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Protecting Local Governments Against State Control

An exploration of potential challenges to Michigan’s Local Government and School


District Fiscal Accountability Act of 2011

By Andrew MacKie-Mason

Introduction
Poor fiscal management by local governments is a problem for taxpayers, and
state governments have a legitimate interest in promoting fiscal responsibility. But this
interest must be balanced against state constitutional guarantees of home rule and local
autonomy.
Since 1988, Michigan has addressed this issue through a series of fiscal
responsibility laws, implemented in three primary and three amending acts.1 The
framework system is simple: certain indicators of financial mismanagement trigger a
tiered state review process,2 and if a state of fiscal emergency is declared for a local
government or school district by the governor, an emergency manager is appointed.3
However, the evolution of fiscal accountability acts has expanded the discretion and
authority of state officials: the newest act gives the governor almost limitless discretion to
declare a financial emergency, and gives emergency financial managers extreme
authority to control the local government which they are appointed to oversee.
This increase in discretion and power raises state constitutional issues that
Michigan courts have never resolved. Many of the provisions in the old fiscal
responsibility acts that are also found in the Local Government and School District Fiscal
Accountability Act (“2011 FAA”) have not been subject to judicial review, and the added
provisions introduce several new constitutional claims. In addition, rulings on the Local
Government Fiscal Responsibility Acts (“1988 FRA” and “1990 FRA”) have recognized
constitutional violations that remain relevant today. In this article I address potential
challenges to the law as guidance to aggrieved local governments, organizations, and
taxpayers. I will detail potential problems with the review process, infringements on
protected local sovereignty, violations of individual rights, and the imposition of
unfunded mandates on local governments.

Increased Discretion Renders The 2011 FAA Improperly Local

Michigan’s laws are classified as either Public Acts, which must be applicable
throughout the state, and Local Acts, which are designed to target only certain
municipalities. Public Acts are passed in a standard legislative process, but Local Acts
must be approved by two-thirds of the members of each legislative house as well as a
majority of the voters in the affected municipality.4 The 2011 FAA was passed and styled
as a Public Act, so it must be generally applicable in order to be valid.5
The 2011 FAA clearly does not create generally applicable duties throughout the
state. Instead, it affects only those areas for which the governor declares a financial
emergency. However, since the act does not explicitly target certain localities — it could
apply to any local government at some point in the future — it does not automatically
become a Local Act. To determine whether it is local or general we must investigate the
way in which financial emergencies are determined under the bill.
Michigan law allows Public Acts to apply only to certain localities if the factors
affecting application are reasonably related to the purpose of the act and if the factors are
consistently applied to every municipality as long as the act is in force.6
Under the 1988 and 1990 FRAs, the existence of certain determining factors
prompted a mandatory preliminary review, which led to a mandatory review team and
determination by the governor.7 All of those stages were based upon an enumerated list
of factors that may be indicative of financial stress.
The new act, on the other hand, makes the initiation of reviews a discretionary
action by the various state actors, 8 and allows them to consider any factor that seems
relevant, rather than limiting them to an enumerated list.9 If these discretionary reviews
lead to incomplete enforcement of the act in different parts of the state, or if the state uses
purely discretionary factors to find that a financial emergency exists, then the act
becomes improperly local. The legislature cannot make a local act into a general one by
delegating determinations to the governor and other officials.
This challenge may be raised either by a local government or residents of the
municipality that is taken over by an emergency financial manager. Local governments,
school districts, and taxpayers have challenged acts that affect their operations as
unconstitutional under the prohibition on improper local acts.10

Emergency Financial Managers Cannot Dissolve Local Governments

Local governments in Michigan do not exist at the whim of the legislature. While
the creation of political subdivisions is a state matter and local sovereignty is not
guaranteed by the federal Constitution, the Michigan Constitution of 1963 guarantees
municipal rights. The 2011 FAA gives emergency financial managers the authority to
dissolve local governments,11 but doing so would violate constitutional guarantees.
The 1963 Constitution provides that counties are bodies corporate12 and that “No
county charter shall be adopted, amended, or repealed until approved by a majority of
electors voting on the question.”13 Dissolving of a county government would repeal
provisions of county charters establishing certain officers,14 which would be
impermissible without voter approval. Furthermore, dissolving a government eliminates
all county positions, which violates the constitutional guarantee of a sheriff, clerk,
treasurer, register of deeds, prosecuting attorney, and board of supervisors to each
county.15 Dissolving a county government would also eliminate the county seat, which
cannot be done without the approval of the residents and the board of supervisors.16
The constitution treats townships, villages and cities differently than counties.
Dissolution of a township would undermine the constitutional authority of the county
board of supervisors to organize and consolidate townships within its borders.17 Like
counties, townships have constitutionally guaranteed, elected positions that the
emergency financial manager cannot eliminate by dissolving the township government:
the supervisor, clerk, treasurer, and trustees. 18 Dissolution of a city or village
government, on the other hand, would violate the residents’ constitutional right to frame,
adopt, and amend a city charter.19
Since counties, townships and cities exist as bodies corporate with certain
enumerated constitutional rights, they may challenge legislative encroachment on those
rights in the courts. The usual prohibition on suits against the state by one of its political
subdivisions does not apply when specific constitutional guarantees to local governments
are violated.20 In addition, any voter could challenge the abrogation of their right to frame
their charter or vote for elected officials. In the case of township dissolution, the county
board of supervisors could sue to vindicate its right to organize its subdivisions.

