Everything you ever wanted to know about the Emergency Manager takeover of Michigan, and how we allowed it to happen

    I had the good fortune a week or so ago to attend the Netroots Nation conference in Detroit. Among the people that I met while there was attorney Alec Gibbs, who, in recent years, has been keeping busy representing retired public employees left without adequate insurance in the wake of the Emergency Manager takeover of Flint, Michigan. What follows is our conversation on the origin of Michigan’s Emergency Manager law, what it’s done to Flint, the current challenges against it in the courts, and what we can do to fight back.

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    [Nayyirah Shariff, a Flint-based activist with the Democracy Defense League, is pictured above silently protesting an Emergency Manager order in Flint that prohibited public comment before city council votes.]

    MARK: If we follow the Emergency Manager narrative all the way back to its point of origin in Michigan, as I understand it, we find ourselves in Ecorse a little over 25 years ago. What was happening there in the late ‘80s that led to the passage of Public Act 72 (PA 72) in 1990?

    ALEC: PA 72 grew out of an unprecedented action that was taken by Judge Richard Dunn, who was a trial court judge on the Wayne County Circuit Court. He appointed Louis Schimmel as a receiver for the City of Ecorse, which was a relatively small downriver suburb of Detroit. It was entirely due to the steel industry. When that industry collapsed, so did the tax base for Ecorse. When Dunn appointed Schimmel, the legislature felt the need to retroactively validate the receivership, and that’s why PA 72 was drafted and passed.

    MARK: How did Dunn justify his decision? It seems like a big leap for an individual judge to essentially take over the finances of a city.

    ALEC: A few years before Dunn’s decision, there was a Court of Appeals decision that suggested a municipality, specifically a school district, could be placed into receivership in extraordinary circumstances. Basically, they said it could be done when there was no conceivable alternative. Judge Dunn’s decision was premised on Ecorse’s failure to pay creditors and make contributions to its pension fund. There were a few different lawsuits that were consolidated, and the result was the receivership… Judge Dunn is an interesting historical figure in his own right. He was elected in 1974, on a platform that encouraged the extension of judicial services into the Detroit suburbs. The pro-suburbanite platform has to be seen within the context of the busing issue, and the famous Miliken v Bradley Supreme Court case, which came out of a Michigan desegregation order, and ended cross-district busing, which created a white flight surge in the region. This happened as Judge Dunn was campaigning.

    MARK: I’m not sure that I follow. Are you saying that Dunn was swept into office by white voters who felt as though they needed to be kept safe from Detroit’s urban (black) population?

    ALEC: I don’t think Judge Dunn’s campaign was necessarily explicit on that point, but it isn’t like we have access to all of his campaign literature. He was campaigning on a pro-suburban platform; he was calling for more court services to be extended to the furthest outlying cities in Wayne County. And the example he cited was related to public safety. I’m sure that voters probably understood that to mean, at a minimum, increased county presence and services, including police services, in places like Northville. So it would certainly feed on the suburban fear of Detroit.

    MARK: And what did did Public Act 72 say?

    ALEC: Well it changed quite a bit between 1990 and 2004. But basically it created a position known as an Emergency Financial Manager (EFM). If there were certain fiscal problems that showed a municipality or a school district was facing financial distress, a review team would be appointed by the Governor to evaluate the available evidence and decide if there was indeed a financial emergency. If there was, the Governor could hand the management of the city’s financial condition to the Municipal Loan Board, which would then appoint an Emergency Financial Manager, or work with the local government to develop what was called a consent agreement, if the review team thought that was a feasible alternative. And, if the EFM decided that the city needed to go through bankruptcy, he could give the local government authorization to file a Chapter 9 petition, subject to oversight by the executive branch.

    MARK: But, in its earliest iteration, the Emergency Financial Manager law did not empower this Governor-appointed administrator to break union contracts. Is that correct?

    ALEC: That’s correct. That power did not emerge until Public Act 4 (PA 4) was passed in 2011.

    MARK: So, as of 2011, Michigan’s Emergency Managers have had the ability to break union contracts. They did not, however, have the ability to break contracts with financial institutions. Is that correct?

    ALEC: That’s correct. The banks were safe; workers (and retirees) were not. This was by design, given the interests of the people who were responsible for drafting this law.

    MARK: Were there non-Michigan precedents when all of this first began to happen, in 1990? Or was the situation in Ecorse truly unique?

    ALEC: There was a major precedent that was incorporated into PA 72, and that was the New York City financial crisis. When NYC neared insolvency, the state government interceded and created new institutions to stabilize the city’s finances. The story behind that financial crisis is interesting in its own right, and involves significant transactions and interactions with Wall Street firms that were underwriting the debt. But, in response to the financial crisis, the State of New York created a Municipal Assistance Corporation, or MAC, that could issue new securities to finance outstanding debt. When MAC had trouble selling the bonds, it began to demanded wage freezes, increases in subway fares, layoffs and tuition charges for the free city university system (CUNY). This caused a lot of unrest. And, to put the austerity on firmer footing, the state also created the Emergency Financial Control Board (EFCB). The EFCB took over the City’s finances, and the EFCB maintained very strong control over NYC finances for a decade, remaining in existence until about 2008.

    MARK: When, after the passage of Public Act 72, was the concept next revisited in the Michigan legislature?

    ALEC: There were a number of amendments that expanded the power of EFMs over the years. The first amendment was in 2002, while Governor Engler was in power. And it was amended again in late 2003, about a year after Granholm was elected. When Granholm took office, there were at least two cities in receivership… Highland Park and Flint. The amendments were largely directed at Highland Park, because the EFM there had suspended the Mayor’s salary, which was unprecedented, and not authorized by PA 72. So the legislature amended it. The amendments were also given retroactive effect. That was done under Granholm. After that, the EFM could effectively suspend the local elected government. Then were amendments in 2004 that vested a lot of legislative and executive power into the EFM. An EFM could, after that, exercise the same powers as the mayor and city council in amending, adopting and enforcing ordinances, as long as those ordinances affected the local financial condition of the city. That’s a very expansive power, and, in fact, Louis Schimmel would later try to use that power to force a transfer of the city’s pension system (which is the best performing pension system in the country) to the statewide Michigan Municipal Employees Retirement System (MERS).

