Michigan Voters Risk Bankrupt Cities With Vote on Managers

Should voters void Michigan’s power to take over broke cities and school districts in the Nov. 6 election, they may pave the way for troubled cities to plunge into bankruptcy, state leaders said.

Republican Governor Rick Snyder said yesterday he’s “looking at contingencies” if a referendum erases a 2011 law granting emergency managers such powers as canceling union contracts and selling assets.

“There could be major challenges for some of our communities if we don’t have the emergency-manager law,” he told reporters in Lansing. “Their options are not very good. Bankruptcy is out there, and that would be a much worse solution than an emergency manager.”

After Michigan this year narrowly averted taking over Detroit, its largest city, opponents led by union members collected signatures and fought in court to let voters decide the law’s fate. The referendum, among six ballot issues, was opposed 46 percent to 42 percent in a September poll of 600 likely voters by Lansing-based EPIC-MRA. The result was within the 4 percentage-point margin of error.

The end of the law would harm the state, where four cities are under appointed emergency managers, said Treasurer Andy Dillon, a Snyder appointee who helped write it.

“These problems aren’t going away, and we see what’s happening in California,” he said.

Imperiled Cities

Thanks to the longest recession since the 1930s, both states suffered falling property values and declining tax revenue that left communities short of funds for basic services. In California, Stockton, San Bernardino and Mammoth Lakes have gone into bankruptcy since June. In Michigan, emergency managers have fixed financial messes in three of the cities where they are in charge, and none are in bankruptcy, Dillon said.

See the slideshow: Stockton, After the Bankruptcy

The law, which replaced an earlier version with less bite, has been a locus for disputes over local control, collective bargaining and racial politics.

“It smacks of a dictator,” said Larry Roehrig, secretary treasurer for Lansing-based Michigan AFSCME Council 25, which led the petition drive to repeal the law. “It really grates against democracy.”

Another Nov. 6 ballot issue would void emergency managers’ ability to tear up union contracts and guarantee collective bargaining in the constitution for public and private employees.

Helping Wealth

The emergency-manager law was enacted in March 2011 by the Republican-led legislature at Snyder’s urging. He said its tougher provisions would keep municipalities out of bankruptcy with quicker intervention and more state clout.

In fact, it protects bondholders at the expense of workers’ wages and services for residents, said Greg Bowens, a spokesman for Stand Up for Democracy, the coalition that sought the repeal.

“You shouldn’t have to cut grandpa’s $30,000 pension to guarantee payment on a note for a bond deal that’s gone bad,” Bowens said.

State control is better than costly legal fights, Dillon said.

“What’s better?” he said. “Having someone show up in your city every day that’s accountable to the governor, or a bankruptcy judge who will never show up in your town?”

The law is the strongest in the U.S., said Eric Scorsone, a Michigan State University economist who ran training sessions in 2011 for would-be managers.

Serious Power

The state-appointed officials can take control of cities and schools from elected politicians, fire appointees and rearrange services, such as merging police and fire departments. Emergency managers can be named after a state financial review.

Dillon said appointments have been used sparingly, and that the law lets the state intervene before local finances crumble. Four cities and three school districts were placed under managers since the law passed, and three cities have straightened out finances, Dillon said.

The law is suspended until voters decide whether to keep it, and the state is operating under the previous 1990 emergency-manager law. A lawsuit by the Detroit-based Sugar Law Center for Economic Justice filed last month on behalf of Pontiac and Benton Harbor, both under emergency management, claims neither law is in effect, and that the reversion to the earlier measure was wrong.

“We don’t think there’s any legal basis to that at all,” said center attorney John Philo. Once the new law was suspended, “this put elected officials back in power.”

There will be a hearing in the case on Oct. 17 in Ingham County Circuit Court, he said.

Racial Tension

Of the cities under managers -- Flint, Benton Harbor, Pontiac and Ecorse -- the first three have majority-black populations, the fourth has a plurality and all have histories of financial problems. That’s prompted cries of racism although a fifth, the mostly white city of Allen Park, also is poised to get an emergency manager.

The Detroit suburb’s property values have plunged by 25 percent since 2008, though its finances went into a tailspin because of a $31 million debt for a failed movie-studio project.

Michigan’s law is sensible and was written with input by turnaround specialists, said Marti Kopacz, founder and managing principal of Brant Point Advisors LLC in Boston, which specializes in public and private restructuring.

“It lays out the state’s authority in print,” she said in a telephone interview. “It codifies it.”

Circumventing Markets

The law helps the credit of communities that are fiscally stressed, said Hetty Chang, a vice president of Moody’s Investors Service based in Chicago. Repealing it may create more uncertainty, Chang said.

Bowens, of the coalition to repeal the law, said the state should pursue other ways to help cities, such as limiting their authority to sell bonds without a public vote. He said allowing municipal bankruptcies in Michigan would induce troubled cities to negotiate savings with employees and bondholders alike.

“We can’t have a serious discussion about municipal finance reform because of the emergency-manager law,” Bowens said. “It eliminates all risk normally associated with investment.”

The lawsuit filed by the Sugar Center is Watkins v. Dillon, 12-001056-CZ, Circuit Court, Ingham County, Michigan (Lansing).

To contact the reporter on this story: Chris Christoff in Lansing at cchristoff@bloomberg.net

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net

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