Municipal Takeovers: Examining State Discretion and Local Impacts in Michigan

Municipal takeovers in Michigan occur under the authority of PA 436, one of the broadest and most permissive state municipal takeover policies in the United States (Sapotichne et al. 2015; Nickels 2019). However, Michigan’s approach to addressing local financial emergencies has evolved since the late 1990s and has been controversial in many ways. PA 101 was enacted in 1988 following a takeover of Ecorse, MI in 1986 (that later became a court intervention) and the financial crisis of Hamtramck, MI. PA101 provided the state with a formal mechanism for state government oversight, establishing Emergency Financial Managers (EFMs) with broad powers. The legislation was part of a legislative package meant to assist Hamtramck, including provisions for triggering state review and the composition of the Local Emergency Financial Assistance Loan Board (Holman 2012; Michigan State University Extension Center for Local Government Finance and Policy 2017).

PA 72, the “Local Government Fiscal Responsibility Act” or more commonly referred to as the “Emergency Financial Manager Act,” replaced PA 101 in 1990. It acted as the primary statute authorizing state intervention in local financial stress and included authorization of state takeover of public schools. The state viewed such measures as necessary for the survival of local government, to assist them with prudent fiscal management. The provisions of PA 72 were triggered when a local government failed to pay creditors or make timely pension contributions, or had payless paydays. Certain local officials or residents could request a preliminary review under the legislation. Once triggered, a preliminary review of the financial condition of the city was to be conducted by the state Treasurer who reported the result to the governor. If financial problems were found to exist, the governor would appoint a financial review team charged with determining one of the following: a serious financial problem did not exist; a financial problem existed but a Consent Agreement had been adopted; or a financial problem existed and no satisfactory plan existed to resolve it. The third determination (or a violation of a consent agreement) resulted in the appointment of an EFM by the Local Emergency Financial Assistance Loan Board comprised of state officials. The compensation of the EFM (paid for by the city) was set by the Loan Board, as well as the approval of actual and necessary expenses.

In 2011, then-Governor Snyder signed into law PA 4, a revised version of PA 72 named the “Local Financial Stability and Choice Act.” The bill was one of the first signed by Governor Snyder when he came into office (Hakala 2016). The law was passed by a majority Republican legislature and allowed the state to impose emergency managers empowered with unilateral decision-making and the goal of balancing municipal budgets. PA 4 provided the state with the power to mute local democratic institutions and break existing contracts as well as privatize or sell municipal assets. PA 4 also changed the name of EFMs to Emergency Managers, a change that continued through to PA 436 (Holman 2012). Previously, emergency managers were allowed to renegotiate existing labor contracts, acting as an agent of the local government in bargaining and then approving subsequent agreements or contracts. Under PA 4, an emergency manager could directly establish or change personnel levels through layoffs, changed labor and vendor contracts, amended budgets, reduced or eliminated benefits and pay, sale of local government assets, removal of local board members, dissolution of municipal government, and/or bankruptcy filing (State of Michigan Department of Treasury 2011).

The new law gave greater and more expansive powers to emergency managers (Rozycki 2017). Critics deemed PA 4 draconian, with the state government usurping local control (Oosting 2012). The changes introduced in PA 4 led to significant public pushback and voter mobilization, and ultimately the law was repealed through a public referendum in 2012 (Hammer 2016). The Flint Democracy Defense League is one example of local organizing and resistance to PA 4, and helped to lead the successful referendum (Nickels 2019).

Following the repeal of PA 4, the state legislature passed PA 436, “the Local Financial Stability and Choice Act,” later that year. The new law included a fiscal appropriation that would ensure it was immune from repeal by public referendum as outlined by state law (Hammer 2016; Rozycki 2017). The most significant change in PA 436 from PA 4 is Section 7, which gives local elected officials governing the city or school district the choice of one of four options when deemed to be facing a financial emergency: entering a consent agreement, employing a state-appointed emergency manager, undergoing an evaluation process, or filing for Chapter 9 bankruptcy. This ability to choose was nominally meant to increase local control: “PA 436, in effect, told [cities] they were going to have to swallow some harsh medicine, but it at least gave them a small selection of pills to choose from” (Guyette 2013). PA 436 also requires the state to pay emergency manager salaries, and an emergency manager can be voted out by local governments after 18 months, or the local government can petition the governor to remove the emergency manager sooner than 18 months. However, the local government would still be required to negotiate a consent agreement with the state or begin mediation. Governor Snyder argued that the changes made in PA 436 signaled that the state had listened to voters.

