November 7, 2012 / 8:55 PM / 5 years ago

Michigan governor warns of bankruptcies in wake of law's repeal

Nov 7 (Reuters) - Tuesday’s repeal by Michigan voters of a controversial law that enhanced the state’s power to intervene in financially troubled local governments and school districts could open the door to municipal bankruptcy, the governor said on Wednesday.

“That is something that could be a greater likelihood of happening if we don’t have Public Act 4,” Governor Rick Snyder said in a conference call with reporters.

Nearly 53 percent of voters rejected the 2011 emergency manager law, known as Public Act 4, according to unofficial results.

The law, which gave state-appointed emergency managers the power to run troubled governments and suspend collective bargaining agreements, had been suspended ahead of the vote. It was replaced by a former weaker law known as Public Act 72; that act’s resurrection is being challenged in court.

If the challenge is successful, Michigan would be left without a law to deal with fiscally struggling governments. Currently, three school districts and five cities have emergency managers, while three cities, including Detroit, are operating under consent agreements.

Even if Public Act 72 does remain in place, Snyder said emergency managers might not be able to act quickly and effectively to deal with problems, increasing the potential for Chapter 9 bankruptcy filings “because that could be the only option left.”

The Republican governor said he will be meeting with legislative leaders to determine whether a new emergency manager law could be crafted.

Greg Bowens, spokesman for a union-backed coalition that put the repeal of Public Act 4 on the ballot, said the governor and legislature need to respect the will of the people. The Stand Up for Democracy coalition had objected to the law’s ability to usurp the power of local elected officials.

Snyder said a financial stability agreement that allowed Detroit in April to skirt the appointment of an emergency manager remains “solid” and should continue to be operational even with the law’s repeal.

Chris Mauro, head of municipals strategy at RBC Capital Markets, said “a rebuff of the emergency manager law would have negative credit consequences for some Michigan local governments.”

Credit rating agencies have warned that the law’s elimination could hurt already financially stressed local governments, including Detroit, which saw its bond ratings hammered lower into the junk category earlier this year.

Michigan voters on Tuesday also turned down a ballot measure that would have required a two-thirds vote in each legislative chamber or statewide voter approval for any new tax, tax increase or for the expansion of the tax base.

Rating agencies had said the measure could limit the state’s financial flexibility.

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