CHICAGO — Michigan would give emergency financial managers who are appointed to take over local governments the authority to terminate labor contracts under a proposed overhaul of the state’s main law for dealing with fiscally stressed credits.
Providing the ability to terminate labor contracts — typically a power that resides with federal bankruptcy judges — is an effort by Michigan officials to craft an alternative to Chapter 9 as more municipalities are expected to have fiscal problems and push for the bankruptcy option.
Gov. Rick Snyder and Treasurer Andy Dillon last week unveiled a five-bill package amending Public Act 72, the main law for dealing with stressed communities. They asked the Legislature to approve the bills by Wednesday, less than a week after they presented them, warning that dozens of local governments and school districts need immediate help.
Michigan currently allows an EFM to terminate many contracts, but not labor contracts. The law also allows an overseer to recommend Chapter 9 bankruptcy, but the move must be approved by a local emergency financial assistance board.
Officials in troubled Hamtramck — which is not currently in a state of fiscal emergency — said the city’s only hope of regaining stability is the ability to terminate its labor contracts. That is why officials have been pushing the state for months to allow it to file for Chapter 9.
Michigan has never allowed a locality file for bankruptcy, but more states are considering specific legislation that would allow the termination of labor contracts.
“It exists in the case law and therefore people are now looking at it,” said James Spiotto, a partner with Chapman and Cutler LLP. Spiotto said he plans to raise the issue Monday when he testifies before the U.S. House Judiciary Committee.
“There is this sort of emergency relief because states are sovereign,” he said.
States must be able to show that existing labor contracts are preventing local governments from providing essential services. “They must be able to demonstrate that there is no other way to solve it, such as raising taxes,” Spiotto said. “They have to meet the threshold that this impairment or discharge of obligations is essential for a significant public purpose.”
Giving an EFM the power to terminate labor contracts is another way for the state to avoid allowing local governments to go into formal Chapter 9 bankruptcy.
“The bills are attempting to provide an alternative to Chapter 9,” said G. Allen Bass of bond counsel Lewis & Munday. “I think that’s very good. Chapter 9 is expensive, protracted, and even its practitioners will say that Chapter 9 is the very last resort.”
Bass said he believes the proposed bills can get “a fair way down the road” to achieving a bankruptcy alternative. “There is some work to be done, and even then the amendments can’t provide a full substitute for Chapter 9,” he added.
The bills would also allow for earlier state intervention into communities and school districts facing financial problems. Upon appointment of an EFM, the unit’s local officials would immediately be fired, and could not run again for 10 years. That provision could end up hurting more than helping, Bass said.
“An announced purpose of the legislation is to provide for early intervention,” he said. “If that’s the case, then it should be encouraging rather than discouraging municipalities to avail themselves of it.”
The proposals also apparently would give the EFM the power to dissolve a municipality, though details are scarce. Treasury officials admitted to lawmakers that they were not sure how it would work.
Legislators’ main concerns appear centered on the fast push to approve the legislation and the loss of local control.
“We need the tools to get in early so that we can do the things we know will work,” Rep. Al Pscholka, R-Stevensville, who sponsored the legislation, told the House Local, Intergovernmental, and Regional Affairs committee last Thursday at what is likely to be the bills’ only hearing.