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Finance Professionals Eye Detroit And Other Strapped Michigan Cities For Emergency Manager Takeover

First Posted: 05/12/11 02:39 PM ET Updated: 07/12/11 06:12 AM ET

NEW YORK -- As Michigan cities grapple with budget deficits and spending cuts, their troubles amount to an attractive opportunity for financial industry players, who are eyeing individual localities for state-sanctioned takeovers.

Thanks to a new Michigan law, the governor can appoint an emergency manager to have total control over a municipality or school system deemed to be in dire financial straits. Such officials currently run three Michigan cities and the Detroit school district. Many more, from private and public industries, are waiting in the wings, boning up on municipal governance in case one of them is called upon to turn a city around. Hundreds have already been trained.

In Detroit, the largest city in the state, the upcoming budgeting process carries an implicit threat: If local politicians can't convince the state they have what it takes to repair the city's finances, the state could appoint an outside official to do the job for them. The city has already hit several of the triggers to initiate the process that could install an emergency manager, say local politicians, who are scrambling to keep the city government out of receivership.

But would-be emergency managers say they can succeed where elected officials have failed. They stand to draw six-figure salaries from the local governments under their management, but some talk about this work as if it were a civic duty.

"We feel very strongly that not only is there a business opportunity here, but we want to be part of a solution for the greater good," said Michael Imber, a principal in Grant Thornton LLP's corporate advisory and restructuring services practice in New York. "We're absolutely ready to help."

Imber is not alone. In February, he was one of about 50 graduates of a training course for Michigan emergency managers, a two-day program promoted in Crain's business magazine.

The course was popular, with a waiting list exceeding 100 people, said Eric Scorsone, an economist at Michigan State University, who helped organize the session with the Turnaround Management Association, a corporate restructuring industry group. More than two-thirds of the participants in February were from the private sector, Scorsone said. At the next training program, held in April, public sector professionals were more heavily represented, and about 400 people participated. That course, too, had a long waiting list.

"There's constant chatter going on about this," said bankruptcy attorney Harley Goldstein, a partner at the law firm K&L Gates. "Everybody wants to make a buck."

Michigan has had an emergency manager statute on its books for 20 years, but Public Act 4, signed by Republican Gov. Rick Snyder in March, endows these officials with expanded powers over the localities where they're dispatched. Emergency managers now can suspend collective bargaining rights for unions. They can terminate worker contracts. They can strip the mayor and the city council of all their power.

These officials were once called "emergency financial managers." Now they're called just "emergency managers."

"That's to emphasize that it's not just about finances," Scorsone said. "It's more like a CEO rather than a CFO."

But even "CEO" doesn't fully capture the extent of emergency managers' authority. In the city of Benton Harbor, Joseph Harris has been the emergency manager for a year. Elected officials have resisted his rule, but thanks to Harris' new powers, he is able simply to “put them in the timeout chair,” state Rep. Al Pscholka (R) told Bloomberg Businessweek.

For Detroit, the coming two months are a crucial period, a time in which the local elected officials must prove to the governor that they can take care of the city on their own. The fiscal year ends June 30, and a new budget, which local officials are now in the process of writing, will take effect the following day. Mayor Dave Bing's proposed budget includes cuts totaling nearly $100 million from a $1.3 billion general fund. The actual cuts could be even greater, city council members say.

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