One of your fellow readers, a man by the name of David Palmer, recently attended a State-sanctioned training session for would-be Emergency Financial Managers. He was kind enough to type up his thoughts after attending the session and send them in. You’ll find them below. If you have any questions, just leave a comment, and I suspect that he will respond.

PA4: how we got here, what it does, and what to do next.
By: David Palmer
www.linkedin.com/in/davidpalmer76
david.palmer76@gmail.com

Over the last many years, we the people have been engaging in a lopsided discourse regarding the role of government in our daily lives. In Michigan, we have discussed the known, open and obvious structural funding deficit, the massive loss of jobs and citizens; and the fact that so many of our local institutions seem broken for any number of different reasons. Whatever that conversation has been among friends, neighbors and communities, the reality is that the conversation in the legislature has been one of deferment and dismantling.

Public Act 4, which replaced Public Act 72, expands the powers of the state, and appointed Emergency Managers to balance the budgets of subunits who cannot, or will not, adjust their spending to the limits available to them. A subunit is effectively any county, city, township, village, or school district. Previous to Public Act 4 of 2011, there had been little effort made in the Michigan legislature to address several fundamental questions. PA4 does not address these questions directly, but it definitely helps frame the conversation.

What kind of government do we want in the 21st century? Does the government we have now serve the people of this community, and this state well?

How do we currently fund our government and what leads to these ongoing structural deficits?

Why are local governments and schools structured as they are? How are they funded, and why do they always seem to be cutting their budgets? Have the funding decisions we have made over time worked out the way we wanted them to?

What happens when there is no meaningful local way to raise revenues needed to operate these institutions and yet their need for resources outpaces inflation on an annual basis (example: health insurance & gas)?

In the absence of a solid course of action we as a society have continued to hobble along using accounting gimmicks, stimulus money (borrowed from abroad) and cut after cut after painful cut. Yet, an old drumbeat plays day after day: Government is inefficient and wasteful. Paying taxes prevents you from, one day, becoming a millionaire small business owner. Reduce, cut and shrink- regardless of if it makes sense or not.

Whether we walk with that drumbeat, or not, it has been a guiding principle in our civic lives for decades.

Today we are meeting face first with insolvency on an unimaginable scale because the legislature refuses to raise revenues concurrent with the needs of our local institutions. They refuse to raise revenues, even with over $8 billion dollars of available room under the Headlee limit, the voter imposed ceiling on taxes that can be levied by the state.

According to James Crowley, an attorney at Clark Hill who specializes in school finance law, about 150 Michigan school districts will face insolvency if Governor Snyder’s budget proposal passes as is. A recent analysis by Mlive.com of state financial reports reveals there are over 100 municipalities that are close to insolvency.

You may ask: Why don’t voters simply raise revenues locally to pay for schools, police, fire, parks and recreation? Why don’t we increase local taxes to keep class sizes at 25, instead of 40, or to keep our community schools open?

Essentially, other than minor tweaks, we can’t. In 1994, we the voter decided to limit and cede our local ability to raise revenue under Proposal A. An environment exists in which local units of government, including schools, have their fortunes tied to ever-diminishing returns. The legislature, which we elect, turns out to have all the power – by our own doing.

According to the Supreme Court of the United States, the role of local government is clear, “municipal governments are the political subdivisions of the state, created as convenient agencies for exercising such of the powers of the State as it may be entrusted to them…”. At the State’s leisure, within its own statutory framework, it may, “withdraw all such powers, may take without compensation such property, expand or contract the territorial area, untie the whole or a part of it with another municipality, repeal the charter and destroy the corporation (unit of government)”. (Hunter v Pittsburgh, 1907)

As much as I find Rachel Maddow entertaining – even sometimes informative – and despite the rhetoric of pundits- regardless of popular opinion, we do not have an inherent right to local government. If the state, in this case the legislature, decides to emaciate local governments and schools to the point where they no longer function, then it is the state’s obligation to clean up the mess in lieu of bankruptcy under Chapter 9 of the US Bankruptcy Code. A government going to bankruptcy court is very rare, incredibly expensive and presumably has a rather disastrous effect on the State’s ability to borrow money via bonding.

