Democratic dissolution: radical experimentation in state takeovers of local governments.

• Author: Anderson, Michelle Wilde

ABSTRACT

While state interventions to stabilize the finances of struggling municipalities date back to the Great Depression, the current fiscal crisis has brought a startling escalation in the powers granted to state intervention authorities. Aptly observed by Abby Goodnough in The New York Times, cities and states have tried "myriad ways of righting their fiscal ships as the recession plods on," but until very recently, "locking the mayor out of City Hall [was] generally not one of them." (1)

In 2010 and 2011, Michigan and Rhode Island, which have been watched closely by other states, dramatically reformed their laws governing state receiverships for local governments in fiscal crisis. The new legislation provided for suspension and displacement of local government in faltering cities during the period of intervention, replacing all elected local officials with a single state appointee. Such interventions leave the legal corporation of the city and its budget intact: the city's borders do not change, regardless of the revenue potential and service costs of that land base, and the city must pay its own bills. Yet the city's power to govern that territory and budget is drawn up to the state's executive branch. The city's elected officials and its governing charter are set aside for an unspecified period of years.

This Article analyzes the new state receivership legislation in Michigan and Rhode Island and offers the concept of democratic dissolution to help interpret this new development. While the new laws are premised on a genuinely urgent and difficult public policy problem--local governments overwhelmed by debt they cannot service and bills they cannot pay--this Article argues that the reforms do both too little and too much. To cure the underlying structural causes of fiscal crisis, the laws do next to nothing; to improve local management, the laws enact a punishing cancelation of local democracy. For Michigan, Rhode Island, and the other states watching them, I propose legal reforms that more moderately balance the seriousness of the challenges of local fiscal stabilization with the importance of local democracy.

TABLE OF CONTENTS Abstract Introduction I. The New Generation of State Takeover Laws A. An Introduction to State Receiverships B. Michigan C. Rhode Island II. Receiverships as Democratic Dissolution A. A Definition B. A Critique C. Tempering Reforms Conclusion INTRODUCTION

A haircut still looks a lot better than a beheading.

Robert G. Flanders Jr., state-appointed receiver of Central Falls, Rhode Island (2)

Democracy, the governor seems to suggest, is something [poor and minority cities] can't afford.

Rainbow PUSH Coalition (3)

Fiscal crisis is generally described in numbers. Here are a few from the city of Benton Harbor, Michigan. More than 48% of its residents live below the poverty line, (4) compared to just 7% in St. Joseph, Benton Harbor's sister city across the river. (5) Formerly a thriving industrial hub for the region, Benton Harbor saw the rapid flight of thousands of white families and jobs from the 1960s to the 1980s. (6) Today, the city is 91% black. (7) St. Joseph is 88% white. (8) At least five decades of bitter race relations separate the cities sometimes known to each other as "Benton Harlem" and "St. Johannesburg." (9) The number one attribute promoted on Benton Harbor's website is the city's status as an enterprise zone. (10) St. Joseph, by contrast, self-describes as "a growing resort community" that is "nestled on the southern tip of what has been termed 'The Riviera of the Midwest.'" (11) A March 2011 audit estimated Benton Harbor's debt at $6 million--quite a figure for a city of just over 10,000 people. (12) Deepening the fiscal crisis, appliance maker Whirlpool Corporation announced layoffs in 2011 of 5,000 employees, many of whom worked at the company's world headquarters in Benton Harbor. (13)

The number three is now important in Benton Harbor as well. As a result of a law passed in 2011, the City Council is now limited to three powers: calling council meetings to order, adjourning meetings, and approving council minutes. (14) The authority, substance, and process in between--setting the meeting, proposing agenda items, determining policy, and managing operations--all lie in the hands of the city's "emergency manager," a state appointee. (15) Under the 2011 law, when the state places a city in receivership because of fiscal distress, the emergency manager assumes the responsibilities of all elected officials for the city. (16) In addition to functionally firing elected officials, the 2011 law gives emergency managers significant new powers. Most notably, they can now break existing collective bargaining agreements and other contracts, negotiate and approve any future agreements on the city's behalf, and ban the city's entry into new collective bargaining agreements for up to five years. (17) They can also privatize the city for the long-term, if not permanently, by contracting out for services, selling public assets, and cancelling local programs.

