State Should Reform Public Act 72 of 1990

In 2005 municipal finance expert Lou Schimmel weighed in on a topic for the Mackinac Center that needs to be of interest to Gov. Rick Snyder and Michigan legislators. The topic involves making necessary changes to Michigan Public Act 72 of 1990. This act provides for emergency financial oversight for struggling local units of government.

These changes and others are all the more important today as the financial positions of many municipalities have only gotten worse since 2005 thanks to declines in tax revenue due to the last and very painful recession among other reasons. Public Act 312 mandates arbitration in labor disputes with police and fire units and has made financial reform of these units exceedingly difficult.

Another potential fiscal wild card for local units of government is whether or not the state will trim revenue sharing payments to municipalities as it tries to balance its own budget. (The state puts the next budget deficit at $1.85 billion, but Mackinac Center analysts believe it exceeds $2 billion.) Less money for local units means it will be even harder for them to make ends meet.

The state’s policy prescription for fiscally floundering cities should be to appointment far more powerful emergency financial managers than they have in the past. Schimmel outlines changes that could — and perhaps should — be made to the EFM law that would give these appointees more power. His center of reference is Detroit, but it could apply to any municipality in need of state fiscal management.

Schimmel, an adjunct scholar with the Center, has served as an emergency financial manager for the city of Hamtramck and as a court-appointed receiver for the city of Ecorse. We reprint his 2005 work directly below.

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

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.

Making 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.

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.