Academic journal article Public Administration Quarterly

Emergency Financial Management in Small Michigan Cities: Short-Term Fix or Long-Term Sustainability?

Academic journal article Public Administration Quarterly

Emergency Financial Management in Small Michigan Cities: Short-Term Fix or Long-Term Sustainability?

Article excerpt

INTRODUCTION

As a form of municipal governance, emergency financial management offers a window of opportunity for local governments to implement sweeping operational and organizational changes. Unlike an elected mayor who is accountable to the residents or a city manager who is accountable to the elected council, an emergency financial manager (EFM) is typically accountable to the state governor and legislature that intervene to prevent or remedy a municipal bankruptcy. A state mandate to improve local fiscal condition and independence from voter control are two unique features of emergency financial management that set it apart from the conventional forms of municipal governance. Since the appointment of an EFM is politically costly and is often viewed as a threat to local democracy, an assessment of the outcomes of emergency financial management is important for determining whether the benefits of an EFM justify the costs and also for legitimizing emergency financial management as a governance tool if it is found to be effective. Little empirical evidence on the processes and outcomes of emergency financial management has been collected to date.

Academic literature recommends a range of actions for EFMs who find themselves steering a fiscally distressed municipality (Mallach & Brachman, 2013). But since local circumstances differ, no standard operating procedures for emergency financial management exist. As a result, EFMs take actions that they see fit in given circumstances. In this study, we are interested in analyzing practices of emergency financial management and linking these practices to the manager effectiveness in achieving local short-term and longer-term fiscal health. Using both qualitative and quantitative data for 2003-2014, we show how three Michigan cities went through emergency management and how their key fiscal health indicators evolved over time. We conclude that emergency financial management holds promise for improving long-term fiscal health, with the success resting on the EFM's long-term vision and the flexibility they are afforded. Importantly, we show that chronic fiscal stress in Michigan cities may have resulted from mismanagement no less than from structural and demographic pressures.

The study is structured as follows. First, we present background information on municipal fiscal stress in Michigan and discuss the role of the state in municipal financial emergency management. Second, we briefly review studies on the form of municipal government and discuss theoretically expected effects of emergency financial management on local fiscal condition.

Next, we review the literature on measures of fiscal condition and select four indicators that capture important short-term and long-term aspects of fiscal health: unrestricted general fund balance, annual required pension contribution, pension funded ratio, and long-term debt. Then, we discuss emergency management practices in the municipalities over FY 2003-2014 and accompany the narrative with an analysis of changes in the four selected indicators. We conclude by discussing aspects of emergency financial management that are likely to be conducive to a longer-term fiscal health of legacy cities.

BACKGROUND

Since the decline of the automotive industry and manufacturing in Michigan in the 1970s, many Michigan municipalities have experienced chronic fiscal stress and ongoing budgetary pressures (Skidmore & Scorsone, 2011). These challenges have been exacerbated by changes in revenue sharing arrangements such as a reduction in state aid and by state limits on local revenue growth and property taxation (Skidmore & Scorsone 2011). In 1990, in the context of the general economic malaise of its municipal governments, Michigan passed Public Act 72, a law that authorized state interventions in local fiscal affairs by allowing the governor to appoint emergency financial managers for cities in dire fiscal straits. …

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