Wolverine Blues

Meanwhile Michigan Governor Rick Snyder and key members of the legislature intend to introduce legislation today under which financially distressed Michigan cities and school districts could choose between mediation with creditors, bankruptcy or a state-appointed emergency manager—legislation intended to replace last year’s local fiscal distress law (Public Act 4) repealed by Michigan voters last month. Five cities and three school districts in Michigan currently operate with emergency managers under a prior 1990 law, which would be replaced by the new measure. Gov. Snyder fears the repeal of Public Act 4 left the state without enough ability to rescue cities and schools (and the federal government…) from insolvency. The new financial rescue proposal would retain the state’s power to declare financial emergencies in cities and school districts, but would also give local governments the options to reach a consent agreement with the state, similar to one Detroit has: mediation, an emergency manager, or a Chapter 9 federal bankruptcy filing. Under current Michigan law, the state must approve a bankruptcy request. The proposed new law would tie a Chapter 9 filing to a full state review of city or school district finances. While the new bill would reinstate broad powers for emergency managers, local officials would have authority to approve certain decisions made by the managers, or develop alternate solutions that produce equal savings. The proposal would also permit local officials to ask the governor to remove emergency managers after a year, or dismiss them with a two-thirds vote of the governing body, such as a city council.

Detroit

Running Low on Fuel in Motor City
Motor City emergency manager, the top official in Detroit Mayor Dave Bing’s administration, told the City Council this week that getting Michigan to release bond funds is the only way to make it through the city’s latest cash crisis: “We have to take strong action to right our own house so the only lender we have available to us — the state — is comfortable in release of the bond proceeds,” said program manager William “Kriss” Andrews, who oversees the consent agreement Detroit inked with Michigan earlier this year to avoid an emergency manager; “We’re all capable of running it better than this, and the sooner we get help the sooner we get it fixed,” he added. The meeting came with the council to discuss Detroit’s precarious fiscal position and the steps needed to make it through the end of the calendar and fiscal years. In addition to approving measures required by Michigan to win bond proceeds from a state-controlled escrow account, the council also needs to approve a budget amendment that will allow the city to file its annual audit by the end of the year to secure the latest installment of state revenue aid. The council will meet Wednesday to vote on the budget amendment, which features a payment plan to address a $29 million shortfall in the city’s annual pension contribution. The 2012 budget apparently did not include the payment, and the city has scrambled over the last two weeks to cobble together a plan with Detroit’s enterprise agencies, including the water, sewer and transportation departments, to make the payment to avoid a hit to the general fund, finance director Cheryl Johnson told the council. The pension payment will allow the city to complete its 2012 Comprehensive Annual Financial Report on time. A timely CAFR filing is needed to win release of the latest installment of state revenue aid. Meanwhile, Bing is expected to meet with the council Dec. 11 for another special session that could include a new vote on a controversial contract hiring of public finance firm Miller, Canfield, Paddock and Stone PLC as special counsel to oversee the consent agreement. The contract is one of three so-called milestones Michigan is requiring to release $30 million of bond proceeds from a bond transaction last August. Without approval, the state has said it will not release the funds on Dec. 20 as scheduled. The council already rejected the three-year contract, but Bing has asked for a new vote. Even if Detroit wins release of the $30 million, a shortfall remains. The most recent fiscal forecast, released last month, projected a $47 million shortfall by next July without new revenue sources. The city’s only option is to continue to meet the state’s requirements for releasing more bond proceeds, Andrews told council members. Mr. Andrews noted: “The cash hole is deeper than any of us would prefer,” Andrews said. “We’re going to have a little greater difficulty in pulling in all of the bond proceeds beyond that $30 million. The only thing we can do is exercise the maximum self-help so our lender, the state, is confident we’re acting appropriately and responsibly, and will release more rather than fewer of the proceeds. I see that as the only avenue to get through this.”

Motor City II
Michigan State Treasurer Andy Dillon met with Detroit elected officials to discuss an expected fresh review of Detroit’s finances, the possible appointment of an emergency financial manager, and the role Detroit Mayor Dave Bing and other elected officials would play, according to local reports. Marshall Dillon reportedly said the city must implement a series of immediate changes to avoid the appointment of such a manager. A state spokesman said a new review, which could take up to 30 days, would likely begin next week. That could lead to the appointment of an emergency financial manager, who could ask the governor to approve a Chapter 9 bankruptcy filing. Mayor Bing was set to meet with the council next week to urge passage of a measure hiring Miller Canfield Paddock and Stone PLC as the city’s legal counsel for the consent agreement. The contract is one of several requirements from the state before it will release bond proceeds.

