4 options loom as Wayne County weighs financial crisis

If Wayne County commissioners select a consent agreement for dealing with the county’s financial crisis, the county will be following a route proposed by Executive Warren Evans.

Commissioners, however, would have three other options from which to choose — neutral evaluation or mediation, getting an emergency manager to run the county or bankruptcy.

And although the county appears at the moment to be traveling toward a consent agreement, questions remain, in part because Wayne County, which has a grossly underfunded pension system and a projected deficit by 2019 of $171.4 million, is the first county in the state in this predicament and much is unknown.

“None of these are necessarily perfect because none of the options have any degree of certainty,” said Doug Bernstein, a restructuring expert and bankruptcy attorney who represented foundations that helped save the Detroit Institute of Arts masterpieces from being auctioned during Detroit’s bankruptcy.

Without a significant track record in practice or in court decisions, the law, Public Act 436, and its four options, offer no precedent when it comes to implementing them in a county setting.

“We don’t have a benefit of (knowing) how they work,” Bernstein said.

Of the four options, the consent agreement appears to have the most initial support.

Wayne State University Law Professor Laura Bartell, who teaches courses in bankruptcy and creditors’ rights, said a consent agreement is the option to choose.

“I don’t think the other possibilities are really desirable from Wayne County’s standpoint,” Bartell said. “The county’s in trouble, and of the four options, it’s the best option for the county to try to pursue … (there’s a) better shot at succeeding this way than the other ways.”

In a statement after Gov. Rick Snyder announced Wednesday that he agreed with a review team’s findings that a financial emergency exists in Wayne County, Evans spokesman James Canning said a consent agreement “is the best option going forward.

“We will seek a consent agreement that respects the roles of the Wayne County executive and commission, and gives us the tools to focus our efforts on resolving the $52-million structural deficit,” he said.

Because union contracts expired last year, experts said Evans could use the consent agreement to impose concessions sought in his “recovery plan,” which envisions $230 million in cuts over four years.

A consent agreement can provide a road map or framework for achieving specific financial goals, Bernstein said.

“You can actually measure progress toward achieving those goals or not achieving those goals,” he said.

A consent agreement would also allow for the use of state financial management and technical assistance. Periodic financial status reports would be required, and the state treasurer could also require a recovery plan or a continuing operations plan. A board could also be appointed by the governor to monitor compliance with the agreement.

According to the law, the governor can place the local government in emergency management or in the neutral evaluation process in the event of any entity breaching the consent agreement. And there would only by 30 days, or less at the state treasurer’s discretion, to reach agreement on the document.

The consent agreement would end when the state treasurer determined compliance had been met.

The downside for some might be that it gives the county executive more power, and it represents change, which can often meet resistance, Bernstein said.

And there’s no guarantee of success. Detroit had its own failed consent agreement before getting an emergency manager and eventually filing for bankruptcy, which it exited last year.

“The key is give it a chance to work, and if it doesn’t work, then you do move on to one of the other options,” says Bernstein, cautioning that all affected parties should try to keep an open mind. “What looks hopeless today may not be hopeless tomorrow, and you only have to look back at Detroit to see that.”

Neutral evaluation

Highland Park Mayor DeAndre Windom said officials in his city wanted to declare bankruptcy but did not believe the governor would agree to it. The city had already had three emergency managers and was in no better shape because of it, he said.

“We didn’t want to go through a consent agreement because it basically sets you up for an emergency manager,” Windom said.

Looking at the remaining options, neutral evaluation, where a neutral evaluator or mediator helps the local government try to reach a settlement with its creditors, unions and others, made the most sense to deal with Highland Park’s financial problems, Windom said. Those issues included heavy retiree health care costs and a loan to cover pension obligations as well as millions sought by the Detroit Water and Sewerage Department.

The process helped the city reduce what it owed on its pension loan by millions of dollars, Windom said. And although the other two issues remain unresolved, Windom said he expects that to change in coming months.

Windom’s biggest criticism of the neutral evaluation process is its maximum 90-day time frame, which he said is too short. The city was able to keep the process going — it began last year — because the “state saw how Highland Park had a plan to address these issues,” said Windom, who noted that the city could have used more financial help from the state because it needed to hire attorneys and consultants.

The neutral evaluation process was borrowed from California, officials said, and Highland Park was the first city in Michigan to try it.

Bartell, however, dismissed the option.

