Connecting state and local government leaders
A less hands-on, longer-lasting intervention model might be what's needed.
Michigan’s handling of the contaminated water system in Flint calls attention to the role of a state government when one of its cities faces difficult financial and operating challenges.
Ranging from monitoring local government finances to offering technical advice to taking over day-to-day operations, laws in 20 states allow intervention. Many of these laws have been put in place over the past 25 years, though some date back as far as the Great Depression.
When a law permits a temporary state takeover—as Michigan’s does—local officials often resist, arguing that the state action infringes on their right to govern themselves. State officials, however, typically say they intervene because the city has failed to stabilize its finances on its own.
In Michigan, where the governor can appoint emergency managers to balance budgets in troubled cities and school districts, the future of the intervention program is under scrutiny after the public health crisis still unfolding in Flint. In 2014, a manager appointed by Governor Rick Snyder changed the city’s water source to save money, but the state did not properly treat water from the new source before delivering it to residents’ homes.
Addressing the issue in his January State of the State address, Gov. Snyder spoke directly to the citizens of Flint. “Government failed you,” he said in apologizing to the city’s nearly 100,000 residents, who cannot use tap water to drink or cook and whose children were exposed to unhealthy levels of lead.
Beginning with the 2013 report, The State Role in Local Government Financial Distress, The Pew Charitable Trusts has examined how Michigan and other states attempt to prevent or resolve fiscal crises in local governments. Other analyses have looked at the lessons learned from the Detroit bankruptcy and New Jersey’s involvement in Atlantic City and other struggling cities. This analysis builds on that work, as will future research on how states monitor local government finances.
Michigan Among the First to Use Emergency Managers
Of the states that allow officials to intervene to help financially troubled local governments, Michigan was among the first to enact a formal program that centered on the governor appointing emergency managers. The program started in 1990 as the decline of automobile-related manufacturing squeezed local tax revenue. In the years since, governors have appointed emergency managers in nine of the state’s cities.
Gov. Snyder, who took office in 2011, earned praise for his role in steering Detroit out of bankruptcy in 2014. There, he named an unelected emergency manager to run the city and bring together stakeholders to agree on a plan to exit bankruptcy after only 16 months. Today, the two-term Republican governor faces a recall threat and demands for his resignation—including from the Democratic presidential candidates. Much of that sentiment stems from anger over missteps by a series of state-appointed managers who took over the Flint city government and by state environmental and health officials. Democrats in both houses of the GOP-led Legislature have introduced bills repealing the emergency manager law.
“There is no accountability for what these managers do because they only report to the governor,” Flint Mayor Karen Weaver told Congress in February. In addition, the emergency managers are protected from legal liability for their decisions.
Concerns Beyond Flint
Reflecting the growing dissatisfaction with the oversight program, the Detroit school system’s emergency manager, Darnell Earley, quit under fire Feb. 2. Before Gov. Snyder appointed him one year earlier to fix that school system’s finances, Earley had served as Flint’s unelected city manager and had advocated for changing the city’s water source. Once the lead poisoning of children in Flint came to light, the Detroit school community demanded his removal.
Instead of replacing Earley with another in a series of emergency managers, Gov. Snyder has endorsed a different tack that more explicitly acknowledges the community’s role in remaking the 47,000-student school district. He has appointed a temporary “transition manager” to run the schools’ operations and finances and an interim superintendent to supervise the district’s academics. The appointments are short-term while the Legislature works on bills to install a permanent structure with an elected school board that would hire a superintendent. On March 22, the state Senate approved and sent to the House a $720 million restructuring plan for the school system.
Eric Scorsone, an expert on state and local government finance at Michigan State University, said the negative public reaction to the emergency manager system in Flint and the Detroit schools has “definitely hurt” the Michigan intervention program. He added, “I wouldn’t be surprised if it [the emergency manager law] is repealed.”
The law has already run into significant trouble. The state’s voters repealed the emergency manager program in 2012 after the GOP-led Legislature and Gov. Snyder gave managers the authority to break union contracts in their efforts to control labor costs. That proved a deeply unpopular move in the automobile-producing state; General Motors started in Flint.
Gov. Snyder and lawmakers restored the intervention program in 2012, but to address critics who argued that they were trying an end-run around voters, they allowed local governments to choose among three options in addition to an emergency manager who reports directly to the governor. Those are bankruptcy, mediation, or a consent agreement between the state and the city to permit local elected officials to balance their budget on their own. Wayne County, for example, is now trying to close a $52 million deficit without an emergency manager.
In many states, the governor would not get involved in a city’s financial troubles or its operations. Often local elected officials must figure out a solution without state advice or money. In California, Governor Jerry Brown (D) and the state Legislature did not try to prevent the bankruptcies in Stockton or San Bernardino in 2012, for example. Alabama stayed on the sidelines as Jefferson County, the state’s largest, filed for bankruptcy protection in 2011.
But Michigan and some other states have traditions of aiding troubled local governments. North Carolina monitors local governments’ finances, sells bonds on their behalf, and takes over if a city or county cannot balance its budget on its own. New Jersey offers assistance to distressed cities as a first step but can increase its control, as demonstrated in the appointment of an emergency manager in Atlantic City last year. Rhode Island appoints receivers to manage financially troubled local governments if initial rescue attempts by others fail.
Gov. Snyder had been involved at nearly every step before and during Detroit’s bankruptcy, even pledging $195 million in taxpayers’ money as the state’s contribution to the exit plan. More recently, he has proposed allocating $232 million to address the Flint water crisis. And, in another example of the governor’s generally strong role in local matters, he has recommended a 10-year, $720 million effort to restructure Detroit’s public education system and eliminate its debt.
