Emergency Financial Managers: Michigan's Unwelcome Savior
In Michigan, financial advisers take control of cities on the brink of bankruptcy.
An outsider’s first visit to Pontiac, Mich., feels a bit like Alice’s first glance at Wonderland. Everything seems upside down. City Council meetings last for hours, but there is nothing on the agenda. The city has a mayor, but he doesn’t have any authority. There are workers inside City Hall, but they aren’t employed by the city. And the man at the head of the table is an exceedingly charming 74-year-old who might be destroying his hometown, or who might be the only person willing to save it.
Thanks to a law championed by Republican Gov. Rick Snyder and passed by the Michigan Legislature early last year, that man, Lou Schimmel, has almost unilateral authority to run the government in this city of 60,000 that state leaders have deemed to be in the midst of a fiscal emergency. That law, known as Public Act 4 (PA4), is the same one that state leaders held over Detroit officials as they threatened a state takeover (the two sides eventually agreed to a more limited type of oversight).
In Pontiac, Schimmel oversees the city’s day-to-day operations. He hires and fires employees. He forces major changes to labor contracts. He sets the budget. He creates ordinances. He sells city property. His critics call the policy that put him in power the “dictator law.”
Pontiac isn’t alone. Five other local governments in Michigan have emergency managers who make decisions that, until now, have been under the purview of democratically elected local officials. In those communities, locally elected officials have virtually no decision-making power. It’s a trend that’s not limited to Michigan. More than half the states in the country have provisions that allow them to exercise some degree of financial supervision over distressed localities, and it’s clear they’re willing to exercise it. In places like Harrisburg, Pa.; Central Falls, R.I.; and Nassau County, N.Y., state-appointed officials are making decisions that were once decidedly local.
But nowhere in America do local officials have less control -- and state appointees more -- than in the financially distressed communities of Michigan. Republican leaders here say that’s no accident, and that they intentionally crafted a mechanism for outsiders to swoop into a troubled community, assess the financial damage and fix it -- all without being beholden to local political interests. They argue that if a locality declares bankruptcy, taxpayers statewide could be left holding the bag. Preventing such a situation is a paramount concern. “You don’t want to go through municipal bankruptcies and pay the debts of these communities,” says state Rep. Al Pscholka, the sponsor of PA4, which vastly expanded the power of state-appointed fiscal overseers established in a previous law. “We have to have protection for taxpayers.” On the surface, it’s a statement that’s hard to argue with. But it also raises a more fundamental question: Can democracy become too expensive?
In 1986, a circuit court named Schimmel the receiver for Ecorse, a small city just outside of Detroit, and told him to put the city’s fiscal house back in order. With that assignment, Schimmel believes he became the first person in the country to hold what’s becoming an increasingly frequent position in local government: emergency financial manager. In 2000, the state again tapped him to take over Hamtramck, a financially distressed city surrounded by Detroit. Now, he’s on his third dance—and he insists it will be his last. But he’s not the typical outsider this time. Pontiac is his hometown, the place he was born and raised. It’s a job that few would be interested in taking, given the track record of Pontiac’s previous two emergency managers. Both encountered harsh resistance from local officials, both resigned after little more than a year and neither is spoken of favorably here. For Schimmel, it’s clear that part of the job’s draw is the immense challenge it offers, as well as the rare opportunity to see what could be realized if a manager were given total control without political interference. “It’s a sense of accomplishment when you take something that’s broke and fix it,” says Schimmel, who, despite the seriousness of his job, almost always wears a smile and constantly cracks jokes.
Critics of the law that put him in power are doing everything they can to get it taken off the books. A campaign to repeal the law, supported by the National Association for the Advancement of Colored People and the labor community, among others, has likely gained enough signatures to force a statewide vote later this year. In the interim, PA4 will be suspended, but it’s unclear what that means for the five emergency managers. In addition, the law is the target of several lawsuits, one of which -- at least briefly -- got the emergency manager in Flint removed from office. (After a successful appeal, he’s back on the job for now.) What’s unclear is whether the legal and political challenges will mean the end of emergency managers in Michigan, or simply a return to the earlier version of the law, which still gave the state significant oversight over troubled localities.
Regardless of the outcome, some believe the debate is moot: Pontiac residents elected a mayor and council to run the city. The state gave them Schimmel instead. Schimmel isn’t accountable to anybody in Pontiac. He answers to the governor and an appointed state treasurer. Yet Schimmel disputes the premise that democracy has been subverted in Pontiac. “The law I’m operating under was passed under a democracy,” Schimmel says. “It wasn’t a law handed down by a king. It was passed by a legislature.”
