs and that limit pensionbenefits.

Pension Fund. The repealed PA 72 was silent onthe emergency managers role with respect to thelocal governments pension fund, but recent crimi-nal investigations and convictions have highlightedproblems in local pension administration.

The reduction in pension fund assets resulting fromstock market and real estate market losses, the fail-ure of governments to make required annual contri-

butions, the disconnect between assumed rates ofinvestment earnings and real rates of earnings haveraised questions about the sustainability of definedbenefit pension plans. The requirement to reportthe value of other postemployment benefits has ex-acerbated concerns about the future effects of bar-gained benefits. Extensive private sector transitionfrom defined benefit to defined contribution planshas also increased pressure on public sector admin-

2 Cornell University Law School, Legal Information Institute,Contract, http://topics.law.cornell.edu/wex/contract .


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CRC Report


istrators to adopt plans that shift risk to employees.

(The State of Michigan and Oakland County areamong the governments that offer only defined con-tribution plans to new employees.)

For public defined benefit plans, an 80 percent fund-ing level is generally considered adequate. PA 4excludes the net value of outstanding pension bondsor pension obligation certificates, such as those is-sued by the City of Detroit in 2005 and 2006, fromthe valuation to determine whether the 80 percentthreshold is achieved. PA 4 allows an emergencymanager of a municipality with a pension fund that

is actuarially funded at less than 80 percent to re-move one or more of the appointed or elected trust-ees of the pension board. Or, the state treasurermay appoint the emergency manager as the soletrustee of the pension board. In that case, the emer-gency manager could place the pension system inthe statewide, voluntary Municipal Employees Re-tirement System (MERS).

Local pension provisions have received special at-

tention from the Governor, who proposed a $200million Economic Vitality Incentive Program to re-place the $300 million statutory state revenue shar-ing program in the fiscal year 2012 state budget.

According to the March 21, 2011 Special Messagefrom the Governor, the proposed program wouldreward units of government that place new hires ondefined contribution or hybrid plans that limit publiccontributions to ten percent of payroll. TheGovernors plan specifies that, where applicable, a1.5 percent multiplier is to be used for calculatingpensions; a two percent multiplier is to be used for

employees who are not eligible for social securitybenefits. Local governments are also to be rewardedwith a smaller loss of revenue sharing for imple-menting controls to avoid pension spiking.3

Pension Plans

In 2008, there were 138 state and local public retirement systems in Michigan (only Pennsylvania, Illinois, andFlorida had more). These systems had 426,804 members, (393,847 active and 32,957 inactive) and 300,268beneficiaries receiving payments.*

The state operates five systems, including the Michigan Public School Employees Retirement System for all publicschool employees.

The Municipal Employees Retirement System (MERS) is a statewide retirement plan that municipalities mayadopt for their employees. MERS was operated by the state government from its creation in 1945 until 1996,when it became an independent nonprofit organization. The 750 members include cities, townships, villages,and counties, as well as hospitals, libraries, medical care facilities, and road commissions. These membersrepresent more than 83,000 individual members and retirees.

MERS offers nine retirement and benefit products including a defined benefit plan, defined contribution plan,hybrid plan, health care savings program, retiree health care funding vehicle, group life and disabil ity, and MERSPremier Advantage. Each municipality has a separate trust account in MERS and each member municipality is

responsible for funding the pensions earned by its own employees.

There are 132 locally administered public pension plans in Michigan. Many general purpose local governmentsthat maintain their own pension systems have separate plans for police and fire employees and for civilianemployees.

* U.S. Census Bureau, Table 5a, Number and Membership of State and Local Public Retirement Systems by State: FiscalYear 2008.

3Rick Snyder, letter addressed to the Michigan Legislature,ASpecial Message from Governor Rick Snyder: Community De-velopment and Local Government Reforms, March 21, 2011.


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The Governors proposal would ban anyone who con-tributes to an elected official who sits on a pensionboard from doing business with that pension boardfor two years and that would restrict political financ-ing activities by financial advisors to pension boards.The Governor has also proposed a number of other

accountability and transparency rules for pensionboards, including a standard reporting format anddisclosure requirements for board members.

