Challenges remain after Flint's exit from Michigan oversight

Register now

Serious fiscal challenges remain for Flint, Michigan, after its exit from state financial receivership.

Those challenges include employee retirement funding and the aging, corroded pipes that caused its drinking water crisis, said Mary Schulz, associate director for Michigan State University’s Extension Center for Local Government Finance and Policy.

A state law passed at the end of 2017 requires that local communities to report underfunded retirement benefits. Flint reported a pension system funded at only 37% and zero percent funding of other post-employment benefits, which the city doesn't prefund, according to the state treasury report.

The price tag to fix its aging water infrastructure is roughly $600 million, and Schulz said that the city may also be facing another major problem in its schools, which she described as just as bad if not worse than Detroit's before that district was placed under emergency management and its schools eventually folded into a new district.

“Flint is Michigan’s Puerto Rico,” Schulz said “It will remain Michigan’s Puerto Rico until the state decides Flint is part of Michigan.”

Flint is making better decisions financially and has a more realistic budget than before it went into emergency management, said Dan Gilmartin, executive director & CEO of the Michigan Municipal League.

“The biggest problem Flint faces now is what all cities in Michigan face, and that is the state’s system of municipal financing, which simply doesn’t work,” Gilmartin said.

State Treasurer Nick Khouri announced on April 10 that Flint was released from receivership under the Local Financial Stability and Choice Act and he dissolved the Flint Receivership Transition Advisory Board. Khouri also signed a resolution repealing all remaining emergency manager orders.

“Removing all emergency manager orders gives the city of Flint a fresh start without any lingering restrictions,” Khouri said in a statement.

“Under the state's emergency manager law, emergency managers were put in place in a number of cities facing financial emergencies to ensure residents were protected and their local governments’ fiscal problems were addressed," Gov. Rick Snyder said in an email. "This process has worked well for the state's struggling cities, helping to restore financial stability and put them on a path toward long-term success. Flint's recent exit from receivership marks the end of emergency management for cities in Michigan and a new chapter in the state's continued comeback."

Detroit is the only Michigan city still under a form of state oversight. Benton Harbor Area Schools, Pontiac Public Schools, Highland Park School District and the Muskegon Heights school district remain under state oversight.

Municipal restructuring expert James Spiotto said that a financial emergency manager is supposed to get a government back to a balanced budget, increase revenue, reduce unnecessary expenses and keep essential services at an acceptable level.

“To the degree that they achieve that then you want to continue with best practices,” Spiotto said. “If they don’t accomplish that then even if you return the city back to mayor and city council then they have to do it.

"Someone has to come up with viable sustainable recovery plan, not just treading water,” Spiotto said.

“Flint has more realistic numbers in place especially when it comes to revenues -- I think that is the most important thing the city has accomplished from a nuts and bolts standpoint,” Gilmartin said. “The negative side of it is the system in which they are working under just doesn’t work for them or any communities in the state. In some cases making all the right decisions at the local level still doesn’t get to where you need to get to and it will require a change in the state law.”

A 2017 MML report said Michigan municipalities were shortchanged to the tune of $8 billion since 2002. “A lot of the fiscal pressures that Flint and other cities in Michigan find themselves in are there by state actions,” Gilmartin said. By 2014, Flint had lost $54.9 million dollars in state aid—funds which would have been sufficient then to have fully paid off its annual deficit, as well as all $30 million of its municipal bond indebtedness, and still have had over $5 million in surplus.

According to Frank Shafroth, director of the Center for State and Local Leadership at George Mason University, in 2016 Flint’s $19.7 million in property tax revenues made up about 23% of the city’s $81 million in general revenue. “One of the hard questions now will be with regard to the potential impact of assessed property values and tax revenues in a city where those values were so harshly impacted by the fear of poisoned water,” Shafroth wrote on his blog.

Michigan’s financial 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. So far, 11 Michigan municipalities and three school districts have had EMs appointed.

In 2012 Michigan voters repealed the emergency manager program in a referendum, but one month later Snyder and lawmakers re-adopted an intervention program. The 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: bankruptcy, mediation, or a consent agreement between the state and the city to permit local elected officials to balance their budget on their own.

Flint had been under state oversight for seven years. In November 2011, a Financial Review Team concluded a financial emergency existed in the city and there was no satisfactory plan in place to address the city’s fiscal problems.

An emergency manager was present from November 2011 to April 2015, when the financial emergency was resolved and the Flint RTAB was appointed to oversee the city’s transition back to local control. Flint had four emergency managers during that period: Ed Kurtz, Mike Brown, Darnell Earley and Gerald Ambrose. Both Earley and Ambrose – both appointed by Snyder-- face charges of criminal wrongdoing in relation to the city’s lead contamination crisis and ensuing Legionnaire’s disease outbreak that claimed 12 lives.

Earley oversaw the decision to change the city's water source to the Flint River in April 2014. The switch triggered the city's water crisis. A March 13, 2014, order signed by Ambrose for a water main cut-in at the water plant cleared the way for the switch to the river, according to emails released previously by the state treasury.

Until we come up with other solutions that aren’t really punitive in nature and leave communities like Flint vulnerable as repeat customer for emergency management law, these communities will remain in financial and service delivery purgatory indefinitely,” Schulz said.

Michigan State identifies at least 93 cities with a taxable value per capita that is less than $20,000. Schulz said that the number basically is a “good indicator” for which cities are on the short list for landing under the EM law. The university also identified 32 cities who are either considered service insolvent or on the verge of service insolvency. Flint’s taxable value per capita of $7575 comes in as the second lowest behind St. Louis, Michigan, which has taxable value of $6733. “Why that taxable value per capita number matters is that it gets you closer to question of what you need to provide a basic level of services a city need to provide to its residents,” Schulz said.

A report released by the state treasurer’s office has identified more than 110 out of 489 local units of government as having an underfunded pension plan, retirement health care plan, or both.

The state in December enacted legislation creating thresholds on pensions and OPEB that all municipalities must meet in order to be considered funded at a viable level.

For retiree health care, a plan is considered underfunded if its obligations are less than 40% funded and if its annual contribution is more than 12% of the unit's revenue. A pension plan is considered underfunded if it's less than 60% funded and if the unit's annual contribution is more than 10% of its revenue.

Plans short of funding are subject to extra scrutiny by the Treasury department. The treasurer will give waivers to communities with underfunded pensions if they have approved plans to rectify the situation. Municipalities that don't receive a state waiver would be overseen by a three-member Michigan Stability Board appointed by the governor.

“The winds here are blowing such that the municipality stability board is going to be up and running soon and there will be an effort to give that board emergency manager powers,” Schulz said. “That means they can break contacts , they can sell assets -- whatever it needs to put money in the OPEB.”

“Getting the community back to zero is the easy part and is just a function of budgeting but having it function and provide services is harder,” Gilmartin said. “I would say that a lot of the support for emergency management in state has dwindled based on the experience over the last several years.”

For reprint and licensing requests for this article, click here.
Budgets City of Flint, MI Michigan