Despite these changes, PA 436 leaves the state with significant powers during local financial emergencies. While cities nominally have a say in how their emergency is addressed, the state treasurer has to agree with the approach the city chooses, and if they do not, the city can be forced into one of the other options (Hakala 2016). Under PA 436, the governor can order a financial review and, based on the review findings, declare a financial emergency (Scorsone 2013). Emergency managers maintain authority over municipal personnel, budgets, and contracts (Rozycki 2017). In addition, PA 436 only applies to those cities where financial problems occurred after March 28, 2013. Those whose financial problems predate still fall under the provisions of the highly disputed PA 4 (Guyette 2013). Eleven Michigan cities have come under emergency management (Figure 1).

Simultaneous to restructuring and expanding the state’s powers during local financial emergencies, in 2011 the Snyder administration also revised the state’s approach to revenue sharing with local governments. Revenue sharing in Michigan is comprised of both constitutional sharing requirements and formula-based statutory sharing guidelines. Prior to 2011, statutory revenue sharing payments had been steadily declining (Figure 2). The statutory revenue sharing program was amended in 2011 to replace a more discretionary, “formula-based funding with an incentive program that uses revenue sharing to foster local government reform … in each of three categories (accountability and transparency; intergovernmental collaboration and consolidation; and employee compensation policies) in order to receive their full allotment of incentive-based funds” (CLOSUP 2012). Analysis from the Michigan Municipal League in 2014 found that the Economic Vitality Incentive Program (EVIP) program had diverted funding from the state’s municipalities, resulting in lost revenue. Michigan is the only state that reduced revenue sharing with cities between 2002 and 2012 (Michigan Municipal League 2017). The City of Flint, for example, lost an estimated $54.9 million as a result of the new revenue sharing formula (Minghine 2014). In Michigan state transfers are typically uneven between cities, and are not fully guaranteed from one year to the next. Given changing political preferences for revenue sharing among state decision makers in Michigan, the decision to initiate emergency management may be driven in part by the community’s reliance on state funding for financial stability.

PA 436 remains highly controversial in Michigan, in part because of the central role state takeover and emergency managers played in creating and perpetuating prolonged drinking water contamination in Flint (Flint Water Advisory Task Force 2016). Flint was under emergency management when critical decisions about the city’s water supply and water treatment protocols were made, and emergency managers were resistant to public concerns about the safety of the city’s drinking water. The Flint case is a pointed example of how state intervention and subsequent austerity measures can disrupt local services. While Michigan Governor Gretchen Whitmer campaigned for office in 2018 with a promise to repeal the law, it remains in place (VanHulle and Beggin 2019).

The Flint case prompted renewed scrutiny of the state’s use of emergency management powers, and particularly the disproportionate impact it has had on Black residents in Michigan. The law has been subject to legal challenge in state and federal court, with prosecutors (unsuccessfully) arguing that it is unconstitutional in its suspension of democratic institutions for Black residents (Guyette 2016); at one point half of the state’s Black population was under emergency management. Scholars have also criticized the law as inherently racist (Stanley 2016; Seamster 2018), poorly designed to solve the problem of municipal fiscal distress (Sapotichne et al. 2015), and having long-lasting impacts on the functioning of city governments and structure of communities (Nickels 2019). An unpublished analysis by Breznau and Kirkpatrick (2018) finds evidence that race helps to explain patterns in municipal takeovers in Michigan.

Our paper fills two key gaps in the literature on municipal takeovers. First, there have been no empirical examinations of the predictability of municipal takeover based on a state’s own definition of municipal financial emergency, which is important given the flexibility and opacity of such criteria in legislation and practice. Second, the effects of municipal takeover on communities have tended to focus on political and financial outcomes, and to be based on case study analysis. There have not been systematic studies of the effects of emergency management on city services. We aim to help fill these gaps with our analysis of Michigan’s use of municipal takeover powers.

