Local Home Rule and State Affairs in Michigan. Dr. Eric Scorsone Department of Agricultural, Food and Resource Economics Michigan State University

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1 Local Home Rule and State Affairs in Michigan Dr. Eric Scorsone Department of Agricultural, Food and Resource Economics Michigan State University 1

2 RoadMap Section one: The debate and concept of home rule Section two: Michigan home rule and local government Section Three:

3 Section One: The Concept and Debate over Home Rule

4 Government Service and Regulatory Responsibilities That can be delegated to local units of government (school districts and boards, cities, counties, townships) Or, departments and agents of the state government could carry out these tasks Local control of schools emerged under Massachusetts Act of 1789 and

5 Home Rule and Local Government Can be defined as autonomy or the ability to make decisions free of interference from outside forces Imperium in imperio a state within a state

6 Why Home Rule? We know at the local level our needs and preferences better than higher level governments More efficient and cheaper Educating citizens about democracy (Cooley)

7 Pitfalls of Home Rule Capture of local government elected officials by local special interests Ignore impact on neighboring jurisdictions (externality) Failure to cooperate on key issues and public goods Widespread discrepancy in quality of service across jurisdictions (equal protection)

8 Two Sides of the Argument: The Law Story Dillon's Rule Cooley Doctrine 8

9 Creatures of the State (No Home Rule) Dillion s Rule (Iowa Supreme Court) Local governments possess no inherent sovereignty unless expressly implied by state law Local governments owe their very existence to the state 9

10 Dillon s argument People v. Hurlbert Citizens had believed that certain limits should apply to state governments Something of a retreat later but still exerted that as long as a municipality did not harm others it was a valid exercise of local control

11 Home Rule Concept Most forcefully argued by Thomas Cooley (MI Supreme Court) in late 1800 s Grants discretionary authority to local governments over local affairs Local government is a matter of absolute right to citizens, cannot be taken away by state 11

12 Home rule origins States began passing constitutional and statutory home rule in 1875 Missouri was first, MI was in the first dozen in 1908 Two stage process First allowed for locally drafted charters Second stage was court directed; liberal interpretation to favor local governments

13 Trenton v. New Jersey 1923 (Supreme Court) In the absence of state constitutional provisions safeguarding it to them, municipalities have no inherent right of self-government which is beyond the legislative control of the state. 1 A municipality is merely a department of the state, and the state may withhold, grant or withdraw powers and privileges as it sees fit. However great or small its sphere of action, it remains the creature of the state exercising and holding powers and privileges subject to the sovereign will. 13

14 Modern definition of Home rule ability of a local government to act and make policy in all areas not designated of statewide interest Must include a degree of autonomy Capacity to perform or use authority

15 Current Examples of Home Rule Fracking LGBT community rights Minimum wage

16 Home Rule Categories Operational Ability to act without legislature Noninterference from state Structural Imperium in imperio Legislative home rule Source of Authority Constitutional statutory

17 Court treatment of home rule If ordinance relates to statewide matter Ordinance conflicts with state law State legislation explicitly preempts local law State legislation implicitly preempts local law

18 Section Two: Michigan, Home Rule and Local Government

19 GENERAL PURPOSE SPECIAL PURPOSE Type Quantity Townships 1,242 Villages 261 Cities 272 Counties 83 School districts 556 Int. school districts 57 Community colleges 29 Special authorities Unknown ( ) Total 2500 approx. 19

20 Local Governments Overlapping Boundaries County City School Dist.* Township** Intermediate School Dist.*** * Boundaries may cross city, township and village lines ** Boundaries are within the township *** Boundaries may include more than one county 20

21 MI Business Leaders Survey, 2013

22 From a survey of MI local govt. leaders The first question was whether or not the local leader thinks there are too many local governments in Michigan today. Overall, 29 percent of local leaders agree that there are too many local governments, while 61 percent disagree. County and city leaders are much more likely than township or village leaders to say there are too many units. Only 23 percent of leaders from the smallest jurisdictions think there are too many local governments, compared to 68 percent of leaders from the largest jurisdictions.