    MARK: When you say that Louis Schimmel tried to use this power to change the city’s pension system, which city are you referring to? By this point, Schimmel had moved on from Ecorse, right?

    ALEC: Yes, I am referring to Pontiac. When PA 4 was repealed by way of referendum, PA 72 went back into effect, and Schimmel had to rely on the powers he had under PA 72. So he cited his ability to enact ordinances that affected the City’s financial condition. The Oakland County Circuit Court disagreed, compared him to a dictator, and he backed off. For now, at least.

    MARK: And why did Schimmel want to restructure the Pontiac pension fund, given that it was, as you mentioned, performing well?

    ALEC: That’s a mystery. Schimmel’s plan followed a successful transfer engineered by Flint’s emergency manager in the summer of 2012, though. And it also parallels efforts to control pension fund investments in other states, and a conservative effort to push the idea of a “public pension crisis,” which the progressive investigative journalist David Sirota documents quite well in his 2013 report The Plot against Pensions.

    Now, it’s important to remember that current Michigan Governor Rick Snyder left his venture capital firm, Ardesta, in 2008, because he was frustrated with the reluctance of “institutional investors” to finance venture capital projects in Michigan. This includes pension funds, as well as MERS. And MERS, by the way, is moving towards direct investments in local firms. And you know what their chief investment officer cites as the reason for that? Michigan’s “competitive” business environment, courtesy of Rick Snyder. And his Emergency Managers have pushed these transfers, in Flint, in Pontiac, and in other cities, which have substantially increased the investments that MERS can make. In addition to that, the Emergency Managers control federal and state grant allocations, and the Michigan Economic Development Corporation (MEDC), through the Michigan Strategic Fund (MSF), is responsible for distributing even more money. In recent years, it’s worth noting, the MEDC and the MSF have been the targets of bipartisan criticism for reporting inflated and misleading job figures. And the Mackinac Center is at least publicly opposed to the existence of the MEDC and other corporate subsidization programs.

    MARK: OK, so your sense is that Michigan’s Emergency Managers were given the word to push their locally controlled pension funds into MERS, with the thought that they could then dole the money out to venture capitalists friendly with the administration, etc…

    ALEC: That’s really the question isn’t it? In other states, like New Jersey for example, there has been pretty extensive reporting on this. For example, The Nation has connected Paul Singer, the founder and CEO of the hedge fund Elliott Management Corporation, to Chris Christie’s “pension reform” project, and Singer was also a major contributor to the short term PAC RGA Michigan 2010. According to the disclosures that are available he was the third top contributor at $500,000, just behind Robert Perry and David Koch. Just over $482,000 came from Steve Cohen of SAC Capital Advisors, another hedge fund. SAC, by the way, just settled a major insider trading case that arose out of the University of Michigan in 2008, and one of their hedge fund managers, Matthew Martoma, was convicted of insider trading in February. Now, in light of these known contributions, and in light of the fact that Snyder’s NERD fund had dark money pouring into it in cities with EMs, aren’t there a lot of questions we should be asking about these transfers? After all, the transfers to MERS involve hundreds of millions to billions of dollars.

    Now with respect to MERS, there’s also been a significant increase in direct lending, which is also reflected in the national market. This is a way of avoiding the stricter lending standards that apply to banks. In other words, these pension funds are now supplying credit to “midsize” companies that can no longer get loans from banks because their credit isn’t good enough. There are arguments marshalled in favor of this, including the elimination of financial intermediaries or middlemen, but this is happening with very limited public input, and in an era of politicized financing. We should be concerned, and we need independent and progressive financial experts to scrutinize what’s happening with our pension funds.

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    MARK: Your mention of the conservative, Michigan-based think tank, the Mackinac Center, a little while ago, sent me to their website in search of their thoughts on the takeover of Ecorse. Following is a clip from a 1989 report by Greg Kaza, who was then Vice President for Policy Research at the Mackinac Center.

    At first glance, Ecorse, Michigan, appears an unlikely place for a grand experiment. Aging steel mills dominate the landscape in the 2.2- square-mile community of 11,000, located in a region known as Downriver Detroit. Down-river is typical of many of the “Rust Bowl” areas that dominate America’s once-great industrial heartland. Row after row of small, wood-frame houses stand in the shadows of the mills, home to three generations of steelworkers. Along West Jefferson Avenue, the bars and fast-food establishments are fighting a battle against creeping blight. Crack cocaine dealers have invaded from Detroit, decimating several surrounding neighborhoods.

    But look beneath the surface and you will find evidence of a grand experiment unique in recent American history. Three years ago, Ecorse teetered on the brink of economic bankruptcy, the result of a $6 million budget deficit mused by wasteful local spending.

    Today, the deficit has virtually disappeared, along with most of the Ecorse city government, which has been privatized to the point of near-extinction. “We have created a model city that nobody else in the country has,” explains Louis Schimmel, the man responsible for Ecorse’s grand experiment. “Some communities have privatized certain functions. I’ve privatized just about everything. Everything that I could legally.”…

    Sounds like the “grand experiment” in Ecorse went pretty well…

    ALEC: Yes, if you’re looking at this experiment from the vantage point of the Mackinac Center, and restricting your timeframe to the first EFM for Ecorse, it might look better, right? But Ecorse was back in receivership by 2009. And this is not just about Ecorse: Flint has had an EFM before, appointed by Governor Engler; the same is true of Hamtramck and Highland Park. The laws simply do not address the actual problems cities face, which is really a decrease in state revenue sharing. Revenue generation is difficult for local governments, given the constraints on taxation imposed by the Headlee Amendment. And it’s not just about loss of funding, because the State of Michigan also passes the governance buck down to these cities.

