Financial Martial Law in Michigan
A new law speeds the takeover of financially ailing towns and cities by state-appointed emergency managers
Rick Snyder, a former technology executive and venture capitalist, campaigned for governor of Michigan as a moderate Republican not in thrall to Tea Party politicking. He called himself "one tough nerd." He appointed another nerd, Democrat Andy Dillon, the former speaker of the Michigan House of Representatives and a former corporate turnaround expert, as treasurer. In their four months in office, they have overseen the passage of a law that's as radical an experiment as any in the country. It dramatically speeds up the process by which financially troubled cities, towns, and school districts can be taken over by state-appointed emergency managers.
The law gives those managers—often former politicians or civil servants—broad and controversial powers, including the authority to void union contracts and remove elected officials. It has also given other outsiders, namely private consultants and restructuring experts, an opportunity to do to distressed places what they've done to distressed companies. "Ninety percent of the law is an early warning system," says Representative Al Pscholka, who sponsored it. "The fundamental point is that if the municipality had made the hard choices there would be no need for an emergency manager."
Michigan is the perfect petri dish for experimental cures in crisis management. Michigan State University economist Eric Scorsone says half the state's communities are under financial stress; unemployment has been above 10 percent for the past three years; of nearly 5 million taxpayers, 200,000 are in arrears; and it's the only state to experience a decline in population since 2000. Still, when the Michigan legislature passed Public Act 4 on Mar. 15, protesters were outside the Capitol in Lansing waving signs that read "Privatize Snyder" and "Recall the Ricktator." Snyder says he doesn't want to exert control over local governments. His intention is the opposite: to identify struggling localities early on and give officials the motivation and help to make difficult decisions about layoffs, service and pension cuts, property sales, privatization—and even the dissolution of entire towns and school districts if necessary. Senator Jack Brandenburg of Harrison Township put it more bluntly: Emergency managers would be deployed as a last resort in communities that need "financial martial law."
On Apr. 14, Joseph Harris, the emergency manager of Benton Harbor (population 11,000), test drove his new powers—by stripping all of Benton Harbor's elected officials of what remained of theirs. A former chief financial officer of Detroit, Harris had been overseeing the community near Kalamazoo since April 2010. He's one of four emergency managers appointed by the former governor, Jennifer Granholm, under a 20-year-old law that granted managers less authority. (Pontiac, Ecorse, and the Detroit school system currently have emergency managers.) "The local elected officials constantly passed resolutions against Harris. They threatened lawsuits. They impeded his ability to do the job," says Pscholka, who represents the area that includes Benton Harbor. "Harris put them in the timeout chair."
A 2009 state review had found Benton Harbor's pension system severely underfunded. Its public safety expenses were more than its tax revenue. The city hadn't filed audit reports on time in eight years. Harris's arrival still came as a shock. According to a local radio station, City Commissioner Duane Seats compared Harris to AIDS. "There's no cure for him," Seats said. Now Harris is the mayor, finance director, and tax assessor. In an Apr. 25 interview with the local Fox News station, he said: "It is conceivable that I would terminate the union contracts.… I believe I'm the angel of common sense, and I believe that 90 percent of the citizens believe I'm the angel of common sense. You hear the commotion made by the vocal minority."
Jesse Jackson came to town to denounce Harris. John Conyers, the U.S. representative from Detroit, had already written an op-ed in the Detroit Free Press calling the law "a blatant unconstitutional power grab." Robert Ward, deputy director of the Rockefeller Institute of Government, says: "At some point it is incumbent on states to ensure financial stability at the local level. But it's worth noting that this is a very big change in the nature of democracy in this country."
Pontiac is surrounded by the wealthiest suburbs of Detroit. The city has a population of about 67,000, a median household income close to $32,000, and an estimated deficit of $4.2 million made worse by declining property values. Mike Stampfler, who has years of experience as a city manager in Michigan as well as Florida and Alabama, was appointed emergency manager in July 2010. His predecessor, Fred Leeb, had resigned after 15 months, blaming Pontiac officials and residents for creating "an environment of escalating hate speeches, slander, threats of violence, and racism."
"I was aware of the problems, but not of the extent of the dysfunction," Stampfler says. "The financial system was broken, but other systems were broken as well." He initiated an audit of health-care benefits he expects will reduce costs by at least $2 million a year. He privatized the community development and planning services and says that it will more accurately collect fees, which could amount to half a million dollars. He's also merging the police force with the county sheriff's department to cut $2.5 million from the budget. Nonetheless, Stampfler thinks he'll have to use his new powers. "It's not like a functional government that you can coax. It's a dysfunctional government. Different standards have to be applied," he says.
Whether Michigan's experiment in emergency management works or not, both sides—public employees wishing to avoid crisis managers and the consultants who might advise them—are getting educated for battle. On Apr. 18 some 350 people paid $175 to attend a day-and-a-half emergency manager training program at Michigan State University called Best Practices in Local Government Fiscal Management. "There's more ability for the private sector to get involved than before," says MSU's Scorsone, who helped put together the training program. "It's not the recent legal change as much as a philosophical one. There is more openness from the governor and treasurer."
"One of the things we emphasized is that within constraints, government should be run like a business," says Edward Plawecki, the general counsel and director of government relations at Stout Risius Ross, a financial advisory firm. He was one of several executives who helped organize the training program at the treasurer's request. "Officials should look at health-care and retirement costs, workers' comp and benefits, and see what best practices might be applied to their municipalities."
For those in the business world, the training offered entree into a new market, one complicated by a demand for transparency and the chance of public vilification. That's politics.
Still, it's a new market at a time when corporate bankruptcy work is slowing. "This is the next wave of opportunity," says Scott Eisenberg, president of the Michigan Turnaround Management Assn., who also helped put together the session. "People are trying to figure out where the opportunity is. It may not be as emergency managers. It may be as consultants." And then Eisenberg says it—the sentiment that sounds reasonable to some and perverse to others: "This past recession brought forth a level of discipline and accountability and restructuring in the private sector that the public sector has not gone through yet. As a result there's no reason why you wouldn't use professionals to help. Good turnaround professionals will pay for themselves."
The emergency managers' salaries—which range from $150,000 for Stampfler to about $350,000 for Robert Bobb, the head of the Detroit school system—come out of local (or school) budgets. Consultants' fees could run about $150 an hour, estimates Eisenberg, a drop from what they're used to making but still lucrative. "I think it is a market," says Michigan Treasurer Dillon. "But a while back I said: 'If I were you, I would establish a division with lower overhead.' There's going to be a need, but we will never pay private-sector rates."
"I think what Michigan is doing is really leading-edge thinking," says Michael Imber, a principal at accounting and consulting firm Grant Thornton. "I told Andy Dillon: 'I want to copy your program and take it to other states.' We view this as a business opportunity. We can make a real meaningful difference for a lot of people. There's a nobility in that. If we can get paid for it, that's a good thing, too."
In Michigan, this enthusiasm isn't always welcome. "People think there's going to be a corporate takeover of cities," says Scorsone. "That's not the case. It's not a free-for-all. There are checks and balances. But emergency managers and officials will need consultants."
Of course, that should be temporary work. Because emergency managers aren't being brought in to create jobs. If all goes according to plan, they'll be cutting them.