25 U.S. School Districts 200,000 districts in US in 1900 MI has about 2,500 Number declined over the 20 th century as industrialization and urbanization took place Small rural districts closed MI closed almost 2,000 districts Number has stabilized at about 20,000 nationally

26 School Consolidation is very possible Arkansas PA 60 of 2003 mandated school consolidation law Any district with less than 350 students must consolidate or be annexed by a larger district Impact on over 100 AK school districts Biggest question was the issue of excessiveness of transportation travel time for a student Fourteenth amendment violation potentially

27 Understanding Michigan s Emergency Manager and Early Warning System Eric Scorsone, PhD Kristi Bowman, JD, MA Kacy Martin Rachel White Seminar sponsored by: Michigan State University Extension and Michigan State University College of Law

28 Context

Context 1750000 Trends in Michigan K 12 Student Enrollment 1700000 1650000

29 Context Trends in Michigan K 12 Student Enrollment Source: Michigan Senate Fiscal Agency

30 Context Graphic Source: Moody s. (2013, November). Declining demographics and growing competition pressure Michigan schools. Report No

31 Context Source: Michigan Senate Fiscal Agency

32 Context Graphic Source: Citizens Research Council of Michigan. (2013, May). Funding for Public Education: The Recent Impact of Increased MPSERS Contributions. State Budget Note

33 Context Number of Schools Number of Michigan Schools in Deficit or Projecting Deficit, by Year Note: Count taken in December of each year Source: Michigan Department of Education Year

34 Context Characteristics of Fiscally Stressed Districts: Enrollment Districts that did not successfully eliminate their deficit (and went further into deficit) Districts that successfully eliminated their deficit Source: Michigan Department of Education; CEPI MiSchoolData

35 Context Characteristics of Fiscally Stressed Districts: Economically Disadvantaged Students Districts that did not successfully eliminate their deficit (and went further into deficit) Districts that successfully eliminated their deficit Source: Michigan Department of Education; CEPI MiSchoolData

36 Context Characteristics of Fiscally Stressed Districts: Students Exercising Choice (out) Districts that did not successfully eliminate their deficit (and went further into deficit) Districts that successfully eliminated their deficit Source: Michigan Department of Education; CEPI MiSchoolData

37 History: Schools & Local Government Fiscal Stress

38 History: Public Act 72 of 1990 Superintendent of Public Instruction (SPI) monitored school district financial conditions If certain conditions exist, financial review team appointed If necessary, consent agreement established If no consent agreement adopted or consent agreement not followed Emergency financial manager (EFM) EFM Can issue any orders necessary implementation of a financial plan. assumes control over all fiscal matters of, and make all fiscal decisions for, the district

40 History: Public Act 4 of 2011 SPI to declare district financial stress using any facts or circumstances (as opposed to specified factors in PA 72) Financial emergency exists: 2+ factors exist or are likely to occur within the next current fiscal year Failed to provide timely & accurate information to the review team Failed to comply with continuing operations plan, recovery plan or DEP SPI recommends (and Treasurer concurs) a financial emergency be declared Expanded Emergency Manager powers (e.g., exercise solely, for and on behalf of the school district, all other authority and responsibilities affecting the school district that are prescribed by law to the board or superintendent of the district) Went into effect in 2011 but was rejected by ballot at the November 2012 general election, thus reverting back to PA 72 of 1990.

41 History: Public Act 436 of 2012 Much like previously rejected PA 4; however, gives local school boards four options for addressing a fiscal emergency Consent agreement Bankruptcy Mediation Appointment of an EM

42 History: Public Act 4 Michigan Local Financial Stability and Choice Act Implementation Process School district meets one of seventeen conditions listed in statute State financial authority for schools, this is the Superintendent of Public Instruction (SPI) may conduct a preliminary review of the district s finances SPI develops report and provides it to the local emergency financial assistance loan board (LEFALB) LEFALB determines probable financial stress exists within the district? Governor determines a financial emergency exists? Review team submits report of findings to the Governor with conclusion that financial emergency does/does not exist Review team identifies if any of fourteen criteria of financial distress are present Governor appoints review team for the district District must select one of four local government options to address financial emergency State board approves district local government option decision District carries out local government option (i.e., consent agreement, emergency manager, neutral evaluation process, bankruptcy)

43 History: Outcomes Under PA 4 Michigan Deficit Districts by Year, by Category* Category 1 Category 2 Category 3 Category Jun 13 Aug Oct Dec Feb 14 Apr 14 Jun 14 Aug Oct Dec *Note: Category 1 denotes a district that began in deficit and is projected to be out of deficit by the end of the school year; Category 2 denotes a district that began in deficit and ended the year with a reduced deficit; Category 3 denotes a district that began in deficit and ended the year in greater deficit; Category 4 denotes a district that did not begin the year in deficit but ended the year in deficit

44 History: Outcomes Under PA 4 Michigan Deficit Districts by Year, by Category* Category 1 Category 2 Category 3 Category Jun 13 Aug Oct Dec Feb 14 Apr Number Jun 14 of districts 8 who began the Aug 14 year in deficit and ended the year with a reduced 7 deficit decreasing Oct Dec *Note: Category 1 denotes a district that began in deficit and is projected to be out of deficit by the end of the school year; Category 2 denotes a district that began in deficit and ended the year with a reduced deficit; Category 3 denotes a district that began in deficit and ended the year in greater deficit; Category 4 denotes a district that did not begin the year in deficit but ended the year in deficit

