Sunday, February 13, 2011

Emergency Financial Managers' Powers to Be Clarified and Strengthened

About 40 Michigan Cities are close to bankruptcy. Hamtramck is just one example. About 40 Michigan public school districts have negative fund balances, requiring them to file two year deficit elimination plans. Detroit is only one of many, with an emergency financial manager (Robert Bobb) running the district’s finances. With declining property values causing local property tax collections to decline and the loss of revenue sharing from the state, many fear the worst is yet to come.

PA 72 (i.e., the current Local Government Fiscal Responsibility Act) currently provides for the declaration of a financial emergency and the appointment of an emergency financial manager (“EFM”). Unfortunately, there are flaws in the process that delay state intervention and make it hard for the EFM to do his or her job well:

• The current system limits the steps the state and local governments can take before reaching emergency status, which overlooks several relatively painless options along the way. Appointing an EM could take months, and by then much more damage could be done.
• If an EFM is appointed, options are restrained by his or her limited authority. The manager cannot negate certain agreements, including minimum staffing requirements and union contracts. If those deals are keeping a city or school from solvency, they have no choice but to pursue bankruptcy, which has negative implications on credit ratings for the city and the state.
• It is clear that EFMs have authority over finances, but the statute is unclear on whether they have the authority to make changes to the way an organization operates. Often, many of the things an EFM could do to save a school district money, like consolidating buildings or restructuring academic schedules, are blocked by the governing school boards because they may affect academics. Local government officials sometimes have incentives to block sweeping but necessary changes and insist on retaining control. The current example is Detroit Public Schools, with several lawsuits between the EFM and the school board concerning control over many actions.
• The existing law allows for EMs to be appointed, but does not provide details on an exit strategy. This ambiguity puts the local government at further risk of recurrence when the manager returns control.

The Proposals: The package of bills we expect to be introduced this week:

• Allows local governments to work with the Department of Treasury (or the Superintendent of Public Instruction in the case of school districts) to proactively address financial issues earlier and hopefully avoid the EFM process entirely. The bills will emphasize early detection and give local authorities a roadmap to finding their own success without resorting to more extreme steps, including receivership with an EFM, or worse yet, bankruptcy. Local control will be retained, to the extent that that local control is exercised responsibly.

Incentives for local government officials to take the prospect of the state placing the local government into receivership and an EFM being appointed include:

o The salary, benefits and other compensation of the governing board and chief administrative officer are suspended.
o Any elected officer or member in office at the time of receivership is declared will be prohibited from running for public office in that local government for a period of ten years.
• If it becomes clear to the state treasurer, state superintendent or governor that a local government or school district cannot act to correct their financial situation, then the state will place the local government into receivership and a trained EFM will be appointed.
• The EFM will be given the freedom to innovate and create the best solution possible. One power that will face opposition will be the power to break labor contracts. The most crippling costs faced by local governments and school districts are their unmanageable labor and legacy costs, which often are 85% of the total expenditures of the municipality. We must give the EFM the authority to get those costs under control if there is any hope of turning the local governments and school districts around. We must do the right thing, even if it is difficult. The taxpayers must be protected.
• The 2 year budget and collective bargaining agreements made by the EFM cannot be undone by the local officials for a year after control is returned to the local governing board.
• Only as a last resort will bankruptcy be an option.

The changes proposed are greatly needed.

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