    For example, there are a number of unfunded mandates in Michigan. This gets back to the Headlee Amendment, because it required governments to maintain the level of support for services and activities in existence in 1978, the base year, while also requiring the state to fund any additional necessary costs of newly mandated activities or services and increases in the level of such activities or services from the 1978 base year. This is flagrantly violated by Lansing, and enforcement in the courts takes decades. Many of these costs are hidden. For example, if you adopt very tough restrictions on sex offenders, that means you are requiring police to devote a substantial amount of time to monitoring them, to enforce state law. The state has also imposed election requirements that impose maintenance, data reporting and additional compliance costs. And there are also local services that are practically mandatory even though they are not considered mandates. And, even when the Michigan courts find that there isn’t a violation, the challenged mandate often violates the spirit of Headlee. For example, every county has the responsibility for providing room and board for juvenile wards, but the Michigan Court of Appeals has said that any county can house juveniles in any state, federal or local facility, so the state isn’t responsible for reimbursing a county for building a new facility, even though the state has an obligation to pay for half of juvenile housing costs. But that kind of decision ignores the ways in which using existing facilities may be impracticable, while requiring every local government to establish that there’s no actual alternative. The net result is piecemeal litigation that takes decades to resolve funding disputes between the state and local governments.

    MARK: And how did Flint fare? Did aggressive privatization solve all of your problems?

    ALEC: Clearly not. Most privatization is simply a boon to some favored special interest. Even if you privatize or outsource public functions, you still have to pay for them. For example, when Flint transferred the local pension system to MERS, the city initially claimed it was saving hundreds of thousands of dollars each year in administrative costs. But, in fact, there was no cost-savings, because the pension system was the entity responsible for paying these administrative costs. Additionally, the transfer to MERS will probably cost the City of Flint even more in the long term, because MERS uses a shorter actuarial period to calculate the city’s payment obligations, which means that the payments to the pension system will be set to increase in the short run.

    MARK: How did you become involved in this fight?

    ALEC: My father has been representing a Flint-based retirees association for decades, and, when I started working for him in 2009 and 2010, they were were under attack by the new mayor, Dayne Walling, and austerity advocates in his administration. So, for example, when the mayor cut health care benefits for a number of widows in early 2010, we fought it in court. And there were other attempts to eliminate or reduce pension payments and health care for other retirees, etcetera. In 2002, when Flint was under its first Emergency Financial Manager, Flint retirees and the City of Flint had actually settled a case involving reduction of prescription drug coverage. Basically the city decided it no longer wanted to cover newer drugs that didn’t have generic alternatives, which would have forced retirees with serious health conditions to expend thousands of dollars out-of-pocket. After the city lost that suit, they settled, and the EFM at the time, Ed Kurtz, actually signed off on that settlement agreement. In 2011, Flint’s first emergency manager under PA 4 was appointed. Ironically, he was appointed on election day. And one of his first orders was aimed at that settlement agreement. He came in and issued an order that tried to modify the settlement agreement, basically eviscerate it. We fought that in court, and we won. And then we were asked to fight similar orders in Pontiac, Saginaw, Hamtramck, and elsewhere. So we’ve been busy.

    MARK: You mention Public Act 4. When did it come about, and why was it that the legislature had decided to pass another act, instead of just continuing to amend Public Act 72?

    ALEC: Public Act 4 was a complete revision of the concept of municipal receivership. In fact, the name change to “Emergency Manager,” from “Emergency Financial Manager,” was prompted by challenges to actions taken by an EFM for the Detroit Public Schools, actions which involved EFM interference in academic development. So, in PA 4, an Emergency Manager for a school district was given broad power well outside of fiscal or financial management, and an injunction restricting the Detroit Schools’ emergency manager was lifted in response. And, of course, another major change was that the appointment of an EM automatically divested local elected officials of their power, subject to an EM’s discretionary power to restore it on terms and conditions he deems fit.

    MARK: And then we had Public Act 436 in 2012. What was it that led the Republican legislature to revisit the Emergency Financial Manager law once again?

    ALEC: There was a voter referendum, a successful one, in November of 2012. That created a very big problem for the state Republican leadership, because their eyes were still on the prize: Detroit. So, when PA 4 of 2011, the first Emergency Manager law, was toast, the State legislature just passed a virtually identical bill in the same lame duck session that turned Michigan into a right-to-work state. But, this time, they included a nominal appropriation in the bill, which would prevent another public referendum. And they didn’t give the law immediate effect. This was important, because Kevyn Orr, Detroit’s EM, was appointed while PA 72 was still in effect, following the referendum. And, while the new law, PA 436, supposedly gives cities a menu of options, ranging from consent agreements, to neutral evaluations, to bankruptcy and emergency managers, those choices were not made available to cities with EFMs appointed under PA 72. Instead, PA 436 used a grandfathering clause to turn those EFMs into Emergency Managers with all of the powers of a traditional Emergency Financial Manager and then some, but effectively prevented Detroit from picking its poison. Not that it would have mattered; if the Governor is determined to appoint an emergency manager, the executive branch can still force a city into receivership. A city might be able to delay the inevitable, but that is all it can really do. The idea of “local choice” is largely illusory.

    MARK: Can you elaborate on why “financial” was dropped from the Emergency Financial Manager title?

