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Policy Initiative Spotlight: Michigan’s ‘Fiscal Accountability Act’

by Jonathan Masters
April 6, 2012

Street cover in downtown Detroit. March 11, 2007 (Courtesy Flickr / Terry Long) Street cover in downtown Detroit. March 11, 2007 (Courtesy Flickr / Terry Long)

As dozens of towns and cities across the country—from Stockton, CA, to Providence, RI—stare down the precipice of insolvency, some states are taking bold action to protect their prized bond-ratings and keep their municipalities out of chapter 9 bankruptcy. The budgets of local governments nationwide have been squeezed in recent years through a convergence of weak tax revenues, declining state dollars, and runaway entitlements.

In an excellent piece for Vanity Fair, Michael Lewis documents the trend and details the acute plight of some of California’s most distressed municipalities— namely Vallejo and San Jose. A common thread is the cities’ losing battle to meet the pension obligations of city workers. “Our police and fire-fighters will earn more in retirement than they did when they were working,” said San Jose Mayor Chuck Reed.

In March of last year, the State of Michigan took the initiative on this front and passed a controversial piece of legislation—known as Public Act 4 (aka the “local government and school district fiscal accountability act”)—that enhances the state’s power to intervene in local fiscal matters. Most notably, the law allows the governor, Rick Snyder (R), to appoint an emergency financial manager (EFM) with the power to depose local officials and void union contracts, if a municipality meets certain criteria of financial stress. Five local governments in the state are currently administered by EFMs, with one expected to exit receivership this year.

The specter of EFM intervention has loomed most prominently over the beleaguered city of Detroit. The Motor City “has come to redefine urban collapse,” according to some observers, crumbling under the weight of a $200 million budget deficit and over $13 billion in structural debt (The Atlantic). On Wednesday, city officials narrowly beat a deadline set by Gov. Snyder to reach a “consent agreement” regarding the management of Detroit’s finances.

The eleventh-hour deal will stave off a Lansing-appointed receiver (Detroit Free Press), at least for now, but requires the city to renegotiate union contracts and share decision-making on all budget matters with a financial advisory board picked jointly by the governor, mayor, and city council. The agreement also clears the road for the cash-strapped city to refinance its massive debt.

Critics of the law have denounced EFMs as a threat to democracy and a dangerous precedent, while proponents see them as necessary “tools to keep [the state's] school districts and cities from wallowing in financial trouble.” (The Week) Governor Snyder, for his part, has indicated his reluctance to impose an EFM on Detroit, but has also stated that “bankruptcy shouldn’t be on the table.”

While it seems the threat of an EFM has helped Lansing gain the upper hand in its fiscal dealings with municipalities like Detroit, it remains to be seen whether Public Act 4 (NYT)—in its helping create interim political bodies like the financial advisory board—is really forging progress or just helping to delay an inevitable state takeover or chapter 9 bankruptcy.

At a recent conference on municipal distress, Robert G. Flanders, who ushered Central Falls, RI, through its bankruptcy, spoke on how best to cut through the gridlock of union contract renegotiations. “All of that leverage shifts once you have the gumption to pull the Chapter 9 trigger (NYT),” he said, “that produces agreements quicker and more effectively than otherwise.”

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