Wolverine Reversal

Michigan voters this week voted to overturn last year’s state law that gave state-appointed emergency managers broad powers to cut spending and avoid bankruptcy for financially stricken cities and school districts, repealing Public Act 4. That law, requested by Governor Tick Snyder, allowed the state to intervene more quickly to prevent insolvencies or have more power to reverse financial collapse. The law was intended to replace a 1990 statute that gave emergency managers less authority. Public Act 4 allowed managers to assume the powers of mayors, city councils, and school boards, to fire employees, sell assets, and cancel union contracts. When the referendum was placed on the ballot in August, Michigan had four cities and three school districts under emergency managers. In the wake of the vote, Governor Snyder warned that overturning the state’s controversial emergency management law could lead to municipal bankruptcies for some of the state’s most troubled jurisdictions: “Bankruptcies could have a greater likelihood of happening…We could have a situation of not having a manager who can do their work more effectively and faster, and the probability of municipal bankruptcy could increase because that could be the only option left to them: I still think there are a lot of negative consequences of municipal bankruptcy, if you look at places like California.” No local government has ever declared bankruptcy in Michigan, which has a high number of struggling cities and school districts. The voter-rejected law, Public Act 4 significantly broadened the state’s authority to intervene in troubled communities as well as the powers of emergency managers, giving them the ability to terminate or unilaterally amend labor contracts. The disputed—and now rejected—law had been suspended since late August, when the state election board approved the repeal question for the ballot. Michigan is currently operating under its previous, less powerful, law for fiscally stressed governments, Public Act 72. (There are currently eight governments in state-controlled emergency management status.) PA 72 itself is not without trials and tribulations: opponents filed a lawsuit last month arguing that the revival of the previous law is illegal. A hearing on the case is set for after Thanksgiving. Faced with such a potential loss, Gov. Snyder said a court-mandated overturn of PA 72 would pose a big problem for the state: “Then there would be no emergency manager law, and that would be a concern….That would really cause me to say that we need to be having a legislative discussion because we need some tools.” The emergency manager of Detroit Public Schools, Roy Roberts, warned last week that he would leave the position if the law were overturned. Under PA 4, Roberts controlled DPS’ fiscal and academic polices, but he controls only the fiscal side of the district under current law. Gov. Snyder said he plans to meet soon with top legislative leaders to discuss the possibility of new legislation that would replace some of the powers of Public Act 4—including the less controversial, but still-effective provisions of PA 4 such as an early-warning system for when local governments are facing fiscal stress.

Wolverine Test

Michigan Treasurer Andy Dillon has indicated he will be disappointed if voters overturn the state’s emergency management law — the strongest in the nation. Nevertheless, he said if Wolverine voters reject the law next month, it would not spark a string of municipal bankruptcies or turn the Michigan local government landscape into one resembling California’s (see above). To date, the law has been used to solve the most pressing problems facing the state’s most stressed jurisdictions. Should the law be overturned, Mr. Dillon stated the state’s previous emergency management law, combined with a few new models, should be sufficient. Mr. Dillon (not to be confused with Marshall Dillon) spoke after he, Gov. Rick Snyder, and state budget director John Nixon met with all three major rating agencies in New York City in an ongoing effort to regain Michigan’s triple-A rating. This year’s meeting comes ahead of a roughly $100 million general obligation bond deal set tentatively for Nov. 8, two days after voters will weigh in on whether to repeal the EM law, known as Public Act 4, as well as five other major ballot initiatives with the potential to have a big impact on the state’s future. One measure would make collective-bargaining rights part of the constitution, and another would require a two-thirds legislative supermajority for any tax increases. There are currently seven Michigan jurisdictions under emergency management, with an EM expected to be named soon in an eighth, Allen Park. Mr. Dillon said the state is preparing to exit three stressed cities: Ecorse, Pontiac, and Benton Harbor. The emergency managers in those cities tapped PA 4 to implement a swath of changes that address core costs, like labor contracts. In Allen Park, he said an emergency manager lacking the powers of PA 4 would likely have a difficult time because one of the biggest problems is a police and firefighter contract that is “virtually impossible for the city.” In Detroit, Mayor Dave Bing relied on powers in PA 4 to order more than $100 million of wage and benefit cuts to current contracts over the summer. Detroit operates under a consent agreement with the state instead of an EM. The agreement has some ties to PA 4 but would not be overturned if the law is overturned. Top state officials would likely push for a new law that features the use of consent agreements and financial advisory boards for fiscally stressed communities if PA 4 falls, according to Dillon.

