Expansion of State Emergency Loan Powers

Since 1980, the Emergency Municipal Loan Act, MCL 141.931 et seq., (the “Emergency Loan Act”) has authorized the State of Michigan’s Local Emergency Financial Assistance Loan Board (the “Emergency Loan Board”) to make emergency loans to financially-distressed counties, cities, villages, and townships under specified circumstances. Generally, emergency loans under the Emergency Loan Act are made from state surplus funds and, under most circumstances, the obligation to repay an emergency loan is a general obligation of the recipient municipality. On August 1, 2012, Governor Rick Snyder signed Public Act 284 into law, with immediate effect, to expand the eligibility criteria, to increase the amount of State funding for emergency loans, and to extend the maximum term of emergency loans from 20 years to 30 years. In addition, school districts, which were not previously eligible for emergency loans from the Emergency Loan Board, were added to the definition of “municipality” for a seven year period commencing retroactively on October 1, 2011, and continuing until September 30, 2018.

According to media reports, the new legislation was prompted, at least in part, to address troubled Southeast Michigan municipalities and school districts. For example, the so-called City of Detroit “consent agreement” entered in April 2012 with the Michigan Department of Treasury is based in part on the City of Detroit obtaining “additional financing” pursuant to the Emergency Loan Act. In addition, the legislation was intended as a means to assist municipalities that experienced defaults by developers on the payment of special assessments that were pledged to repay bonds.

Public Act 284 increased the available loan limits for emergency loans. Prior to the adoption of Public Act 284, the annual aggregate state fiscal year limit for all emergency loans by the Emergency Loan Board was $5.0 million. Public Act 284 increased the annual limit on State emergency loans to $85.0 million for the seven state fiscal years which commence October 1, 2011 and end September 30, 2018, and to a total of $10.0 million annually for subsequent state fiscal years. Each fiscal year through September 30, 2018, a maximum of $50.0 million in emergency loans may be made to school districts, with the remaining $35.0 million available for emergency loans to counties, cities, villages or townships. The new legislation also increases the annual limit for emergency loans to a single municipality from $3.0 million to $20.0 million during the seven-year period (October 1, 2011, to September 30, 2018), and to $4.0 million per year thereafter.

Public Act 284 refers in several different contexts to alternative Michigan statutes, which authorize the appointment of an emergency financial manager.

In 2011, Public Act 4, known as the Local Government and School District Fiscal Accountability Act, MCL 141.1501 et seq., was enacted to authorize the state appointment of an emergency manager for a financially stressed municipality. This enactment repealed the prior law by which an emergency financial manager could be appointed for a local unit of government, known as the Local Government Fiscal Responsibility Act, which was enacted in 1990 as Public Act 72, MCL 141.1201 et seq. Public Act 4 was the subject of much public discussion and debate. Earlier this year, referendum petitions were filed with the Secretary of State under Article 2, §9 of the Michigan Constitution of 1963 to place a ballot proposal before the voters at the November 2012 General Election to approve or reject Act 4. The referendum petitions were certified as Proposal 1, and Public Act 4 was suspended pending the November 2012 election.

Michigan voters rejected Public Act 4 at the November election, and Public Act 72 is now once again (at least temporarily) in effect. Fortunately, the Legislature anticipated this potential outcome when Public Act 284 was adopted, and Public Act 284 operates in conjunction with Public Act 72, or with any future “successor” statutes to the now-repealed Public Act 4. In this regard, the House and Senate in early December each adopted, as a House Substitute to Senate Bill 865, a new Local Government and School District Fiscal Responsibility Act, which, at the time of publication, is awaiting signature by the Governor. If signed by the Governor, this legislation will replace Public Act 4 and repeal Public Act 72.

Previously, a municipality was required to provide two certifications to qualify for a loan under the Emergency Loan Act. First, the municipality was required to certify that a general fund deficit is projected for the current fiscal year. Public Act 284 did not affect this requirement. Second, a municipality was required to certify that the municipality has issued (or the Michigan Department of Treasury has acted upon a request by the municipality to issue) either tax or revenue anticipation notes under the Revised Municipal Finance Act within the preceding six months. Public Act 284 extends this period to eighteen months and clarifies that such notes issued by a school district would be issued under the Revised School Code.

A municipality also had to certify under prior law that one or more of the following criteria was met: (1) its income tax revenue growth rate is .90 or less, or the municipality has two or more emergency loans outstanding at the time its application is submitted and its income tax revenue growth rate is 1.3 or less; (2) its local tax base growth rate is 75 percent or less of the statewide tax base growth rate; or (3) the State equalized valuation of real and personal property within the municipality is less at the time the loan application is made than that of the immediately preceding year. In each case, “income tax revenue growth rates” and “tax base growth rates” are based on statutory formulas.