45 History: Outcomes Under PA 4 Michigan Deficit Districts by Year, by Category* Category 1 Category 2 Category 3 Category Number of districts that did not Jun 13 Aug begin the year in deficit but who Oct Dec Feb 14 Apr Number Jun 14 of districts 8 who began the Aug 14 year in deficit and ended the year with a reduced 7 deficit decreasing Oct Dec ended the year in deficit increasing *Note: Category 1 denotes a district that began in deficit and is projected to be out of deficit by the end of the school year; Category 2 denotes a district that began in deficit and ended the year with a reduced deficit; Category 3 denotes a district that began in deficit and ended the year in greater deficit; Category 4 denotes a district that did not begin the year in deficit but ended the year in deficit

46 History: Early Warning System, 2014 Budgetary assumptions reporting (all, those with less than 8% fund balance) Budgetary assumption review (Treasury, ISD) Democratic accountability: If necessary, posting of notice on website noting district adopted a budget that relies upon unreasonable budgetary assumptions Increasing state intervention and/or local reporting in fiscally distressed districts based upon non-compliance with reporting requirements rather than increasing fiscal stress e.g., If a district failed to submit a periodic financial status report, it could have been required to develop and submit an EDEP

47 History: Early Warning System 2015 March 11, 2015 Introduced House Bills 4325, 4326, 4327, 4328, 4329, and 4330, which contribute to the development of an early warning system. July 14, 2015 Enacted, PA 115

48 Michigan s Early Warning System Requires a district that is identified by the state treasurer as potentially at risk for fiscal distress to either work with an ISD or the state in an attempt to eschew deficit. Allows an ISD working with a district to use a contractor(s) to assist in an administrative review of the district s finances on a cost recovery basis as determined by the ISD Exempts any district working with an ISD to avoid a deficit from having to submit periodic financial status reports for at least two years while working with thee ISD unless the district hasn t implemented any of the ISD s recommendations within one year after the district is notified of the potential for fiscal stress Requires a district that is required to submit periodic financial reports and that uses a state loan while doing so to submit periodic financial reports for at least four years after the date of the issuance of the loan.

49 Michigan s Early Warning System State treasurer as the state financial authority of a district subject to a Deficit Elimination Plan (DEP), leaving the state superintendent of public instruction (SPI) as the state financial authority of an Enhanced Deficit Elimination Plan (EDEP). Makes the state financial authority s confirmation of the existence of any financial stress factor in a district prima facie evidence that probable financial stress exists for a district. Allows the Michigan Department of Education (MDE) to withhold funding in an amount necessary to incentivize the district to eliminate the deficit from : (a) any district that incurs a deficit but fails to submit a DEP/EDEP and (b) any district with a DEP/EDEP that is not approved

50 Michigan s Early Warning System

51 Michigan s Early Warning System 5% exemption ISD partnership option State partnership option

52 The State Superintendent of Public Instruction or, for districts subject to a Deficit Elimination Plan (DEP), the State Treasurer, determines one of more of the following exists: Governing body requests a preliminary review State financial authority receives a written request from a creditor with an undisputed claim that remains unpaid 6 months after its due date against the local government that exceeds the greater of $10,000 or 1% of the annual general fund budget of the local government State financial authority receives a petition containing specific allegations of local government financial distress signed by a number of registered electors residing with the government s jurisdiction equal to not less than 5% of the total vote cast for all candidates for the governor within the local government s jurisdiction at the last preceding election State financial authority receives written notification that a local government has not timely deposited its minimum obligation payment to the local government pension fund as required by law State financial authority receives written notification that the local government has failed for a period of 7 days or more after the scheduled date of payment to pay wages and salaries or other compensation owed to employees or benefits owed to retirees State financial authority receives written notification from a trustee, paying agent, bondholder, or auditor engaged by the local government of a default in a bond or note payment or a violation of 1 or more bond or note covenants State financial authority of a local government receives a resolution from either the Senate or the House of Representatives requesting a preliminary review Local government has violated a requirement of, or a condition of an order issued pursuant to the revenue bond act, the revised municipal finance act, or any other law governing the issuance of bonds or notes The municipal government has violated the conditions of an order issued by the local emergency financial assistance loan board pursuant to the emergency municipal loan act Local government has violated a requirement of the uniform budget & accounting act The local government fails to timely file an annual financial report or audit that conforms with the minimum procedures and standards of the state financial authority and is required for local governments under the uniform budgeting and accounting act The school district fails to provide an annual financial report or audit that conforms with the minimum procedures and standards of the superintendent of public instruction and is required under the revised school code and the state school aid act The municipal government is delinquent in the distribution of tax revenues that is collected for another taxing jurisdiction and that taxing jurisdiction requests a preliminary review The local government is in breach of its obligations under a DEP or an agreement entered into pursuant to a DEP A court has ordered an additional tax levy without the prior approval of the governing body of the local government The municipal government has ended a fiscal year in a deficit condition as defined in the Glenn Steil state revenue sharing act or has failed to comply with the requirements of that section for filing or instituting a financial plan to correct the deficit condition The district ended its most recently completed fiscal year with a deficit in 1 or more of its funds and the district hasn t submitted a deficit elimination plan to the state financial authority within 30 days after the district s deadline for submission of its annual financial statement The local government has been assigned a long-term debt rating within or below the BBB category or its equivalent by 1 or more nationally recognized credit rating agencies Existence of other facts or circumstances that, in the state treasurer s sole discretion for a municipal government, are indicative of probable financial stress or that, in the state treasurer s or superintendent of public instruction s sole discretion for a school district, or indicative of probable fiscal stress State Superintendent of Public Instruction (SPI) or, for districts subject to a Deficit Elimination Plan (DEP), the State Treasurer, may conduct a preliminary review to determine the existence of probable financial stress within the district.

