Michi­gan Over­sight In Ques­tion

The Bond Buyer - - Front Page - By Nora Colomer

no longer has any lo­cal gov­ern­ments un­der emer­gency man­age­ment and ob­servers be­lieve the state pro­gram to take over dis­tressed lo­cal gov­ern­ments may be qui­etly laid to rest.

The EM pro­gram has been cred­ited with help­ing put Detroit on a path to fis­cal sol­vency but it’s also been blamed for con­tribut­ing to Flint’s water con­tam­i­na­tion cri­sis. Two of Flint’s for­mer EMs have been crim­i­nally charged in con­nec­tion with the cri­sis.

The Flint cri­sis may make state of­fi­cials leery of step­ping in to con­trol a lo­cal gov­ern­ment, though mu­nic­i­pal mar­ket par­tic­i­pants and oth­ers see state over­sight pro­grams as a pos­i­tive credit fea­ture.

The re­lease of High­land Park School Dis­trict from state con­trol in June marked the first time since 2000 that no city or school dis­trict in Michi­gan has an emer­gency man­ager. Some mar­ket par­tic­i­pants be­lieve that sig­nals the state’s re­luc­tance to use the pro­gram go­ing for­ward, though the pro­gram re­mains on the books.

The last lo­cal en­tity placed un­der state over­sight was Lin­coln Park. Gov. Rick Sny­der ap­pointed an EM on July 3, 2014 and the city was re­leased from state over­sight at the end of 2015.

“Each sit­u­a­tion that led to the fi­nan­cial emer­gency is unique, so I can’t give a broad-brush as­sess­ment about how the law will be used in the fu­ture,” said Ron Leix, a trea­sury spokesman. “For the first time in 18 years, no Michi­gan mu­nic­i­pal­ity or school dis­trict is un­der state fi­nan­cial over­sight through an emer­gency man­ager. This is re­ally about the hard work our lo­cal units of gov­ern­ment have achieved to iden­tify prob­lems and bring to­gether the re­sources needed to prob­lem-solve chal­leng­ing fi­nan­cial con­di­tions.”

Michi­gan launched the emer­gency man­ager pro­gram in 1990. It gives the gov­er­nor au­thor­ity to ap­point a man­ager with ex­ten­sive pow­ers over a trou­bled mu­nic­i­pal­ity or school dis­trict.

In 2012 Michi­gan vot­ers re

pealed the emer­gency man­ager pro­gram in a ref­er­en­dum, but one month later Sny­der and law­mak­ers re-adopted a sim­i­lar in­ter­ven­tion pro­gram. The new statute al­lowed lo­cal gov­ern­ments to choose among three new op­tions in ad­di­tion to the ap­point­ment of an emer­gency man­ager who re­ports di­rectly to the gov­er­nor: bankruptcy, me­di­a­tion, or a con­sent agree­ment be­tween the state and the city to per­mit lo­cal elected of­fi­cials to bal­ance their bud­get on their own.

Cities that exit emer­gency man­age­ment re­main un­der the over­sight of a re­ceiver­ship tran­si­tion ad­vi­sory board while ex­ec­u­tive pow­ers are slowly re­stored to elected may­ors and city coun­cils. The goal of the RTAB is make sure the city stays on track to meet its fis­cal mile­stones.

“My ex­pe­ri­ence was that rat­ing agen­cies and in­vestors took great com­fort from the fact that the state took this proac­tive ap­proach to en­sur­ing that obli­ga­tions to bond­hold­ers were honored to the ex­tent pos­si­ble,” John Naglick, Detroit’s chief deputy chief fi­nan­cial of­fi­cer and fi­nance di­rec­tor.

“A lot of the in­vestor com­mu­nity and rat­ing agen­cies be­lieve that once the state in­ter­venes, they will move heaven and earth to en­sure bond­hold­ers are pro­tected,” said Tom Schuette, a part­ner at Gurtin Mu­nic­i­pal Bond Man­age­ment. “How­ever, we be­lieve it is very im­por­tant for in­vestors to un­der­stand the me­chan­ics of state over­sight given that there are very dif­fer­ent track records and tools avail­able de­pend­ing on where you are and what sec­tor is in­volved. State in­ter­ven­tion most fre­quently falls well short of be­ing a le­gal guar­an­tee that bond­hold­ers will be pro­tected.”

Detroit’s emer­gency man­ager, Kevyn Orr, led the city into a Chap­ter 9 bankruptcy that re­sulted in wide­spread bond­holder losses.

State in­ter­ven­tion has ben­e­fits but it’s not a panacea, said Howard Cure, di­rec­tor of mu­nic­i­pal re­search at Ever­core Wealth Man­age­ment. “It de­pends on the ul­ti­mate econ­omy and tax base, and it’s a lot easier to fix fi­nan­cial mis­man­age­ment with a tax base than it is with an erod­ing tax base,” Cure said.

The pro­gram had mixed suc­cess, said Michi­gan State Univer­sity economist Eric Scor­sone. “In some cases it’s worked well, like Allen Park where the sit­u­a­tion was pretty clear cut and the so­lu­tion was pretty clear as to what needed to be done,” said Scor­sone, who pre­vi­ously served as in­terim deputy trea­surer su­per­vis­ing the EM pro­gram.

Allen Park re­gained full lo­cal con­trol of its op­er­a­tions and fi­nances in Fe­bru­ary 2017 af­ter nearly four years of state over­sight. In June S&P Global Rat­ings up­graded the city to in­vest­ment-grade BBB-plus from junk-level BB, cred­it­ing strong bud­getary per­for­mance and fi­nan­cial flex­i­bil­ity more than 12 months af­ter ex­it­ing state over­sight. Allen Park strug­gled to pay bonds for a failed movie stu­dio deal also led to Se­cu­ri­ties and Ex­change Com­mis­sion sanc­tions.

