How are municipal units formed, un-formed

**corktownyuppie** · July-03-11, 11:14 PM

I'm sure this isn't even up for discussion, let alone going to happen. But can someone explain to me what happens when a municipality is simply permanently insolvent?

Let's say for example, that City X is unable to make payroll. An emergency manager [[and, please, let's save the arguments about EMF's for another thread) is unable to correct the solvency of the municipality. At some point, if you increase the tax burden while simultaneously cutting services to the bone, you risk population loss....which only lowers the tax revenue even more.

Does the municipality have the option of unincorporating and merging with the county? In exchange for a resignation of the elected officers, perhaps the county absorbs and assumes all of its debts, and the county then gets access to all the tax revenues of the city, much like a failing company might merge with a more financially stable entity.

And if the municipality does have the option, is the county required to take them in? How does it all work?

I mean, at some point, the crushing weight of the debts become so enormous, that it's almost irreversible. At least if a county takes them in, they can spread the losses over a greater number of people, and perhaps refinance that debt at much lower rate...maybe even one so low that the tax revenues from the city that was disbanded might even exceed its expenses, and the debt can be slowly paid off?

Curious and uninformed...

lilpup · July-04-11, 01:00 AM

Understanding that the most basic level of local government in Michigan is the township I looked for answers there and didn't find any provisions for redistribution of debt. This is most likely because property in the concerned area is [[theoretically) tax generating, either presently or in the future.

Obviously there are various provisions for mutually agreed upon annexation or corporate dissolution and reattachment to surrounding communities but none of that's at county level.

I suppose, if some county officials were politically suicidal, they could go in and purchase properties for the county but that could also open a can of worms in regard to fudiciary duty, eminent domain, etc.

The local poster child to watch for this situation is the Charter Township of Royal Oak [[aka Royal Oak Township). I don't see any provisions regarding automatic reversion but RO Twp at last count is only about 100 people above the 2,000 resident threshhold required for incorporating as a Charter Township.

http://www.dailytribune.com/articles...mode=fullstory

Handy link for Michigan Compiled Laws:

Michigan Compiled Laws

**Hermod** · July-04-11, 07:04 AM

An area may petition to incorporate as a village. A vote is then held of the residents in the area. If the vote is successful, the area is incorporated as a "village" and is entitled to become a governmental and taxing agency. A village may petition to become a city. A vote is held and with passage, the village is incorporated as a city. The difference between a village and a city is that a village is a part of a township while a city is independent of the township. Townships may apply for incorporation as a city [[which renders them immune from annexation from surrounding cities).

I believe the state is the granting authority for incorporation. While I do not believe any cities in Michigan have ever ceased to be, there are villages [[especially in northern Michigan) which have lapsed. There are many "ghost towns" in northern Michigan.

I do not know who initiates the revocation of the charter or whether it is just a case of "last one out turn out the lights". I would surmise that the state has the power to cancel the charter of a city.

Now, does the city debt become worthless paper or is it assumed by the county or state?

**Hermod** · July-04-11, 07:10 AM

Here are the legal forms and procedures for city incorporation in Michigan.

http://www.michigan.gov/documents/dl...n_222310_7.pdf

**Hermod** · July-04-11, 07:19 AM

Sounds like Detroit on a smaller scale.

http://justareport.com/bell-commerce...rdens-sun.html

lilpup · July-04-11, 07:58 AM

Originally Posted by Hermod

I do not know who initiates the revocation of the charter or whether it is just a case of "last one out turn out the lights". I would surmise that the state has the power to cancel the charter of a city.

Now, does the city debt become worthless paper or is it assumed by the county or state?

Voters have the option of petitioning to vacate incorporation if they wish but that does not make the debt go away. The people are what constitute the city/village/township. Even if everyone moves away the taxable land is still there to be sold to whoever will take it.

One of the specific prohibited powers in the Home Rule City Act is 117.5[[h): To repudiate a debt by a change in its charter or by consolidation with any other municipality

I don't know why anyone thinks a city's debts would or should be redistributed to others.

As bad as some aspects of Detroit government might be it's nowhere near as ludicrous as the Bell, CA case.

**corktownyuppie** · July-04-11, 09:30 AM

Originally Posted by lilpup

I don't know why anyone thinks a city's debts would or should be redistributed to others..

Well, the basis behind my assumption in that regard is that corporations do exactly that in order to avoid bankruptcy and so that shareholders can rescue whatever value is left in the company.

