Resources & Research

New EM Law—Paradise or an Assault on Democracy?

By Tony MInghine

Not many public Acts in recent memory have garnered as much attention as the new “emergency manager” Act has managed to attract. The Local Government and School District Fiscal Accountability Act has been praised by many and vilified by others, so what’s the real story?

Eric Scorsone of Michigan State University discusses the new emergency management law at the 2011 MLGMA summer conference in St. Joseph.

PA 4 of 2011 was passed to enhance and broaden the powers of an emergency financial manager. PA 4 replaces PA 72 of 1990 as
the governing statute to be used when a local government is in fiscal distress.

It has rarely been the case in Michigan that a community is assigned an emergency manager. Clearly, no community wants to find themselves faced with the possibility of coming under the control of a state-appointed emergency manager. In fact, fewer than 10 communities were assigned emergency managers under the old Act. In spite of that fact, Michigan must have a way to deal with local governments that are in financial distress. For this very reason, every state has their own version of PA 4—a local government cannot be allowed to simply fail. Based on this premise, I believe that PA 4 is an improvement over the former Act 72.

What Makes PA 4 Better?

First and foremost, it provides for a more timely intervention and retention of local control. Under the old Act 72 system, help simply came too late and the result was a community left in financial ruin. One of the main thrusts of the new Act is earlier intervention, with the hope of averting an overwhelming financial crisis. It also provides for broader opportunity for the community to correct their issues independent of an emergency manager. Communities can negotiate consent orders to correct their problems without the appointment of an emergency manager.

How Does the Process Work?

Essentially, the process begins with a preliminary review. For the most part, a preliminary review of the financial condition of a local unit of government occurs if one or more of 17 specific events described in the Act are present. The purpose of the preliminary review is to determine if a more comprehensive review is warranted. If the preliminary review finds probable financial stress, a more formal review will be ordered.

The formal review is performed by a team of individuals. The team is made up of representatives from the state treasurer’s office, the director of the office of management and budget, the speaker of the House, the Senate majority leader, and anyone else the governor deems necessary. This team is charged with fully assessing the finances of a tagged municipality and reporting back within 60 days whether or not a financial emergency exists. If there is a determination of fiscal stress, then the real fun begins.

Big Change: Consent Agreements

One of the most important changes from the old Act occurs at this point in the process. If there is a finding of severe stress, the state treasurer does not immediately assign an emergency manager. Under PA 4, the first step is to try and enter into a consent agreement with the local entity. A consent agreement is a document that lays out mutually agreed upon steps to be taken to correct the problem, as well as the development of a continuing operations plan. In other words, even if severe financial distress exists, the community retains control and an emergency manager is not placed in control of the community. This is a big improvement—there was little to no opportunity to do this effectively under PA 72. In addition, the consent agreement may grant extraordinary powers to the chief administrative officer, the chief financial officer, the governing body, or other officers of the local government to resolve the crisis.

The EM Is in Charge of Everything

When a consent agreement can’t be reached, or a community fails to comply with a consent agreement, an emergency manager is assigned. Make no mistake—the emergency manager under PA 4 has far greater power than the emergency financial manager had under Act 72. In short, the emergency manager is in charge of EVERYTHING. The Act is clear in this regard; this was done to eliminate any squabbles about where an emergency manager’s authority began and where it ended. An emergency manager may return some powers to the community if he or she chooses, but is not compelled to do so.

Once assigned, the emergency manager has 45 days to develop a financial and operating plan to address the financial emergency. Once the plan is approved by the committee, the emergency manager is required to conduct a public informational meeting about the plan within 30 days of submitting the plan to the state. Keep in mind that local or public approval of the plan is not required.

The emergency manager may issue orders as necessary to implement the financial and operating plan, and those orders are binding on local elected and appointed officials. Once placed under the control of an emergency manager, a local government remains in receivership until the emergency manager and state treasurer declare the financial emergency to be resolved. In addition, before the termination of receivership, the emergency manager must prepare and implement a two-year budget which includes all of the municipality’s contractual and employment agreements. The effective start date of the two-year budget will be the end of the receivership, and the local government is prohibited from amending that budget, and from revising any order or ordinance implemented by the emergency manager, for a period of one year without the approval of the state treasurer.

In the most severe cases, PA 4 provides a path to bankruptcy. With the earlier intervention provided for in the Act, this section should rarely, if ever, be utilized. While not a trip to paradise, PA 4 is not an assault on democracy, either. For the unfortunate few that require intervention, help will come quicker, the process will be shorter, and if consent agreements are reached and adhered to, hopefully will be completed without an emergency manager.

Tony Minghine is the associate executive director and COO of the League. You may reach him at 734-669-6360 or [email protected].

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