CHICAGO – A week after Michigan voters overturned the state’s emergency management law for distressed governments, at least two emergency managers say they are likely to leave their diminished posts, and state officials are warning that the repeal could set the stage for the state’s first municipal bankruptcies.

The repeal of the controversial law, Public Act 4, leaves uncertain the future of the eight local governments that are currently under state control. Detroit operates under a consent agreement with the state that has ties to Public Act 4 but does not rely on it. Opponents of the financial stability agreement, including some members of the Detroit City Council, said they plan to challenge the state’s new authority.

Michigan is now operating under its old, less powerful law for fiscally stressed local governments, Public Act 72. The old law is the target of a lawsuit as well, with opponents saying its revival was illegal. A hearing on the case is set for early December.

Enacted in mid-2011, Public Act 4 significantly broadened the state’s power to intervene in and control local governments. Among the most controversial aspects of the overturned law is the manager’s ability to terminate or amend labor contracts. The law sparked immediate criticism from opponents who said it was anti-democratic. A group called Stand Up for Democracy spent months gathering signatures for a referendum to put the question to voters, who overturned the law by a close margin in last week’s election.

Moody’s Investors Service warned last week that the repeal is a credit negative for distressed jurisdictions because of reduced state supervision, and that litigation could result in even less state oversight.

Michigan has never had a municipal bankruptcy, but in a press conference after last week’s election, Gov. Rick Snyder warned that the possibility now looms.

In interviews with The Bond Buyer, the emergency financial managers of Pontiac, Benton Harbor, and Flint said the repeal leaves them with little power and that Chapter 9 is now one of the only options left to severely distressed local governments.

“We had a strong [emergency manager] law, but the voter said no,” said Louis Schimmel, the manager of Pontiac and a veteran municipal finance figure in Michigan. “The next option, which I’m sure the governor doesn’t want and I don’t want, is to let the municipality continue to misspend and the state will subsidize it,” he said. “If you can’t do it with an EM anymore, and you’re unwilling to subsidize what’s going on, there’s no other option – you will see bankruptcies.”

Schimmel and Detroit Public Schools manager Roy Roberts said they’re likely to leave their posts after the repeal.

Since taking over Pontiac in September 2011, Schimmel has implemented a number of changes, including selling the city’s sewer system to Oakland County. He also negotiated new labor contracts through 2016.

But Pontiac faces a mounting retiree health care tab that it cannot pay, and voters last week rejected a property tax increase that would have raised money for the liability. Schimmel wants to privatize the city’s overfunded pension plan and use the money for the OPEB liability to fix one of the city’s last big structural problems, he said in an interview last week.

“I’m 90% there with my agenda, but that’s different from saying it’s fixed,” he said. “We’ve come a long way but I was counting on PA 4 to have the authority in order to make the final fix, and I can’t do that now.”

Schimmel said he would have stayed at least through mid-2013 if PA 4 was upheld.

“I don’t understand why you want to let places go bankrupt, but maybe that’s what we’ll see,” he said.

Joseph Harris, former chief financial officer of Detroit, has been the manager of troubled Benton Harbor for two and a half years. Like Schimmel, he said he already made the most important changes needed to address the city’s structural problems under PA 4.

He did not tap his authority under PA 4 to amend contracts but the power to do so was a “trump card” that helped him negotiate favorable contracts with unions through 2014, Harris said.

“PA 4 gives the emergency manager much of the authority of a receiver in bankruptcy,” said Harris. “It’s better for the state to address an insolvent municipality than for the federal courts,” he added. “If you take a look at what’s happening in California and take a look at Michigan, it’s a no brainer – what we’re doing works.”

Harris said he plans to remain in his post despite weakened authority. “We’re still treading water here,” he said.

In the long-troubled city of Flint, Ed Kurtz took over as emergency financial manager in August. Kurtz served as EFM of Flint more than 10 years ago, and said many of the changes he implemented then were reversed by city officials after he stepped down. The city’s subsequent 10-year decline illustrates the need for stronger powers of PA 4, Kurtz said.

“When I was here in 2002, I tried for two years to get a contract with police and firefighters, and I was not able to get one,” he said. “If you want to be able to make the kinds of actions that are going to be necessary, you’re going to have to have the ability to be able to bargain for or impose contracts.”

Kurtz said it is “extremely difficult” to make structural changes under PA 72.

“I think PA 4 was the best option for cities to avoid bankruptcy, and frankly if the people are upset with a strong emergency manager, wait until they get a court-appointed receiver,” he said.

Detroit, which avoided an emergency manager earlier this year by negotiating a consent agreement with the state, faces litigation tied to cuts and reforms made under the consent agreement when PA 4 was alive.

Detroit Mayor Dave Bing said the city will continue to pursue reforms outlined in the consent agreement despite the repeal.

“Public Act 4 was a tool to help us implement our restructuring plan, by giving us more leverage with labor unions,” Bing said in a statement. “With or without the support of Public Act 4, our goal remains the reform of city government to better serve the citizens of Detroit.”

City council members, meanwhile, last week asked the city attorney for a legal opinion on the legality of the consent agreement, and are considering undoing some of Bing’s PA 4-related cuts.

A week before the election, the emergency manager of Detroit Public Schools sent a letter to Snyder warning that he was likely to step down if the law was overturned.

Under PA 72, school district managers have control only over fiscal matters, while they are able to control academics as well under PA 4.

“In the absence of legislation empowering a single entity with the authority to operate the district, continued progress will be virtually impossible,” DPS manager Roy Roberts wrote in the letter to the governor. “[W]ithout the tools provided by [PA 4], I do not believe that my presence here can have any further impact.”

Roberts said he would make his decision within the month depending in part on conversations with the Detroit school board, with which he has battled in the past.

Gov. Snyder said a court-ruled overturn of PA 72 would leave the state without any law for its troubled governments and that Senate Majority Leader Randy Richardville, R-Monroe, is already working on a new bill.

Snyder said last week he plans to meet with legislative leaders to discuss crafting a new law that would incorporate what he called the less-controversial aspects of PA 4, such as the process for entering and exiting troubled local units.

For managers like Schimmel, revamped legislation could be too little, too late. “I have a list of about eight things I could do and I can’t do them anymore,” Schimmel said. “If I can’t make changes, I’m gone.”

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