Last year we elected a governor from the private sector, who sees government from the eyes of a CEO. Governor Snyder enjoyed popular support at the polls. He had both financial and rhetorical support from prominent Democrats. Early in the process he was even lobbied to run as a Democrat. Signing the Emergency Manager law (Public Act 4) is a CEO’s natural response to an imminent need to restructure subunits of the organization he manages.

PA4 can be read in its entirety here.

Under the act there are 18 different triggers under which any municipal government or school district can fall in order to instigate a review by the State Treasurer’s office. These are enumerated under Section 12(1) of PA4. They include a voluntary request by the local unit, a request by an unpaid creditor, a request by either the House or the Senate, for not making payroll, or at the discretion of the Treasurer.

The Department of Treasury is granted 30 days to conduct a preliminary review. If it determines that there is “probable financial stress” among the 12 stress indicators under Section 13(3), they must explain as much in the final report. This report is allowed to have one of four conclusions under Section 13(4):

• There is no financial stress, or it is mild;

• There is severe financial stress, but a consent agreement is in place;

• There is severe financial stress and no consent agreement;

• A financial emergency exists and there is no satisfactory plan to resolve it.

If problems are found, a consent agreement is the only way to avoid state takeover. There was a consensus among the presenters at the Best Practices in Local Government Fiscal Management workshop, which was held last week in Lansing, that consent agreements were the strong preference of the State Treasurer and the Governor. Ironically, the State Treasurer does not have the staff to process tens, or hundreds, of reviews simultaneously, nor does he have the staff to consult with tens, or hundreds, of Emergency Managers.

A consent agreement must be approved by the local unit and by the state. It can include a three-year budget plan to eliminate a deficit and any other reasonable and necessary changes that need to be made by the local unit in order to remain solvent.

If a consent agreement cannot be reached, or there are two or more factors apparent under 13(3), Section 15 describes the powers granted to the Governor to resolve the situation.

Should an Emergency Manager (EM) be appointed, his/her powers are enumerated in the act, and begin under Section 15(5).

These include adopting a budget in the first 45 days, receive and oversee the payment of all funds, fill vacancies, consolidate or eliminate departments, enter into agreements and refer evidence of criminal conduct to the Attorney General.

It is fair to say that there is extreme conflict between the common concept of fairness and democracy, and the abilities of the EM, since there is no opportunity for debate and locally elected officials may have their powers suspended. Just as in a large business, decisions are made to fix the problems regardless of how observers feel about the solutions that are implemented, or who gets fired. While local officials may return to office after the EM leaves town, they are not able to amend the budget put in place for two years, and effectively remain on probation for that period.

As we react to the abilities of an EM to act on the behalf of the state with near impunity, and ponder all the terrible things that could/may/will happen, it is important to remember that we the people have the ability to change this situation by either electing a legislature that will make government more efficient and raise the revenues needed to pay for the services we want, or we can pass funding mechanisms by referendum.

It is also important to remember that, so far, there are no organized coherent alternatives to the Governor’s budget, as proposed on 17 February 2011. There are many good ideas, some have been in circulation for years, that could serve as a real alternative to the Governor’s budget.

Finally, the EM must still abide by the laws of the State of Michigan. Consolidations cannot occur unilaterally. There is a statutory process wherein the Boundary Commission and affected voters must be involved. Competitive bidding must be applied to any contracts over $50k. In most cases the EM cannot unilaterally raise taxes without a public vote. Contracts cannot be canceled or amended without first going through a review process and finally must be approved by the Governor.

This is not a good law. Instead, it is the result of a prolonged ideological process that has demonized public servants and pitted our fundamental desire for fairness against the reality of diminishing returns and the sovereign rights of the state.
Democrats, Republicans and all of us who vote, all caused this problem together. And, believe it or not, we have the ability to get ourselves out of this mess with the correct combination of leadership and backbone. But, the web of problems we have created for ourselves is simply too complicated to be addressed in a television segment, or in a YouTube clip. We must act now. Now is the best time to begin organizing state legislative campaigns for the 2012 election. We need a majority of legislators, regardless of party affiliation, who will work together to positively define 21st Century government in Michigan. Our current legislature and governor have told us unequivocally what it is that they see our future to be. We have two choices: We can either like it, and concur via inaction, or we can do something about it.

David, I should add, recently ran as an Independent to represent the 54th District in the Michigan House. He was also kind enough to loan me the first few Star Wars movies (the good ones) the last time that I was sick.