Examining 'municipal entities in distress'

By Steve Thorpe
Legal News

There is a wide diversity of opinion on how to deal with the financial crisis facing some Michigan cities. What nearly all the experts agree on is that it won’t be easy.
The Bankruptcy Committee of the Federal Bar Association, Eastern District of Michigan recently presented “Between a Rock and a Hard Place: Municipal Entities in Distress.”

The panel discussion on emergency managers and Chapter 9 bankruptcy was held Wednesday, Oct. 10, at the Southfield Westin Hotel.

Speakers and panelists included Judge Steven Rhodes, Frederick Headen, director of the Bureau of Local Government Services in the Michigan Department of the Treasury, Edward Plawecki of Pierce, Monroe & Associates, Judy O’Neill of Foley & Lardner, Douglas Bernstein of Plunkett Cooney and Charles Moore of Conway MacKenzie.

With Public Act 4 on the November ballot, the emergency manager solution has gotten a lot of attention, both positive and negative, lately. The subject generates a lot of heat, but little consensus. The theory of the emergency manager is that an outsider can come in and balance the books

But Frederick Headen from the State of Michigan says that simply generating more revenue and spending less oversimplifies the problems and solutions.

“There also are what I’ll call the operational inefficiencies, which can be equally frustrating,” Headen says. “Back in January our review team was in Detroit. The city at that time had between nine and ten thousand employees. It also had 48 bargaining units, one of which I believe had only one member. The state of Michigan, by contrast, has about 50,000 employees with less than half a dozen bargaining units. In Detroit, 65 people are doing payroll while we have 15 people doing payroll for the entire state of Michigan.”

Several of the panelists were convinced that the problems are too great for conventional city leadership to solve and that until they change their ways of identifying problems and dealing with them, outside managers with business experience must play a role.

“Why aren’t municipalities addressing these issues?” Charles Moore asked rhetorically. “If this is what is causing financial distress, why aren’t leaders taking more action, as companies would, to address them?”

Moore bemoans the lack of financial and business experience that many municipal leaders bring to the table.

“Many times those elected officials have no experience in business at all.” Plus, the usual checks and balances that occur in a business environment are usually absent in government. This can lead to a lack of urgency, even when all involved see a problem looming on the horizon.

“No politician ever gets rewarded for solving tomorrow’s problems today,” Moore said. “So you have a situation where you see the trends happening, but there’s no incentive to act, even if the leader knew what to do. They’re not equipped with crisis management skills or expertise.”

Some experts point out that Detroit’s population is half what it once was and they advocate shrinking the city services in to serve that greatly reduced number.
Edward Plawecki argues that population isn’t the only factor that should be considered when discussing “resizing” the city of Detroit. Geography plays a big role in getting essential services like police and fire to citizens in a timely fashion.

“I hear all the time that we have too many police officers,” Plawecki said. “Well, if you look at a study that says for 700,000 people you should have 5000 officers, statistically that’s too many. However, you can’t look at it that way. A geographical analysis would show that just two precincts in Detroit — the 7th and the 9th — are larger than the entire cities of Cleveland or Paris. So when you’re talking about resources you would have to move firefighters or officers from one side of the city to the other.
You’ve got to look at the size of the land when you look at the size of the services.”

All of the panelists seemed to agree on the difficulty of taking meaningful, effective action to relieve municipal financial distress. And they agreed that remedies are often fought every inch of the way.

“What we’ve heard from everybody here today is that every method of implementation is replete with litigation,” Judy O’Neill said. “Even Chapter 9, which probably has the strongest hold, has this eligibility fight that consumes resources and time.“

Headen hopes that more effective solutions to municipal troubles are on the way. For his sake as well as for the sake of citizens.

“I have the distinction of having served on 16 financial review teams and I have the battle scars to prove it,” he said. “I was appointed to five by Gov. Engler, five by Gov. Granholm and six, so far, by Gov. Snyder. That’s a record that I hope is never broken because no one else should ever have to witness so much financial distress.”