Financial Martial Law in Michigan

A new law speeds the takeover of financially ailing towns and cities by state-appointed emergency managers

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By Susan Berfield

Rick Snyder, a former technology executive and venture capitalist, campaigned for governor of Michigan as a moderate Republican not in thrall to Tea Party politicking. He called himself "one tough nerd." He appointed another nerd, Democrat Andy Dillon, the former speaker of the Michigan House of Representatives and a former corporate turnaround expert, as treasurer. In their four months in office, they have overseen the passage of a law that's as radical an experiment as any in the country. It dramatically speeds up the process by which financially troubled cities, towns, and school districts can be taken over by state-appointed emergency managers.

The law gives those managers—often former politicians or civil servants—broad and controversial powers, including the authority to void union contracts and remove elected officials. It has also given other outsiders, namely private consultants and restructuring experts, an opportunity to do to distressed places what they've done to distressed companies. "Ninety percent of the law is an early warning system," says Representative Al Pscholka, who sponsored it. "The fundamental point is that if the municipality had made the hard choices there would be no need for an emergency manager."

Michigan is the perfect petri dish for experimental cures in crisis management. Michigan State University economist Eric Scorsone says half the state's communities are under financial stress; unemployment has been above 10 percent for the past three years; of nearly 5 million taxpayers, 200,000 are in arrears; and it's the only state to experience a decline in population since 2000. Still, when the Michigan legislature passed Public Act 4 on Mar. 15, protesters were outside the Capitol in Lansing waving signs that read "Privatize Snyder" and "Recall the Ricktator." Snyder says he doesn't want to exert control over local governments. His intention is the opposite: to identify struggling localities early on and give officials the motivation and help to make difficult decisions about layoffs, service and pension cuts, property sales, privatization—and even the dissolution of entire towns and school districts if necessary. Senator Jack Brandenburg of Harrison Township put it more bluntly: Emergency managers would be deployed as a last resort in communities that need "financial martial law."

On Apr. 14, Joseph Harris, the emergency manager of Benton Harbor (population 11,000), test drove his new powers—by stripping all of Benton Harbor's elected officials of what remained of theirs. A former chief financial officer of Detroit, Harris had been overseeing the community near Kalamazoo since April 2010. He's one of four emergency managers appointed by the former governor, Jennifer Granholm, under a 20-year-old law that granted managers less authority. (Pontiac, Ecorse, and the Detroit school system currently have emergency managers.) "The local elected officials constantly passed resolutions against Harris. They threatened lawsuits. They impeded his ability to do the job," says Pscholka, who represents the area that includes Benton Harbor. "Harris put them in the timeout chair."

A 2009 state review had found Benton Harbor's pension system severely underfunded. Its public safety expenses were more than its tax revenue. The city hadn't filed audit reports on time in eight years. Harris's arrival still came as a shock. According to a local radio station, City Commissioner Duane Seats compared Harris to AIDS. "There's no cure for him," Seats said. Now Harris is the mayor, finance director, and tax assessor. In an Apr. 25 interview with the local Fox News station, he said: "It is conceivable that I would terminate the union contracts.… I believe I'm the angel of common sense, and I believe that 90 percent of the citizens believe I'm the angel of common sense. You hear the commotion made by the vocal minority."