Public Act 284 expanded the eligibility for an emergency loan by adding the following criteria to existing requirements, allowing a municipality to become eligible if it alternatively meets one or more of the following: (1) the municipality is levying property taxes at the maximum number of mills it is authorized to levy and it has at least one delinquent special assessment, or outstanding indebtedness that is secured by a contract or assessment obligation with another municipality that has delinquent special assessments that were levied to satisfy some portion of the contract or assessment obligation; provided that a municipality may not use an emergency loan with respect to a special assessment or special assessment district established after August 1, 2012; (2) a financial emergency has been confirmed to exist for the municipality and responsibilities for the municipality are vested in an emergency financial manager or a consent agreement, including a plan to address a serious financial problem, is in place for the municipality in accordance with Public Act 72; or (3) for a school district, its pupil count, determined in accordance with statutory formula, at the time the loan application is made has declined over a preceding three-State-fiscal-year period by a total of 15 percent or more, as determined by the Department of the Treasury. A municipality must also approve and submit a five year plan (a “Five Year Plan”) that balances future expenditures with anticipated revenues.

House Bill 5566, a modified version of which ultimately was enacted as Public Act 284, as originally introduced would have also extended emergency loan eligibility to a municipality with a downtown development authority, a tax increment finance authority, a local development financing authority or a brownfield redevelopment authority which is unable to generate sufficient tax increment revenues to pay bond or contract indebtedness, presumably as a result of stagnant or declining taxable values within the tax increment district. This condition, as eligibility for an emergency loan, was not ultimately included in Public Act 284 and thus a municipality with a troubled tax increment authority or financing plan must qualify for an emergency loan under one of the other criteria mentioned above.

A municipality which receives an emergency loan is obligated under the Emergency Loan Act to comply with specified requirements which were amended and expanded by Public Act 284. A municipality with an emergency financial manager in place under Public Act 72 is now required by Public Act 284 to compensate and pay the expenses of its emergency financial manager, and a municipality that is under a consent agreement must compensate and pay the expenses of the officials specified by the terms of the consent agreement. In addition, the municipality must submit to the Emergency Loan Board semi-annual evaluations of the municipality’s performance against the Five Year Plan.

The new legislation also modifies the way fixed interest rates may be set for an emergency loan by eliminating the requirement that the annual interest rate may not generally exceed the average rate of interest earned on the investment of state surplus funds at the time the loan is approved by the Emergency Loan Board. Instead, Public Act 284 provides that fixed loan rates may not be less than the municipal ten-year rate as determined by the State Treasurer. The Emergency Loan Board may also consider a higher rate of interest based on both market interest rates and the credit risk of the municipality requesting the loan.

Public Act 284 also authorizes the Emergency Loan Board to restructure payments (but not the outstanding principal balance or interest) on an emergency loan that is outstanding after September 30, 2012, if the municipality, or school district, satisfies specified conditions.

The State Treasurer may modify the terms of an emergency loan made to a municipality or accelerate the repayment of the emergency loan if the State Treasurer determines that the municipality is not in compliance with the loan requirements or the municipality’s Five Year Plan.

Four other state laws were amended in conjunction with Public Act 284 as follows:

• Public Act 285 amends the Revised School Code, MCL 3801.1, et seq., to allow a school district to pledge, with the State Treasurer’s approval, specified revenues for the repayment of an emergency loan and, in addition, includes repayment of an emergency loan in the definition of “school operating purposes.”
• Public Act 286 amends the State School Aid Act, MCL 388.1601 et seq., to permit the Department of Education to advance school aid payments to school districts if a district would otherwise experience significant hardship in satisfying its financial obligations, and to permit school districts to repay an advance or overpayment of school aid with the proceeds of an emergency loan.
• Public Act 287 amends the State Surplus Funds Act, MCL 21.141 et seq., to reflect the increased annual and per municipality emergency loan limits established by Public Act 284.
• Public Act 287 amends the Shared Credit Rating Act, MCL 141.1051 et seq., to include an emergency loan within the definition of a qualifying municipal obligation, provided that the emergency loan is assigned or otherwise transferred by the State to the Michigan Finance Authority.

For additional information about the Emergency Loan Act, the procedures for applying for an emergency loan, or how the Emergency Loan Act works in conjunction with emergency management law, contact your principal attorney at Mika Meyers.