How can a state force its cities to stop their fiscal
mismanagement? Michigan has an answer: Sweep in and take over
municipalities and cut up their costly deals with public-sector
unions. Since 2009, Michigan has taken over five city governments
and school districts. This includes Detroit’s spectacularly inept
public school district, which is now under state control for the
second time in the last decade, and Pontiac, the former home of the
Detroit Lions. This year, thanks to a
newly passed law, it may end up taking over as many as 107 more
cities unwilling or incapable of getting their financial houses in
order. This may include Detroit, whose overwhelming fiscal problems
and political corruption continue unabated for a fifth decade.
One city already taken over is Benton Harbor, better known for
its scenic lighthouse, low levels of crime (not one homicide
between 2007 and 2009), and native son comedian Sinbad than for
being a gritty Rust Belt fiscal basket case. In the past decade,
the city has all but surpassed Detroit as the symbol of fiscal mismanagement and government
incompetence. Between 2006 and 2009, the city’s reserves dwindled
from $1.7 million to $300,000, while it was paying out at least
$80,000 a year in bank overdraft fees. Its defined-benefit pension
was underfunded to the tune of $10 million. Last year, a Michigan
state investigation determined that Benton Harbor had failed to
hand over withheld federal taxes from city workers to the IRS in a
timely manner, and that it was siphoning money from some accounts
to balance spending in others. The city was so broke it asked state
officials for a $325,000 advance to stay afloat.
The state stepped in. It took the city government’s finances out
of the hands of the grossly inept mayor and city commission and
handed them over to emergency financial manager Joseph Harris, a
former chief financial officer for Detroit’s city government,
serving on behalf of the state. Harris proceeded to slash the
city’s budget to close a $1 million deficit, and began merging its
police and fire departments. This year, thanks to a newly enacted
state law, Harris has taken over the rest of city government,
relegating the mayor and city commission to figureheads.
None of this sits well with either Benton Harbor’s officials —
including the old-school black politicians who were responsible for
the city’s slide into fiscal ruin — or the public-sector unions
that have long profited from its spendthrift ways. And the city’s
status as a ward of the state has become the latest cause célèbre
for race-baiting civil rights activist Jesse Jackson, who is urging
the U.S. Department of Justice to stop Harris in his tracks.
Other states are watching what’s happening in Benton Harbor and
the rest of Michigan — for good reason. Decades of fiscal
profligacy, declines in tax revenues caused by the current economic
malaise, and budget-cutting by states struggling with budget
deficits have left many cities on the brink of financial failure.
Some of them, including dusty Vallejo, California, have already
filed bankruptcy; 16 others, including Pennsylvania’s own state
capital of Harrisburg, may do the same. But cities have found that
bankruptcy neither relieves them of their state-mandated
obligations to bargain with public-sector unions such as the
American Federation of State, County, and Municipal Employees
(AFSCME) and the United Auto Workers, nor gives them the ability to
cancel decades of costly pension and benefit deals.
Michigan’s new city takeover law changes all that. It allows
state-appointed finance czars to cancel union contracts or even
take control of a local pension fund in order to address a deficit.
The finance overlords can also take over underfunded pensions,
tossing out the boards that oversaw their financial failure. If the
Wolverine State succeeds in turning these cities around, other
states may follow with similar measures.
STATE GOVERNMENTS RARELY step in to take control of local
governments. When they do, it’s usually to run school districts
that have fallen into insolvency or become massive dropout
factories. (More such takeovers will occur over the next few years
thanks to President Barack Obama, whose school reform efforts —
including the Race to the Top initiative and School Improvement
Grant program — are forcing more states to take responsibility for
failing schools.)
When it comes to municipalities, states usually limit themselves
to management of financial controls. The most famous such instance
took place in 1975, when New York State created a financial control
board to take charge of New York City’s finances and stave off
fiscal insolvency. The board’s move to end the city’s high
spending, along with the election of Ed Koch as mayor two years
later, helped precipitate the revival of the Big Apple. Earlier
this year, the Empire State had to use its takeover powers once
again, seizing control of Nassau County, one of the state’s
wealthiest suburbs, after failing to balance its $2.6 billion
budget.
Michigan has had a local government takeover law on its books
since 1990, after a state court placed the Detroit suburb of Ecorse
into receivership. But in the two decades since, the state rarely
used that power. This changed in February 2009, when then governor
Jennifer Granholm placed control of Pontiac’s budget into the hands
of an emergency financial manager after the city ran up more than
$60 million in budget shortfalls for five straight years. A month
later, Granholm took control of Detroit Public Schools, whose
financial misdeeds — including buying five floors in the landmark
Fisher Building for $21 million more than the owner paid
for the entire
building — sealed its
reputation as the nation’s worst urban school district.
