There are two court cases this week that are being closely watched by policymakers and citizens on both sides of the Emergency Manager debate. As the Emergency Management program continues with Muskegon Heights School District getting an Emergency Manager and the Pontiac School District starting the process with a preliminary review, a basic premise of the law is being tested. The argument being presented to the State Appeals Court is that the Treasury's Review Teams, which have gone into fiscally stressed cities and investigated deficits, finances, and operations without public oversight and in many cases recommended the use of an emergency manager, violate the Open Meetings Act. The Open Meeting Act broadly applies to all commissions, councils, or other decision making groups that operate under the authority of state or local government, and prohibits such groups from meeting in secret in most cases. In the court cases, the State has argued that the Review Teams play only an advisory role, and do not make any final decisions, only "recommending" different courses of action. However, the lawsuit brought by Highland Park School Board Member Robert Davis alleges that Review Teams, which have been used for over a decade in Michigan, serve more than an advisory role, and have decision making authority under the Emergency Manager Law that would subject it to Open Meetings Act provisions. The governor, after all, cannot appoint an emergency manager without the Review Team's determination, and the Review Teams have the power to work out (or not work out) binding consent agreements with local units. These determinations can have serious effects on local units and citizens from operational changes to losing local control completely. The case is currently in the appeals process after a circuit court judge ruled that Review Teams must comply with the Act and meet publically.

The other court case will decide whether or not the Emergency Manager Law will come up for a referendum vote in the November elections. The community activist groups Stand Up for Democracy and Michigan Forward submitted a petition with more than 226,000 signatures to the State last month in order to get a referendum vote on Act 4, however, the State Board of Canvassers denied certification for the referendum citing possible typeface problems with the official submission. Stand Up for Democracy filed a writ of mandamus with the Michigan Court of Appeals last week which would require the Secretary of State to put the question on the ballot anyway. Although changing the font size of a heading is a relatively simple maneuver for the rest of us, the Board of Canvassers decision was split evenly between Democrats and Republicans and now the nuances of typeface will have to be argued in front of the appeals justices. If the courts rule that the petition submission is valid despite the smaller heading, come November Michiganders will be asked to take a hard look at how the Emergency Manager Law has been applied, how it relates to fiscally stressed cities, whether it has been fair and effective, and where it will lead in the future.

Introduction:

The emergency management debate has always had a heated two sided component- the state versus the local governments, the Democrats versus the Republicans, or the pro-union groups versus the anti-union groups. This debate will become even more intense if the question is allowed to come to the ballot. The pro-emergency management side in the past has largely based its arguments heavily around the dire fiscal stress, structural problems, and bad management practices in local governments that require state intervention in order to contain dire situations. The anti-emergency management side has largely seen the program as an attack on democracy, local autonomy, and collective bargaining, and as an unfair attack on certain cities based on demographics. Brandon Jessup, who founded Michigan Forward and collected signatures for the referendum, sees the emergency management law as being used unfairly against young, minority-majority urban communities, and attack on unions. He says "It doesn't do anything and it's really a political tool. And we don't see any emergency manager finding ways to generate revenues outside of cutting. As a younger generation looking for more reasonable solutions, we saw it as being egregious and unconstitutional."

The pro-side on the other hand points mainly to fiscal stress and baseline structural problems that hamstring local governments. Roger Fraser, speaking as the Deputy State Treasurer in charge of the Emergency Manager program speaks to this when he says, "Ford closed [their plant] completely and all of a sudden [the City of] Wayne, their budget was cut in half, and that happened in the course of just twelve months. Well those are very, very difficult things. Now Wayne managed it. Highland Park didn't. Ecorse didn't. River Rouge didn't. And, let's just say that you've got to have skills, and abilities, and knowledge in order to do the right things in response to those circumstances."

