Special report: EFM law

By Susan Demas

The Legislature’s quick passage of Gov. Rick Snyder’s idea to broaden the powers of emergency financial managers for crisis-ridden local governments and schools generated plenty of heat from protesters, from the State Capitol lawn to the broadcasts of MSNBC. Bu what does the Snyder-inspired revamp, which labor voices say could kill collective bargaining rights in Michigan governments, actually do? In this week’s Center for Michigan special report, correspondent Susan Demas adds a little light to the overheated debate:

What exactly is “collective bargaining?”

Collective bargaining is a voluntary process through which a labor union and an employer negotiate terms of employment, typically including salary, hours, working conditions, retirement and health benefits. At the end of negotiations, the parties sign an agreement that’s in effect for an agreed-upon tern, such as three years. That means the union and employer don’t have to negotiate until the contract is up, unless they both agree to re-open the contract. The collective bargaining process was established in the National Labor Relations Act passed by Congress in 1935.

So, how many people are covered by labor unions and collective bargaining?

Michigan is known for its strong labor tradition, but labor has lost considerable muscle in Michigan and nationally. Overall, 16.5 percent of workers in Michigan and 12 percent of all workers nationally were unionized in 2010. Those numbers are about half what they were a generation ago. In 1983, 30.4 percent of Michigan workers and 20.1 percent of U.S. workers were unionized, according to research from George State University Policy Studies Professor Barry Hirsch, based on U.S. census data.

How does Michigan compare to other states on unionization?

In 2010, Michigan ranked eighth in the nation in terms of union representation. The states with higher proportions of union workers are New York, Alaska, Hawaii, Washington, California, New Jersey and Connecticut. 

Again, this is down from 1983, when Michigan ranked second in the nation with 30.4 percent of its employees working under collective bargaining agreements.

When it comes to union representation, is there a difference between the public sector and the private sector?

Yes. Across the nation, a much higher proportion of workers in government, schools and other public sector functions is unionized than in the private sector.

Nationally, 36 percent of all public sector workers belong to unions, compared to only 6.9 percent of private sector workers.

In Michigan, about half of all public-sector workers are unionized, versus about 11 percent of private sector workers.

According to the Census Bureau’s 2009 Annual Survey of Public Employment and Payroll, 59 percent of Michigan’s full-time-equivalent public employees are employed in education.

In many small ways, the new Emergency Financial Manager Act is quite similar to past legislation. Until now, how has the state handled local governments that fall into financial crisis?

In the 20 years that the Emergency Financial Manager (EFM) Act (P.A. 72 of 1990) was in effect, the governor declared seven financial emergencies in municipalities, according to the Department of Treasury.  
They were in: Hamtramck (2000), Highland Park (2001), Flint (2002), Three Oaks (2008), Pontiac (2009), Ecorse (2009), and Benton Harbor (2010).

Three of those – Benton Harbor, Ecorse, and Pontiac — still had an emergency financial manager in place when the law changed earlier this year. In Highland Park and Three Oaks, there is no longer an EFM, but a financial emergency remains in place.

As for school districts, Detroit Public Schools currently has an EFM in place, Robert Bobb, the most well-known EFM in the state. Inkster Schools had an EFM from 2002-2005.

So, how do I know if my community is going to fall under an emergency financial manager?

Under the new law, a state review of locals’ finances could be triggered by a less-than-stellar municipal bond rating of BBB or below, an operating deficit or “other facts or circumstances that were indicative of financial stress.”

Michigan Department of Treasury spokesman Terry Stanton said the department doesn’t have a list of how many local governments and school districts presently have a BBB rating or below. But Treasury maintains a list of local governments in a state of either “fiscal watch” or “fiscal stress,” based on warning signs like deficits, unusually high expenses, population and business decline and other factors.