I own a lemonade company generating $10,000 in revenue per year. But let's say my cost of operating is $5,000 per year and then my debt payments are $6,000 per year. Ouch. I'm losing money. So I go to Lilpup Enterprises Inc, and say, "Mr/Mrs Lilpup, you've got access to a lot of capital and top notch credit. You could refinance my debt with your sterling credit rating so that the debt payments decrease from $6,000/yr down to $4,000/yr."

In essence, we have two choices:

[[1) I continue to own lemonade company, losing $1,000 per year, eventually filing bankruptcy, and get nothing. My employees will likely lose their job, and my creditors won't get their loans repaid.

[[2) You own lemonade company, but you're PROFITING $1,000 per year despite doing nothing but use your access to capital. Banks are happy, employees are happy, and you're making money.

We both agree that choice 2 is better for everyone involved, and we negotiate some buyout...perhaps you write me a check for $1000 or $2000, I get something which is better than bankruptcy, and you get a cash cow.

This happens in the corporate world all the time, I was just curious if it worked this way in municipality debt restructuring.

Even if everyone moves away the taxable land is still there to be sold to whoever will take it.

Sure the land is there, but that doesn't mean the city tax model is still sustainable. Let's say that 30 years ago, the entire town was making $100,000 per household every year. We negotiated plush pensions for the city workers. But now times have changed and the per capita income got cut in half. So now we have the same bills to pay, but only half the money to pay it. So what do we do?

Raise taxes.
Cut expenses.

But, wait, we can't just tell an 80-year-old retired cop to cut his pension in half. So we raise taxes and cut the police force in half. So now the homeowner has a choice. I can pay sky high taxes for a police force that is way undermanned, or I can move 20 minutes south to "New Suburban Development" which has no debt, low taxes and great city services.

Sure the whole city could move out and be replaced my new population, but at the end of the day, the new residents will be assuming the debt and expenses of the prior residents. At some point, the equation becomes so imbalanced that the structural debts are so overwhelming that no one in their right mind would move in to that town.

===========

So that's what begs the questions. I've seen lots a resources about how township becomes a village becomes a city. I've read very little about how the process happens in reverse.

All that said, thanks for responding to the OP. Definitely gave me much food for thought .

**Hermod** · July-04-11, 10:12 AM

I guess that there is two types of debt in a political entity.

One kind is bonded debt secured by either "the full faith and credit" of the polity or there is bonded debt tied to a revenue source [[revenue bonds like for a toll road, toll bridge, or other income producing source). In these cases, the debt holder has a stake in what is securing the debt.j

The second kind are pension obligations. If there is a retirement fund and not a pay-as-you-go retirement system, the only security for the pensions is the pension fund. It can be taken over, but I would think that, over time, the pensions would shrink with no cost of living allowances.

**Mikeg** · July-04-11, 11:19 AM

Originally Posted by corktownyuppie

......... So I go to Lilpup Enterprises Inc, and say, "Mr/Mrs Lilpup, you've got access to a lot of capital and top notch credit. You could refinance my debt with your sterling credit rating so that the debt payments decrease from $6,000/yr down to $4,000/yr."

In essence, we have two choices:

[[1) I continue to own lemonade company, losing $1,000 per year, eventually filing bankruptcy, and get nothing. My employees will likely lose their job, and my creditors won't get their loans repaid.

[[2) You own lemonade company, but you're PROFITING $1,000 per year despite doing nothing but use your access to capital. Banks are happy, employees are happy, and you're making money.

We both agree that choice 2 is better for everyone involved, and we negotiate some buyout...perhaps you write me a check for $1000 or $2000, I get something which is better than bankruptcy, and you get a cash cow.

This happens in the corporate world all the time, I was just curious if it worked this way in municipality debt restructuring...........

Municipalities operate under different laws than corporations. Corporations can go into debt to finance both their capital projects as well as their on-going operations, whereas municipalities by law must have balanced annual operating budgets and are limited to borrowing for capital projects only [[through the issuance of long-term municipal bonds). Since tax revenues do not flow evenly throughout the year, municipalities are allowed to borrow funds for short periods [[less than one year) that are backed by the anticipated tax revenues [[I believe that the state also lends money for this purpose). The interest rate applied to a municipality's bonds are determined by the municipal bond rating agencies and if they are in fiscal trouble, they will pay through the nose for those funds, unlike your example.

**corktownyuppie** · July-04-11, 11:36 AM

Originally Posted by Mikeg

The interest rate applied to a municipality's bonds are determined by the municipal bond rating agencies and if they are in fiscal trouble, they will pay through the nose for those funds, unlike your example.

