Michigan’s Emergency Manager Law: What it is and Why You Should Care

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Detroit Skyline // credit: gm-volt.com
Detroit Skyline // credit: gm-volt.com

For those who fear any law that minimally infringes on one’s right could engulf that right all together, Michigan’s Emergency Financial Manager Law proves this point. An Emergency Financial Manager (EFM) is similar to what is known as a receiver.

A receiver is an individual appointed by an outside entity (a judge, governor, or committee of the governor) to take over a city or local government’s finances when they get in trouble. Instead of being appointed a receiver, struggling cities typically go through bankruptcy. However, only 40 cities have declared bankruptcy in the last 30 years, though ten have occurred in the past 3 years.

While some favor receivership in part because it saves a city’s bond credit rating, others favor bankruptcy because it maintains democratic rights.

Steven Greenhut, vice president of the conservative-leaning Journalism for the Franklin Center for Government and Public Integrity, explained it best when he said “Democracy is messy, but dictatorship offers greater  pitfalls.” He goes on to say “there is no magical formula to bypass the human condition.” The history and effectiveness of Michigan’s Emergency Manager law seems to prove his point.

Michigan’s first Emergency Financial Manager Law (Public Act 101) was enacted in 1988 by Governor James Blanchard, a Democrat.  The law gave Emergency Financial Managers broad powers, including the ability to sell off city assets, eliminate departments, and reduce or eliminate pay to the local mayor and city council.

One thing it did not allow was the cancelling of labor contracts already in place, though it did allow for the ability to renegotiate them. In 1990, Public Act 72 expanded the law to allow for the takeover of public schools.

In 2011, Republicans took control of every branch of Michigan’s government and replaced PA 72 with the “Public Act 4 of 2011.”  Public Act 4 gave the Emergency Manager the ability to cancel contracts and also to make non-financial moves (they dropped the word financial from the title).

In Benton Harbor, the Emergency Manager did not allow the mayor to enter his own office and prohibited the city council from taking virtually any action, even if it did not have financial implications. While this did not take away an individual’s right to vote for their elected officials, it made their vote essentially meaningless.

Voters were not a fan of the law and repealed it via referendum in November 2012. In less than two months, state Republicans arguably defied the will of the voters and passed a new Emergency Financial Manager Law known as “Public Act 436.”

The new law gives local school districts and cities a bit more freedom. School districts can get rid of their EFM after 18 months and cities have options besides EFMs, including filing for bankruptcy. The new law also included a legislative trick to take away the ability of voters to repeal it.

Michigan activists are still battling the law. There are lawsuits in the state court alleging, among other things, that the recent appointment of an Emergency Financial Manager for Detroit violated the Open Meetings Act.

There is also a federal lawsuit underway alleging the law violates the Equal Protection Act of the U.S. Constitution since a majority of the state’s African-American residents are now under the authority of Emergency Financial Managers.

The Emergency Financial Manager law also lacks a strong track record for success. The City of Highland Park is on its third Emergency Financial Manager since 2001. One of their former EFM’s recently accepted a plea bargin for allegedly embezzling money from the city. The City of Pontiac is also on it’s third Emergency Financial Manager.

Former EFM Michael Stampfler said the law is destined to fail because it does not leave a well functioning government in its place. Current Pontiac EFM Louis Shimmel was actually a receiver for the city of Ecorse prior to the first EFM law. Shimmel’s supposed success as a receiver for Ecorse was likely used to codify the original Emergency Financial Manager law. Ecorse though, has not had sustained success and is once again under an Emergency Financial Manager.

So why should you care about Emergency Financial Managers if you live outside of Michigan?  Because we live in an era where ”model legislation” is being passed around from state to state like a football at a tailgate party.

The legislation will likely be pushed by the business community in your state because they benefit most from the law since the largest savings implemented by Emergency Financial Mangers come from privatizing services.  The fundamental question each state must answer is do they value capitalism or democracy more?  Michigan, whose Governor is a venture capitalist, favors capitalism.  What will your state chose?

 

