Muni Bankruptcy Threat Makes Michigan Train Financial-Emergency SWAT Teams
Michigan is giving hundreds of financial professionals and public employees a crash course in advising troubled municipalities, building an army of emergency managers that may become a model for other U.S. states.
As many as 400 accountants, lawyers, school employees and city workers will start classes in Lansing today on topics including “Dealing with the Unionized Workforce,” navigating municipal bankruptcy and negotiating contracts for sewer, water and other utilities. It’s a “rare” example of preparing people in advance for potential fiscal difficulties, said Michael Imber, a principal in Grant Thornton LLP’s corporate advisory and restructuring services group.
“Management is usually in denial and waits until it’s too late before they reach out, and here was a state saying, ‘We need help,’” Imber said. He is on the international executive board of the Turnaround Management Association and was among about 50 initial graduates of Michigan’s February course. “It enables qualified professionals to walk around cities and towns in Michigan and say, ‘How can I help?’”
States face projected deficits totaling $112 billion in the next fiscal year because revenue hasn’t bounced back from the recession while spending on unemployment and Medicaid has swelled. Vallejo, California, the largest municipal bankruptcy case currently in the courts, sought protection in May 2008. In Michigan, where unemployment hasn’t been less than 10 percent since October 2008, manufacturing employment remains more than 400,000 jobs, or 46 percent, below the last peak in 2000.
“A SWAT team is an OK way to look at this,” said Michigan State University’s Eric Scorsone, an economist who helped organize the class with the turnaround association. “This is coming together on the fly. We’ve had the program for 20 years without any real training.”
Michigan Governor Rick Snyder, a Republican, signed a law March 16 granting state-appointed financial managers new powers that include terminating employee contracts and suspending collective bargaining for as long as five years. Snyder said the added restructuring powers will help keep Michigan communities out of bankruptcy. Enactment of the law came as governors in Wisconsin and Ohio confronted thousands of protesters against measures aimed at curbing union power and cutting state costs.
Michigan has emergency managers running the schools in Detroit as well as the cities of Pontiac, Ecorse and Benton Harbor. Flint, Hamtramck, Highland Park and Three Oaks Village have had managers in the past. Hamtramck has sought to reorganize under Chapter 9 of the U.S. Bankruptcy Code, which the state has refused to permit.
“The knowledge and expertise from both the private and public perspective can help an emergency manager do a better job,” said Joyce Parker, who has been in charge in Ecorse since November 2009. Public officials can better understand the best ideas of industry and company experts can learn about government operating environments and open meetings requirements, she said.
Half of Michigan communities are under financial stress and as many as a couple dozen may be at a more significant level of risk, Scorsone said. Two of the nation’s three major automakers, which are all based in the Detroit area, went through bankruptcy in 2009.
Local governments across the U.S. have eliminated 416,000 jobs from a peak in September 2008. While the recession, the longest since the Great Depression, ended in June 2009, state- and local-tax collections have yet to recover to levels reached more than two years ago.
Drawing Corporate Advisers
Michigan’s new approach is among state experiments attracting the attention of restructuring executives as corporate work dissipates in the improving economy, said Scott Eisenberg, a managing partner at Amherst Partners LLC, an investment bank in Birmingham, Michigan. He helped develop some of the turnaround association’s initiatives in Lansing.
The classes are taught both by public officials and restructuring-company executives, said Ed Plawecki Jr., general counsel and director of government relations at Stout Risius Ross Inc., an investment-banking firm in Southfield, Michigan. Plawecki is also a former Wayne County commissioner and helps mediate Detroit police union matters.
“The purpose of this class is to educate, not advocate,” said Plawecki, who helped organize the program. “We hope to help officials avoid the requirement for an emergency manager.”
About two-thirds of the participants are from school districts or municipal governments and the rest are from businesses, Scorsone said. He said there’s a waiting list of 50 or more for the two-day program. About 90 percent of those attending are from Michigan, with the others coming mostly from companies looking for ideas they can use elsewhere, he said.
Other states may start similar programs, with adjustments to accommodate local laws, as they try to streamline the process for fixing ailing communities, Imber said. He is part of a Grant Thornton team advising the Nassau County interim finance authority, the state-appointed agency that took control of the suburban New York county’s finances in January.
The Michigan law is “credit positive” because it enables the state to intervene earlier when municipalities are financially stressed and boosts the powers of emergency managers, Moody’s Investors Service said March 21. Such steps may be needed to prevent a Chapter 9 bankruptcy, it said.
Snyder’s Local Government and School District Fiscal Accountability Act also calls for a state financial review if a municipality defaults on a bond or note payment or receives a long-term debt rating “within or below the BBB category or its equivalent” by one of the major credit-rating companies.
Companies expecting fees similar to those collected for work on corporate restructurings following the 2008 failure of Lehman Brothers Holdings Inc. (LEHMQ) will be disappointed, Eisenberg said. Governments may pay $150 an hour compared with the $250 to $500 rate received by mid-size firms for corporate work and as much as $1,000 for larger advisory companies, he said.
Even though only a handful of actual emergency managers may ultimately be needed in Michigan, the expertise offered by the two-day program will help advisers, said Imber, who went through a similar program in February with 50 people.
The private companies will play an important role in state restructuring, said Joyce, the Ecorse emergency manager. For example, Southfield-based Plante & Moran PLLC works on accounting services and Miller Canfield Paddock & Stone Plc, a Detroit law firm, provides legal counsel to Ecorse, she said.
“Now we have trained people,” Scorsone said. “They should be ready to go in at any time.”