    ALEC: Yes, that was in response to some early litigation that challenged actions taken by the Emergency Financial Manager in Detroit. In December of 2010, before Public Act 4 was passed, Wayne County Circuit Judge Wendy Baxter ruled that the Detroit school board had academic powers under an emergency financial manager. Before the board could make any decisions, the new law was passed and the word “financial” was dropped to remove any doubt about the expanded responsibilities of an EM under PA 4. When PA 4 was implemented the injunction was lifted because Emergency Managers had power over academic matters, and when PA 4 was suspended, another judge put the school board back in charge of academic matters.

    MARK: So it was changed to reflect the increased powers of a state appointed receiver?

    ALEC Yes. And I think that it was also a reflection of strategy. Because this law was sold on a theory that these cities were mismanaged into the ground to the point of a generalized crisis, not simply a financial one. So for example you have the Flint EM claiming that retiree health care threatens public safety. You have Kevyn Orr telling the Wall Street Journal that Detroit workers are entitled, stupid, lazy and fat.. The backlash against that was pretty strong, so he backed away from those comments when he spoke with the local press. But it was very revealing: These people, members of the financial and technocratic intelligentsia that dominates Wall Street and Washington, think that workers don’t deserve anything.

    You see this very clearly in the Detroit water shutoffs. I think that they are very happy to cut off water to unemployed Detroit families, because they’ll either die from dehydration or leave, paving the way for the Detroit Future City plan. The shutoffs weren’t designed simply to improve the water system’s finances; if that was the plan, they would target the corporate accounts, but they don’t want to do that.

    In order to convince people that this is a legitimate project, its architects must lay the blame on the working class. They are very cognizant of the parallels to authoritarianism; Kevyn Orr was quick to point out that the takeover would be perceived as a fascist exercise in emails that were released as part of a FOIA request. That was in relation to the idea of the Bloomberg Foundation financing the takeover, which also raises interesting questions about the secret donors who paid for Orr’s $4200 a month condo at the Westin Book Cadillac.

    But the corporate press doesn’t dwell on this. Instead there are two competing narratives, one that is reflective of American liberal or Keynesian thought, and the other reflective of more right wing presuppositions. In the liberal framework, which Flint’s Mayor Dayne Walling articulates quite well, this is the inevitable consequence of the decline of the manufacturing industry, and is largely beyond the control of local officials, even if local corruption might exacerbate the problems. The right wing narrative blames unions and local corruption almost exclusively, and that’s the narrative you hear coming out of Orr when he meets with the Wall Street press.

    Of course, all of these people are footsoldiers with patrons in the corporate sector. They have been set up to take the fall if necessary. And you don’t have to look very far to see earlier examples of this. The irony of the local corruption narrative is that it is partially true, after all; Detroit’s former mayor, Kwame Kilpatrick, was corrupt. But his bid rigging schemes that rewarded Detroit-based supporters didn’t create Detroit’s cash crisis; the cash crisis was the result of cuts to state revenue sharing as well as predatory lending from Wall Street. Kilpatrick was beloved by Wall Street for his loan deals, and the Bond Buyer invited him to Wall Street in 2005 to accept the “Midwest Deal of the Year” award. Was that deal disastrous and illegal? Judge Rhodes thought so, but he still accepted an $85 million payout to the banks to settle it. That settlement not only meant a loss of $85 million, but the loss of any opportunity to recover hundreds of millions in fees from an illegal municipal financial transaction. And the banks, UBS and Merrill Lynch, will still collect the remaining payments from Syncora, which insured the transaction.

    Local corruption exists, but it is a symptom of a disease, and it would be a mistake to view this as a partisan matter, since both major political parties are complicit. President Obama has refused to prosecute the banks that laid waste to this country in 2008 and sought to pick at the ruins like vultures, although the Justice Department is quite willing to prosecute local officials while entering into civil settlements with financial institutions that made corrupt practices an investment policy, like JP Morgan. In this rigged game, only the people lose.

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    MARK: What are we seeing now in other parts of the country? Is American Legislative Exchange Council (ALEC), for instance, pushing similar legislation in other areas, seeing how successful it’s been for Republicans here?

    ALEC: This legislation is a little more organic than something you see out of ALEC. But the state’s main ALEC-affiliated “think tank,” the Mackinac Center for Public Policy, is a strong proponent of this law. One of their resident scholars is Louis Schimmel, the state’s first emergency financial manager and someone who has served as an EM in a number of communities. Public Act 4 of 2011 and Public Act 436 of 2012 were drafted by the current CEO of one of Michigan’s largest law firms, Michael McGee of Miller Canfield. He has floated this law as an alternative to bankruptcy across the country, at seminars sponsored by the American Bar Association, for example. Snyder’s officials have also attended municipal bond seminars to discuss the topic. There are more limited versions of this law that have been enacted in Indiana and Rhode Island. But I think that conservative leaders and activists outside of Michigan who find it attractive are waiting to see how legal challenges play out.

    MARK: And how have we fared thus far relative to challenges, both at the polling place and through the courts?

    ALEC: Well the voters clearly hate this law, they rejected it in 2012. The courts are another matter. By and large, they have gone out of their way to avoid any direct ruling on the constitutionality of the emergency manager law in general or on actions taken by the EMs in various cities. So the Michigan Supreme Court was set to rule on a challenge brought by progressive attorneys at the Sugar Law Center for Economic Justice, and they punted after PA 4 was repealed by the voters. There were some important exceptions: In Flint, retirees got an injunction in March of 2013 which was upheld by the Sixth Circuit in January, and in August of last year a three judge panel of the Sixth Circuit, in a case coming out of Pontiac, called the immediate effect vote for PA 4 “farcical” and directed a lower court to consider the effect of the voter referendum. Last may, that ruling was set aside by the entire Sixth Circuit in a very unusual en banc ruling, which also cast doubt on Emergency Manager orders to gut retiree contract rights.

