Detroit’s Financial Crisis Sparks New Scrutiny of Michigan Receivership Law

BY MICK ERLANDSON — On March 14th, Michigan Governor Rick Snyder selected Kevyn Orr, a bankruptcy attorney at Jones Day, to become the most high profile emergency manager to date, assuming nearly autocratic control over the municipality of Detroit.  The controversial move is intended to help the dire financial situation of the city, which sits some $14 billion in debt, and is gauged to mitigate Michigander’s criticism over an unpopular state receivership law.

State intervention to improve the finances of struggling municipalities is not a new concept, but Michigan has struggled with a public relations backlash after its experimentation with its radical state receivership law. The state law allows the governor to appoint an emergency manager, after a series of triggers are met, and grants unilateral power to the appointee to remake the city’s financial plan, restructure city contracts, and sell city assets.

Placing such broad and sweeping power in the hands of a politically appointed outsider has drawn the ire of many communities directly affected.  The real job of an emergency manager is to fix the spreadsheets by any means necessary. Even those who have served as emergency managers question whether the law’s civic cost, the nullification of meaningful choice for a community, is worth the financial benefits.  Michael Stamplfer, former emergency manager from Pontiac, Michigan, noted in an interview:

I do not believe [emergency managers] can be successful—they abrogate the civic structure of the community for a period of years then return it virtually dismantled for the community to attempt to somehow make a go of it. The program provides no structure for long term recovery, and that is why most communities slide back into trouble, if they experience any relief at all—a vicious cycle.

So, there are practical reasons to be skeptical of the governor’s move. But perhaps even more importantly voters seem to hate the receivership law. Governor Snyder’s high-profile move comes only months after a successful referendum to repeal a more expansive version of the state receivership law–Michigan voters rejected it by a margin of 52-48 last November.   But when the legislature reconvened for its lame-duck session, it re-passed a modified version of the bill using a parliamentary tactic to ensure it cannot be repealed by referendum.

Proponents argue that the state’s executive branch needs every tool possible to get Michigan’s fiscal house in order after a significant population loss and the devastating effects of the recession.  Yet traditionally, state intervention of municipal affairs has been coupled with increased financial support as a means of nursing the local economy back to health. Instead, Michigan’s law allows the state to suspend the local democratically elected government, to install a proxy until the financial emergency is over (indefinitely), and to force austerity on the municipality without additional investment.

Officials cannot even agree over whether the law has been effective where emergency managers have been installed.  Pontiac, Michigan, just 30 minutes down the road from Detroit, has been under emergency manager control for the past five years.  Little remains of a gutted local government after three different emergency managers have overhauled labor contracts, sold off city assets, and privatized almost every city service that the town once offered. Jobs once held by local taxpayers have been slashed and replaced by outside private contractors. Resulting short-term surpluses come at the expense of long-term assets and do little to address the systemic problems that caused the fiscal distress in the first place.

The receivership approach essentially assumes that local government mismanagement is to blame, and an appointed “consultant” has the wisdom and insulation from local politics to make “hard choices” and right the ship. But the municipalities where local governments are displaced by the law are disproportionately minority-run and Democratic, making the political picture quite risky for the white Republican governor in charge of the appointment.

Enter Democrat Kevyn Orr, the top biller for Jones Day during Chrysler’s bankruptcy restructuring, and who happens to be the head of the diversity task force at the firm.   This politically shrewd appointment by Governor Synder looks to depoliticize the state receivership process.  But the city council of Detroit continues to stand in firm opposition to the appointment, and many locals are already vowing civil disobedience in response.  Surely, a Washington insider like Orr realizes the immense political pressures he will soon face from the executive’s office to serve the state’s interest and get the numbers right.  And possible conflicts of interest have already arisen as Jones Day is up for a contract with the City of Detroit.

Only time will tell if Orr will decide to keep the people of his new hometown in mind, or if his loyalties will lie with those who elevated him to power.  For Governor Synder, the question remains whether the appointment of this fresh face can save face when it comes to the state receivership law.

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