Can Detroit’s Problems Be Corrected by an Emergency Financial Manager?

The city of Detroit is facing a looming financial crisis.

Michigan Public Act 72 of 1990, as amended, provides for the appointment of an Emergency Financial Manager if it is determined that a serious financial problem exists in a municipality or school district. The appointment of an EFM for the city of Detroit is often discussed as a possible solution for dealing with the city’s continual mismanagement and financial mess.

If it were ever determined by the state that an EFM should be appointed for the city of Detroit, under current law the EFM would not have all of the necessary tools to be successful. There are four major problems that would have to be resolved by amending Act 72 prior to the appointment of an EFM.

The changes needed are as follows:

1. Under current law, the EFM can be sued personally. Given that actions by an EFM will almost certainly be controversial, and harassing lawsuits are likely, it is essential that an EFM’s personal assets be protected. Making the EFM an employee of the state treasury department with access to the legal staff of the attorney general would make the present lack of indemnification for an EFM largely moot. Harassing lawsuits by local bargaining units or other affected entities or individuals would be defended by the state – an entity that has the depth of financial resources to discourage the filing of frivolous lawsuits.

2. The present Act lists the powers of an EFM, which are extensive but are not all-inclusive. This can allow the governing body to impede the overall effort of the EFM to deal with the municipality’s fiscal crisis. The Act should state that the EFM replaces and takes on the powers of the governing body (mayor and council or school board.)

3. Charter provisions, especially in old charters, can prevent or make it difficult for an EFM to make necessary structural changes to address financial problems. The EFM should have the power to review charter provisions that frustrate the process of cleaning up and streamlining a municipality’s financial functions.

4. Presently, most labor contracts provide for mandatory continuation of an expired contract until a new one is negotiated. This means municipalities have no opportunity to take advantage of lower-cost service providers. Additionally, in the case of public safety unions, municipalities must adhere to the provisions of Act 312, which mandates that when a municipality and union cannot agree on the terms of a new contract they must go to binding arbitration. In most cases, it takes nearly two years or longer to complete the process, and the legal costs are substantial. Furthermore, municipalities rarely reduce costs by going through the Act 312 process but rather, at best, limit the amount of increased expenses. Act 312 should be repealed in its entirety.

Making the above changes to Act 72 would be essential for an EFM to have the necessary tools to deal with the city of Detroit’s management and fiscal problems.

If Michigan is sincerely interested in keeping and attracting new business it needs to face rather than ignore the issue of the state’s excessively high, non-competitive municipal labor costs. High labor costs for municipalities result in high municipal taxes, which in turn make municipalities unattractive and create major fiscal problems.

Currently the auto, airlines and other private sector industries are being forced to deal with their high labor costs in order to stay in business and become competitive. However, Michigan municipalities are handcuffed from dealing with their high labor costs by labor contracts that cannot be terminated. Such contracts prevent the possibility of purchasing municipal services at the lowest possible cost. Unlike the private sector, municipalities can’t move their operations to a market with lower labor costs. Also, unlike the private sector, municipalities can’t go out of business or declare bankruptcy and reorganize to reduce pension, health care, and labor costs.

Michigan needs to remove the shackles preventing the purchase of municipal services at the lowest cost — not only for the few municipalities that fall into the position of having an EFM – but for all Michigan municipalities. Repealing Act 312 would be a giant step in the right direction.

Louis Schimmel is an emergency financial manager in charge of labor negotiations for the city of Hamtramck and an adjunct scholar at the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Michigan. Permission to reprint in whole or in part is hereby granted, provided the author and his affiliation are cited.