    The attorneys for the State Attorney General and the Emergency Managers have successfully prevented a number of constitutional challenges by using a unique feature of bankruptcy law. After Detroit filed its bankruptcy petition in July of last year, the attorneys moved for an extension of what is called an “automatic stay.” When a city files for bankruptcy, pending lawsuits against it are “stayed,” or stopped, until the bankruptcy court has time to rule on the city’s petition. Very shortly after the petition was filed, Orr asked Judge Rhodes to extend the automatic stay to prevent any constitutional challenge to PA 436! Judge Rhodes granted his request, and, as a result, three lawsuits challenging PA 436 were stayed.

    The lawsuits that were stopped did not name the City of Detroit as a party. They were challenging PA 436 as an unconstitutional impairment of the right to vote, the right to equal protection, the right to due process, the right to enforcement of contracts, and as an interference in the exclusive power of the federal government to pass uniform laws on bankruptcies. Judge Rhodes later clarified his order and said that it did not extend to some of the challenges, but he still ruled that Detroit residents could not bring a suit to vindicate their constitutional rights. And the State of Michigan is still appealing Rhodes’ ruling, arguing that no constitutional challenge to emergency management should be allowed to proceed for as long as Detroit is in bankruptcy or subject to the jurisdiction of the bankruptcy court, which could be a very long time.

    This is a very bizarre abuse of the bankruptcy process. If those lawsuits are successful, PA 436 would be deemed unconstitutional from the date of enactment. That means that the bankruptcy court would never have been able to accept Detroit’s bankruptcy petition. So you have a very unusual situation, where a court is effectively saying that Detroit residents can’t be allowed to vindicate their rights, because, if they are successful, it will cast doubt on the bankruptcy itself. It is a very circular argument.

    MARK: As was mentioned earlier, Michigan’s policies over the past several decades have helped to put our aging cities in the situations they now find themselves in. Cuts in state revenue sharing. The passage of the Headlee Amendment. Etc… I’m not sure how much of this was planned at the outset, but it certainly seemed to come together pretty well for folks on the right. Our cities were defunded to the point of collapse, giving the state the ability to install non-elected officials with sweeping powers, who then sold off public assets, smashed union contracts, and privatized everything that could be privatized. It’s difficult to imagine a better scenario for those intent on shrinking government and killing unions.

    ALEC: Well I don’t think that the current assault on local democracy was planned when the voters passed Headlee in 1978. I think that Governor Snyder’s plan for Michigan cities was planned well before PA 4 was introduced, right down to the cronyism for the various private contractors. How do we know this? Because in December of 2010, Crains Detroit Business ran a story titled “Dillon scouts talen for state turnaround team: Treasurer expects wave of local fiscal distress.” The article outlines a December 2010 meeting that was held at the Detroit Regional Chamber of Commerce. The Chamber is one of Governor Snyder’s strongest supporters, and they had just appointed a new president earlier that year who was not only a strong supporter of Snyder before he was elected, but was also a strong proponent of Kevyn Orr’s appointment in 2013.

    But we can learn a lot from that December 2010 article. Who attended that meeting? Representatives from the following firms with EM contracts: Plane & Moran, an accounting firm based in Southfield that has handled fiscal and audit reports, Miller, Canfield, Paddock and Stone PLC, which was responsible for drafting the law, Bloomfield Hills-based Plunkett Cooney PC and Troy-based Giamarco Mullins & Horton PC, all of which have received EM contracts.

    Why was Dillon expecting a wave of local fiscal distress? Because they had a plan to cut state revenue sharing, in order to finance corporate tax cuts. Interestingly, there’s a quote in that article that lays the blame on the foreclosure crisis. That’s true to some extent, because the foreclosure crisis did create revenue problems for many Michigan cities. But the cash crisis, the threat of insolvency, that was the result of cuts to revenue sharing.

    Connecting the dots reveals some pretty disturbing things. Sandy Baruah, for example, was acting head of the Small Business Administration in the waning years of the Bush administration. When he came on board, (http://www.asbl.com/showmedia.php?id=1147) the SBA was embroiled in a controversy over corrupt contracting practices, and he refused to release damaging information that showed how the SBA was diverting small business loans into Fortune 500 corporate coffers. There was also considerable controversy over revelations that banks were abusing the SBA’s flagship 7(a) loan guarantee program, which guarantees loans issued by private lenders for up to 85 percent of the loss in the event the applicant defaults on the loan. This guarantee makes lenders more willing to take on riskier applicants, and it also encourages fraud in the market much in the way lax lending requirements encouraged mortgage fraud. This exploded in 2007, when national outlets reported that the SBA had not only delegated oversight to the lenders who stood to benefit from the loans, but that it had also tried to cover up an Office of Inspector General report on the fraud, which came out of Michigan. It gets weirder: Citizens Bank, based in Michigan, was a preferred lender for the SBA and was named Michigan’s preferred lender of the year for at least three years in a row through 2011.

    In 2009, Tom Zernick, who was in charge of SBA loans at Citizens, was recognized as a “Michigan Financial Services Champion” for the number of loans he had processed while in charge of the program.

    What ties this all together? Rich Baird, Governor Snyder’s “transformation manager.” (http://www.eclectablog.com/2013/06/richard-baird-rick-snyders-transformation-manager-the-governors-enforcer-behind-the-scenes.html). Baird was brought on by Snyder right after he was elected, and he immediately formed MI Partners LLC, with a single client: Rick Snyder. Baird was being paid out of the Governor’s secret donor “New Energy to Reinvent and Diversify” Fund, also called the NERD fund. Eventually he was brought onto the state payroll because of the controversy over the secret fund, in October of 2013, and in the midst of the Detroit bankruptcy in which both Snyder and Baird had to testify.

    Now, Rich Baird’s MI Partners has a listed address of 4755 E Hawk Hollow Drive in Bath, Michigan, and that the former owner, according to the public records (before it was sold to Baird in early 2011, the same date that he formed MI Partners, LLC) was Thomas Zernick, head of that SBA preferred lender program.