For some, that point offers little consolation. The debate about PA4 in Pontiac is bitter and discussed in overtly racial terms. The majority of Pontiac’s population is black. All three emergency managers -- not to mention the governor, treasurer and legislator who sponsored PA4 -- are white. Democratic blogger Chris Savage generated national attention when he noted in December that, if you included Inkster and Detroit, two cities that were on the verge of emergency management, more than half of the state’s black population could soon lack full-fledged local democracy. Fred Leeb, Pontiac’s first emergency manager, says that some people in Pontiac tried to promote the sentiment that he was “the master sent from Lansing to control the plantation.” Indeed, at a recent City Council meeting, one black resident thanked an elected official for trying to protect “field negroes” like him from “carpetbaggers” like Schimmel.
Pontiac got into fiscal trouble when the automobile industry, which once had manufacturing plants throughout the city, began its decline. A boomtown in the first half of the 20th century, Pontiac’s population peaked around 1970 at 85,000 and then declined dramatically in subsequent decades. Today, it has 30 percent fewer residents than it did at its height. More than a third of those residents live in poverty, including nearly half the city’s children. For decades, its unemployment rate has exceeded the national average. Right now, it’s at 22.5 percent -- second worst in the state. “When we were affluent, we didn’t diversify,” says City Councilman Kermit Williams. “We married GM instead of dating around, and when the divorce happened, it was brutal.” General Motors plants, which were once the economic driver of the city, are being demolished, and their rubble is carried away by freight trains. The process gives residents the unusual opportunity to watch their city disappear before their eyes.
As Pontiac’s population and economy declined, so too did property values and tax revenue, along with its share of state revenue. That caused deficits to mount in the short term; in the longer term, debt from projects that might have been profitable in better times is climbing. Meanwhile, the city faces an unfunded liability for retiree health and life insurance of nearly $270 million. For officials in the state capital of Lansing, it became clear in 2009 that Pontiac needed professional help, so then-Gov. Jennifer Granholm picked Leeb as her man for the job.
Two managers later, Schimmel is in charge. He’s not only Pontiac’s first emergency manager appointed under Snyder, a Republican, he’s also Pontiac’s first emergency manager appointed under PA4. Schimmel says critics shouldn’t blame him for his work. “I’m not the one who made the appointment,” he says. “The law is what it is.” But Schimmel himself is being modest, as his work may have helped inspire key aspects of the law. In 2005, Schimmel wrote a piece for the Mackinac Center for Public Policy, an influential conservative think tank in Michigan, that detailed reform he thought the state should make to its existing emergency management law, which he believed lacked the tools needed to enact a serious municipal turnaround. He recommended that emergency managers be given immunity from lawsuits, the authority to assume powers held by the mayor and city commission, and the ability to cancel labor contracts. All those provisions made it into PA4, and today Schimmel is able to take full advantage of them.
Schimmel’s focus in Pontiac has been on cutting costs. He ripped out the city’s parking meters when he realized it cost more money to collect parking fees than the city was taking in. He consolidated 87 separate city employee health plans into one to save $5 million annually. And he’s launched a major effort to sell city property. But what’s generated the most controversy is an aggressive campaign to outsource as many city services as possible. He can rattle off a list of city services that are no longer performed in-house: building permits, water and sewer operations, income tax collection, payroll, trash pickup, IT and cemetery operations, among others. Indeed, walking through City Hall (which Schimmel might sell, by the way) is an unusual experience. The city’s payroll has been reduced from about 600 to 60 employees. The building is largely empty, and those who remain perform city work but get their paychecks from the private-sector companies that employ them.
Schimmel’s predecessor closed the local police department and outsourced law enforcement to the Oakland County Sheriff’s Office in a move expected to save $2.2 million annually. Schimmel took a similar step and used his authority to outsource the fire department service to neighboring Waterford Township. The Pontiac firefighters’ contract wasn’t set to expire until June 2013, but Schimmel was set on the move. So when Pontiac firefighters resisted, he essentially gave them an ultimatum: agree to a deal -- and get some modicum of job security -- or risk getting laid off completely. “Without Public Act 4,” Schimmel says, “I couldn’t do that.” In the end, firefighters reluctantly agreed to a provision in which all but a handful received early retirement or new jobs with Waterford, albeit on a lower pay scale. The changes, Schimmel says, will save Pontiac $3 million annually.
