DALLAS — The time may be ripe to rethink Michigan's emergency management law after the Flint and Detroit Public Schools crises exposed flaws that critics say highlight how the law can fail citizens and ultimately hurt the state's credit.
The emergency manager program, in which the state governor appoints a manager with extensive powers over a troubled municipality or school district that meets certain criteria, was launched in 1990. It's the state's go-to method for dealing with local government financial trouble. So far, 11 Michigan municipalities and three school districts have had EMs appointed.
The intervention program has been a longtime target for critics who complain that it usurps local democracy. It's future is now in play amid scrutiny triggered by the public health crisis in Flint. Many municipal market participants see room for improvement.
"The challenge of an EM is the concentration of authority in one person, magnifying the impact of any mistakes they make," said Matt Fabian, a partner at Municipal Market Analytics. "In Michigan, because the EM is appointed by the state, their mission is a little unclear: is it to remediate the local government's finances for the benefit of local citizens or is it to reduce the state's potential costs related to that local government?
"Those two can be very different points and the Michigan law may need to clarify what exactly the EM is about," Fabian said.
On March 24 a task force appointed by Michigan Gov. Rick Snyder to investigate the Flint water contamination crisis concluded that the state's EM law should be reviewed to identify measures to compensate for the loss of the checks and balances provided by the local elected government.
The task force's report said the EM law hamstrung Flint as it attempted to manage its water supply.
The crisis began after the city, under oversight of an EM appointed by Snyder, broke off from the Detroit Water and Sewerage System in 2014 when its contract to receive Detroit-supplied water ended.
The city began pulling water from the Flint River and intended to use it until later this year, when it links to a new Karegnondi Water Authority pipeline.
No one made sure the Flint River water was property treated, and it corroded pipes throughout the system, creating lead contamination that remained even after the city switched back to Detroit water.
"Emergency managers charged with financial reform often do not have, nor are they supported by, the necessary expertise to manage non-financial aspects of municipal government," the report said. The state should "consider alternatives to the current emergency manager approach."
Darnell Earley, who was appointed by Snyder as the Flint EM in October 2013, delayed the city's return to Detroit water. Snyder appointed Earley in 2015 to fix Detroit's fiscally distressed public school system. Earley quit DPS on Feb. 2, ahead of schedule, after he came under fire for his role in Flint's contamination crisis.
DPS has been under state oversight for seven years. The district's operating deficits ballooned over the last four years to an expected $335 million at the end of 2016 from $83 million in 2012, according to the Citizens Research Council of Michigan, a nonpartisan public affairs research organization.
"Despite the emergency manager's successes with Detroit's government, the city's schools—also run by emergency managers—have not seen similar progress in wiping out debt, boosting academic progress, or repairing aging buildings, according a Pew Charitable Trust report.
Earley has been replaced with a temporary "transition manager" – Steven Rhodes, the retired bankruptcy court judge who presided over the city of Detroit's bankruptcy -- to run the schools' operations and finances, and an interim superintendent to supervise the district's academics as lawmakers work on a long-term restructuring of the system.
Snyder's decision to move away from emergency management in Detroit schools is effectively his "admission that the program has not worked in this instance," the Pew report stated.
Still, emergency management has had some success.
No cities remain under emergency managers, and Detroit is the only one to go bankrupt.
Frank Shafroth, the director of the Center for State and Local Leadership at George Mason University, labels Detroit a successes.
"The appointment of Kevyn Orr was invaluable to Detroit," Shafroth said of the city's emergency manager, because his actions put the city on a firmer financial footing, enabling future success.
Orr wasn't universally popular; Detroit citizens decried the loss of local control over their own city government, and bondholders suffered significant haircuts.
EMs are most successful when they can overcome criticism from local elected leaders by involving key community stakeholders in discussions about the difficult cuts needed to balance budgets, according to the Pew report.