    Coincidence?

    MARK: What, if anything, does that tell us about the Emergency Manager situation?

    ALEC: I think it makes it clear that this takeover is planned. It makes it clear that Governor Snyder had a fairly well developed plan for Michigan’s cities before he took office. And it built on the experiences of the most conservative players in Michigan’s EFM law, like Louis Schimmel.

    There are actions across multiple cities consistent with this. So you have the transfer of the Flint retirement system to MERS in 2012, and a proposed transfer in early 2013, which was only thwarted by a court decision. And in Saginaw there is a similar proposal, at least for the Police and Fire System. Given the performance of the Pontiac pension fund, there’s no argument that the transfers are about improving performance. So that lends support to some ulterior motive.

    And then you have the water situation. Detroit makes the headlines because of the shutoffs, but Flint’s water rates are the highest in the country. Similarly, there was a huge dispute over water during the EFM receivership in Highland Park under Engler and Granholm, and that dispute has been revived recently as Highland Park was put under state control yet again this year. In Flint, the EM also pushed through massive new construction of a new pipeline, one that an independent audit report commissioned by the state treasury argued against. This pipeline just happens to run through an area of Michigan targeted for fracking, which requires significant diversion of water, and you know who is financing it? JP Morgan and UBS, the two financial firms most associated with municipal securities fraud. Miller Canfield represented Genesee County in the bond offering and had to get a conflict of interest waiver from the City of Flint’s Emergency Manager in order to assist with the deal.

    MARK: I’m curious… What, in your opinion, would have been the right way to handle the Flint situation?

    ALEC: I think that the state should have maintained existing shared revenues, and I also think that the state should commit more resources to cities like Flint that were injured by the decline in manufacturing.

    You know what I find fascinating? Both Governor Granholm and Governor Snyder declared financial emergencies in a number of cities, but, for some reason, neither of them believed that they had the power to declare a moratorium on foreclosures, water shutoffs or heat shutoffs, using their power to declare a state of emergency. If the situation is so dire, why is all of the relief directed at the banks? Why is it that we see proposals to starve the little guy and enrich the corporate ruling class?

    And I think the reason is clear enough: There’s a ruling class in this country with so much wealth and influence that we do not have a functioning democracy. So it’s not surprising to me that we see recent academic studies confirming that the US functions much more like an oligarchy than a democracy, or that people like Thomas Picketty are raising the alarms, warning us that rising inequality threatens the survival of democracy. The Emergency Manager law is just a manifestation of that threat in one of the states where capitalism has so clearly failed.

    That brings me back to Flint. Flint is the home of the sit-down strike, which turned a collection of local activists on the fringe of the automobile industry into a major labor union that helped to organize millions of people across the country. We need something similar today, something aimed at not only restoring democracy at the local level but extending meaningful democracy throughout the city, the state, the country, even the globe.

    Now, in the short term, there are things that can be done to alleviate the cash crunch, like restoring state shared revenue, rescinding the repeal of corporate tax cuts with a sensible tax policy, and ending this insane level of corporate welfare that pervades the state. But to sustain that, we need to change institutions. We need worker controlled enterprises, a public bank that uses state money to directly fund public projects, near-complete transparency at all levels of government, and more public input into budgeting decisions. We need a kind of social and political revolution, in part or in full, much as we had during the New Deal era.

    MARK: How many people in the state of Michigan are now living under Emergency Manager rule, essentially unable to elect their own local representation? …Did I read somewhere that nearly half of all black voters in Michigan, thanks to the Emergency Manager law, now have no voice in local governance?

    ALEC: I’m not sure what the total number is under EM rule, but you certainly have the right statistics on the percentage of African American residents. And, given this state’s history, and the concentration of our African-American population in cities like Flint, Pontiac and Detroit, that’s obviously very disconcerting. That’s one of the reasons that the NAACP brought a lawsuit to challenge the law. Judge Rhodes wouldn’t let that lawsuit proceed, though. The right to vote is apparently trumped by bankruptcy.

    According to the State Department of Treasury, there are twelve municipalities under some form of PA 436 receivership: Five have an emergency manager (Allen Park, Detroit, Flint, Hamtramck and Lincoln Park), three have a Receivership Transition Advisory Board that effectively controls local government with veto power over decisions (Benton Harbor, Ecorse and Pontiac), three have consent agreements that restrain local decision-making and are subject to EM rule if breached (Inkster, River Rouge and Royal Oak Township) and one, Highland Park, is under review.

    Those are just municipalities. There are also three school districts with Emergency Managers, one under preliminary review and another operating under a consent agreement. Other school districts, like Buena Vista, were just dissolved. All of these school districts are majority minority: Benton Harbor, Detroit, Highland Park, Muskegon Heights and Pontiac. Muskegon Heights just proves that this system is a complete failure for public schools as well: This year, the State of Michigan had to bail out the for-profit company that was brought in by the Emergency Manager to run it!

    So if you do the math, you have over 800,000 people living under EM rule, just over 80,000 under the transition boards, just under 36,000 under consent agreements and about 11,600 waiting to hear their status in Highland Park. Now over at Eclectablog Chris Savage shows that you end up with just over half of the State of Michigan’s African-American population living without local government by early 2013, when Detroit was given an EM.

    Group of protesters demonstrate against Michigan Governor Snyder's appointment of emergency financial manager for city of Detroit during rally outside federal building in downtown Detroit, Michigan

    MARK: So, what’s next? And what do you tell people who want to get more involved in this fight to restore local authority?

    ALEC: There’s so much!

    In Flint, you can attend meetings of the local Democracy Defense League. The email is democracydefenseleague@gmail.com, and the group also has a Facebook page. If you are more interested in particular issues, you can get involved in a wide range of fights, from the retirees through URGE to the Flint River Water Support Group.