First, we apply legislatively and administratively defined measures of financial stress to Michigan cities to determine whether these measures are good predictors of whether a city has experienced a state takeover. There are two options available for operationalizing financial distress to reflect Michigan state policy: the language in the law (PA 436) or in the letters of determination sent to cities that come under emergency management. Using the language in the law presents several challenges. PA 436 contains a list of conditions that can animate the enforcement actions in the bill. This list is nearly identical to the two previous approaches to addressing municipal financial distress. However, as Kleine, Kloha and Weissert (2002) observe, these conditions lack predictive power and a sense of proportion; further, they are not tied to specific and uniformly available data nor are they linked to the literature concerned with identifying and predicting financial stress in local governments. Responding to these concerns, Michigan institutionalized a new set of metrics in 2006. These metrics were an improvement but still subject to criticism (Plerhoples and Scorsone 2011; Crosby and Robbins 2013). A detailed proposal to improve the policy’s sensitivity to both net and relative stress, service demands, and structural underpinnings of financial stress was proposed (Plerhoples and Scorsone 2011). However, the incoming 2011 Snyder administration halted any changes and the language of the legislation became the de facto method again of determining financial stress (Spreen and Cheek 2016).

Given the challenges presented in operationalizing and interpreting the metrics of financial stress contained in PA436 legislation, we focus instead on the letters of determination issued by the state in each instance of review and enforcement of PA 436. These letters cite financial aberrations or distress signals that constitute financial stress in the eyes of the state, and therefore necessitating emergency management. These letters are a clearer indication of how the state operationalizes financial distress and when it sees fit to exercise its emergency powers. Our concern here is not to predict or model financial distress, nor is it to propose a complete set of indicators of financial stress. Our purpose here is to identify the metrics of financial stress used by the State of Michigan in order to determine whether there is a broader set of cities that theoretically could have been subject to emergency management but were not. A reading of the letters of determination reveals that justification for the application of PA 436 can be categorized as a concern in one of the following areas: deficits, pension obligations, excess debt, insufficient capacity to pay debt, and inadequate accounting practices. The supporting evidence presented in these letters often focuses on a city’s general fund.

To capture such metrics for a large number of Michigan cities we used Annual Local Unit Fiscal Reports. The State of Michigan requires that all local units of government, regardless of size, file an Annual Local Unit Fiscal Report with the state Treasury within 6 months of the end of the local unit’s fiscal year; this report is commonly referred to by the form number, f65, and includes a variety of financial indicators that are self-reported by the local unit to the state.

We used f65 information to construct eight variables that mirror the logic of the state’s letters of determination (Table 1). For each measure of municipal financial stress, we calculated the three-year average (2010–2012) or the average of two years of change (2010–2011 and 2011–2012). We centered FY2011 because it is the first year of complete, publicly available f65 reports and captures the financial status of local governments during a time that the state was most active in instituting emergency managers (2009–2014). We used average values to minimize any outsized effect of one bad (or good) fiscal year, mirroring the logic of PA436, though an analysis using just FY2011 values produced similar results. Finally, we normalize variables per capita except for ratio scores.

We also measured community characteristics beyond financial health that may have increased the likelihood that they were targeted for emergency management, including reliance on state transfers, proportion of African American residents, and median household income. Reliance on state transfers was measured using information from the f65 reports. We collected race and income data from the 2015 American Community Survey five-year estimates for Michigan cities. Our aim in including these data is to determine whether characteristics of a community beyond financial condition can help to explain the state’s decision to intervene.

In our final analysis, the eight financial variables were transformed into z-scores. A z-score measures a single observation’s distance to the mean value of the group. The distance is measured in standard deviation and will include positive and negative values, equally distributed so the sum of z-scores for all cities on any indicator is zero. The theoretical contribution (positive or negative) of each variable toward financial stress (as indicated in Table 1) is built into the calculation of the z-score by inverting signs to mirror these contributions. Therefore, across all scores a positive z-score indicates some degree of financial stress. We calculate a total financial score as the sum of each city’s z-scores across the eight financial indicators (see Appendix). This method allows good performance on one indicator to balance out poor performance on another. Given there is no single indicator of a municipal financial emergency, and given the intentions of Michigan’s PA436, we assume the state will be looking to identify cities facing acute financial stress that manifests in more than one way. We also avoid with this method evaluating financial stress in one city relative to another—or ranking or quartile-based measures—that require there be “winners” and “losers” in each category (Crosby and Robbins 2013). In our analysis, if all cities are performing similarly for a given indicator, they will have similar z-scores.

