Rick Snyder, the "tough nerd" Republican Governor of Michigan, is easily one of the most determined advocates of good government in America today. After voters in November rejected his "Public Act 4," a law that strengthened the process by which Michigan dealt with municipal insolvency, he quickly bounced back, and passed a replacement law shortly after Christmas.
It's remarkable that Snyder should make an issue out of insolvency policy at all. According to Stateline, only 19 American states have "statutes allowing state-supervised local government assistance programs," which in some cases amounts to just "technical advice" but in others means "cash grants [and/or] the appointment of overseers or control boards to run the city until it recovers." Thus, in most American states, when a locality becomes unable to pay its bills, the problem is addressed ad-hoc, by the state or a judge (bankruptcy or receivership).
Why don't most states have a formal insolvency policy in place? To begin with, despite all that has been written about Central Falls, Stockton and such, extreme municipal distress is still an extreme statistical rarity. Throughout much of the nation, a politician who pushes for a formal and pro-active approach to municipal insolvency would sound like someone pitching a solution in search of a problem.
Rarity also threatens the integrity of any insolvency policy. State officials will never get into the habit of relying it as the way to deal with fiscal distress. Even when a policy is in place, there will probably always be a making-it-up-as-we-go-along aspect to insolvency resolution. There will certainly always be a temptation to treat each insolvent city as unique case, which is reasonable, since no two cases of municipal distress are ever exactly alike. It would be vainglorious and futile to design an insolvency policy that did not grant flexibility to those charged with its application. But then at what point are we even still talking about one unified, effective policy, not just a set of suggested guidelines?
And those are only the technical reasons why developing a formal insolvency policy may not be worth state officials' time. There are also political reasons.
Insolvency is messy. To begin with, there is the union issue: most local expenditures are bound up in personnel costs. If expenditures must be reduced to be brought into line with revenues, well, in an unionized situation, that won't come easy.
State interventions are said to subvert local democracy, to emphasize fiscal problems over economic ones, to make a bad situation worse through counter-productive austerity measures, and to be racist (white Governor and state Legislature, black community). State interventions are high-risk and low-reward. Balancing a budget in a place like Flint or Pontiac may be an amazing feat, but it lacks ribbon cutting potential. And distressed cities typically suffer from a variety of intractable problems going back for decades. There are limits on what any outside authority, however strongly empowered, can accomplish in a limited time.
Thus, developing a pro-active insolvency policy implies, almost by definition, picking a fight over race, democracy, and collective bargaining rights before there's even a problem.
When Rick Snyder came into office, Michigan technically had an insolvency policy in place, Public Act 72, passed in 1990. But it was weak and vague. Snyder thought Michigan could do better, so he passed Public Act 4, under which, according to Governing, "nowhere in America d[id] local officials have less control -- and state appointees more -- than in the financially distressed communities of Michigan." Public Act 4 granted sweeping powers to state-appointed emergency financial managers, such as to break contracts, sell off assets and privatize services. (For a thorough account of Public Act 4 and its improvements over Public Act 72, see this extremely detailed report by the Mackinac Center.)
Then came the successful union-led campaign to overturn PA 4. Snyder's counter-revolutionary stroke was PA 436, the "Local Financial Stability and Choice Act," passed shortly after Christmas. This replacement to PA 4 offers a somewhat less high-handed approach to state intervention. Now, localities get to choose between an emergency manager or another intervention such as "mediation with debtors, a consent agreement with the state or municipal bankruptcy in federal court" (see image below). Any emergency manager that the state puts in place is effectively sunsetted (the local elected body can vote to remove an emergency manager after 18 months with a 2/3 majority vote.)
Maybe insolvencies are like typhoons: state governments can set up early warning systems, and even understand the problem's root causes, but the problem ultimately can't be mastered. But Rick Snyder thinks mastery of insolvency, or something close to it, is worth a shot. This belief, and the actions with which Snyder has backed it up, make him one of the premier reformers of state and local government in American today.
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