Commentary

Detroit 'Openly and Notoriously' Went Bankrupt

Its reward? Maybe a state bailout

Detroit Emergency Manager Kevyn Orr visited Lansing last week trying to persuade hesitant state lawmakers to ante up $350 million toward a partial bailout for the city.

It’s a tough sell for reasons Orr himself expressed with regard to a group that is getting no love from current policymakers — those who lent money to the city and would like to get repaid. Here is how he characterized the actions of some of these lenders:

If you lent money to an insolvent city that has been going insolvent as openly and notoriously [emphasis added] as possible since 2000, and you don't have as security interest, then you are an unsecured creditor.

In other words, Orr contends the city's fiscal malpractice was so flagrant that these lenders knew or should have known trouble was coming, and so today have little ground to complain about proposals to give them disproportionately large financial "haircuts" compared to others.

But hang on, there's a big contradiction in this. The lenders weren't the only ones who "knew or should have known." Both city and state officials were well aware of Detroit's looming fiscal problems, and in general they chose a business-as-usual approach to its "open and notorious" mismanagement, spending and debt. For years, they themselves ignored countless warnings about the city's growing financial house of cards.

Among many who issued such warnings was the Mackinac Center for Public Policy, which in 2000 published a Detroit-specific, full-color edition of the Michigan Privatization Report that gave explicit warnings about the city's underfunded pension system (including its retiree health care promises).

The city's health insurance plan for retirees, on the other hand, is not actuarially sound. It is funded on a pay-as-you-go basis … the liability that has accrued to the city for Detroit's current and future retirees for health care lies between $1.75 billion and $3 billion.

A few months later this author warned the state's Treasury Department that Detroit had violated the Uniform Budget and Accounting Act. The violations should have triggered an emergency financial review by the state. The warning letter stated:

I bring this to your attention for two reasons. First, I believe the law may have been violated and feel obligated to bring this to your attention for a remedy. Second, Detroit's fiscal health is poor and eroding further still.

I spent the last five months poring over the city's budget and Comprehensive Annual Financial Report and have been mortified by my discoveries. I believe that a state investigation into the city's fiscal health may be just what Detroit officials need to get them to make real changes for the city and its citizens.

In 2005 I published an op-ed in The Detroit News titled, "Detroit Can't Postpone Reforms" with the following warning:

Real reform can't be postponed. If Detroit's decline persists and the city's financial problems continue, the state may be forced to appoint an "emergency financial manager" to run the city under Public Act 72 — an ignominious end for the mayor and Detroit itself.

In the same year, then-Mayor Kwame Kilpatrick warned of a possible receivership while a New York Times headline blared: "Shrinking, Detroit Faces Fiscal Nightmare."

Given the massive failure of state and local officials to address the city's problems when there was still time to avoid what has now occurred, it is rich indeed that their successors (some of whom are the same people in different elective offices) are now trying to force Michigan taxpayers to bailout a Detroit political class and citizenry who for decades have been "openly and notoriously" hostile to real reform.

Michigan Capitol Confidential is the news source produced by the Mackinac Center for Public Policy. Michigan Capitol Confidential reports with a free-market news perspective.

News Story

Attorney General: School District Violating State Law By Automatically Deducting Union Dues

Wayne-Westland says appeals process not exhausted

The Wayne-Westland Community Schools district automatically deducts union dues from employee paychecks, which the Michigan Attorney General's office says is a violation of state law.

An attorney representing Wayne-Westland said the district can do it because the appeals process in an Ingham County court case involving dues deduction hasn’t been exhausted yet.

Public Act 53 of 2012, which made it illegal for school districts to take union dues out of the paychecks for school employee unions, has been challenged twice in court since it became effective March 16, 2012. Both courts ruled against the unions.

The legal issues became complicated when U.S. District Court Judge Denise Page Hood issued a preliminary injunction on June 5, 2012. On May 9, 2013, the Sixth Circuit Court of Appeals overturned Judge Hood's decision, and on July 10, 2013, Judge Hood dissolved the injunction.

What wasn't as clear was what happened to those districts that passed collective bargaining contracts during the 13 months Judge Hood's injunction was in place.

Wayne-Westland ratified new contracts for eight union groups just before the March 28, 2013, deadline when the right-to-work law became effective.

The state Attorney General took the stance that those contracts signed during the injunction should have to abide by PA 53.

The Attorney General's stance was seconded by an Ingham County Judge in March.

That's when several unions in the Lansing School District filed their own case in Ingham County Circuit Court challenging the legality of PA 53. On March 28, Judge William Collette ruled contracts signed during the injunction had to abide by PA 53.

John Gierak, the attorney for Wayne-Westland Community Schools, cited the status of the case in Ingham County Circuit Court as the reason the district was still automatically deducting dues for the union.

In an email, Gierak said the judge allowed for an appeal and that the judge's order would not be enforceable during the appeal. On April 28, the unions filed a motion for reconsideration and the judge hadn't acted on that appeal as of yet, Gierak said.

"We will be advising the district's board of education with respect to the Ingham County Circuit Court case in the near future," Gierak said.

The Attorney General's office said the Wayne-Westland contract violates the law.

"Any collective bargaining agreements entered, amended or otherwise modified to authorize a public school employer to use public resources to deduct dues and fees for labor organizations from public school employees would violate the law," said Joy Yearout, a spokeswoman for the state Attorney General.

Patrick Wright, senior legal analyst for the Mackinac Center for Public Policy, said the law is two years old and two courts have rejected challenges to it.

"It is past time for the district to actually follow it," Wright said.

The Michigan Education Association has set up electronic deductions for its members via a credit card or bank account.

Michigan Capitol Confidential is the news source produced by the Mackinac Center for Public Policy. Michigan Capitol Confidential reports with a free-market news perspective.