Finance Professionals Eye Detroit And Other Strapped Michigan Cities For Emergency Manager Takeover

Finance Professionals See Business Opportunity In Strapped Michigan Cities

NEW YORK -- As Michigan cities grapple with budget deficits and spending cuts, their troubles amount to an attractive opportunity for financial industry players, who are eyeing individual localities for state-sanctioned takeovers.

Thanks to a new Michigan law, the governor can appoint an emergency manager to have total control over a municipality or school system deemed to be in dire financial straits. Such officials currently run three Michigan cities and the Detroit school district. Many more, from private and public industries, are waiting in the wings, boning up on municipal governance in case one of them is called upon to turn a city around. Hundreds have already been trained.

In Detroit, the largest city in the state, the upcoming budgeting process carries an implicit threat: If local politicians can't convince the state they have what it takes to repair the city's finances, the state could appoint an outside official to do the job for them. The city has already hit several of the triggers to initiate the process that could install an emergency manager, say local politicians, who are scrambling to keep the city government out of receivership.

But would-be emergency managers say they can succeed where elected officials have failed. They stand to draw six-figure salaries from the local governments under their management, but some talk about this work as if it were a civic duty.

"We feel very strongly that not only is there a business opportunity here, but we want to be part of a solution for the greater good," said Michael Imber, a principal in Grant Thornton LLP's corporate advisory and restructuring services practice in New York. "We're absolutely ready to help."

Imber is not alone. In February, he was one of about 50 graduates of a training course for Michigan emergency managers, a two-day program promoted in Crain's business magazine.

The course was popular, with a waiting list exceeding 100 people, said Eric Scorsone, an economist at Michigan State University, who helped organize the session with the Turnaround Management Association, a corporate restructuring industry group. More than two-thirds of the participants in February were from the private sector, Scorsone said. At the next training program, held in April, public sector professionals were more heavily represented, and about 400 people participated. That course, too, had a long waiting list.

"There's constant chatter going on about this," said bankruptcy attorney Harley Goldstein, a partner at the law firm K&L Gates. "Everybody wants to make a buck."

Michigan has had an emergency manager statute on its books for 20 years, but Public Act 4, signed by Republican Gov. Rick Snyder in March, endows these officials with expanded powers over the localities where they're dispatched. Emergency managers now can suspend collective bargaining rights for unions. They can terminate worker contracts. They can strip the mayor and the city council of all their power.

These officials were once called "emergency financial managers." Now they're called just "emergency managers."

"That's to emphasize that it's not just about finances," Scorsone said. "It's more like a CEO rather than a CFO."

But even "CEO" doesn't fully capture the extent of emergency managers' authority. In the city of Benton Harbor, Joseph Harris has been the emergency manager for a year. Elected officials have resisted his rule, but thanks to Harris' new powers, he is able simply to “put them in the timeout chair,” state Rep. Al Pscholka (R) told Bloomberg Businessweek.

For Detroit, the coming two months are a crucial period, a time in which the local elected officials must prove to the governor that they can take care of the city on their own. The fiscal year ends June 30, and a new budget, which local officials are now in the process of writing, will take effect the following day. Mayor Dave Bing's proposed budget includes cuts totaling nearly $100 million from a $1.3 billion general fund. The actual cuts could be even greater, city council members say.

But it might take more than a balanced budget to convince the state to leave Detroit alone. Local politicians are also writing a plan to eliminate the city's accumulated deficit, which exceeds $200 million, according to the mayor's estimate. The goal is to give the city a budget surplus in five years.

But for all the planning, the city's finances could remain tenuous. For one, Detroit's deficit-reduction plan depends on the state's allowing the city to collect certain taxes, and to raise others. The latest Census data showed Detroit's population had declined by a quarter over the last decade, falling below a legal threshold and preventing the city from collecting a utility tax. To get this revenue, and to raise its income tax, Detroit needs approval from the Republican-controlled state legislature -- the same body that passed the new emergency manager law.

Already, the city has made deep spending cuts to compensate for its depleted coffers. Workers have absorbed furlough days that amount to a 10 percent pay reduction. But city officials say they're prepared to cut even more.