    If you want to get involved in Benton Harbor, there’s an urgent campaign against the prosecution of an anti-EM activist, Reverand Pinkney, which is supported by BANCO, a Benton Harbor group.

    If you want to get involved in Detroit, there’s a wide range: Detroiters Resisting Emergency Management (D-REM), Moratorium NOW!, Peoples Water Board, Detroit Water Brigade and I’m sure there are others.

    If you want to help with the lawsuits challenging PA 436, the Sugar Law Center and the National Lawyers Guild are good contacts.

    The Michigan ACLU is also doing important investigative work in this area, and they have hired Curt Guyette, a well known Detroit journalist, to help fight for democracy with a special focus on the EM regimes.

    So there are a lot of opportunities to get involved.

    MARK: Would you say that you’re optimistic about our chances?

    ALEC: Yes and no. I think that there is a good chance that the courts will strike down some of the more egregious parts of this law. As much as conservatives hate organized labor, I think that they are loathe to approve of a law that lets one person invalidate contracts on a whim. The sanctity of contracts, a principle embedded in the Contracts Clause of the US Constitution, is a very conservative value.

    But the problem with the EM law is that it is an extreme local manifestation of a broader problem: Democracy is under attack, suffocated by an extreme growth in economic inequality, particularly inequality of wealth. The campaign to repeal PA 4 was an uphill battle; if you talk to the organizers, you realize that convincing the public was just as much of a fight as getting the question on the ballot. People throw their hands up in the air because they’ve watched the banks get bailed out, they’ve watched their neighbors homes go into foreclosure, they’ve seen the future recede in front of them. And even when they are convinced that they can make a difference by voting, they quickly realize that their voices do not carry the weight that Wall Street does.

    Even if the courts strike down PA 436, they are not going to unravel the Detroit bankruptcy. They are not going to rescind the so-called “Grand Bargain.” They are not going to rescind Public Act 181 of 2014,which creates a “Financial Review Commission” that effectively governs Detroit for a minimum of ten years under the near complete control of the executive branch. This Commission will effectively govern Detroit for a minimum of 13 years, and given its scope and size it will likely be a much longer period of time. And this is similar to the recommendations of a secretive so-called “Blue Ribbon Committee” that was appointed by Flint’s Emergency Manager. And although it was closed to the public, prominent local businessmen were invited to attend and give input, most notably representatives of the Mott-affiliated Uptown Development Corporation that has benefitted so much from EM rule in Flint. And the same is true for Benton Harbor, where Sharon Hunt and Marvin Raglon, both former Whirlpool managers, sit on the transition board that sets Benton Harbor’s governance agenda, sharing that power with two Snyder officials.

    Even when the form of government changes, the material interests behind it remain largely the same. And you maintain this form of rule by intimidating voters, activists and other opponents of plutocracy. You cannot separate what is going on in Michigan’s cities from broader national and global trends, whether it is CIA spying on the Senate, military coups in countries like Egypt, NSA and FBI surveillance, or any number of decidedly anti-democratic practices that are being normalized in an era of inequality and instability. And we cannot separate it from the distorted priorities of the national government; the bombs that fall on Gaza today explode in Detroit. The billions of dollars that our government pays to subsidize the Israeli war machine destroy not only Palestinian lives, but the hope of a better future right here.

    We cannot rely on the courts to save us, and we cannot rely on our representatives to save us. So what are our chances? I think that is largely up to us. There have been similar periods on world history, and there have been successful popular movements to restore some semblance of democracy and equality. The ruling class may compete with one another for market dominance, but they are clearly standing together in solidarity against the working class. But I share Dr. King’s optimism about the moral arc of history. If we can stand together and declare that an injury to one is an injury to all, we can win.

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      24 Comments

      1. josh
        Posted July 29, 2014 at 11:07 pm | Permalink

        Well that was depressing.

      2. Demetrius
        Posted July 30, 2014 at 5:57 am | Permalink

        Thanks, Mark for this original, in-depth reporting.

        We are literally witnessing the erosion of our democracy, and only a small handful seem to be aware — let alone care.

        The local groups mentioned are laudable, but it seems the only way to fight this effectively would be to develop a larger, more unified coalition. And it is hard to imagine who might be capable of leading and promoting such an effort given the weakened state of our labor unions and “traditional” press.

      3. John Galt
        Posted July 30, 2014 at 7:06 am | Permalink

        Please don’t share this post.

      4. Posted July 30, 2014 at 9:19 am | Permalink

        Spectacular. Really, REALLY well done, Mark.

      5. Posted July 30, 2014 at 10:56 am | Permalink

        Also saw Alec Gibbs at NetRoots Nation 2014 (#NN14) when he gave a really good summary of Emergency Manager (EM) Law history there.

        This is one of the best summaries out there right now lately on the whole PA 72 to PA 4 to EM Kevyn Orr takeover in Detroit Bankruptcy right thru to Curt’s work at the ACLU.

        Thank you so much for following up with this comprehensive interview. Great work, both of you.

      6. Anonymous Mike
        Posted July 30, 2014 at 1:10 pm | Permalink

        “The bombs that fall on Gaza today explode in Detroit. The billions of dollars that our government pays to subsidize the Israeli war machine destroy not only Palestinian lives, but the hope of a better future right here.”

        Amen, brother.

      7. Posted July 30, 2014 at 1:41 pm | Permalink

        Even if you hate unions, even if you think that everyone should bargain for him/herself, even if you think that Management has your best interests at heart, this should piss you off:

        ALEC: That’s (they could break union contracts but not contracts with financial institutions) correct. The banks were safe; workers (and retirees) were not. This was by design, given the interests of the people who were responsible for drafting this law.

