While the City of Detroit seeks to emerge from bankruptcy in late-September 2014, sixteen other Michigan municipalities are currently operating under an emergency manager or a consent agreement with the state, or are under state financial review. The appointment of an emergency manager is a prerequisite for a Michigan municipality to file for chapter 9 bankruptcy protection. The distressed municipalities include: Allen Park, Benton Harbor, Benton Harbor Area Schools, Detroit Public Schools, Ecorse, Flint, Hamtramck, Highland Park, Highland Park School District, Inkster, Lincoln Park, Muskegon Heights School District, Pontiac, Pontiac Public Schools, River Rouge, and Royal Oak Township.
As discussed in a recent Detroit Free Press editorial, the key factors causing Detroit’s bankruptcy filing (e.g., high legacy costs, massive debt loads, and a declining tax base), can be found in many of the entities currently operating in Michigan’s emergency management system. For example, Flint, which is embroiled in litigation with its retirees over proposed benefit cuts, has been in emergency management since 2011 and now faces the choice of either cutting pensions or cutting funding for emergency services. Cutting pensions, which many argue violates Michigan’s constitution, has been green-lighted by the bankruptcy judge in the Detroit bankruptcy case, who essentially ruled that federal law, which the judge believes allows for pension cuts, trumps state law when a municipality files for bankruptcy protection. That ruling, which was made as part of the initial determination that the City of Detroit was eligible for chapter 9 bankruptcy, is currently being appealed.
Meanwhile, it appears inevitable that more and more municipalities will be forced into emergency management. For example, Wayne County, where Detroit is located, is facing serious financial issues itself. Its current pension obligations are only 45% funded and it has an $850 accumulated deficit. Michigan’s emergency management law allows for state intervention if pension funding falls below 80%. In February 2014, Wayne County proposed a plan to cut its debt load by more than $175 million, which will supposedly return the county to fiscal solvency by the end of 2015. The plan calls for, among other things, the spinning off of the county’s wastewater treatment facilities for an expected $121 million profit and the use of $81 million from the delinquent tax revolving fund. The State of
Michigan must still formally approve the plan, but has already announced its conditional approval.
The issues facing Flint and Wayne County illuminate the struggles of many Michigan municipalities and highlight the probability that Detroit’s bankruptcy filing may have been the first of many municipal bankruptcy filings in Michigan.