Our clients are understandably anxious about the provisions of the new Local Government and School District Fiscal Accountability Act (commonly referred to as the EFM Act) and the related potential impact on their organizations. The best first step is always education. Bits and pieces of the legislation have been reported in the media. Having a full understanding of the triggers that may lead to a review and understanding the resulting review process are key to determining what impact, if any, this act will have on your entity. To that end, we have summarized the provisions of the EFM Act that was passed on March 16, 2011.
If you have any concerns at all about the impact of the new provisions, we encourage you to answer the following questions:
- Do we have our financial house in order? Do we know where we stand?
- Do any of the 18 triggers listed below apply to us?
- Can we develop a practical plan to deal with these items?
- Have we fully documented how these new plans will pay off in the long run?
- Have we prepared a long-range forecast to determine if new triggers will be set off in the near future?
Knowing where you stand in terms of your structural deficit, implementing plans to address the issues, and fully documenting your game plan will help you now and will go a long way later if a review is ever initiated.
House Bill 4214 repeals Public Act 72 of 1990, the existing Local Government Fiscal Responsibility Act. Legislators felt this amendment was necessary in order to protect the health, safety, and welfare of the citizens that may be adversely affected by insolvency of local governments and school districts. Fiscal solvency is necessary to protect the credit of the state and its political subdivisions.
To date, seven Michigan communities have had emergency financial managers appointed under Public Act 72 of 1990:
Hamtramck — 2000
Highland Park — 2001
Flint — 2002
Village of Three Oaks — 2008
Ecorse — 2009
Pontiac — 2009
Benton Harbor — 2010
Additionally, a financial manager was appointed for the Detroit Public School District in 2009.
Preliminary Review to Determine Financial Problem
For a school district, the State Superintendent of Public Instruction could conduct a preliminary review for financial problems, if one or more of the following 18 events occurred:
- Review requested by governing body/chief administrative officer
- Review requested by a creditor under certain conditions
- Petition received, signed by at least 5 percent of the total votes cast in that jurisdiction for last gubernatorial election
- Failure to contribute required contributions to the pension plan in a timely manner
- Payless paydays or not paying retirees (seven-day window)
- Bond or note default or violation of covenants
- Senate or House resolution requesting a review
- Revenue Bond or Revised Municipal Finance Act violations
- Local Emergency Financial Assistance Loan Board order violations
- Violating the budget act section regarding expenditures not exceeding budget
- Failing to file a timely, conforming annual audit
- Delinquencies in distribution of taxes collected for other jurisdictions
- Breaching obligations under a deficit elimination plan
- A court ordered tax levy without the prior approval of the governing body
- Ending the year in a deficit condition or not filing a deficit elimination plan
- Ending a school’s most recently completed fiscal year with a deficit without submitting a deficit elimination plan within the required timeframe
- Long-term debt rating within or below BBB category or equivalent
- Existence of other facts or circumstances indicative of financial stress, as determined by the state superintendent
Before commencing the review, the state superintendent will give specific written notification of the review.
If a finding of probable financial stress is made, the governor shall appoint a review team consisting of the state superintendent, the state treasurer or his designee, the director of technology, management and budget or his designee, a nominee of the senate majority leader and a nominee of the speaker of the house. Others could be appointed as well.
Considered in Review Team's Report
If the conditions above exist and a review is deemed appropriate, then the review team would be required to report its findings to the governor, with a copy to the state superintendent within 60 days following its appointment. The report would have to indicate the likely occurrence of any of the following:
- Default in payment of bonds
- Failure for a period of 30 days to transfer: (1) income taxes withheld; (2) taxes collected for another taxing authority; (3) any contribution required by a pension or benefit plan
- Failure to pay wages or retiree benefits within a seven-day window
- Accounts payable in excess of 10 percent of total annual expenditures (basically 36 days of expenses)
- Failure to eliminate an existing deficit within two years
- Deficit projected in general fund in excess of 5 percent of budgeted revenues
- Failure to comply with deficit elimination plan
- Material loans to the general fund from other funds that are not regularly settled or are growing
- Material recurring unbudgeted subsidies from the general fund to other funds
- Existence of structural operating deficit
- Use of restricted revenues for unauthorized purposes
- Any other facts and circumstances indicative of financial stress
Conclusions that can be reached by the review team with concurrence by the governor:
(1) Review team can negotiate and sign a consent agreement (CA) with the chief administrative officer. Before it goes into effect it needs to be approved by the District’s governing body.
- CA provides for remedial measures under a plan that supersedes the budget
- Material uncured breaches of the CA give state superintendent right to place into receivership
Key Provision — The Consent Agreement may include a grant to the chief administrative officer of one or more of the powers prescribed for emergency managers, if necessary to achieve the goals and objectives of the consent agreement. A key exception is that the EFM power to reject, modify, or terminate one or more terms and conditions of an existing collective bargaining agreement cannot be granted under a CA.
Collective Bargaining Exemption – Beginning 30 days after a local government entered into a consent agreement, the local government would not be subject to the collective bargaining provisions in the Public Employment Relations Act.
The EFM will continue serving essentially until the financial emergency is rectified and the district is removed from receivership.
Key Powers of the EFM Under Receivership
- Conduct all aspects of operations within the available resources
- Determine if criminal conduct contributed to the emergency and refer the matter to the attorney general and the local prosecuting attorney
- After meeting and conferring with the appropriate bargaining representative, if a prompt resolution is unlikely, they can reject, modify, or terminate one or more terms and conditions of an existing collective bargaining agreement.
- May recommend that the district consolidate with one or more other districts
- May disincorporate or dissolve the district
- Consolidate or eliminate departments or transfer functions from one department to another
- Sell or transfer assets
- Enter into agreements with other local governments or entities for the provision of services, the joint exercise of powers, the consolidation of services or the transfer of functions and responsibilities
- Apply for a loan from the state
- Order a millage election
- Any other actions deemed necessary to achieve the objectives of the financial and operating plan
If no reasonable alternative exists to rectify the situation, EFM may recommend Chapter 9 bankruptcy.