The mayor has proposed shrinking the workforce by nearly 200 positions to help achieve that $100 million in savings. Other layoff counts discussed around City Hall reach as high as 1,000 workers, Council Member James Tate said.

The pension and health care systems, too, are frequently cited targets for cuts. Between June 2008 and June 2010, the assets in Detroit's General Retirement System pension plan lost nearly 40 percent of their value as the financial crisis struck, an auditor's report shows. In his budget address last month, Mayor Bing said he wants to replace the city's defined benefit pension plan with a 401k-style defined contribution plan for future hires, and to reduce the value of future employees' pensions.

But the city's organized labor has resisted. In the end, budget savings might depend on whether the elected officials can successfully negotiate with unions.

"We have to make those unpopular decisions," Tate said. "I truly believe that this particular city council and this mayor will probably go down as one of the most unpopular groups of city leaders in the history of this city. We're talking about massive change, massive sacrifice."

Outside the city, prospective emergency managers say they can do better.

"There's no question that an outside party can move things along faster," Imber said. "Whatever the constituencies are that are resistant to change need to recognize what the reality is. If they don't, they're going to lose the right to choose."

While some prospective emergency managers have little or no experience in the public sector, they say their private sector experience has prepared them for this job.

"We run a process to solve the financial issues of the enterprise," said Michael Boudreau, a director at the financial firm O'Keefe and Associates, who has 20 years of experience in private industry, and who attended the February training session. "That process works in one industry as well as another industry. In this case, I'm going to say that it works just as well in private as in public."

Like elected officials, emergency managers are paid by the municipality they serve. But private sector turnaround artists are accustomed to salaries far larger than what these cities would offer. A "typical" salary for an emergency manager is about $11,000 a month, according to Terry Stanton, spokesperson for the Michigan Treasury Department.

For Detroit, the salary would likely be more, said Scorsone, the economist who helped organize the emergency manager training sessions. He estimated that the annual pay for managing Detroit could reach as high as $400,000. The Detroit Public Schools' Emergency Manager, Robert Bobb, earns about $350,000 annually.

Compensation for private sector restructurings is often many times that. But clients in the private sector tend to have deeper pockets than Detroit taxpayers, who would foot the bill for an emergency manager. The city could end up paying several salaries, since the emergency manager can appoint advisers.

But Goldstein, the bankruptcy lawyer, said in an email that he would consider working on Detroit on a pro bono basis. "I strongly believe that restructuring professionals should give something back to the community," he said, adding, "Detroit's situation is a noble cause that is deserving of altruism."

Stanton, the Michigan Treasury spokesperson, refused to speculate about whether an emergency manager is in Detroit's future. State officials are "not waiting with bated breath to send EMs into different local units of government," he said. What's more, the purpose of the new law is preventative, he said.

"The goal here is not to name emergency managers," Stanton said. "The goal is to avoid having to name emergency managers."

Indeed, the new law seems to have inspired a fresh sense of urgency in Detroit city hall. A state takeover would be "tragic," said Council Member Kwame Kenyatta. Local officials are avoiding it "like the plague," Council Member Tate said.

"It would be the end of the democratic process as Detroiters know it," said Gary Brown, the council president pro tem. "You'd basically have a dictator that's not accountable to the citizens of the city of Detroit."

"I appreciate people getting their training, but we won't need them," Council President Charles Pugh said. "I hope that that training was in vain. I hope that they wasted their time."

But not all city leaders show such confidence in the way the city is currently run. Al Garrett, president of the local division of the American Federation of State, County and Municipal Employees, said the city council members have a vested interest in avoiding emergency receivership -- to protect their own jobs.

Garrett expressed frustration with the way local politics works. He strongly opposes an emergency manager takeover -- "it's just a host of bad things," he said -- but he also said the current city leaders aren't exactly ideal.

"There are decisions that are made daily that make no damn sense, that lead to our fiscal crisis," he said. "Part of what we want to see, when we go to the table, is how are you going to deal with the other issues."

"I'm not willing to voluntarily take a bad deal," he added, "just to get the city out of receivership."

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