Understand the Emergency Manager Law Before Changing It

Making sure that local governments meet their financial obligations

A panel assembled by Michigan State University’s Institute for Public Policy and Social Responsibility will discuss reforms to the emergency manager law. Any attempt to change this law ought to first understand its purpose. This law is meant to be used as a last step in a long series of attempts to ensure that Michigan’s local governments can pay their bills.

Michigan local governments are creations of the state. The state defines their authority and writes the rules under which they operate. One rule is this: All local governments must be able to pay what they owe. The state has a series of policies to keep governments from insolvency. When it appoints an emergency manner, it takes the last step in this series. The local government’s top priority is to maintain a balanced budget. As long as it receives more revenue than it spends, the state refrains from further involvement. Only a fraction of the state’s 2,900 local governmental units ever draws additional state action.

If a local government posts a deficit, the state requires it to submit a deficit elimination plan. Local leaders must outline how they will cut expenses, raise revenues or otherwise find a way to get out of the deficit. If the government has a plan that looks like it will work and then implements it, the state does let it proceed without further intervention.

Some governments may need extra cash to get through a tough fiscal situation. The state can provide some assistance to smooth the way, but it comes with strings attached. Those strings are meant to help the government alleviate fiscal stress.

If balanced budget requirements, deficit elimination plans and state assistance do not put the government back in the black, the state may take other steps. If the government continues to operate in deficit — or meets certain conditions that trigger a fiscal review — then the state assembles teams to review its finances and determine whether there is a financial emergency. If there is, state officials have several options to keep the government solvent. They can negotiate an agreement with the local government that lays down actions the local unit must take to get back to solvency. They also may appoint an emergency manager, enter into a “neutral evaluation process” (which has yet to be attempted), or allow the local government to go directly to bankruptcy court. Before the 2012 statewide referendum on the emergency manager law, the only way a local government could enter bankruptcy was to go through an emergency manager.

Whether the government even receives a review team and which option the state selects is not immune to politics. For instance, the city of Detroit’s fiscal situation should have triggered a fiscal review years before the state began the emergency management process. The reason that did not happen was probably due more to politics, not policy. Had the state acted sooner the city wouldn’t have had to cut pensions and other debt obligations in bankruptcy. But perhaps not.

Critics of the emergency manager law say that appointing an emergency manager curtails local democratic self-government. Yet the law was created to address that very concern. Before there was an emergency manager law, a court-appointed receiver control of the city of Ecorse, which was insolvent at the time. The original emergency manager law was passed with strong bipartisan support in part to prevent the courts from doing that again.

Critics of the emergency manager law also say it does not give managers a “revenue option” — the power to raise taxes. Experience suggests, though, that governments already explore tax increases before they get to insolvency. Sometimes cities even withhold the taxes they collect for other governments, which a state-appointed review team found when it declared Benton Harbor had a financial emergency. Still, emergency managers do in fact have the power to raise taxes within existing limits. The Allen Park emergency manager put a tax hike on the ballot and pushed it through.

The emergency manager law is the answer to a question that should never have to be asked: What happens when the officials elected to manage the finances of a local government fail? Their failure has serious and potentially life-threatening consequences for residents, and must be taken seriously. Michigan has done so, with a law deemed the most comprehensive in the nation according to a 2013 study by the Manhattan Institute.

The emergency manager law is fundamentally about making sure that governments in Michigan meet their financial obligations. It is only triggered after the state has exhausted all other attempts to solve a local government’s fiscal woes. Attempts to tweak the emergency manager law ought to keep in mind its original purpose and functions.

Michigan Capitol Confidential is the news source produced by the Mackinac Center for Public Policy. Michigan Capitol Confidential reports with a free-market news perspective.