CHICAGO — Michigan is set to enact a controversial law that expands state power over fiscally stressed local governments and gives emergency managers broader authority, including the ability to terminate labor contracts.

The Republican-controlled Senate passed the bills Wednesday with a 26-12 party-line vote after two days of sometimes-heated debate. The House passed the measure two weeks ago.

The chambers were poised yesterday to iron out the bills’ relatively minor differences and send a final measure to Gov. Rick Snyder, who, as the primary author of the legislation, is expected to sign it.

The measure, which overhauls the state’s 20-year-old law for dealing with distressed governments, sparked some of the largest protests that Lansing has seen in years.

Opponents call it an assault on collective-bargaining rights that echoes proposals in Wisconsin and Ohio and seriously undermines the power of local governments.

Snyder and state Treasurer Andy Dillon, however, urged the Legislature to pass the bill quickly, warning that dozens of municipalities and school districts are facing insolvency and would benefit from the new tools.

The new law’s emphasis on greater state control is generally positive for bond buyers, one investor said.

“There’s no downside to loss of local control, particularly to the state of Michigan, which is very well-managed financially” in light of its major revenue losses, said Gordon Murray, vice president and senior credit analyst at Belle Haven Investments, which buys local government debt in Michigan. “Having state oversight we always feel is positive.”

“Depending on the timing of the state’s entrance, it gives it significant power to fix things and to ensure financial recovery,” Murray added. “However, the point at which the state steps in is a question, because a lot of times the situation may have deteriorated to such a state that bondholders are already feeling the pain.”

The new law would allow emergency managers to terminate labor contracts, strip local ordinances, hold millage elections, dissolve a government with the governor’s approval, and merge school districts.

It would allow managers to remove pension fund trustees or become a sole trustee if a pension fund is less than 80% funded. It allows managers to recommend that a local government file for Chapter 9 bankruptcy, but leaves the final decision to the governor.

Current law allows school district emergency managers to file for Chapter 9 without the governor’s approval.

“There are certain tools the [emergency manager] has to have at his disposal to fix the problem,” Sen. Phil Pavlov, R-St. Clair, the key bill’s sponsor, said yesterday as senators debated 29 amendments. “These are strong powers, but they are within the rights of our constitution.”

The bill expands the circumstances under which the state may step in to review a local government, and expands the number of triggers that would lead to a takeover.

The new law would trigger a review if, for example, one or more rating agencies assign a triple-B or lower rating to a unit’s long-term debt, or if a school district ended its most recent fiscal year with a deficit and had not submitted a deficit elimination plan to the state.

“From my perspective, the triggers previously described were, in a real world sense, far too narrow,” said Michael McGee, an attorney with Miller Canfield, Paddock and Stone PLC who helped draft the legislation.

“We had and have several communities that did not fall within any of the triggers but were in great fiscal distress,” McGee said. “Those triggers have been expanded, but only in the context of making real-world sense.”

For supporters, the new law’s emphasis on early intervention could end up stabilizing local governments and possibly avoiding the official appointment of an emergency manager. “My instinct is this is a credit-positive” for the Michigan bond market, McGee said.

Senators who voted against the bill package warned that, combined with Snyder’s proposed 2012 budget cuts, it would end up sending more local governments into fiscal stress.

“This bill, along with the governor’s proposed cuts, is going to create a race to the bottom, which guarantees that many of our cities and schools are going to head into bankruptcy,” Senate Minority Leader Gretchen Whitmer, D-East Lansing, said before the final vote.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.