As of May 2012, there are four cities with appointed Emergency Managers (Pontiac, Ecorse, Benton Harbor, and Flint) and three cities with active consent agreements (River Rouge, Inkster, and Detroit.) This study looks at several factors that may separate these seven cities from other cities in Michigan that are in fiscal stress. The purpose of this study is to find out how well the Emergency Manager Law has been applied to fiscally stressed cities in Michigan and what common factors are shared by the cities that have gone through the process. The study is intended to fact check some of the arguments on both sides of the debate and yield some truth about how the Laws affect certain cities over others.

Methods:

The study uses a fiscal stress model of Michigan cities as a basis. There are several different models that have been published as a way of determining a city's level of fiscal stress. These models usually use some type of algorithm that weighs a local unit's revenue, costs, and debt. This study uses a model that was published in 2005 to measure fiscal stress in Michigan cities. (Kloha, Weissert, and Kleine, 2005) The model is a set of calculations of a city's financial situation that yields a "Fiscal Stress Indicator Score": zero being the lowest fiscal stress score, ten being the highest. Each of the calculations below goes into determining the total Fiscal Stress Indicator Score for a city:

1. Population Decline: If population over a two year period is estimated/reported to have declined, city gets one point.
2. Real Taxable Value Growth: If the taxable property value of the city declined (as adjusted for inflation) over a two year period, the city gets one point.
3. Large Real Taxable Value Decrease: If the real taxable value of the city declined by a factor of -0.04 or more over a two year period, city gets an additional point.
4. General Fund Expenditures as a Percentage of Taxable Value: When current year general fund expenses of the city are divided by the current year taxable value, if the result is less than 0.05, then the city gets one point.
5. General Fund Operating Deficit: When current year general expenditures are subtracted from general fund revenues and then divided by general fund revenues, if the result is less than -0.01 the city gets one point.
6. Prior General Fund Operating Deficits: Calculates indicator 5 for two previous years in the city, and city gets one point for each year that the result is less than -0.01 (Maximum is 2 points, divided into indicator 6a and 6b.)
7. Size of General Fund Balance: When current year general fund balance is calculated as percentage of general fund revenues, if the result is less than 0.13, then the city gets one point.
8. Fund Deficits in current or previous year: If a fund deficit is found in a major fund in the current or previous year, city gets one point.
9. General Long Term Debt as a Percentage of Taxable Value: When the current general long term debt in the city is divided by its current taxable value, if the result is less than 0.06, then the city gets one point.
Maximum Points: 10

Each of these indicators has been suggested to show "fiscal stress" in a city. All of the points are added up to give the city a final "Fiscal Indicator Score" for each year. These scores used to be published for each city every year by the State Treasury, for each fiscal year from 2006 to 2009. Scores have not been published for 2010 or more recent years by the current administration, however, the State average score for cities was usually around 2 or 3 and a score of 6-10 indicated high fiscal stress. (Fiscal Indicator Scores, 2009)

For this study, data was collected from each of the 28 cities that had a score greater than 6 in 2009, and a score was calculated for those cities for Fiscal Year 2010, which represents the latest data available. (Local Unit Audit Reports, 2010) The study compared the group of cities that had a fiscal indicator score of 6 or higher in 2009 and 2010, (the "Fiscal Stress Cities") with the group of cities that are currently under state intervention (the "Financial Emergency Cities") in order to see if fiscal stress corresponded to state intervention in the form of an emergency manager or a binding consent agreement, and if so, which specific indicators were most closely related.

Results:
The first figure just shows the average Fiscal Indicator Scores in Michigan from 2006 to 2010. Scores were checked against State Treasury data and calculated manually for the 28 cities that had a score of 6 or higher in 2009. Of those cities, 20 continued to have a score of 6 or higher in 2010.

Figure 1. State Average Fiscal Indicator Scores

*Applicable cities that had a financial emergency were included in this list
**This may not be a complete list, as only cities with a score of 6 or higher in 2009 were calculated for 2010.