The effects of municipal takeovers on public services can be challenging to determine empirically. They can manifest quantitatively as increasing costs or decreasing levels of services, but also more qualitatively in terms of “public value” or “perceived service quality” (Giannoccaro et al. 2008; Pidd 2012). To understand the effects of municipal takeovers on public services in Michigan, we conducted a comparative media analysis for the eleven cities that have experienced emergency management (plus two cities that used the consent agreement option) and ten other Michigan cities with the highest levels of financial stress based on our calculated composite z-score. These comparison (or control) cities are: Wyoming, Adrian, Greenville, Harper Woods, Melvindale, Grand Rapids, Port Huron, Jackson, Saginaw, and Burton. Media analysis allowed us to capture a range of salient changes in drinking water services and systems in these communities.

We focused our analysis specifically on evidence of changes to drinking water services including changes in water prices, decisions about privatization, and new water quality issues. As Gould (2004) emphasizes, media analyses identify key messages and issue frames. Our aim was to use media content analysis to “gain strategic insight and intelligence into issues and trends reported in the media” on drinking water services in these cities (Macnamara 2005, 21). The analysis provides some initial insight into the extent to which drinking water services are targeted by emergency managers.

We first identified appropriate national and local news sources—newspaper articles and local media releases—and verified media accounts using Michigan Department of Treasury documents and academic sources where necessary (Table 1). We chose three main topics to guide news article collection: water system, emergency management, and privatization, which we used as key terms in Google and Google News. The search terms can be found in Table 2.

As Table 3 illustrates, we included in our analysis articles from a variety of news sources, but regional news outlets contained the bulk of our articles. We focused on identifying media reports from the time each city was under emergency management or experiencing financial stress without an emergency manager. Articles that fit our criteria were read carefully and the relevant content was captured qualitatively according to our analytical categories: emergency management, water, and privatization. Each category then included additional subcategories. Under emergency management we coded for context (e.g., dates), emergency manager, history, emergency manager decisions, and effects (e.g., on residents or for city council). For water we coded for water system history, water bills, conflict, and private actors. For privatization we coded for sector and actors. The data were analyzed according to the topic, the way in which the information was framed, and the spokesperson/outlet that was sharing the information (Gould 2004). The summaries were then combined according to each category. We synthesized the findings qualitatively to identify any relationships between the categories and incorporated these interpretations (Altheide and Schneider 2013).

We analyzed the news stories qualitatively. Our aim was to begin developing insight into how emergency management has affected public drinking water systems, and if there are discernable differences between those cities that have experienced financial stress but maintained local control over services. Such qualitative text analysis helps to uncover these relationships (Macnamara 2005). The analysis was conducted at three time points: once during the initial search for articles (April to May 2019); second once sources were chosen, read, and summarized (August to October 2019); and third, when all sources were reviewed to ensure framing and context were adequately considered (December 2019 to February 2020). This same process was repeated for cities that experienced financial stress without emergency management (October to December 2020). These analyses were all conducted by a single researcher (one of the paper’s coauthors). The nature of the topic (changes to drinking water systems) meant that news stories were often written in a way that made facts easy to validate. The results are presented qualitatively in the sections that follow.

Our expectation was that at least one financial indicator used by the state, or the composite score based on all eight indicators, should be able to identify all eleven cities that have experienced a takeover in Michigan; the financial precarity of these cities should be unequivocal and distinctive. We find that, in aggregate, the measures of financial health the state has used to identify municipal financial emergencies and initiate takeover do not entirely predict which cities have come under emergency management (Table 2). The composite z-score captures less than half of the Michigan cities that have come under emergency management. One individual measure, net position of the general fund, performs better and captures eight of the eleven cities that have come under emergency management (73 percent). We also find very little change in a city’s general fund over the three-year period examined, with a median change in net position of $8.96 (Table 4). Despite a long list of probable indicators of financial stress, a city’s general fund is important to state officials, though this importance is not articulated in the legislation.

Overall, reliance on state funding and community demographic characteristics performs at least as well as the financial indicators used by the state at distinguishing the eleven emergency manager cities. A city’s reliance on state revenue sharing is the best performing measure, capturing nine of the eleven cities that have come under emergency management (82 percent). We also find statistically significant differences between emergency manager and nonemergency manager cities in their general fund net position, composite financial scores, proportion of Black population, household income, reliance in state revenue, and loss of state revenue over time (Table 5).