Emergency Financial Managers Cannot Abrogate Contracts or


Collective Bargaining Agreements

The 2011 FAA gives emergency financial managers the authority to modify or
terminate clauses of existing contracts21 or collective bargaining agreements22 entered
into by the local government. However, such alteration would violate the Contract
Clauses of the Michigan and United States Constitutions.23 The emergency manager may
terminate elected officials and other public servants who serve at the will of the
legislature, but he cannot abrogate contracts lawfully entered into by the local
government as a body corporate. The inquiry into whether a law violates the federal
Contract Clause takes three parts: whether there is a contractual relationship, whether the
law impairs that relationship, and whether the impairment is substantial.24 The Contract
Clause in the Michigan Constitution is parallel to its federal counterpart.25 Unilateral
alteration of a contract or collective bargaining agreement by the emergency manager, as
long as such alteration is significant, certainly satisfies all three parts.

Emergency Financial Managers Cannot Arbitrarily Fire Certain


Employees
In addition to limits placed by contracts and collective bargaining agreements,
emergency financial managers must also give cause and afford procedural rights before
firing employees who were not hired on an at-will basis.
This was established under the 1990 FRA when Fred Leeb, then the Emergency
Financial Manager for Pontiac, attempted to eliminate the local Legislative Auditor’s
position.26 The Legislative Auditor was hired under a provision of the Pontiac City
Charter that provided she could only be fired for cause.27 The court ruled that such a
position gives its holder a property interest in continued employment that cannot be
violated by the state without due process under the federal Constitution.28
The 2011 FAA Imposes Unfunded Mandates On Local Governments
The easiest challenge to the provisions of the 2011 FAA, one raised in a
committee hearing on the bill but not resolved,29 is that the law imposes unfunded
mandates in violation of Const 1963, art 9, §29 (in relevant part):
A new activity30 or service31 or an increase in the level of any activity or
service beyond that required by existing law shall not be required by the
legislature or any state agency of units of Local Government, unless a
state appropriation is made and disbursed to pay the unit of Local
Government for any necessary increased costs.
“New” activities or services under this section are those implemented after the
amendment took effect on December 23, 1978.32 Since the fiscal accountability acts first
appeared in 1988, any activity they require is new. “Local Government” in this provision
includes all of the entities covered by the 2011 FAA, including school districts.33
The 2011 FAA forces a local government in receivership to pay the salary and
expenses of their emergency financial manager.34 It requires that the local government
fund any legal defense of the law or official actions under the law put on by the state
Attorney General, regardless of who brings the challenge.35 It mandates the local
government provide various forms of insurance for the manager and his or her
employees.36 It requires the local government to fund any future legal defense mounted
by the emergency manager due to his or her actions under the law.37 Finally, it imposes
administrative duties on the local government: supplying information demanded by state
officials during the review process.38
Each of these requirements constitutes a specific and identifiable administrative
action of a local unit of government, and thus falls within the definition of “activity”
under MCL 21.232(1). That statute excludes benefits and protections for employees from
the definition of activity, which may seem to apply to some of the requirements imposed
by the 2011 FAA. Interpreting the statute in that way would render it unconstitutional. To
be valid, the definition of activity must not allow the state to shift its budgetary
responsibilities to local governments. 39 Compensation, insurance, and legal protection for
state appointees are traditionally the responsibility of the state. The same is true of
funding legal defenses made by the attorney general for state statutes and the actions of
state officials. The state cannot pass those costs onto local units of government without
violating the constitution. In addition, the Michigan Attorney General’s office issued an
opinion in 1989 construing the employee benefits exception to apply only to employees
voluntarily hired by the local government.40
Guidance on the applicability of the unfunded mandates ban to the 2011 FAA can
be found in Adair v. Michigan.41 In that case, school districts and taxpayers sued for
declaratory judgment against a state law requiring the districts to provide statistical
reports on student performance to the state. The court ruled that the requirement was an
unconstitutionally unfunded increased level of activity.42 This case is on point to the
provisions of the 2011 FAA requiring cooperation by local officials in the review of
finances by the state, and supports a fortiori a claim that paying salaries, reimbursing
expenses, providing insurance, and funding legal defense are also unfunded activities.
Any taxpayer, or local government acting in parens patriae, may bring a
challenge to the 2011 FAA’s unfunded mandates. Taxpayer standing is guaranteed by
Const 1963, art 9, §32.
Any taxpayer of the state shall have standing to bring suit in the Michigan
State Court of Appeals to enforce the provisions of Sections 25 through
31, inclusive, of this Article and, if the suit is sustained, shall receive from
the applicable unit of government his costs incurred in maintaining such
suit.
The Michigan Supreme Court granted local governments standing and reimbursed their
legal fees in Oakland v. Michigan.43 As per the text of §32, such a challenge should be
brought in the Michigan Court of Appeals, not a state circuit court or federal court.44