While he says these decisions are critical to an effective and quick turnaround of a city, his critics are skeptical. They view his 2005 article and subsequent job at Mackinac as evidence that ideologically driven Republicans are using Pontiac as a testing ground to see if a model based on outsourcing can be reproduced in other cities. “It’s just an experiment to see if privatization works,” says Williams, the city councilman.
Moves like the firefighter deal aren’t popular in a city that’s down on its luck and views the fire department as one of the few remaining sources of local civic pride. That’s part of the problem, says Mayor Leon Jukowski, who has no authority as mayor but is a paid member of Schimmel’s staff. “That sort of emotional attachment to an institution is part of what’s dragging the city under at this point,” he says.
“I’m a Democrat,” Jukowski continues. “People in my party say it’s union busting. To a certain extent, it is. The dilemma is, how do you send someone in and say, ‘I want you to fix this problem, but you can’t touch 80 percent of what’s under the hood?’” Douglas Carr, a professor at nearby Oakland University, says the firefighter situation illustrates the dichotomy facing the city: Nearly everybody recognizes its financial challenges, but few people like the way that Schimmel’s changes are affecting them personally. Those who support the actions of Schimmel and other emergency managers argue that labor contracts have long offered generous terms to public employees and were a ticking time bomb ready to wreak financial havoc on localities at the first sign of a downturn in revenue. Labor supporters say that in the wake of the recession, municipal workers have been unfairly scapegoated when larger economic forces are to blame.
What’s clear is that, whoever is right, techniques like the one Schimmel used are being reproduced elsewhere. In nearby Ecorse, emergency manager Joyce Parker recently cross-trained police officers and firefighters, reduced their numbers and combined what was left into a single public safety unit. In Central Falls, R.I., state-appointed receiver Bob Flanders slashed the pensions of emergency responders in a move critics call draconian. Flanders isn’t apologetic. “Of course your contracts are being destroyed. That’s what it’s all about,” says Flanders, a former state supreme court justice. “It’s tough luck, but that’s the way it is.”
“If you’re a taxpayer, you probably want to nominate me for sainthood,” Flanders continues. “If you’re a municipal worker, you probably think I’m the devil incarnate.”
Meanwhile, the Michigan model is drawing praise from many conservatives, who maintain that labor unions are threatening the finances of cities across the country and believe laws that give officials the authority to blow up those contracts may be the only way to solve the problem. “Over time, what you build up ... is a set of contracts and work rules that are restrictive like a boa constrictor,” says Eric Kriss, who served in former Massachusetts Gov. Mitt Romney’s cabinet and was involved in state takeovers of the cities of Chelsea and Springfield. Without a change in the law -- like Public Act 4 -- “no administrative effort can break through it.”
But others question whether Schimmel’s methods will be enough to save Pontiac. As Schimmel focuses on cost cutting, the other side of the ledger is in jeopardy as tax revenue continues to fall.
“There’s no question and no debate that a lot of cities are under serious financial stress,” says state Rep. Tim Greimel, who represents Pontiac. “The question is: Is an emergency manager likely to improve things and make it better? Just because one way is bad doesn’t mean another is better. It may be worse.”
No other state centralizes its oversight of distressed localities as tightly as Michigan. Even the decision of when it’s time for Pontiac to emerge from its status lies largely with Schimmel himself. In Pennsylvania, a state that has experienced a similar decline in manufacturing, financial oversight plans are developed in concert with localities. Harrisburg -- while generating headlines for its problems -- is the lone case in which the state has taken the onerous step of appointing a one-man receiver. In neighboring Ohio, when a city falls under emergency status, the state includes local officials on the oversight commission. “It’s not one person coming in with a ‘hail Caesar’ approach,” says Dave Yost, Ohio’s state auditor.
That’s the central question for many here in Pontiac: Does it make political sense to have one person in charge? Many civic leaders in Pontiac say they believe in Schimmel and are even fond of him. Still, they think he has too much authority. “I have a lot of respect for Lou,” says Douglas Jones, a pastor in Pontiac who has helped convene an association of business and civic leaders to address the city’s challenges. “I think he wants the best for the city of Pontiac, and his heart’s in the right place.” But too much power in one person -- even Schimmel -- is problematic. “I’ve still got to report to God,” says Jones.