53 Michigan s Early Warning System Who will this affect: Administratively: districts with less than a 5 percent general fund balance in either of the two most recently completed school years must submit budgetary assumptions by July 7 th each year (August 7 th for 2015) projected foundation allowance and projected membership of the district for the current school fiscal year projected enrollment used for the current school fiscal year budget estimated expenditures per pupil for the district for the immediately preceding school fiscal year projected expenditures per pupil for the district for the current school fiscal year Pragmatically: all districts

54 Michigan s Early Warning System ISD partnership option

55 Michigan s Early Warning System District can contract with an ISD Conduct preliminary review Provide recommendations Submit quarterly reports on district progress 360 days to implement an ISD recommendation Unclear what happens if 730 days into contract with ISD, district still fiscally stressed State Treasurer may require district to submit periodic financial status reports (PFSRs)

56 Michigan s Early Warning System State partnership option

57 Michigan s Early Warning System If choose to/don t contract with ISD and Less than 5% fund balance in each of the two most recent school years Declining fund balance in at least one of two most recent school years Not under a DEP or EDEP Treasurer may require district to submit PFSRs Room for districts to maneuver around the system

58 OTHER ISSUES

59 Clarifications & Unknowns: Who s in Charge? Requires districts to be compliant to different state agencies depending upon where in the early warning system they are located.

60 5% Exemption 1 2 July 8 th : MLive published list compiled by CEPI of districts with less than a 5% fund balance in both of the 2 most recently completed school years Statute implies that any district with less than 5% fund balance in either of the 2 most recently completed school years is subject to budgetary assumption submission requirements Two most recently completed school years on CEPI s list were and (not ) with districts reporting budgetary assumptions for Issue of reporting timelines Districts <5% fund balance in and >5% fund balance in and still may have to submit budgetary assumptions

Clarifications & Complications: 5% Exemption Arbitrary selection of threshold Nearly half of the school districts that were in deficit in 2014 had general fund balances of higher than 5

61 Clarifications & Complications: 5% Exemption Arbitrary selection of threshold Nearly half of the school districts that were in deficit in 2014 had general fund balances of higher than 5 percent. Let s take Akron-Fairgrove as an example Small, rural district in the thumb 1 elementary & 1 middle/high school 71% economically disadvantaged; 10% non-white students Focus school

62 Example: Akron-Fairgrove MDE Bulletin 1011 (publically available compilation of district-reported FID data) DCode District Name Akron- Fairgrove Schools TOTASSET S TOTLIAB ENDFUNDBAL LOCREV OTHPOL STATEREV FEDREV TOTREVBT OTHPUBMI TOTREVBT +OTHPUBMI , ,641,538 General Fund Balance as a Percent of General Revenue = 9% No budgetary assumption reporting required

63 General Fund Balance as a Percent of General Revenue = 9% No budgetary assumption reporting required

65 Thank You Questions

OSRFA. Samuel Irrer Financial Specialist. Jake Brower Financial Analyst. Office of School Review and Fiscal Accountability

OSRFA. Samuel Irrer Financial Specialist. Jake Brower Financial Analyst. Office of School Review and Fiscal Accountability OSRFA Office of School Review and Fiscal Accountability Samuel Irrer Financial Specialist Jake Brower Financial Analyst Our goal: provide value to Michigan schools: Identify financial challenges Trend