As of 2009, the last year for which full data is available, 109 local governments were in a state of “fiscal watch” or “fiscal stress.” (You can download the full list at www.michigan.gov/documents/treasury/2009_Fiscal_Scoring_Data_343693_7.xls). Of the more than 1,800 local governments in Michigan, those on the watch list are presumably at higher risk of falling under the new emergency financial manager law. Six Michigan communities stood out with the worst finances as of 2009 and are in full-bore “financial stress,” according to the state score sheets. Those communities are Standish, Elberta, Flint, St. Ignace, Genesee Township and Jackson.

As the Detroit Free Press reported in March, more than 40 school districts or charter schools are in deficit and another 150 are in danger of going into deficit. Look up yours with the Freep’s database of school budgets: (www.freep.com/article/20110325/NEWS06/110323044/Database-See-how-much-your-district-has-put-aside-rainy-day).

The new law would allow emergency financial managers to modify collective bargaining agreements and potentially cut previously negotiated wages and benefits for school and local government employees. Is there any parallel to what happened in the auto industry during its recent financial troubles, which included the bankruptcies at General Motors and Chrysler?

The United Auto Workers agreed in negotiations with Detroit’s Big Three automakers to shift billions of dollars in retiree health-care liabilities from the companies to new independent trusts known as voluntary employee beneficiary associations, or VEBAs. A new two-tiered wage scale started new hires at $14 per hour, about half the average wage of previous employees.

The UAW became part owner of both GM and Chrysler in return for steep concessions, including a pledge not to strike over compensation for five years. The union estimates that the givebacks in pay and benefits were worth $7,000 to $30,000 a year per member. It also agreed to end its job bank program, which allowed laid-off workers to continue collecting almost full pay.

One concern under the new law is pay rates for emergency financial managers. What have managers been paid in the recent cases under the past Michigan law?

Under the repealed P.A. 72, EFM contracts were set by the Emergency Loan Board and typically for an amount of $11,000 per month – or $132,000 annually, Stanton said. Under the new law, the state treasurer or superintendent of public instruction would contract with an emergency manager in likely a similar salary structure. There is no limit on pay in the law (Democratic lawmakers failed in an attempt to cap it at an amount equal to the governor’s annual salary of $159,000).

In setting the salary for an emergency manager, factors such as the municipality or school district’s population, geographic size and complexity are considered, Stanton said.

Has any other state ever imposed this sort of “financial martial law” in which local officials are essentially deposed from their elected positions? If so, what happened?

It appears not. According to a 2008 National Public Radio report, the Great Depression caused more than 2,000 local governments to default on debt. This eventually led, reported NPR, to changes in federal bankruptcy law, including the creation of a specific chapter for local governments, Chapter 9

How many municipalities have sought bankruptcy protection?

Between 1980 and 2008, 32 cities and towns declared bankruptcy, said the NPR report. Among the largest were Bridgeport, Conn., in 1991, Orange County, Calif., in 1994, and Vallejo, Calif., in 2008. Vallejo’s case may have the greatest application to Michigan’s current debate, since local leaders there said bankruptcy was necessary to allow the city to revamp its pension and health-care commitments, particularly to police and firefighters.

What’s the difference between a local community falling into bankruptcy and a local community entering into this emergency financial manager situation?

“It would mimic bankruptcy without the stigmatism linked to bankruptcy,” Stanton said.

Bankruptcy is operated entirely by the courts. The emergency financial manager process could end in a receivership, which is statutory and not judicial, Stanton said. Chapter 9 municipal bankruptcy is designed to restructure or reorganize a local unit. Receivership could potentially go beyond that to consolidate the failed unit with other units or dissolve and disincorporate it, Stanton said.

What are the likely legal challenges to this law? On what grounds?

In February, prior to the law’s passage, Democratic Rep. Mark Meadows, a former assistant attorney general, asked Attorney General Bill Schuette to offer a legal opinion on how the EFM bill would affect longstanding Michigan statutes, specifically the Employment Relations Commission Act of 1939, the Public Employment Relations Act of 1947 and the contract clauses of the state and federal constitutions. Schuette’s office declined to offer an opinion. Last week, Meadows renewed his request with the attorney general.