These results show that the averages of cities that will have state intervention within three years are similar to the averages of all the cities that got a score of 6 or higher. Therefore the cities chosen should serve as a good comparison. Notably there is an upward trend of fiscal stress statewide from 2006-2009.

Figure 1a shows the Fiscal Indicator Scores for the seven cities that, as of May 2012, have had some form of state intervention (the "Financial Emergency Cities"). The cities that experienced state intervention in the form of an emergency manager appointment are in purple, and the cities that had a consent agreement are in beige. The year that the financial emergency went into effect is highlighted in yellow.

Figure 1a.

The Fiscal Indicator Score is not definitively tied to state intervention, as some cities have high fiscal scores but delayed intervention and others have more immediate intervention. However, there are the beginnings of a trend of cities reaching a score of 6 before being declared a financial emergency.

Figure 1b shows the cities that are being surveyed as the "Fiscal Stress Cities" to which we may compare the Financial Emergency cities. The Fiscal Stress Cities are the 15 cities that had a score of 6 or higher in 2009 and 2010, but, as of today, are under local control with no state intervention.

Figure 1b: The "Fiscal Stress Cities" Fiscal Indicator Scores


It is true that Highland Park and Hamtramck have had emergency managers in the past; however, this intervention ended years ago and these cities are currently under local control. Because we are only looking at cities that are currently under state intervention as of 2012 (cities affected by P.A. 4), these cities were not included the "Financial Emergency Cities" list. In 2010, Highland Park, which had been under emergency management from 2001-2009, received the highest score possible on the scale for fiscal stress.

The study looked specifically at the individual indicators as they were scored for the cities. Figure 2 shows the average scores based on each indicator point in order to see which indicators may mean more to financial emergency declarations. The averages were across all years.

Figure 2 Indicator Score Averages

*Applicable cities that had a financial emergency were included in this list

The chart shows that certain indicators are weak, such as #1, 2, and 9, because there was little difference between the State as a whole and the cities in fiscal stress or financial emergency. #1, for example, which is population decline, shows that the state averaged 0.85 on this indicator, meaning the vast majority of cities in Michigan had a population decline and there is little relation of the population decline indicator specifically to high fiscal stress or financial emergency. Indicators that were specifically strong include #7 and #8. In #7 the state only averaged a 0.16 while the cities above a score of 6 averaged a 0.81 and the cities in financial emergency averaged a perfect 1.0, as in all of the financial emergency cities met this indicator point in each of the three years before they went into financial emergency (measured with data available). Indicator 7 is the size of the general fund balance, and a point in this calculation indicates a low level of reserves in city finances. Indicator 8 is whether or not the city experienced a deficit in a major fund in the current or previous fiscal year. These two indicators may be especially relevant to high fiscal stress and financial emergency.

The government structure of the implicated cities also might suggest a relation to financial emergencies. Figure 3 shows collected data based on three categories of government structure for Michigan cities: Strong Mayor, Weak Mayor, or Council-Manager. (Sapotichne, 2011) The results indicate whether there may be operational or structural problems that indicate stress or financial emergency.

Figure 3: Governmental Structure

This chart shows the fifteen "Fiscal Stress Cities" (cities that had a score of higher than 6 in 2009 and 2010 but are not currently under any form of state intervention), versus the state and financial emergency cities. The study surveys different forms of government in Michigan. A Mayor -Council government, for example, is structured with an elected city council (that passes laws, raises taxes, approved budgets) and a separately elected mayor tasked with carrying out laws and managing city functions. There are two types of Mayor-Council Government: Strong Mayor and Weak Mayor. In a Strong Mayor form, the elected mayor generally has the power to veto laws, appoint and remove officials and department heads, and transfer and manage government funds. In a Weak Mayor form, the elected mayor generally serves more of a secondary role, presides over city council meetings and has some limited operational control over departments. The other category is a Council-Manager type structure. In a Council-Manager system, a city manager is hired by and serves directly under the city council to manage funds and department functions as the city council sees fit. A Council-Manager system may still have a mayoral position, but this is generally only as a ceremonial or promotional role, that is elected by the city council amongst themselves, and not by the citizens. Each city decides what structure and powers exist for different positions in their individual charters.