Pensions

Judge Joyce Draganchuk of Ingham County has ruled that a 2011 law requiring members of a state employee pension fund to contribute 4% of their pay toward the fund is unconstitutional. Judge Draganchuk wrote that Public Act 264 infringed on the constitutional authority of the Michigan Civil Service Commission to set compensation for state employees: “By mandating that members contribute 4% of their compensation to the employees’ savings fund, the Legislature reduced the compensation of classified civil servants -- an act that is within the sphere of authority vested in the Civil Service Commission.” The decision, likely to be challenged by the state, had been expected to save the state $5.6 billion in long-term liabilities and ensure “the post-retirement promises made to our employees can be kept.”

Property Tax Vacancies

The Census reports that the total number of vacant housing units in the United States grew by over 4.5 million from 2000 to 2010, a 44% increase. Unsurprisingly, vacant and foreclosed homes are not evenly distributed, but rather are disproportionately found in many older industrial cities, particularly those that have lost much of their population and job base over the past several decades. Boarded houses, abandoned factories, and apartment buildings, and vacant storefronts are a common part of the landscape in large cities like Detroit, Buffalo, and Philadelphia, and a host of smaller cities such as Flint, Gary, and Youngstown. For these cities, counties, and public school districts; they create a lasting double whammy—hammering property tax revenues and imposing significant public safety and other costs on eroded budgets.

Toying with Troy

With a default looming next year on nearly $17 million of junk-rated tax-increment financing (TIF) bonds issued by a development authority in Troy, Mich., the bonds’ insurer, a subsidiary of MBIA, is threatening to pursue litigation or state intervention if the city does not step in to ensure the obligation is repaid. Even though the bonds are limited obligations of the Troy Downtown Development Authority payable solely from TIF revenue--they do not have a pledge from the city of Troy, a triple-A rated municipality in top-rated rated Oakland County; nevertheless, the Troy Downtown Development Authority projects it will run out of funding for debt service by a year from November. The subsidiary has advised both Troy and Michigan officials it would file a lawsuit or seek state intervention if Troy or the Downtown (remember the song?) Development Authority does not pledge to repay the insurer over time if it is forced to cover the obligation. Troy officials have indicated they are weighing their options ahead of the default, with meetings on the issue set for the next two weeks. The problem, as with many TIF districts across the country, is that the Troy district has failed to generate projected revenue due to falling property values. The city picked the wrong time in the real estate cycle: the district has seen 12% drops in real estate or property tax revenues over the last two years with more erosion feared in the future. The city’s own five-year forecast has projected that the authority will not have sufficient money to cover the debt by November 2013. The insurer has suggested that the authority put the $6.6 million remaining in its general fund and debt-service reserve fund to help pay down the outstanding debt and refund the remainder, unhelpfully writing: “Unfortunately the DDA sleeps while the city burns;” and the letter threatens it will pursue litigation if necessary to argue its position that if it takes over payments it becomes, in effect, a bondholder that must be paid. The insurer also said it would be forced to go to the Michigan treasurer, where the currently suspended emergency management law allows the treasurer to declare a fiscal emergency and take over the DDA. According to the Michigan Treasurer’s office, however, it is “not clear what authority or obligation the firm is referring to” when it said default could precipitate a state intervention. Troy officials have not responded to the letter or decided their next action; the Authority meets next week to discuss the matter and the City Council will convene Sept. 24.

Manifestly Dysfunctional?

Michigan Gov. Rick Snyder late last week declared the city of Allen Park to be in a state of fiscal emergency due in part to its struggle to pay bonds issued for a now-failed film studio—giving Allen Park officials until next Monday to request a hearing to appeal the decision. Allen Park faces a chronic general fund deficit, severe cash-flow problems, and political infighting that the state review team said rendered the City Council “manifestly dysfunctional.” In his declaration, the Governor said: “We are committed to helping Michigan's struggling communities, and while declaring a financial emergency in Allen Park is not a decision we like to make, it is a necessary one to restore the city’s financial stability and put it on a path to success.” Absent a successful appeal, Allen Park would become the eighth local government to be placed under the state-controlled fiscal distress program. Three other jurisdictions, including Detroit, operate under consent agreements with the state. Allen Park is a formerly wealthy suburb of Detroit that, like many other Michigan cities, has suffered from declining property values and high unemployment over the past several years. Governor Snyder announced his decision ahead of a highly anticipated ballot referendum in November that asks residents to overturn Public Act 4, the controversial emergency management law that governs how the state deals with fiscally stressed municipalities. If overturned, the previous emergency management law, which lacks many of the powers of the new statute, will become law.