Emergency Manager Approach Has Its Backers
Defenders of Michigan’s approach to using emergency managers said the breakdown in Flint and Detroit’s schools does not justify scrapping the intervention system. They point to the particular mix of circumstances in each case.
In Flint, a series of mayors, city councils, and emergency managers supported the money-saving plan to stop buying Lake Huron water from Detroit’s system and switch to a new, cheaper regional water authority that would also tap the lake when a new pipeline was completed in 2016.
Until that switch could be made, though, the emergency manager decided to get water from the Flint River, the city’s previous backup water source. But when the change was made in 2014, the aging pipes were not properly treated with anti-corrosives to prevent lead from leaching into the water, according to Terry Stanton, spokesman for the state treasury department, which administers the emergency manager program. Residents began complaining about smelly, discolored water.
Gov. Snyder acknowledges that the state erred in its handling of Flint’s water but has backed emergency managers whose efforts to balance budgets have given many Michigan local governments a second chance. No Michigan city is currently run by an emergency manager, Stanton said, the first time that has happened in 15 years. Still, emergency managers continue to run two Michigan school districts, while Snyder appointed a “transition manager” for the Detroit system in February until a school board is appointed to take over.
As recently as last summer, six cities were under state-appointed managers. “Deficits have been eliminated, sound accounting practices have been restored, and advisory boards are in place to ensure a smooth transition to full home rule,” Stanton said in an email.
Involvement of Stakeholders a Key to Success
Research by Pew has found that emergency managers succeed most often when they can overcome criticism from local elected leaders by involving key community stakeholders in discussions about the difficult cuts needed to balance budgets.
Joyce Parker, who has been appointed by Democratic and Republican governors of Michigan to take over city governments in Allen Park and Ecorse, as well as the schools in Highland Park, told Pew that she held dozens of meetings to get community buy-in even though she was not required to do so.
Parker’s efforts earned praise from Anthony Minghine, an official with the Michigan Municipal League, a group focused on strengthening local governments. “Understanding that she had the hammer, she needed to swing it, but she really went above and beyond the call to try to engage the community,” Minghine said.
Kevyn Orr, who served as emergency manager in Detroit, won similar acclaim for including major stakeholders in the critical decisions needed to erase the city’s debt. That process required difficult sacrifices from the state, public-sector unions, bondholders, businesses, civic leaders, and nonprofit institutions.
Orr, now an attorney in Washington, D.C., also worked with urgency, turning Detroit back to elected officials 16 months after the bankruptcy filing.
“Orr’s legacy is this: He gave Detroit a second chance at life,” reporter Nathan Bomey writes in Detroit Resurrected, a book scheduled to be published in April by W.W. Norton. “He put the city on a track to revitalization. With Snyder’s political backing, he made hard decisions that leaders from Detroit’s past had refused to make.”
Despite the emergency manager’s successes with Detroit’s government, the city’s schools—also run by emergency managers—have not seen similar progress in wiping out debt, boosting academic progress, or repairing aging buildings. The schools’ challenge is vast: Years of enrollment declines, rising costs, and lower revenue resulted in a staggering debt of $515 million. The system has lost 121,000 students since 2000.
Gov. Snyder’s proposal to move away from an emergency manager in the Detroit school system to a transition manager is effectively an admission that the program has not worked in this instance. In addition, the negative fallout nationwide over the state’s role in the Flint crisis may leave Michigan’s political leaders no choice but to revise its intervention program. “The words, ‘emergency manager,’ are almost too toxic,” Michigan State’s Scorsone said.
An Alternative Approach
James Spiotto, a Chicago attorney who specializes in municipal finances, said Michigan may want to consider a different intervention model. Emergency managers, he explained, tend to be unpopular because they are seen as “extremely hands on” and “in and out” of a city, while often failing to resolve long-term, systemic challenges such as financing public-sector pensions.
Spiotto favors a model closer to an independent control board or financial oversight authority. With that approach, outside technical advisers with government finance experience would assist local elected officials in making their own decisions. They would not actually run the city.
“Mayors say the emergency manager assumes that elected officials are incapable of making the right decisions, that they don’t have the experience,” Spiotto said. “They need access to people who do have the financial experience so they can make a better decision locally.”
In 2014, Pennsylvania revised its 29-year-old intervention program to something closer to this model. The state now appoints “recovery coordinators” as outside consultants to advise struggling cities and towns on how to balance their budgets. For example, Public Financial Management Inc., a municipal finance firm advising Pittsburgh, recently had to certify that the city’s budget complied with its five-year recovery plan.
On a smaller scale, the state named a 15-member team of professionals from three firms to develop and implement a recovery plan for the borough of Colwyn outside Philadelphia. “Each member of the team brings their own area of expertise to address Colwyn’s financial issues,” said Dennis Davin, secretary of the state agency that supervises the distressed cities program.
Beyond the structure of specific intervention programs remains a larger issue about states’ role in contributing to the conditions that require financial overseers in the first place. Pennsylvania, Michigan, and other states have cut aid and have restricted tax revenue options available to local governments, adding to the financial pressures facing cities in economically depressed areas such as Flint.
“Michigan cities are operating with a set of [state] policies that create a structural deficit,” Scorsone said. “In this environment, emergency managers will be of limited use at best.”
In other words, the professor said, states must intervene to resolve the underlying issues in economically disadvantaged communities such as Flint. “As in medicine, prevention can be a much better cure than remediating the problem after the fact.”