As Emergency Managers are said to be instituted as a type of centralized power that cities vitally need to get finances in order, the chart is notable for the higher percentage of Financial Emergency Cities that have a weak mayor system relative to the state and other cities in fiscal stress. The cities in financial emergency are primarily Mayor-Council cities, whereas other cities in the State are mostly Council-Manager governments. The government structure may be based on many factors including the size of the cities, location, and what services are provided. If a weak mayor/no mayor system specifically relates to fiscal stress and financial emergency, it could be an indicator of a lack of organizational management and decision-making power that would warrant state intervention.

Lastly, the study looked at a large set of demographic factors in the same manner to search for any distinctive factors that may relate to state intervention. The demographic factors that were queried were based off of possible topics of interest in the public emergency management debate in Michigan. Figures 4a, 4b, and 4c show the demographic data collected. The State Averages include the entire State population together, not just those who live in cities.

Figure 4a: Demographics Part 1 of 3

Figure 4b: Demographics Part 2 of 3

Figure 4c Demographics Part 3 of 3

A large amount of demographic data was collected on cities, and the averages are used to see if there are any relations. The data shows there was little to no relation to financial emergency found in cities with higher percentage of the workforce employed in the manufacturing or government sectors (unions), and little to no relation to cities that may have higher percentage of population with social security income. This may debunk claims of manufacturing intense cities, or those that rely on the government, having more financial emergencies. On the other hand, as expected, Financial Emergency cities on average had higher rates of unemployment, housing vacancy, and population loss, and lower income per capita. The approach to the data was these factors would be especially indicative of fiscal stress and financial emergency: poverty and unemployment leads to community financial problems.

What was also found, however, was that the financial emergency cities have a definitively higher percentage of African Americans, as well as a significantly younger median age, relative to state and fiscal stress city averages. Cities that are currently under a financial emergency and have undergone state intervention have an average of 67% of the population being African American, compared to cities that have fiscal stress, but have been left alone by the State which are on average only 20% African American. The median age of the financial emergency cities are also on average 4 years younger than the state and fiscal stress cities. This definitely seems to be an imbalance and will be an interesting topic for further study.

Conclusions:

There were many changes in Public Act 4 that did not exist in the previous Emergency Manager Law, P.A. 72. One of the notable ones was a change in the way the emergency management process was initiated. Now, under P.A. 4, the State Treasurer can decide to begin the review of a local unit based on any "facts or circumstances that, in the state treasurer's sole discretion for a municipal government, are indicative of municipal fiscal stress". There is, however, no specific and definitive threshold of "fiscal stress" that a local unit has to cross before receiving state intervention. Therefore, it is up to citizens who may be voting on the issue in November to judge the law based on how it is being applied: or whether the State is intervening in the right cities at the right times based on the "State Treasurer's sole discretion"

Although there are many factors that could go into a state intervention determination, and this study was limited by a small sample size of only seven cities that are currently in a financial emergency, this data shows that there are some fiscal-stress and non fiscal stress indicators that may be significant to financial emergency cities. Indeed there is some evidence that the cities that have gone under state intervention have reached some definitive level of fiscal stress. These cities are most likely to have a Fiscal Indicator Score of 6 or higher and more specifically have indicators #7 and 8 in their scores. In addition, they are more likely to have a Mayor-Council form of government than a Council-Manager form of government and more specifically a weak mayor form of government in which the elected mayor has less operational control of the city. Lastly the cities are more likely to have higher unemployment rates, housing vacancies, and population decline, and less income per capita as well as a higher percentage of African Americans and younger median age than cities that do not receive state intervention.