Michigan's law is similar in key respects to a new state receivership law passed in Rhode Island in 2010. (18) The new laws in Michigan and Rhode Island represent a major change from older models of state receiverships, in which states generally granted emergency bailout funding in exchange for local consent to the appointment of state receivers, and these receivers then guided financial recovery planning alongside local officials. Breaking with these models in the name of fiscal exigency, Michigan and Rhode Island now permit a state takeover without bailout funding or local consent, and they dramatically increase the powers granted to emergency managers.

The new laws suspend a city's charter and its sitting government, imposing the authority of the state through an appointee of the governor. A legislative sponsor of the Michigan bill thus referred to the legislation as "financial martial law." (19) A more precise description of the new statutes is, in my view, "democratic dissolution"--that is, changes that suspend local democracy, even though the city remains a legal entity. For an unbounded period of time, a city's corporate status is held in place while its charter and system of government are replaced by a single official acting with unprecedented authority, discretion, and autonomy. This unusual combination means that the rereceiverships dissolve democratic self-rule for the city, but not in a way that changes the taxable land base of the city or the service needs of its population. In other words, local power is absorbed by the state but the local budget is not- the struggling city must continue to sustain the costs of an independent municipal government (including the emergency manager's salary, staffing costs, and administrative expenses) through revenues collected locally. Whereas a true dissolution removes a locality's borders and thus merges its land base and people with a larger county or township government, a democratic dissolution preserves the municipal corporation but suspends its government.

This Article analyzes the state receivership laws in Michigan and Rhode Island, using the concept of democratic dissolution to interpret these recent developments. While local fiscal crisis is an urgent public policy problem for which there are no painless remedies, I argue that Michigan and Rhode Island have failed to enact effectual reform. Instead, they answer crisis with an extreme centralization of power that fails to restructure or rebuild the city's finances and management over the long term.

The clear message of these laws--that it is only local government management that stands in the way of solvency--is a gross oversimplification of the causes of fiscal decline. Centralization of power by the state on these terms does not ameliorate structural causes of financial distress, like concentrated poverty, the loss of middle-class jobs across a region, or local borders that fragment a single metropolitan area into socioeconomically segregated cities. Indeed, local democratic dissolution may only exacerbate fiscal malaise over the longer term by facilitating changes (like the abrupt sale of public assets) that produce quick returns at the cost of permanent sustainability. Along the way, radical state takeovers can enflame antagonism between state and local actors, further disempower a beleaguered local electorate, and dramatically undermine the transparency and accountability of local governance.

The consequences of these reforms matter nationally because several other states where municipalities are mired in debt and deficits are watching Michigan and Rhode Island. (20) Indeed, a bill borrowing elements of the Michigan law was passed in Indiana in March 2012. (21) For all of these states, I offer legal reforms to better address the serious challenge of local fiscal stabilization while upholding the virtues of local democracy.

1. THE NEW GENERATION OF STATE TAKEOVER LAWS

   Compared to collective bargaining reform efforts in Wisconsin, the Michigan and Rhode Island laws went into effect with little public attention beyond the states' borders. Yet they were not unnoticed; indeed, Michigan's reforms attracted attention from the likes of Steven Colbert and Rachel Maddow. (22) Maddow commented, "this could be the most important and most under-covered story of the year." (23) To introduce these laws, this Part describes their scope and structure and situates them in the context of other laws that address local fiscal crisis.

   1. An Introduction to State Receiverships

      Three categories of laws have evolved to address municipal fiscal meltdown: (1) traditional creditors' remedies, i.e., state mandamus actions to compel increased taxes for payment of debts, which can be organized and enforced through a judicial receivership; (2) municipal bankruptcy under Chapter 9 of the U.S. Bankruptcy Code, if the state permits...