Takeover of Pension Boards


As of this writing, two Detroit pension boards – the General Retirement System of
the City of Detroit and the Police and Fire Retirement System of the City of Detroit –
have filed suit against Governor Richard Snyder and Treasurer Andrew Dillon seeking an
injunction to prevent enforcement of MCL 141.1519(1)(m), a provision of the 2011 FAA
that allows emergency financial managers to take over municipal pension funds under
certain circumstances.45
While outside the scope of this article, as it addresses pension funds rather than
local governments and school districts, the complaint makes several claims parallel to
those raised in this article: that the 2011 FAA unconstitutionally allows for the abrogation
of contracts, the amending of local charters, and denial of due process. The resolution of
this case should be of interest to individuals or governments planning to challenge other
aspects of the 2011 FAA.

1 14
1988 PA 101 (MCL 141.1101 et seq.), See i.e. Wayne County Charter, §§
replaced by 1990 PA 72 (MCL 141.1201 3.111 (establishing County
et seq.), amended by 1992 PA 265, 2002 Commission), 4.111 (establishing Chief
PA 408, and 2003 PA 282, all replaced Executive Officer)
15
by 2011 PA 4 (MCL 141.1501 et seq). Const 1963, art 7, §§ 4,7
2 16
MCL 141.1512(1). Compare MCL §10
17
141.1212(1), MCL 141.1104(1). §14
3 18
MCL 141.1515(4). Compare MCL §18
19
141.1218(1), MCL 141.1110. §22
4 20
Const 1963, art 4, §29 Kent Co Aeronautics Bd v Dep’t of
5
Dearborn v. Bd of Sup’rs for Wayne State Police, 239 Mich App 563, 580;
County, 275 Mich 151, 157; 266 NW 609 NW2d 593 (2000)
21
304 (1936) MCL 141.1519(1)(j)
6 22
Lucas v. Bd of Co Road Comm’rs of MCL 151.1519(1)(k)
23
Wayne Co, 131 Mich App 642; 348 Const 1963, art 1, §10, and US Const,
NW2d 660 (1984) art I, §10
7 24
See MCL 141.1212(1), 141.1213(1), General Motors Corp v. Romein, 503
141.1214(2), 141.1215(1) (1990 FAA). US 181, 186; 112 S Ct 1105; 117 L Ed
8
MCL 141.1512(1) 2d 328 (1992)
9 25
See MCL 141.1512(1)(r), Porter v. Highland Park, unpublished
141.1513(3)(l). See also MCL opinion per curiam of the Court of
141.1515(1)(c) referencing 141.1514 Appeals, issued May 30, 2006 (Docket
referencing 141.1513. No. 263479), 2006 WL 1479909, 3
10 26
See e.g. W. A. Foote Memorial Savage v. Pontiac, 743 F Supp 2d 678;
Hospital, Inc. v. City of Jackson 77 F R Serv 3d 907 (ED Mich, 2010)
27
Hospital Authority, 390 Mich 193; 211 id. at 681
28
NW2d 649 (1973) (City of Jackson as id. at 688
29
additional plaintiff), and Airport Michigan House of Representatives.
Community Schools v. State Board of Committee on Local, Intergovernmental
Education, 17 Mich App 574; 170 and Regional Affairs. 2/16/2011.
NW2d 193 (1969) (school district and Testimony of Matt Schenk. Available
local taxpayers as plaintiffs) from State at
11
MCL 141.1519(1)(cc) http://www.house.michigan.gov/Session
12
Const 1963, art 7, §1 Docs/2011-2012/Testimony/
13
§2 Committee13-2-16-2011-2.pdf
30
Defined in MCL 21.232(1), see
Owczarek v. Michigan, 276 Mich App
602, 609; 742 NW2d (2007)
31
Defined in MCL 21.234(1), see
Owczarek, supra
32
Judicial Attorneys Ass’n v. Michigan,
460 Mich 590, 595; 597 NW2d 113
(1999)
33
Const 1963, art 9, §33
34
MCL 141.1515(4)(e)
35
MCL 141.1525(3)
36
MCL 141.1525(4)
37
MCL 141.1525(5)
38
MCL 141.1526(1)
39
Owczarek, supra
40
OAG, 1989-1990, No 6583, p 118
(June 1, 1989)
41
486 Mich 468; 785 NW2d 119 (2010)
42
id. at 482
43
465 Mich 144; 566 NW2d 616 (1997)
44
Parties filing a claim under this
section should take special note of MCR
2.112(M) regarding pleading
requirements for unfunded mandate
suits.
45
Complaint at 29, General Retirement
System of the City of Detroit v. Snyder,
No. ____ (ED Mich, 2011)