As of 2011, Michigan had taken financial control of five local
governments. But the emergency financial managers didn’t have a
whole lot of tools to overhaul finances. State law required
municipalities to bargain collectively with AFSCME, UAW, and other
union locals regardless of financial condition; the unions
therefore had little reason to make more than perfunctory wage and
benefit concessions. City officials, particularly miffed that they
finally had to answer for their fiscal misbehavior, were still
technically in charge of operations; this meant they could sabotage
overhaul efforts. When Detroit’s then financial czar, Robert Bobb,
decided in March to push ahead with a plan to overhaul the
district’s curriculum, the school board successfully sued to stop
the effort.
Granholm’s successor, Rick Snyder, decided the financial czars
needed more power. In March, he persuaded the state legislature to
pass a new emergency financial control law that allowed the czars
to cancel or amend union contracts and gave them full power over
city operations. With that law in place, the finance czars moved
swiftly to repair the damage. In Detroit, Bobb’s successor, Roy
Roberts, announced a deal under which the state will take control
of 45 of its schools, a move similar to what Louisiana did in New
Orleans after Hurricane Katrina. Meanwhile, his counterpart in
Pontiac, Michael Stampfler, canceled the city’s contract with the
union representing police dispatchers.
In Benton Harbor, Harris ousted members of the city’s
commissions and increased city water fees by as much as $46. By
June, those moves, along with the merging of the city’s police and
fire departments, allowed Harris to declare to Benton Harbor’s
residents that “we do have a positive cash flow.”
Of course, neither the law nor the moves by the finance czars
sat well with either the state’s city officials or its union
leaders. Soon after the law was passed, Detroit’s pension funds
sued to invalidate it; Benton Harbor’s officials have also filed
their own tort. They, along with left-leaners across the nation,
are borrowing from the conservative playbook, declaring that
Michigan is engaged in big government overreach. They also accuse
Snyder of trying to subvert democracy and push blacks out of
political power, conveniently ignoring that all the takeovers so
far took place under his Democratic predecessor.
But some officials have found the threat of state takeover a
nice weapon in their cost-cutting efforts. Detroit mayor Dave Bing,
for example, is using the threat to get the AFSCME local and other
unions to agree on cutting $121 million in annual health care
costs. Declared Bing in an interview with the Detroit Free Press: “Our unions are kidding
themselves if they think refusing to negotiate is going to make
this problem go away.”
AT THE VERY LEAST, Michigan’s takeovers have staved off the
possibility of state bailouts, forcing city officials to make tough
choices. Whether the turnarounds will work is another matter.
In corporate America, turnarounds rarely work out. In education,
they fare even worse. Just 11 percent of California elementary
schools forced by state officials to undergo turnarounds were
successful three years later, according to former Thomas B. Fordham
scholar Andy Smarick. Save for the turnaround of New York City, few
state takeovers of local governments have been successful. The
birthplace of basketball, Springfield, Massachusetts, has had its
finances under control of a state board for eight straight years
now. Michigan knows this all too well: Michael Moore’s hometown of
Flint, which spent two years under state control in the last
decade, may end up under state control again by year’s end. Its
sister city, Ecorse (whose insolvency led to the passage of the
state’s first takeover law), is back under state control.
One reason why the efforts don’t work? The financial czars still
have to struggle with the long-term consequences of overspending
and public—sector union influence. In Michigan, the governments
are constitutionally on the hook for pensions even if the
obli-gations are too burdensome to bear. The fact that the unions
still wield tremendous political clout through rank-and-file
workers and campaign giving to state and local officials — along
with the clout they retain to force a city back to the bargaining
table once the finance czars finish their work — means that the
conditions that led to a city’s insolvency remain in place. Given
that city residents have been far too willing to accept fiscal
mismanagement in the first place, the success of the overhauls will
always remain an open question.
Snyder and his fellow state officials are themselves struggling
to get the state’s finances in balance. Two previous years of
budget tricks — including $1 billion in one-shot revenues for the
2010–2011 -fiscal year alone — forced state officials to cut
spending and tax giveaways in order to make up a $1.2 billion
shortfall in the state’s 2011-2012 budget. To keep the budget in
balance, Snyder must either force the state’s own public-sector
unions to agree to $145 million in concessions, or lay off some of
the 47,000 employees on its payroll. Meanwhile Michigan faces a
longer-term crisis in the form of at least $70 billion in public
pension deficits; based on estimates by Northwestern’s Joshua D.
Rauh and the University of Rochester’s Robert Novy-Marx, the busted
pensions could be tapped out within the next 12 years.
Abolishing collective bargaining laws, a step taken by
Michigan’s fellow Rust Belt state Wisconsin earlier this year, is
one way local governments in Michigan and elsewhere could rid
themselves of costly union contracts and return to a strong
financial footing; so would getting rid of laws requiring local
workers to contribute to unions whether they want to or not. States
will also have to step in and address local pension issues as part
of their efforts to deal with their own obligations. Ultimately,
voters must finally subject their elected officials to scrutiny,
and vote them out when they are overspending. If folks in Benton
Harbor and other Michigan cities had done so years ago, their pols
wouldn’t have run up such huge tabs in the first place.