An emergency manager who is appointed sole trusteeof a pension board is specifically authorized to changeactuarial assumptions. If the emergency managercan also modify collective bargaining contracts, heor she could unilaterally implement the governorsrecommendations for pension plans.

Article IX, Section 24 of the 1963 Michigan Constitu-tion states The accrued financial benefits of eachpension plan and retirement system of the state andits political subdivisions shall be a contractual obli-gation thereof which shall not be diminished or im-paired thereby. Pension benefits that have beenearned are protected by the state constitution, andPA 4 affirms that protection. The constitutional lan-guage has been interpreted to allow changes to bemade to pension benefits that have not yet beenearned and to other postemployment benefits, andan emergency manager could make changes to those

prospective benefits.

Inspector and Auditor. PA 4 specifically autho-rizes a financial manager assigned to a local govern-ment to hire an expert individual or firm to ensurethat internal systems controls are adequate and toprovide other technical assistance. An auditor wouldbe responsible to assure that internal controls overlocal government operations are designed and oper-ating effectively to mitigate risks that hamper theachievement of the emergency managers financialplan, assure that local government operations are

effective and efficient, assure that financial informa-tion is accurate, reliable, and timely, comply with poli-cies, regulations, and applicable laws, and assure as-sets are properly managed. An inspector would beassigned to assure integrity, economy, efficiency, andeffectiveness in the operations of the local govern-ment by conducting meaningful and accurate investi-gations and forensic audits, and to detect and deterwaste, fraud, and abuse.

The state treasurer is to provide a list of approvedindividuals and firms from which the emergencymanager must select an auditor or inspector.

PA 4 provides that an emergency manager mustdecide whether possible criminal conduct contrib-

uted to the financial emergency, and if so, must re-fer the matter to the attorney general and local pros-ecuting attorney. If a local inspector has beenretained, that person would be expected to identifypossible criminal conduct.

PA 72 required that the determination of whetherpossible criminal conduct contributed to the finan-cial emergency be made within 180 days of theemergency financial manager being appointed; PA4 includes no such time constraint.

Millage Elections.An emergency manager can-not increase tax rates or impose new taxes withouta vote of the people, but he or she may place aproposal for a tax increase on the ballot at the No-vember election. Under PA 72, emergency financialmanagers in school districts were authorized to or-der school millage elections.

Incu r, Restruct ure, or Retire Debt. The emer-gency manager may borrow money (as was allowedunder PA 72), settle claims against the unit, andsubject to the approval of the state treasurer, re-structure payment of existing debt.

Transfer of Assets, Functions and Property.The emergency manager is authorized to sell, lease,or transfer assets, liabilities, functions, or responsi-bilities if that action was included in the plan ap-proved by the state financial authority or with thewritten approval of the governor or the governorsdesignee, and only if the action does not endangerresidents or impair a legal financial obligation. Thisgrant of power could conflict with local charter re-

quirements for votes on the sale of major assets.

As noted, the Governor is proposing a number ofinitiatives to encourage the merger and consolida-tion of public services and of local governments. PA4 contains specific grants of authority to the emer-gency manager to further this goal, including enter-ing into agreements with other units of governmentor other entities for the provision of services, the


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joint exercise of powers, or the transfer of assets,functions, and responsibilities.

Public utilities are a special case. According to ArticleVII, Section 25 of the Michigan Constitution, no cityor village may sell any public utility furnishing light,

heat, or power without the approval of a majority ofthe electors of the city or village voting thereon, or agreater number if the city or village charter provides.PA 4 similarly limits the power of an emergency man-ager to sell or transfer a public utility without a voteof the people. In a further restriction, an emergencymanager is prohibited from using the assets of a publicutility furnishing heat, light, or power, the finances ofwhich are separately maintained and accounted forby the city or village, to satisfy the general obliga-tions of the city or village.

A public utility owned by a city, village, township, orcounty is a municipality according to the definitionin PA 4, and is subject to the appointment of anemergency manager under the same process andconditions that are established for cities, villages,townships, counties, and other authorities estab-lished by law.