Further research is needed to look closely at the cities which are not currently under state intervention, but fit the general profile of the current financial emergency cities. Figures 5a - 5d show which cities match the different relevant indicators of this profile in Michigan.

Figure 5a: Fiscal Stress Cities that have a score of 6 or higher (and Financial Emergency Cities)

Figure 5b: Fiscal Stress Cities that have indicators 7 and 8 in 2010

Figure 5c: Fiscal Stress Cities with a Mayor-Council Form of Government

Figure 5d: Fiscal Stress Cities with non-fiscal stress demographic factors

The four cities that share the majority of these indicators are Highland Park, Hamtramck, Muskegon Heights, and Jackson. Highland Park and Hamtramck have both had state intervention in the past, but Muskegon Heights and Jackson have thus far avoided the Treasury's scrutiny. Muskegon Heights is a small city of around 12,000 people bordering the larger city of Muskegon to the North and is one of the state's poorest cities in terms of income per capita. The city also has a high crime rate and a school system that is currently under emergency management. Jackson is also a relatively small city of around 33,000 people, but it is a county seat and center of a metropolitan region of around 160,000 people. Both cities have sizable poverty rates and business downsizing recent years, however Jackson may end up being an example of a turnaround city. From 2010-2012, the city gained 1,000 manufacturing jobs and may be poised for more as the auto companies continue to rebound. More importantly, the city has been able to mitigate a drop in revenue by cutting expenditures, and has seen some decrease in budget shortfall amounts in recent years.

Whether these cities will be the next ones subjected to state intervention, or whether they will buck the trend remains to be seen. However with an increase in fiscal stress statewide, and three cities receiving state intervention in the past six months alone, the emergency management program is probably here to stay. It is likely that it could be revised and revamped, both by the courts and the voters, but this will require a comprehensive look at the law and how it has evolved thus far. Is it fair and equitable to all Michigan communities? Can citizens hold their local government accountable better with a clear and specific criterion for state intervention? And what are the more serious fiscal and structural problems that will need to be addressed in some of these cities that may be beyond the scope of a consent agreement or emergency manager? These are the hard questions policymakers and citizens will be asking in the coming months as the program faces tough legal and public opinion challenges going forward.

References:

2009. "Fiscal Indicator Scores" Michigan Department of Treasury. http://www.michigan.gov/treasury/0,1607,7-121-1751_47023-171423--,00.html

2010. "Local Unit Audit Reports" Michigan Department of Treasury. http://www.michigan.gov/treasury/0,1607,7-121-1751_31038_56333---,00.html

2011. U.S. Census.

2011. "Public Act 4 of 2011" Michigan Legislature. http://www.legislature.mi.gov/%28S%280l01db45lrs21n55wjccqr45%29%29/mileg.aspx?page=GetObject&objectname=2011-hb-4214

Egan, Paul. 3 May 2012. "Appeals court: Do financial review teams have to adhere to Open Meetings Act?" Detroit Free Press. http://www.freep.com/article/20120503/NEWS15/120503018

Jackson, Tarryl. 29 Oct 2011. "Manufacturing Making a Recovery in Jackson After Years of Decline" Jackson Citizen Patriot. http://www.mlive.com/news/jackson/index.ssf/2011/10/industry_making_a_recovery_in.html

Kloha, P., Weissert, C. S. and Kleine, R. 2005. "Developing and Testing a Composite Model to Predict Local Fiscal Distress." Public Administration Review, 65: 313-323.

Sapotichne, J. 2011. "Michigan City Charters: Variables and Codes."

Scott. Melanie D. 4 May, 2012. "Coalition Appeals to Michigan Court to Get State's Emergency Manager Law on November Ballot" Detroit Free Press. http://www.freep.com/article/20120504/NEWS06/205040412/Coalition-appeals-to-Michigan-court-to-get-state-s-emergency-manager-law-on-November-ballot?odyssey=mod|newswell|text|FRONTPAGE|s