What You Need to
Know about Michigan’s
Emergency Manager Law
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© 2011 Miller Johnson. All rights reserved.
On March 16, 2011, Governor Snyder greatly expanded the State’s authority to intervene in local government operations by signing the “Local Government and School District Fiscal Accountability Act,” commonly referred to as the Emergency Manager Law. In short, the law allows the Governor to appoint an Emergency Manager (EM) to take over a school or municipality’s operations upon finding that the school or municipality is experiencing a financial emergency. The Law sends a not so subtle message to local officials (and the unions representing local government employees) that, in order to avoid a State takeover, they need to devise and implement strategies to ensure the local government’s long-term financial health. To Whom Does The Law Apply?
The Law applies to schools, cities, villages, townships, charter townships, counties, municipal authorities established by law, public hospitals and utilities owned by a city, village, township or county.
What Is the Process For Appointing An Emergency Manager?
Step One: The Preliminary Review
The first step toward appointing an EM occurs when the State Treasurer (for municipalities) or State Superintendent of Public Instruction (for schools) decides to conduct a “preliminary review” to determine whether a school or municipality is experiencing “probable financial stress.” A preliminary review may be conducted when one of 17 specific conditions listed in the Act occurs, such as:
a request for review by (a) the school or municipality’s governing body or chief
administrative officer, (b) a creditor with a significant undisputed claim, (c) 5 percent of the electorate, or (d) the House or Senate;
default on a bond, note payment or other bond or note covenant; receipt of a low long-term debt rating;
a court imposes a tax levy without local approval;
breach of an obligation associated with a deficit elimination plan;
failure to properly fund pensions or make timely payments to employees.
A preliminary review may also be conducted if the State Treasurer (for municipalities) or Superintendent of Public Instruction (for schools) finds “the existence of other facts or circumstances that in [his] sole discretion ... are indicative of financial stress.”
Step Two: Review Team
If the preliminary review reveals probable financial stress, the Governor will appoint a “Review Team” to conduct a more in depth investigation into the school or municipality’s financial condition. The Review Team, which is composed of various State appointees, has the right to examine the school or municipality’s books and records; utilize the services of the State’s agencies and employees; require assistance and cooperation from the local employees; and negotiate and sign a consent agreement with the chief administrative officer of the school or municipality.
The Review Team has up to 90 days (60 days plus a 30-day extension) to complete its investigation and file a report of its findings. Within 10 days after receiving the Review Team’s Report, the Governor must decide whether (1) the school or municipality is not in a condition of severe financial stress; (2) the school or municipality is in a condition of severe financial distress, but has entered into a consent agreement with a plan to resolve the financial stress; (3) a financial emergency exists and there is no satisfactory plan to resolve it; or (4) the school or municipality has materially breached a consent agreement that it had entered into to resolve its financial problem.
Under a consent agreement, local officials may be granted one or more powers of an emergency manager. The power to reject, modify or terminate a collective bargaining agreement is the only power that cannot be granted. However, unless the State Treasurer decides otherwise, beginning 30 days after approval of the consent agreement, the school or municipality is exempt from collective bargaining obligations, including the obligation to enter into a new collective bargaining agreement, for the term of the consent agreement. Consent agreements may either contain a continuing operations plan developed by local officials, or a recovery plan developed by the State Treasurer or Superintendent of Public Instruction.
If the Governor finds either a financial emergency or the material breach of a consent agreement, either of which would result in the appointment of an EM, he must provide written notice of his conclusion (and the facts supporting that conclusion) to the school or municipality.
Step Three: Local Appeal
Within 7 days of the Governor’s notice, the school or municipality may request a hearing before the Superintendent of Public Instruction or State Treasurer (or their designee). After that hearing, the Governor will either confirm or revoke his earlier determination.
The school or municipality has the right to appeal the Governor’s determination in Court, but the Governor’s decision is given great weight. It may only be overturned if the court finds that it is “not supported by competent, material, and substantial evidence” or “arbitrary, capricious, or clearly an abuse or unwarranted exercise of discretion.”
© 2011 Miller Johnson. All rights reserved.
Step Four: Appointment
Once the Governor’s determination is confirmed, he will declare the school or municipality in receivership and will appoint an EM to replace the local elected officials and chief administrative officer. The EM must be a person (not a company or firm) and he/she must have at least 5 years of experience and demonstrable expertise in business, financial, or local or state budgetary matters. There is no requirement that an EM appointed to lead a school have any experience in education.
The EM must create a financial and operating plan and submit it to the State Treasurer or Superintendent of Public Instruction within 45 days of his/her appointment. Then, within the next 30 days, the EM must hold a public informational meeting to explain the plan.
Powers of the Emergency Manager
The EM is responsible for resolving the financial emergency that precipitated his/her appointment, and has broad powers to fulfill that duty. The EM’s powers include the power to: Reject, modify or terminate existing contracts;
Reject, modify or terminate an existing collective bargaining agreement, if certain conditions are met;
Overrule minimum staffing requirements in charters and contracts;
Hire an auditor and/or inspector to ensure that internal systems controls are adequate and to provide other technical assistance;
Borrow money, settle claims, and (with State Treasurer approval) restructure existing debt; Transfer the school or municipality’s assets, functions and property;
Order millage elections;
Consolidate services or disincorporate/dissolve the school or municipality (with Governor approval);
Replace trustees serving on a local government pension fund, if that fund is not funded at a level of at least 80 percent;
Recommend to the Governor and State Treasurer that the school or municipality file Chapter 9 bankruptcy, and if approved, act exclusively on the school or municipality’s behalf while in bankruptcy.
The right to void contracts and collective bargaining agreements, which is one of the most controversial powers given to EMs, is being challenged as violating the constitutional prohibition on enacting “law[s] impairing the obligation of contract.”
Termination of the Receivership
The receivership ends when the EM declares the financial emergency to be resolved in his/her quarterly report to the State Treasurer, and the State Treasurer (for municipalities) or the Superintendent of Public Instruction (for schools) agrees. Before turning control back over to local officials, the EM must have adopted and implemented a two-year budget, including all contractual and employment agreements.
Miller Johnson’s Municipal and Public School District Restructuring Team
Cities and school districts are considering significant financial and organizational changes. We can help restructure obligations; pursue alternative arrangements (consolidation and privatization) to lower costs; renegotiate collective bargaining agreements; and avoid the appointment of an emergency manager.
We have developed our multidisciplinary Municipality and Public School District Restructuring Team to be an experienced and effective resource for our clients and professional contacts. Contact us to learn how we can work proactively to help you restructure to succeed in these challenging times.