      8. Maria Huffman
        Posted July 30, 2014 at 2:05 pm | Permalink

        I still think there’s a way out. For instance, if the state wants to hold onto the money they collect and force bankruptcies to occur, people should boycott things that pay the state money. Drive less, for example. I’m waiting for the day, schools don’t ask for the state for money to run their schools, but use only local levies. Then, they would have local control back. Find ways, legal ways, to pay less state tax.

      9. Maria Huffman
        Posted July 30, 2014 at 2:18 pm | Permalink

        It could work. Better than anyone could imagine, I think.

      10. Lynne
        Posted July 30, 2014 at 10:22 pm | Permalink

        We have to reclaim our governments from these people!

      11. Rising ghosts
        Posted July 31, 2014 at 3:51 am | Permalink

        people are waking up to the mass criminal activity of our so called local “leaders” of both parties who work together to suppress the will of the poor and working people in Michigan,

        We will NOT back down until justice is served and we will GROW and we will ORGANIZE and take this state back.

      12. Maria Huffman
        Posted July 31, 2014 at 6:29 am | Permalink

        Quit paying them so much. That’s the state’s strategy with us…back at them, I say.

      13. Posted July 31, 2014 at 7:37 am | Permalink

        “Drive less, for example. I’m waiting for the day, schools don’t ask for the state for money to run their schools, but use only local levies. Then, they would have local control back. Find ways, legal ways, to pay less state tax.”

        Education already depends too much on local property taxes. It’s the reason that schools in Flint are so much worse than schools in Bloomfield Hills.

        Yes, you are waiting for that day, but understand that you are supporting an unequal education system where life’s opportunities are based on your zip code.

      14. Frosted Flakes
        Posted July 31, 2014 at 8:41 am | Permalink

        I am not sure how it works or what it means but for 2012/2013 Flint spent more per pupil than Bloomfield. Bloomfield revenues came more from local sources than Flint, whereas, Flint received more revenues from federal sources.

      15. Frosted Flakes
        Posted July 31, 2014 at 9:07 am | Permalink

        …lower performing schools probably dedicate more money to special education. I do not know but it seems pretty consistent (although counter intuitive) that lower performing schools (like Detroit) actually are in the higher percentile in terms of money spent per student.

      16. Maria Huffman
        Posted July 31, 2014 at 10:04 am | Permalink

        I’ve lost count of how many schools DPS has left, and how many kids are now in for profit charters, and what the actual average payment by the state to kids,for all kids in Detroit is. There’s a lot of kids in charters now.
        But, and there’s no doubt in my mind, that the state pay less per kid in charter than they do to a traditional public school, and then, since that school is a for profit, a child again, is receiving less true funding than the traditional public schools kids. Throw in the charter’s dislike and harddriving ways to get rid of special ed kids.. and it’s a perfect storm of downward pressure, especially on kids who need a lot of service.
        So, personally, and it’s just me, I think county wide school district, or near county wide school districts, would help with the inequity in funding problems. Plus every special ed is a kid who delivers the district $4000. for help in paying for special ed services…
        But the bigger point I have, and this would be a specific task when deciding to looking for ways to decide to not pay state tax, is that, for me, the money I’ve decided I would not pay the state would go to local, but more consolidated, local government, doing things more in keeping with what I believe in.

      17. Maria Huffman
        Posted July 31, 2014 at 10:14 am | Permalink

        And in a way, that’s kind of what Rick Snyder is shooting for with, for instance, the best practice money he offers to districts. Only his best practice isn’t best practice. They’re just kind of ideas, untested, and he offers not much for jumping through all those hoops, and the schools really want that extra money, and they do it. I guess they have to decide in the future if it’s really worth that extra dollars or could they try to get away from his ideas.
        So how I view it, I reward the folks who are doing things I like and not Rick Snyder for doing all those things I dislike and disapprove of.

      18. Maria Huffman
        Posted July 31, 2014 at 10:22 am | Permalink

        So, say the Whitmore Lake Annexation to AAPS goes through and my local taxes increase some. I would then look to way to not pay that amount in state tax. And to do that is not always not real obvious, either. Snyder tax increase are really often fee increases. But I would. and I would be pleased to do so.

      19. jcp2
        Posted July 31, 2014 at 3:39 pm | Permalink

        Local schools with local control, local leviesm without state intervention or state funding so that local individuals can support only what they like and nothing that they don’t? Sounds like either a voucher program or a private school to me.

      20. Stupid Hick
        Posted July 31, 2014 at 7:41 pm | Permalink

        @Frosted Flakes

        “for 2012/2013 Flint spent more per pupil”

        I don’t know about Flint, but I wonder if it might have to do with declining enrollment.

        Some fixed costs will stay the same regardless of the number of pupils. Maintaining a building with 500 students will cost twice as much per pupil than the same building with 1000.

        Again I don’t know about the specifics. Just speculating.

      21. Angela Barbash
        Posted August 2, 2014 at 10:39 pm | Permalink

        This is a great interview Mark, thank you for posting it. It’s absolutely amazing (and disheartening/maddening/disappointing) to see what happens when you follow the money trail. This article led me on a 3 hour research binge. Much appreciated.

      22. Catherine
        Posted August 9, 2014 at 9:53 am | Permalink

        Thank you, Mark, for seeking out Alec for more of the real deal on the EM takeover. Thank you, Alec, for expanding on your remarks from the NN14 panel (and for all the work that you do). This is a brilliant, essential overview. I’ve taken the liberty of promoting it now at Daily Kos in hopes of driving more traffic and views over here. It deserves wide promulgation and readership–as a precursor to engagement.

      23. Posted August 9, 2014 at 3:47 pm | Permalink

        Thank you, Catherine. I look forward to greeting the Kosac hoards.

      24. Helen Moore
        Posted August 11, 2014 at 12:25 pm | Permalink

        Still fighting after all these years of our rights being taken. We will never stop until we win.

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