Referenda

The Michigan Supreme Court this week ruled that three out of four controversial referendum proposals can appear on the November ballot, ending months of legal wrangling over the measures. The court ordered that a referendum requiring a vote on a $4 billion, largely bond-financed international trade bridge to Canada should appear on the ballot. That marks a setback for Gov. Rick Snyder and other powerful supporters of what would be one of the country’s largest public-private partnerships. Also appearing on the ballot will be a referendum to make collective bargaining rights part of the state constitution, another question opposed by Snyder and state Attorney General Bill Schuette, who argued that the referendum would change too many state laws to be understood in the 100-word ballot language. The court also ruled that a measure calling for a two-thirds supermajority vote for the Legislature to pass any tax increases should be on the ballot. A proposal authorizing eight new casinos across Michigan will not appear on the ballot. The court, which heard oral arguments on the four proposals last week, had previously approved a referendum to repeal the state’s emergency management law for fiscally stressed municipalities. It will be one of the most crowded ballots in recent history and many of the measures could have long-term impacts on Michigan’s future. The Board of State Canvassers, which has deadlocked on many of the referendums, meets today to finalize the ballot. Voters could decide six proposals in November after the Michigan Supreme Court on Wednesday ordered collective bargaining, tax and bridge questions onto the ballot.

The court blocked a contested proposal that would have asked voters to OK the construction of eight casinos across the state. The court also clarified the process groups and the Board of State Canvassers must follow to get initiatives on future ballots. The decision paves the way for many voter choices, including the five constitutional amendments and a referendum on the emergency manager law. The Board of State Canvassers is set to meet today to finalize language for the ballot questions. The court’s ruling and the board’s ultimate approval will allow the board to meet the deadline for getting proposals added to the November general election ballot. A central issue on the four ballot proposals decided was whether they violated part of the constitution that says a petition must republish provisions that will be altered or abolished. The court said an amendment that does not alter a provision could still annul part of the constitution if it rendered the entire or part of a provision wholly inoperative. The majority of justices ruled the language in the petition to add casinos contained a “fatal” flaw in bypassing the constitutional authority of the Michigan Liquor Control Commission by stipulating the eight casinos would be entitled to a liquor license. The proposal would have authorized casinos on specific properties in Detroit, Romulus, Pontiac, Clinton Township, DeWitt Township, Grand Rapids, Birch Run, and Clam Lake Township near Cadillac. Already on the ballot is a referendum on the emergency manager law, and proposals seeking regulation and limited collective bargaining rights for home health care aides, and a 25 percent renewable energy mandate for utility companies. Michigan Alliance for Prosperity v. Board of State Canvassers, Director of Elections, and Secretary of State, No. , 09/05/12; Citizens for More Michigan Jobs and Robert J. Cannon v. Secretary of State, Board of State Canvassers, and Director of Elections, No. 145754 & (4), 09/05/12; Citizens for More Michigan Jobs and Robert J. Cannon v. Secretary of State, Board of State Canvassers, and Director of Elections, No. 145754 & (4); 09/05/12; The People Should Decide v. Board of State Canvassers, Director of Elections, and Secretary of State, No. 145755; 09/05/12; and Protect our Jobs v. Board of State Canvassers and Citizens Protecting Michigan's Constitution, No. 145748, 09/05/12.

Proposals Michigan voters will decide on the Nov. 6 ballot

Require public vote on new bridge

Purpose: To stop new bridge over the Detroit River by requiring a public vote before construction of international bridges or tunnels.

Status: ON. By order of the Supreme Court today.

Collective bargaining

Purpose: Protect and expand bargaining rights; repeal limits enacted in 2011; block right-to-work.

Status: ON. By order of the Supreme Court today.

Repeal emergency manager law*

Purpose: Repeal Michigan’s emergency manager law that broadened the managers’ powers.

Status: ON. By order of Supreme Court on Aug. 3.