Others say there are more practical considerations. “If you put in an emergency manager that only acts unilaterally, at some point in time, that person leaves and then what happens?” says John Filan, vice president of DSI Civic, which specializes in government restructuring. Schimmel recognizes that the City Council can undo much of what he’s done, and it’s not lost on him that Ecorse -- the place where he got his start in municipal restructuring -- is once again under an emergency manager. Williams, the city councilman, says that upon Schimmel’s departure, he expects local officials to start in-sourcing some of the city services that have been privatized.
Nevertheless, critics’ skepticism may be warranted, given the city’s track record. At the end of last fiscal year, more than two years after Pontiac received its first emergency manager, the city had a positive fund balance of $1.7 million, according to financial statements that Schimmel filed with the state shortly after taking over. But it achieved that largely by failing to make payments into employee pension and benefit funds, and opting against putting aside money for a property tax refund it owes GM. Those liabilities still exist, and if the city had paid them, it would have had a $12.5 million deficit instead.
Some even blame Michigan for inflicting some of the pain Pontiac and other distressed cities are now experiencing. In early 2011, while promoting PA4, Snyder simultaneously advanced a budget eliminating one-third of the state revenue sharing set aside for localities -- about $307 million. That was on top of the $4 billion in state revenue that localities had lost over the last decade. While Pontiac struggles, the state ended last fiscal year with a reported $457 million surplus. That disparity has prompted some residents and elected officials to openly question whether Snyder’s budget, in concert with PA4, is an attempt by state leaders to systematically dismantle urban communities and promote a regionalized approach that favors counties. Schimmel’s immediate predecessor, Michael Stampfler, had suggested that the city consider filing for bankruptcy or being absorbed by Oakland County. The idea infuriated many residents, who viewed it as the state giving up on Pontiac.
Ultimately, however, critics don’t buy the oft-repeated argument made by Schimmel and others that local officials aren’t willing to address the problem. In 2009, Pontiac residents elected a new mayor and replaced all but one member of the City Council. “I’m 29 years old,” Williams says. “Some of the problems we have in Pontiac were created before I was alive.” In addition to the City Council losing its power, it’s also suffered symbolic affronts. Council members don’t get paid, they don’t have the keys to City Hall and because they don’t have power, the City Council meetings are essentially meaningless.
Members of the City Council say Schimmel tries to keep them in the dark, and even Schimmel admits that while he has an open door policy with locally elected leaders, the relationship isn’t great. “My agenda is so different from theirs,” he says, “that it became obvious there was nothing to be gained by either side” by trying to work together.
Still, Schimmel says he’s making the most effective reforms he can. As fiscal 2013 approaches, he expects the city will have no shortfall as a result of a multimillion dollar deal in which the city will sell excess sewer system capacity to a county comission. (He wryly jokes it’s a move that even his critics should like. By helping to shore up the city’s finances, the deal will help expedite his departure from Pontiac.) Schimmel also says local officials aren’t giving him credible alternatives. He may have a point. Williams says instead of outsourcing the fire department, Schimmel could have simply laid off enough of the existing personnel to keep fire protection in-house. But that plan would have caused an even larger furor over lost jobs. Or, Williams suggests, Pontiac could have generated revenue by absorbing Waterford’s department. But that plan would have increased long-term labor expenses.
Williams does make a salient, larger point. “The bottom line is if your city gets poor enough, they can strip your democracy.”
The greatest criticism of Michigan’s law is that it does little to ensure a long-term turnaround of the state’s most troubled cities. The problem, say local officials in Pontiac and elsewhere, is that the state has failed to build up business and encourage urban renewal. Schimmel is candid that his primary concern is not economic development. That duty, he says, is “beyond my purview.”
In Schimmel’s defense, economic development is a process that takes years, and neither he nor local leaders want him to stay in Pontiac for that long. But it’s hard to imagine a strategy based primarily on cuts will do much to change the underlying factors that have caused 20 percent of homes to remain vacant and thousands of residents to remain out of work. As many observers note, people who can afford to pay taxes have a choice of where they can live, and right now, it doesn’t seem they have much incentive to move to Pontiac.
But Schimmel also believes people won’t move to a town that’s in a fiscal crisis either. He’s trying to fix the backbone of the city and put it on a successful path. “I’ve done it before,” Schimmel says. “We’ll get there. I hope to work myself out of a job by the end of this calendar year.”
Others are more skeptical. “The one thing people seem to agree on in Pontiac is that it’s a disaster,” Leeb says, “and that is unfortunate.”
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