Eric Scorsone, an expert on state and local government finance at Michigan State University, believes there is little chance that the law will be repealed but said there is likely to be some serious discussion about reform.
In 2012 Michigan voters repealed the emergency manager program in a referendum, but one month later Snyder and lawmakers re-adopted an intervention program.
To address critics who argued that the state was attempting an end-run around voters, new statute allowed local governments to choose among three new options, in addition to the appointment of an emergency manager who reports directly to the governor.
They are bankruptcy, mediation, or a consent agreement between the state and the city to permit local elected officials to balance their budget on their own. Wayne County, for example, is now trying to close a $52 million deficit under a consent agreement.
Cities that exit emergency management remain under the oversight of a receivership transition advisory board while executive powers are slowly restored to elected mayors and city councils. The goal of the RTAB is make sure the city stays on track to meet its fiscal milestones.
RTABs are now in place in Flint, Ecorse, Pontiac, Benton Harbor, Allen Park, Lincoln Park and Hamtramck.
Scorsone said the choice between the three options is not as straightforward as it looks. That's mostly because "it has to be agreed by the state and if the state doesn't agree with the choice they can veto it, which means that the state can basically force a city" under EM oversight by vetoing all other options.
The law needs to better address accountability, he said. Although emergency managers are accountable to the governor and can be impeached by the legislature, they aren't accountable to the local population, and that was clearly part of the problem in Flint.
"There needs to be more transparency about what these people are doing, what is the basis for the decisions that they are making," said Scorsone.
Scorsone said that approaches in other states, such as the installation of a financial control board as opposed to an individual, should be reviewed. With that approach, outside technical advisers with government finance experience would assist local elected officials in making their own decisions. They would not actually run the city.
He also thinks state lawmakers may need to consider reviewing mandates and policies that make it difficult to operate city governments. Michigan cut aid and restricted tax revenue options available to local governments.
"Maybe it would be easier to just change some of those policies that have nothing to do with emergency management and approach the fix as prevention rather than the cure," he said.
One of the criticisms of the law is the level of protection EMs have coupled with a lack of transparency behind the decisions they make. EM's have legal immunity, "so even if you do sue a city, the city pays, not the EM," Scorsone said. "It is a pretty powerful set of protections and on top of that Michigan has pretty strong governor immunity laws."
The rationale behind the powerful legal protection is because EMs are ultimately making tough choices during difficult times that will always come under scrutiny.
One lawsuit, filed in 2013 against Snyder and then-state Treasurer Andy Dillon, challenged the constitutionality of the law. Scorsone believes that more lawsuits over the EM law will follow.
"The Governor is open to reviewing the current emergency manager law and possibly suggesting improvements, such as identifying subject matter experts to assist managers in decisions involving projects that require specialized knowledge – such as public works department," said Snyder's deputy press secretary, Anna Heaton.
Meanwhile Flint's citizens, who have regained their elected representatives' control of the city though a special board retains some oversight powers, begin the long road to cleaning up its crisis. That means a critical need to find money to tackle the short-term health and long-term safety concerns of Flint residents.
Fabian believes that a reform of the law could have the unintended consequence of making Michigan bonds more attractive to investors.
"The market has come to equate Michigan's EM law with the state pushing local governments to default on their bonds. So any changes that weaken state control over the EM are a positive," he said.
With the cost of fixing Flint's problems largely laid at the state's doorstep, Snyder has requested $232 million in state funding for Flint but the costs could grow beyond that figure. Snyder has asked for $715 million to restructure Detroit Public Schools.
Moody's Investors Service and Standard & Poor's recently affirmed Michigan's ratings of Aa1 and AA-minus respectively. However Standard & Poor's lowered the outlook on Michigan's credit rating to stable from positive, citing the costs of dealing with the Flint crisis and the costs of restructuring Detroit's school district.
This, according to Shafroth, will translate into higher capital costs for both Flint and Michigan to complete the cleanup in Flint.