“What’s that get you? That’s like saying, we don’t know what we’re doing, so we better get somebody else (to help),” Bartell said.

Emergency manager

Emergency management is another option, but one already panned by several officials.

“We don’t believe an emergency manager is essential,” said Wayne County Chief Deputy Treasurer David Szymanski. “We have some confidence that we’ll be able to work this out internally without having external forces (involved).”

An emergency manager would have broad powers to try to rectify the financial emergency, including modifying or terminating contract terms and implementing staffing levels. But such an appointment by the governor would effectively strip the commission and the county executive of their authority and pay, unless, as Kevyn Orr did in Detroit, the emergency manager were to decide otherwise.

An emergency manager can remove members of a pension board if the fund is not funded at 80%, and serve as the lone trustee of a pension board under the appointment of the treasurer. Evans’ office said in its request for a consent agreement that funding levels for the county’s pension funds are at 44% for retirees and 58% for airport retirees.

Officials said emergency management would pose complications for a county because of the existence of constitutional offices, such as the sheriff, prosecutor, clerk, register of deeds and treasurer. Power is less concentrated in the county executive, than it is with a city’s mayor.

Sheriff Benny Napoleon offered an explanation.

“I’m the elected sheriff of the county. A statute cannot change that,” Napoleon said. “You can give us a budget, but you can’t manage the office.”

Napoleon said he does not care which option is chosen because he has to adequately staff the county’s jails regardless of the option, but he is quick to praise Evans, a former sheriff, as someone who gets the issues facing the sheriff’s office. Napoleon said he is confident Evans will do what’s in the best interest of public safety.

“I feel like I’m sleeping, dreaming, and I don’t want to wake up and it’s a good dream,” Napoleon said.

Bernstein said the emergency manager provides a decision maker for a local government, but there can be mixed results. Most people, according to Bernstein, would say Kevyn Orr did well in Detroit, shepherding the city through a remarkably fast bankruptcy, but they would likely have a different opinion about the Detroit Public Schools, which has had a parade of emergency managers and still has a massive deficit.

Filing bankruptcy

And then there’s bankruptcy.

Although Detroit achieved a “grand bargain,” which limited the financial hit to employees and retirees, preserved the Detroit Institute of Arts’ treasures and slashed city debt, experts caution that the city was a special case.

“If you think Chapter 9 is a panacea, how come there have been so few?” asked Bernstein. “There’s a great degree of uncertainty, they’re very expensive (and) they don’t necessarily go as quickly or as well as Detroit’s did.”

But if bankruptcy is successful, “you know what you have to do because it’s in the form of a confirmed plan of adjustment … that’s your new contract with all of your stakeholders, you know what has to be done and when it has to be done,” Bernstein said.

And bankruptcy comes with a price. In Detroit, the city paid about $170 million in fees for lawyers, consultants and staffers in its bankruptcy.

Still, officials noted that it’s unclear whether Wayne County would even qualify for bankruptcy.

“Bankruptcy is probably the least desirable option. We don’t believe it’s appropriate in the climate we find ourselves in,” Szymanski said.

Commissioner Vice Chair Alisha Bell, D-Detroit, said she has not made up her mind, but she does not believe the majority of commissioners are considering emergency management or bankruptcy.

Bell also does not believe the commission will request a hearing, an option prescribed by PA 436. If no hearing is called — the deadline to request one is 5 p.m. Wednesday — and Snyder, as assumed, confirms his earlier determination of an emergency, the commission would then have seven days to make its choice, although the commission could also attempt an appeal to the Michigan Court of Claims.

The commission has scheduled a Committee of the Whole meeting for Tuesday and is “going to get down in the meat of those four choices,” Bell said.

It’s not a good position in which to be, but a decision must be made, Bell said.

“These are the cards we’ve been dealt so we have to deal with them,” she said.

Contact Eric D. Lawrence: elawrence@freepress.com. Follow him on Twitter: @_ericdlawrence.

Wayne County’s choices

Gov. Rick Snyder is expected to confirm his determination that Wayne County is in a financial emergency, setting the stage for Wayne County commissioners to select from four options for dealing with the emergency:

■ Consent agreement, which would be negotiated and signed by the county executive and the state treasurer.

■ Neutral evaluation, a mediation process designed to reach a settlement between the county and its creditors, unions and others.

■ Emergency manager, a decision-maker who would be appointed by the governor with wide “broad powers” to address the crisis.

■ Chapter 9 bankruptcy, which would require the approval of the governor.