Fiscal Crossroads: EM expert sees Detroit situation as tipping point


– Photo by Paul Janczewski

By Paul Janczewski

Legal News

When Detroit recently became the largest American city to enter Chapter 9 municipal bankruptcy, the news shocked some, angered others and was a foregone conclusion to still more.

Some key officials in the know actually predicted that bankruptcy was the only remaining step to be taken to save the city of Detroit and to find ways to get out from under $18 billion in long term debt.

One of those who in mid-June predicted the last-gasp effort was Timothy Wittebort, an attorney with Howard & Howard in Royal Oak.

Wittebort spends his time in the areas of commercial lending, creditors’ rights, real estate transactions, and corporate mergers and acquisitions.

He also worked with municipalities in certain matters, and has experience representing downtown development authorities and developers in downtown redevelopment projects.

And in 2008, Wittebort was appointed by then Gov. Jennifer Granholm to be a member of a financial review team that was formed to oversee and assist the city of Pontiac with its financial deficit problems.

He also has been called upon to advise on similar issues for other governmental entities.

Wittebort is also familiar with the emergency financial manager (EFM) law, including its origins, changes and uses over the years in cities, villages, townships and school districts. The EFM has been a lightning rod for controversy and debate. But love it or hate it, the EFM is here to stay.

“It was originally called the Local Government Fiscal Responsibility Act,” Wittebort said.

He said discussion of such an act began in the 1970s as a result of fiscal crisis in New York and Cleveland, which Michigan officials feared could carry over.

The first act was enacted in 1998 and amended in 1990. Since then, the current act also has been expanded and re-written. Since then, Wittebort said eight or nine municipalities and up to 10 school districts in Michigan have had emergency managers (EM).

The key to having an EFM, or EM, put in place starts with an entity that does not have a balanced budget, and that appropriations are not made without legal approval.

“There were local units of government ignoring that legal requirement,” he said.

He said critics of the emergency manager act blame the Republicans, or Gov. Rick Snyder’s regime. But in reality, Wittebort said, more EMs have been put in place under Democratic state rule.

“I’m not defending Snyder, but just saying that (EMs) are a bipartisan attempt to counter the effects of deficit spending by municipalities,” he said. “And part of the objective also to protect the credit of state and its subdivisions, because if one city goes down, or files bankruptcy, if affects the whole region.”

Municipalities spending well above and beyond its means have occurred in places like River Rouge, Pontiac, Hamtramck, Highland Park, Benton Harbor, the village of Three Oaks, and twice in Flint, as well as Detroit.

A major factor in each instance has been unfunded legacy costs, according to Wittebort, while fiscal mismanagement also has played a key role. In many cases, the incompetence of elected officials led to these crises, he said.

“Michigan law prohibits units of government from spending money they don’t have, but clearly that’s not the case by what’s transpiring now,” he said.

He sums it up in two words. “Financial mismanagement.”

“Not all of it is on the elected officials, but at the end of the day, if you see you’re losing population, if you see you’re losing tax revenue because large corporate tax payers are moving out, or whatever the reason, you’ve got to adjust your spending habits,” Wittebort said. “That’s just kicking the can down the road, or just not being sophisticated enough to recognize it.”

He believes there are more pros to having an EM than cons.

“An EM takes the politics out of it,” he said.

They are there to do one job, and that is to restructure the finances so the municipality is no longer in a deficit-spending situation.

EMs are there for a specified period of time, and have a strict obligation to report conditions to state officials.

“What’s important is that the citizens, the taxpayers, receive the benefits they’re paying for, and are entitled to.”

Wittebort said the cons, according to the critics, are that voters feel disenfranchised because the people they elected to do the job are temporarily removed from office or lose their legislative powers.

“Any arguments I can come up with, the pros far outweigh the cons,” Wittebort said.

Wittebort said Detroit’s problems have been in the making for 40 years. Pontiac has gone through several mayors and an uncooperative city council.

“You can’t just blame one individual, one elected official, one mayor, one city council, it’s just happened over time. It just snowballed. Bad decisions made in the 1970s are now coming back to haunt these cities,” Wittebort said.

He said collective bargaining agreements were made “that were too rich for today’s market.”

“In defense of some of these elected officials, back in the ‘70s, who would have thought health care would be so expensive these days, or whether they had the foresight to recognize that the population of all the baby boomers would be aging and they would be living longer,” Wittebort said. “No one has a crystal ball, but once you start recognizing this, you start making changes.”

He notes that the vast majority of local government units are not being managed by an EM.

“So they’ve made the necessary adjustments, with some struggles, some layoffs, but they make it work.”

Wittebort said it’s no different than managing your own household budget.

“If your expenses are exceeding your income, then you have to make some adjustments, and if you don’t, then you’re going to be in a deficit situation. And if you don’t address it quickly, it just compounds to the point where you’re insolvent.”

Legal challenges to EMs and their actions are pending in many areas, including Detroit.

But he said the future of the EM act will be determined, in large part, by what happens in Detroit. Three Oaks was successfully saved, and he believes Pontiac can be turned around.
“I believe the city of Detroit will be very telling,” he said.

After bankruptcy is filed, “the EM law will be tested to see if it’s effective,” according to Wittebort.

Can Detroit be saved?

“There’s no choice. It has to be. You can’t just ignore it. It has to be saved one way or another, whether it’s a downsized Detroit, a more efficient Detroit. You can’t keep providing services you can’t afford. You have to find a way to turn it around.”

He hopes that this pushes colleges and universities to establish programs to train qualified EMs.

“This is a relatively new area,” he said. “You can bring in a public accountant, but that doesn’t mean he can handle municipal finances.

“Now, you just don’t have enough qualified people who can understand all aspects of a municipality — the laws, finance, hiring and firing, labor issues. So this is the beginning of something that will continue to expand, and you’ll get more experienced people.”

Twenty-seven school districts are on a financial watch list, and EMs are running a handful of cities nationwide.

Their future is uncertain. And only time will tell if those municipalities can rise again, according to Wittebort.