Consol idat ion and Dis incorporat ion. TheGovernors March 21, 2011 special message to thelegislature included changes to state revenue shar-

ing that are intended to create incentives for localgovernments to collaborate and consolidate, includ-ing a $5 million fund to help local governments thatdecide to merge or consolidate. A number of statu-tory changes are designed to remove impedimentsto service sharing and consolidation and to allowmetropolitan government.

Under PA 4, the emergency manager would haveauthority to enter into contracts with other localgovernments or public bodies for the consolidationof services. An emergency manager for a city, vil-

lage or township may recommend to the state bound-ary commission that the unit consolidate with oneor more municipal governments if that would ma-terially alleviate the financial emergency of the mu-nicipal government and would not materially andadversely affect the financial situation of the gov-ernment or governments with which the municipalgovernment in receivership is consolidated.

Under PA 191 of 1968, consolidation is initiated bythe filing of a citizen petition with the state bound-ary commission, and if the boundary commissionfinds that the petition meets the legal requirement,the matter is put to a vote of the people in eachmunicipality proposed for consolidation.

A city or village may be disincorporated (a valid pe-tition initiates a process that leads to a vote of thepeople) and become a township; a general law town-ship cannot be disincorporated. PA 4 provides thatan emergency manager, with the approval of thegovernor, may disincorporate or dissolve a munici-pality and assign its assets, debts, and liabilities asprovided by law. Citizens of an area that has beendisincorporated presumably would be allowed to re-incorporate.

General Powers. PA 4 is specific in giving emer-gency managers complete authority over all of theoperations of the local government, including assign-ing to the emergency manager all of the power andauthority of elected or appointed boards, commis-sions, authorities, and other entities that are com-ponents of the local government. An EM for a schooldistrict has new and expanded powers to exerciseall authority and responsibility that would otherwisebelong to the school board and superintendent ofthe school district, to hire school administrators, and

to close schools and other buildings. The emergencymanager is authorized to remove, replace, appoint,or confirm the appointments to any office, board,commission, authority, or other entity that is part ofthe local government.

Reports

Under PA 4, reporting requirements are expanded:beginning six months after the emergency managersappointment, reports must be filed with specifiedstate and local officials and posted on the local unitswebsite every three months (the old standard wasevery six months); reporting thresholds are reducedfrom $10,000 to $5,000; and three new reports arerequired (a copy of the emergency managers con-tract; the salary and benefits of the emergency man-ager; and the financial and operating plan). (A con-troversy and lawsuit arising from the compensationreceived by the emergency financial manager ap-pointed to the City of Highland Park may have con-


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tributed to the expansion of reporting requirements.)The following information must be reported:(a) A description of each expenditure made, approved,

or disapproved during the reporting period that hasa cumulative value of $5,000 or more and the sourceof the funds (previous limit was $10,000).

(b) A list of each contract that the emergency managerawarded or approved with a cumulative value of $5,000or more, the purpose of the contract, and the identityof the contractor (previous limit was $10,000).

(c) A description of each loan sought, approved, or dis-approved during the reporting period that has a cu-mulative value of $5,000 or more and the proposeduse of the funds (previous limit was $10,000).

(d) A description of any new position created or any va-cancy in a position filled by the appointing authority.

(e) A description of any position that has been elimi-nated or from which an employee has been laid off.

(f) A copy of the contract with the emergency manageras provided in section 15(5)(e) (new requirement).

(g) The salary and benefits of the emergency manager(new requirement).

(h) The financial and operating plan (new requirement).

Liability

The statute provides broad protection from liabilityto an EM and a person employed by an EM. The EMis authorized to obtain insurances for himself or her-self and for any employees, agents, appointees, orcontractors. The attorney general is required to

defend any civil claim, demand, or lawsuit that chal-lenges the validity of the act, the authority of a stateofficial or officer acting under the act, or the author-ity of an emergency manager who was acting withinthe scope of authority under the act. Costs incurredby the attorney general are to be reimbursed by thelocal government. Other defense and legal settle-ment costs may also be charged to the local govern-ment, under specified conditions.

Bankruptcy

If the emergency manager believes that the

citizen research council of michigan emergency financial manager law report

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