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  1. Don D "So why should you care about Emergency Financial Managers if you live outside of Michigan? Because we live in an era where ”model legislation” is being passed around from state to state like a football at a tailgate party." This quote is pretty good.. now imagine how bad it will be when states' rights are killed for good, and experiments like this are done nationally, subjecting the entire nation to treasonous laws like this. Also, it's kind of ironic this bill does most of what the extremist left wants in this country... just happened to be by the other side this time... law that seizes the power of entire area and focuses that power on one of a small few of individuals (who are of course, corrupt), and then essentially revokes capitalism for a form of a statist socialism/dictatorship...
  2. Paul Jordan Given its brevity, this is an excellent summary of developments in Michigan. (I am one of the plaintiffs in the current federal lawsuit.) PA 4 deserved to be repealed, not only because it was anti-democratic but because it couldn’t work to restore long-term fiscal health. With the exception of Ecorse, cities in Michigan are in great financial distress because they have experienced a catastrophic decline in their tax bases. In many instances, these cities are taxing themselves to the legal limit. Nothing in PA 4 brought a cent of additional revenue to the cities under emergency management. It also did nothing to build expertise in local officials, even though it is they who will have to manage their city for the long term. A real remedy must have preventive, remedial, and debt-restructuring elements—but rely on enhancing local government’s effectiveness rather than supplanting it. The state should help prevent distress in the first place by monitoring the tax bases of cities to identify potentially at-risk cities at the earliest possible moment. In exchange for supplemental funding on a residual basis or the ability to divert state income taxes to fund local government (for those that are already taxing themselves to the extent permitted by law), it would have a veto over various financial functions, and require extra training for elected officials who want to run for reelection. If this isn’t sufficient, local officials should have the option of appointing an ‘autocrat’ who, for a certain period of time, would possess all the collective authority of all local elected officials. (This autocrat should be subject to being overruled by a super majority of the city council.) If this, too, fails, then local officials should have the option of pursuing municipal bankruptcy. The judge will oversee a process in which stakeholders—including local government—negotiate a solution to return the city to fiscal health. Everyone involved is virtually guaranteed to suffer to some degree, which will motivate all concerned to negotiate in better faith earlier in order to avoid bankruptcy. PA 4 was a dead end, and PA 436 is no better.
  3. Chad Phillips Paul, You make some great points including the point about revenue which I didn't really have room to deal with. In some states, but not in Michigan, receivers are allowed to institute new taxes to help with the revenue side. The only thing I disagree with you is that PA 436 isn't better. It is better as it does give additional options, but it is not nearly good enough.
  4. Chad Phillips Thanks Chad. Yes, I believe there are shades of each. Is it still a democracy if the people you elect have no power to govern? Imagine if the UK voted for the Queen, but were ruled by an unelected parliament. That is how I view the Emergency Managers.
  5. Chad Peace This is a great piece, but do we have to choose between capitalism and democracy? Are there not shades of each?
5 comments
Chad Peace
Chad Peace

This is a great piece, but do we have to choose between capitalism and democracy? Are there not shades of each?

Chad Phillips
Chad Phillips

Thanks Chad. Yes, I believe there are shades of each. Is it still a democracy if the people you elect have no power to govern? Imagine if the UK voted for the Queen, but were ruled by an unelected parliament. That is how I view the Emergency Managers.

Don D
Don D

"So why should you care about Emergency Financial Managers if you live outside of Michigan? Because we live in an era where ”model legislation” is being passed around from state to state like a football at a tailgate party."

This quote is pretty good.. now imagine how bad it will be when states' rights are killed for good, and experiments like this are done nationally, subjecting the entire nation to treasonous laws like this.

Also, it's kind of ironic this bill does most of what the extremist left wants in this country... just happened to be by the other side this time... law that seizes the power of entire area and focuses that power on one of a small few of individuals (who are of course, corrupt), and then essentially revokes capitalism for a form of a statist socialism/dictatorship...

Paul Jordan
Paul Jordan

Given its brevity, this is an excellent summary of developments in Michigan. (I am one of the plaintiffs in the current federal lawsuit.)

PA 4 deserved to be repealed, not only because it was anti-democratic but because it couldn’t work to restore long-term fiscal health. With the exception of Ecorse, cities in Michigan are in great financial distress because they have experienced a catastrophic decline in their tax bases. In many instances, these cities are taxing themselves to the legal limit. Nothing in PA 4 brought a cent of additional revenue to the cities under emergency management. It also did nothing to build expertise in local officials, even though it is they who will have to manage their city for the long term.

A real remedy must have preventive, remedial, and debt-restructuring elements—but rely on enhancing local government’s effectiveness rather than supplanting it.

The state should help prevent distress in the first place by monitoring the tax bases of cities to identify potentially at-risk cities at the earliest possible moment. In exchange for supplemental funding on a residual basis or the ability to divert state income taxes to fund local government (for those that are already taxing themselves to the extent permitted by law), it would have a veto over various financial functions, and require extra training for elected officials who want to run for reelection.

If this isn’t sufficient, local officials should have the option of appointing an ‘autocrat’ who, for a certain period of time, would possess all the collective authority of all local elected officials. (This autocrat should be subject to being overruled by a super majority of the city council.)

If this, too, fails, then local officials should have the option of pursuing municipal bankruptcy. The judge will oversee a process in which stakeholders—including local government—negotiate a solution to return the city to fiscal health. Everyone involved is virtually guaranteed to suffer to some degree, which will motivate all concerned to negotiate in better faith earlier in order to avoid bankruptcy.

PA 4 was a dead end, and PA 436 is no better.

Chad Phillips
Chad Phillips

Paul,

You make some great points including the point about revenue which I didn't really have room to deal with. In some states, but not in Michigan, receivers are allowed to institute new taxes to help with the revenue side. The only thing I disagree with you is that PA 436 isn't better. It is better as it does give additional options, but it is not nearly good enough.