We note that a city’s general fund net position and the level of financial support it receives from the state better capture their likelihood of coming under emergency management than do measures of change in those variables. In the interest of further exploring changes in a city’s net position and reliance on state intergovernmental revenue sharing, we collected these data for all cities for the duration of the Snyder administration (2010–2018). We find that over this time period the general fund net position of cities that came under emergency management increased, though never reached the levels of nonemergency manager cities (Figure 3). This improvement could be interpreted as evidence of the effectiveness of state takeovers in alleviating municipal financial distress. However, cities that came under emergency management lost significantly more state intergovernmental revenue over this time period, sometimes experiencing reductions while non-EM cities saw increases (Figure 4). Given that emergency manager cities on average also saw a loss of own revenue over this time, any improvements in general fund net position must have been achieved primarily, if not exclusively, through spending cuts.

We found evidence that Michigan cities that have come under emergency management are more likely to have had changes made to drinking water services than similarly financially stressed cities that did not come under emergency management. Out of eleven cities under emergency management, six have seen changes to their drinking water systems, the most common being water rate increases, water shutoffs for nonpayment, and the privatization of water services or infrastructure. In most instances, the changes made under emergency management were made with the intention of saving money or reducing spending, with emergency managers aiming to ensure that the city would appear to be doing all it could to improve its financial position. These decisions led to poor water quality, service unreliability, and increases in water bills. The ten comparative cities did not experience any such changes.

Table 6 summarizes the effects of emergency management on drinking water services based on evidence from media reports, news releases, and supplemental information from the state Treasury. It is possible that there were other effects on the water system and public services beyond those we found. Some decisions were perhaps not made public or simply were not covered by the media. In Allen Park for example, we found no evidence of drinking water effects and only limited privatization when the emergency manager supported selling a community center and ice rink (Herndon 2013). In Three Oaks Village as well as in River Rouge, no water or other public service effects were found. Lincoln Park had no effects on the water system or other public services that we could find. However, Lincoln Park had among the shortest periods of receivership under PA 436.

Detroit was under emergency management from 2013 to 2018. The emergency manager, Kevin Orr, made the water system an asset in the city’s bankruptcy process, and in preparation targeted unpaid water bills so that the system would be more attractive on the open market. This led to widespread and highly publicized water shutoffs in 2014 for residents that had not paid their bills, which Orr referred to as “a necessary part of Detroit’s restructuring” (Swaine 2014). By 2019, when the city was out of receivership, water shutoffs had declined significantly. In the end the water system was not sold, in part due to a lack of support from suburban interests. Water shutoffs for nonpayment were also widespread in Highland Park during emergency management (2000–2005); with some residents owing thousands of dollars in unpaid bills, which also led to an attempt to privatize the water system that was rejected due to community opposition (Guyette 2007).

Residents in Highland Park and Benton Harbor faced particularly sharp increases in water bills under emergency management or consent agreement (Smith 2011; CBS Detroit 2014). In Inkster, city council considered reducing water bills for residents but decided not to because they did not want to look irresponsible (AlHajal 2013). As in Detroit, the emergency manager in Highland Park attempted to privatize the city’s water system but the plan was abandoned once it became public that the company would be allowed to bottle and sell the water (Caruso 2011). Pontiac succeeded, with an emergency manager signing a contract with United Water for the operation of its water system; in 2014, the Oakland County Water system took over following many customer complaints over water issues with frozen lines and water main breaks under United Water’s management (Blitchok 2014).

We did not find evidence that our ten comparative cities underwent similar changes in their water systems during this time period. In 2012, Grand Rapids actually decreased water and sewage rates for residents as a result of reduced operating costs and falling interest rates (Van de Bunte 2012), though rates have subsequently been raised to cover differences in yearly revenue (Hicks 2018). Water rates in Wyoming were raised slightly in 2011 to help pay for the expansion of the Lakeshore water plant to meet growing demand (Van de Bunte 2011). Some of our comparative cities have likewise raised water rates since this time period to fund specific infrastructure investments. Water main breaks in Burton between 2010 and 2012 led to a new water infrastructure investment program, which was expected to increase water costs (Acosta 2013; 2014). Water rates increased in Jackson in 2019 to raise funding to replace lead service lines as required by new state legislation (DesOrmeau 2019). Saginaw city council also approved increases in bills due to increases in costs and major projects (Tower 2015). We found no evidence of widespread water shutoffs for nonpayment or attempts at privatization in these cities. Rate increases were tied to specific investments and were introduced gradually over time.