In other cases, crit­ics say, emer­gency man­agers fell short with Flint a glar­ing ex­am­ple. Flint re­gained full con­trol of its fi­nances in April, end­ing nearly seven years of state over­sight that was marked by a water con­tam­i­na­tion cri­sis that drew na­tional head­lines, con­gres­sional hear­ings and crim­i­nal charges.

Flint had four emer­gency man­agers: Ed Kurtz, Mike Brown, Dar­nell Ear­ley and Ger­ald Am­brose. Ear­ley and Am­brose – both ap­pointed by Sny­der-- face charges of crim­i­nal wrong­do­ing stem­ming from the lead con­tam­i­na­tion cri­sis and en­su­ing Le­gion­naire’s dis­ease out­break that claimed 12 lives.

Ear­ley over­saw the de­ci­sion to change the city’s water source to the Flint River in April 2014 as the city awaited com­ple­tion of a new pipe­line. The city failed to prop­erly treat the water, cor­rod­ing water de­liv­ery pipes, spread­ing lead into the sys­tem.

“Michi­gan is go­ing to be a lit­tle gun-shy af­ter what hap­pened in Flint be­cause we have not heard the last of Flint,” said Cure. “I think just the health is­sues par­tic­u­larly for chil­dren from the in­take of tainted water is go­ing to keep this is­sue alive for a while.”

Cure sees the state tak­ing on a less dom­i­nant role in fi­nan­cial crises, with the state tak­ing a much more ad­vi­sory role.

Two years ago, a task force Sny­der ap­pointed to in­ves­ti­gate the Flint cri­sis called for a re­view of the EM law and said Sny­der should look for al­ter­na­tives to the cur­rent ap­proach that en­gage lo­cal elected of­fi­cials. No ac­tion has been taken to change the law.

Scor­sone said that, at least un­der the cur­rent ad­min­is­tra­tion, it is un­likely that the state will step into an­other emer­gency. He doesn’t see the two ma­jor can­di­dates in the Michi­gan gu­ber­na­to­rial race – Repub­li­can Bill Schuette and Demo­crat Gretchen Whit­mer -- lead­ing a full-scale state takeover of a lo­cal gov­ern­ment. “Both can­di­dates have ei­ther ex­plic­itly or im­plic­itly made it clear that this is not the kind of ap­proach that they would use,” Scor­sone said.

Scor­sone said it is un­clear if the leg­is­la­ture will want to tackle the EM law or if it will just lie dor­mant.

“If they are not us­ing it then there tends not to be a lot of mo­men­tum to do so, un­til a cri­sis breaks through,” Scor­sone said.

On the up­side Scor­sone said that the fis­cal health of Michi­gan lo­cal en­ti­ties is the best it’s been in 20 years.

“There are still is­sues and prob­lems but we are cer­tainly as good at least since the 90’s,” he said. Things are pretty solid at the mo­ment.”

Cure said that there is only so much the state can do if a lo­cal en­tity is fac­ing a longterm eco­nomic de­cline.

“If it’s more of a short-term cash flow is­sue they may per­mit is­sue deficit fi­nanc­ing bonds or loan them money or ad­vance them state monies but there is only so much that can be done when you have an erod­ing tax base,” Cure said.

From a rat­ing per­spec­tive the in­ven­tion pro­gram car­ries some weight.

Jane Ri­d­ley, se­nior di­rec­tor in the U.S. public fi­nance gov­ern­ment group at S&P Global Rat­ings and sec­tor lead for lo­cal gov­ern­ments, said that state over­sight is con­sid­ered as part of the rat­ing agency’s lo­cal GO cri­te­ria.

“We do think that hav­ing a state that has over­sight, es­pe­cially if it’s a proven mech­a­nism, can be very help­ful for strug­gling en­ti­ties,” Ri­d­ley said.

“If they ended over­sight en­tirely it would likely have an im­pact on the in­sti­tu­tional frame­work scores and their sub scores … and it would be re­flected in our rat­ings but nec­es­sar­ily to the point that we would change rat­ings,” she said.

“While an EM is in most cases is a last op­tion, the abil­ity for it to im­ple­ment some poli­cies and pro­ce­dures is go­ing to be typ­i­cally viewed, at least at the on­set, as a credit pos­i­tive,” said An­drew Van Dyck Do­bos, a public fi­nance an­a­lyst at Moody’s

For Detroit, the role of state, even in an in­ac­tive state, is con­sid­ered a plus by some. The state re­lin­quished con­trol over the city’s fi­nances on April 30, three years af­ter Detroit’s Chap­ter 9 exit in De­cem­ber 2014. The city now has the power to en­ter into con­tracts and en­act city bud­gets without seek­ing state ap­proval. The de­ci­sion to scale back over­sight was trig­gered by three con­sec­u­tive years of bal­anced bud­gets along with three years of pro­jected bal­anced op­er­a­tions.

Detroit must con­tinue to pre­sent monthly in­for­ma­tion to the com­mis­sion so that it may con­tinue to mon­i­tor the city’s fis­cal health and en­sure that the city con­tin­ues to meet the con­di­tions for waiver.

“If they don’t meet cer­tain bench­marks and put to­gether bal­anced bud­gets and pro­jec­tions, the state’s fi­nan­cial con­trol board can still step in,” said Cure. “Done right I think it gives com­fort to an in­vestor to have that ef­fec­tive over­sight and an ad­di­tional fi­nan­cial mon­i­tor on fi­nances.” ◽

Bloomberg News

Nega­tive fall­out from the water safety cri­sis in Flint may weigh against the fu­ture use of emer­gency man­agers in Michi­gan.

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