Spotlight on the News: The Debate Over Proposals 1 & 5

Proposal #1, the Michigan Emergency Manager Referendum, is on the ballot in Michigan for the November 6th election. If the referendum passes (by voting “Yes”, Public Act 4 (which was passed by the Michigan legislature in 2011 as the Local Government and School District Fiscal Accountability Act) will be adopted but if the proposal is defeated (by voting “No”), the law will not take effect.

I strongly recommend that you vote YES on Proposal #1.

A mini-debate on Proposal #1 was held and aired Sunday, October 28, 2012 on WXYZ Channel 7#039;s Spotlight on the News program hosted by Chuck Stokes. The participants were Herb Sanders, attorney for Stand Up for Democracy (the coalition that sought to place the referendum on the ballot) and me (the former Emergency Financial Manager of the City of Pontiac). The video of this debate can be seen by clicking on the picture above. [The portion related to Proposition #1 is from the beginning of the clip until 13:16, sorry about the initial advertisement.]

I believe that there are many reasons to vote yes on Proposal #1, as follows:

The law has been used very rarely and only when it has been absolutely necessary to try to save a local governmental unit from a financial disaster. I do not believe the State has any desire to take over the responsibility for managing many governmental entities. There are currently only 5 cities (Flint, Pontiac, Ecorse, Benton Harbor and Allen Park) out of about 2,900 local governmental units in Michigan and 3 school districts (Muskegon Heights, Detroit and Highland Park) out of 579 school districts that have an Emergency Financial Manager. In addition, there are three cities working with a consent agreement (Detroit, River Rouge and Inkster).

If the law is defeated, it is likely to cause additional lengthy delays in the process of helping cities to get back on track financially as the parties argue about what should be done instead. The biggest loser is likely to be the City of Detroit because it already has “hit the wall” and is only able to operate with the State providing managerial assistance and financial resources. On December 21, 2011, Andy Dillon, the State Treasurer, said that Detroit had total liabilities estimated at more than $12 billion and that the deficits in the General Fund have fluctuated between over $155 million and over $300 million each year from 2005 through 2011. Total General Fund debt and other liability proceeds have been over $600 million for 2005 through 2010.

Under Public Act 4, the local governmental entity has many opportunities to avoid the need for an Emergency Manager, even after what may be decades of poor financial management. There also are a number of checks and balances. First, the State has to conduct a preliminary review of the level of financial stress. Second, if necessary, there must be a more formal review including representatives or nominees from the State Treasurer, the State House, the State Senate, the State budget office and others appointed by the Governor. Third, there is an opportunity for a consent agreement for continuing operations. There also is the potential for a recovery plan in which additional powers can be granted to the local officials to help them in their efforts to correct the situation. Fourth, if the Governor decides an Emergency Manager is necessary, the local unit can request a hearing. Fifth and finally. the local governmental unit can appeal the decision to the Ingham County Court.

Public Act 4 requires communication and disclosure of the Emergency Manager#039;s decisions to the State and to the public. For example, the Emergency Manager must have a financial plan in 45 days and conduct a public information meeting. The Emergency Manager also must report all details of expenditures, hiring, transactions, etc. every three months. In addition, the Emergency Manager may retain a local inspector or auditor (from an approved list provided by the State Treasurer) to oversee and report on the local governmental unit.

Property tax revenues will not increase significantly and help local governments for many years even if the economy experiences an economic boom. Michigan#039;s Proposal A already limits increases in property taxes per year to the lesser of 5% or the rate of inflation (which has been recently at only 2-3%/year).

Chapter 9 municipal bankruptcy (one of the alternatives) has been used very rarely by local governmental units anywhere in the country. Its provisions are very different from Chapter 7 or Chapter 11 bankruptcy. Chapter 9 generally leaves the local administration in place running the local governmental unit without a trustee and without court oversight. It is unclear to me how any major operating changes would be considered or implemented. Even if there was a plan approved by the bankruptcy court to reduce the local government#039;s liabilities, it is likely that new deficits would continue to be generated since the underlying operating structure and processes wouldn#039;t necessarily change. Chapter 9 is a debt adjustment plan without a reorganization function. A couple of the cities in California, however, have used it primarily to reject collective bargaining agreements quickly and to significantly reduce or try to eliminate retiree healthcare.

I strongly believe it is time to get past arguing about who is in charge and get into developing and implementing good ideas for sorely needed major changes. There are many other cities that already have had great success for years in working to improve their communities. We should spend our time examining places like New York City (with one-eighth the murders per capita of Detroit), Colorado Springs, Turin, Italy, downtown Las Vegas, Atlantic City and many others. Let#039;s get on with making Detroit#039;s turnaround a huge success.

[Please note that, contrary to current TV ads from Stand Up for Democracy regarding Prop #1, I have never been a partner of the person who bought the Silverdome. Two years after the sale I did begin to supply limited consulting services to him to help improve the property to try to again encourage business growth in Pontiac.]