This makes sense to me. So my next question is, when the debt payments become so overbearing that it's irreversible, what do they do? Could they "merge" with another city who can use their better credit rating [[and, perhaps, better management) to refinance their debt in exchange for losing governing authority? Do they actually file bankruptcy and never get access to capital again?

State takeover doesn't necessarily solve them problem. If the structural deficits are so high, it won't matter who's in control. Like when GM fell into bankruptcy, it wasn't just the government loans that fixed the problem. You had to combine that with the UAW's willingness to take the risk of managing their own health care plan...and funding that plan with GM stock.

That would be the equivalent of telling city pensioners, "look, we can only make 75% of our pension payments going forward. We will make up the remaining 25% by giving you a municipal bond whose face value is equivalent the shortfall"

Of course, the other option, is that you change the pension benefits starting in the present day, then wait out the next 30 years for all your pensioners to die, then your structural deficit disappears. But, man, there's gotta be an easier way.

lilpup · July-04-11, 03:19 PM

Originally Posted by corktownyuppie

Sure the land is there, but that doesn't mean the city tax model is still sustainable. Let's say that 30 years ago, the entire town was making $100,000 per household every year. We negotiated plush pensions for the city workers. But now times have changed and the per capita income got cut in half. So now we have the same bills to pay, but only half the money to pay it. So what do we do?

Raise taxes.
Cut expenses.

But, wait, we can't just tell an 80-year-old retired cop to cut his pension in half. So we raise taxes and cut the police force in half. So now the homeowner has a choice. I can pay sky high taxes for a police force that is way undermanned, or I can move 20 minutes south to "New Suburban Development" which has no debt, low taxes and great city services.

Sure the whole city could move out and be replaced my new population, but at the end of the day, the new residents will be assuming the debt and expenses of the prior residents. At some point, the equation becomes so imbalanced that the structural debts are so overwhelming that no one in their right mind would move in to that town.

Exactly, but when no one moves in all that land is available for sale - be it to businesses, speculators, whoever - AND since there's no more police force no new debt obligations are being generated. It might take a long time to pay down the existing debt but the mechanism is still there for doing so.

When discussing the debt incurred by a geographically defined entity, such as a city with individuals moving in and out, doesn't change the definition of the entity that owns the debt. The residents who move out don't take the city's services or capital improvements with them.

Just imagine if Michigan could continue to tax everyone who left...

**Ray1936** · July-04-11, 05:46 PM

The smallest form of American govenment should be the county. Anything getting together in a unit smaller than that should be called a HOA. Simple. Easy to dissolve an HOA.

**Hermod** · July-04-11, 06:30 PM

Originally Posted by Ray1936

The smallest form of American govenment should be the county. Anything getting together in a unit smaller than that should be called a HOA. Simple. Easy to dissolve an HOA.

Ray, you realize here are counties in the U.S. with fewer than 3,000 people.

Keweenaw County in the U.P. is the smallest in Michigan. It has 2,156 people as of the 2010 census.

.

**Ray1936** · July-04-11, 07:31 PM

Check out my neighboring county in Nevada, Esmeralda. Population 783 [[2010). Area? Just under 3600 square miles.

And the point is......???

**Novine** · July-04-11, 09:29 PM

There's no process in Michigan law for merging a unit of local government into the county government.. I doubt you'll find any counties that would have any interest in taking on the debts of a local government that fell into the kind of situation that you described. lilpup pointed out that a debt can't be voided by changing the form of government either.

What would likely happen in such a case is what has happened in some Michigan communities that have fallen into serious indebtedness like Ecorse. Local services would be slashed to the bone. Most services would be outsourced or contracted out with the county possibly providing some services like policing via the sheriff's department. Property and buildings owned by the local government could be sold off to pay off the debts. If this ended up in court with creditors, you could see a judge order the local government to levy taxes to pay off the debt. It sounds like what you're suggesting is a form of municipal bankruptcy. I'm not familiar with what process Michigan has for allowing a local government to go into bankruptcy but if that happened, you could see union contracts and pensions voided or modified.

lilpup · July-04-11, 09:43 PM

Michigan doesn't have a process for municipal bankruptcy. Everything is geared to intervention before a financial crisis reaches that point. The newest EFM procedure so many love to hate is the closest a city can get to bankruptcy, especially since EFMs can void contracts. One of the reasons an EFM can dismiss elected government officials is because officials have to be paid while in office, so they're a drag on already overstressed finances.