Today’s Emergency Manager Law
January 17, 2013
Last year I wrote a piece contrasting the path a city would have to take under the State’s Emergency Manager statute vs. bankruptcy (“Trick Question for Detroit”, Feb. 16, 2012).
In the 2012 general election, the voters repealed that emergency manager statute by referendum. Then, in the last days of 2012, the lame duck legislature replaced the repealed statute with a new one: 2012 Public Act 346, the “Local Government and School District Fiscal Accountability Act”.
In signing the new bill into law, the governor said that it “builds in local control and options while also ensuring the tools to protect communities and school districts’ residents, students and taxpayers.”
But opponents have contended that the new law is just as undemocratic as the one it replaced, and have vowed to challenge it in court and at the ballot box.
So, who is right? Let’s take a look.
Both the repealed law and the new law apply to all municipalities (i.e., cities, villages, townships, etc) and public school districts. I will refer to them as “Locals”.
The process for determining that a local financial emergency exists is essentially the same as under the repealed law. A governor-appointed financial review team examines the Local’s finances and reports back to the governor, who makes the decision whether a “financial emergency” exists. The Local can appeal this determination to the Ingham County Circuit Court, just as it could under the repealed law.
Assuming that the determination is not overturned, the new law offers the Local a choice of four alternatives. This is new –at least on the surface. But the reality is that three of the four choices were available under the repealed law.
The four choices are:
- Appointment of an emergency manager. Of the seven emergency managers currently serving, only one (Muskegon Heights School District) was requested by the Local. The other six were imposed by the state, and it seems unlikely that very many Locals will seek an emergency manager voluntarily.
- Request permission to file for bankruptcy. This choice was also available under the repealed law if an emergency manager was appointed first. As far as I know, no Local has ever made this request and, again, it seems unlikely that any will.
- Negotiate a consent agreement. This process was also available under the repealed law, and the City of Detroit “chose” it, under pressure from the state.
- Neutral evaluation. This choice is new. The first step is that the Local and its creditors choose a mediator, called a “neutral evaluator”. The neutral evaluator has the duty of attempting to get the Local and its creditors to reach a settlement, but he or she cannot impose a settlement. The neutral evaluator also must explain “the limitations of Chapter 9 bankruptcy” to the parties, which I take to mean he or she must describe the endless litigation expense, time and uncertainties of municipal bankruptcy. The reason for this “explanation” requirement is made clear by what happens if the parties fail to settle: the Local must then request the governor’s permission to file for bankruptcy.
“Neutral evaluation” will put a lot of pressure on individual creditors to compromise on the debts owed by the Local. The choice presented to them will be “settle now for 50 cents on the dollar or pay your lawyer for a year of litigation and risk ending up with 20 cents on the dollar”.
The 2012 Act does give Locals more formal rights for input than the repealed law. The Local can terminate an emergency manager after twelve months by a 2/3 vote of its governing body, with concurrence of its elected executive, if there is one. But if it does this, the next step is mandatory neutral evaluation.
An emergency manager has the same power to change or terminate collective bargaining agreements that he or she had under the repealed law, with one difference. The emergency manager must submit the proposed action to the Local’s governing body, which has 17 days to approve or disapprove. If they disapprove, then they must submit an alternative plan “that would yield substantially the same financial result”. A governor-appointed state board then chooses either the emergency manager’s or the Local’s plan. The emergency manager then must implement whichever plan the state board chose.
So the bottom line is this: Locals do have more input than they did under the 2011 statute, but in all significant areas gubernatorial appointees still have the final say.
Opponents of the new law have at least two options: a ballot initiative and a court challenge.
The 2011 version of the emergency manager law was successfully challenged by ballot referendum; the opponents gathered signatures exceeding the Michigan Constitution’s requirement of at least 5 percent of the votes cast for governor in the preceding general election, which suspended the statute pending the next general election. In that election (2012) the “no” vote was higher than the “yes” vote, thus repealing the statute.
However, the opponents cannot use the referendum this time; the State Constitution prohibits a referendum if the statute includes an appropriation and 2012 PA 346 included two appropriations.
Instead, the opponents will have to use a different process, the ballot initiative. This requires submission of petitions with signatures exceeding 8 percent of all votes cast for governor in the preceding general election, which will increase the required signatures by almost 97,000.
A court challenge would probably take a year, maybe two years including appeals, and the result is impossible to predict. The opponents would argue that the legislature enacted a statute that is, in all significant respects, is the same as the statute which the voters repealed in the 2012 referendum. Supporters of the law would argue that the new statute is quite different not only in form, but in substance.
The courts would likely allow the law to continue in effect until all appeals were exhausted.
The Michigan Constitution contains no language expressly addressing this situation, but the obvious argument would be that the voters who approved the Constitution could not possibly have intended to allow the legislature to over-ride a referendum vote of the people.
So, one way or another, the new law will probably be with us for the foreseeable future.