Home health care workers unionization

Purpose: Create registry of home care workers; authorize unionization and bargaining rights for workers.

Status: ON. By order of Board of State Canvassers on Aug. 15; no court challenge.

Tax hike supermajority

Purpose: Require two-thirds majorities in Legislature to raise taxes.

Status: ON. By order of the Supreme Court today.

25 by '25, renewable energy

Purpose: Require utilities to generate 25% of Michigan’s energy from renewable sources by 2025.

Status: ON. By order of Board of State Canvassers on Aug. 15; no court challenge.

* The emergency manager proposal is a referendum on a state law. All of the others are proposed amendments to the state constitution.

Off the ballot

Casino expansion

Purpose: Authorize eight new casinos at specific locations around Lower Michigan.

Status: OFF. By order of the Supreme Court today.

Wolverine Recovery?

In this year’s annual survey, the University of Michigan finds that a growing number of local governments in Michigan are beginning to experience greater fiscal stability for the first time in years, despite ongoing falling property-tax revenues and rising infrastructure needs continue to plague many jurisdictions, especially larger cities in the southeast part of the state around Detroit. Nearly half of communities with more than 30,000 residents reported a declining ability to meet their fiscal needs in 2012 compared to more than 60% in 2011. Nevertheless, local officials across the state are the most optimistic about their future fiscal health since the report began being issued four years ago. Michigan ranks high in terms of fiscally stressed local governments. Seven local governments are currently in state-declared emergency management, and three more operate under consent decrees with the state. Adding to the fiscal misery are cuts in property tax revenue and state aid and high retirement-related debt. The survey, which tallies how local officials respond to stress, notes that more are relying on their general funds to cover shortfalls, as well as shifting costs of health care benefits to employees, and trimming or outright eliminating services.

Key findings: One-third of local government officials said they will be somewhat or less significantly able to meet their fiscal needs this year compared to last year — a drop from last year’s figure of 48% and 61% in 2010; just under one quarter said they are somewhat or significantly better able to meet their fiscal needs this year compared to last year, up from 16% last year and 9% in 2010; 27% predict good financial times in 2013 while 22% foresee bad. The number of local officials who said they were less able to meet their fiscal needs this year was 33% — a drop from 61% two years ago. Nevertheless, nearly two-thirds of local governments realized reduced property tax revenues this year compared to last; and 46% of governments reported declining state aid this year. Among municipalities with more than 30,000 residents, 47% reported a declining ability to meet their fiscal needs in 2012 compared to 2011, down from 61% last year, and compared to 34% among smallest jurisdictions. Larger communities also reported greater property-tax declines — 75% of cities with more than 30,000 reported they

The survey indicates that both larger and smaller cities are turning more toward collaboration and privatization to deal with fiscal challenges. Among the larger municipalities, 36% said they expect to increase privatization of services next year, a still-large number that is down from 58% in 2011. Many local officials said they plan to rely on general fund balances and rainy-day funds to manage through problems, with 46% of mid-size governments saying they plan to increase their reliance on their general fund balances and 21% saying they plan to increase their reliance on rainy-day funds. Some half of all jurisdictions also said there was no change in their ability to repay debt this year, including 77% of counties saying there had been no change and 66% of cities saying the same. But 15% of cities reported a somewhat decreased ability to repay debt this year compared to last. Looking forward, most local governments said they do not expect to take on more or less debt next year, with 15% saying they plan to somewhat decrease the amount of their debt, including 22% of cities. Another 12% of local governments, including 25% of cities, said they plan to somewhat increase their levels of debt next year.

Like governments across the country, Michigan’s communities face problems tied to pension and retiree benefit costs that will continue to pose problems in the future. The university survey notes that one common response to fiscal stress in 2012 was to shift more health care costs to employees. Among the jurisdictions that offer benefits — most of which are larger — 62% plan to have employees cover more of their own costs next year, including 81% of the largest governments. Trimming or cutting services is another common response, and the survey reported that 22% of the state’s largest municipalities completely eliminated a service last year and 21% plan to do so next year. Calling this an “extreme action,” the report says that the cuts “indicate a continuing retrenchment for many local governments across Michigan in 2012.”

Looking ahead, the report found there were a number of factors that could affect local government fiscal stability over the next few years, including Gov. Rick Snyder’s efforts to eliminate the personal property tax, a revenue stream that is dedicated almost entirely to local governments.