Flint City Council v. State

• Decision Date: 09 January 2003
• Docket Number: Docket No. 243029.
• Citation: 253 Mich. App. 378,655 N.W.2d 604
• Parties: CITY COUNCIL OF FLINT, Darryl Buchanan, John Coleman, and Scott Kincaid, Plaintiffs-Appellees, v. STATE of Michigan, Defendant-Appellant.
• Court: Court of Appeal of Michigan — District of US

655 N.W.2d 604

253 Mich. App. 378

CITY COUNCIL OF FLINT, Darryl Buchanan, John Coleman, and Scott Kincaid, Plaintiffs-Appellees, v. STATE of Michigan, Defendant-Appellant.

Docket No. 243029.

Court of Appeals of Michigan.

Submitted on special motion September 20, 2002, at Lansing.

Decided October 4, 2002, at 9:25 a.m.

Released for Publication January 9, 2003.

Howard & Howard Attorneys, P.C. (by Jon H. Kingsepp, Donald F. Tucker, James H. Geary, Melvin S. McWilliams, and Patrick M. McCarthy), Bloomfield Hills, for the plaintiffs.

Jennifer M. Granholm, Attorney General, Thomas L. Casey, Solicitor General, and Treva R. Truesdale, Assistant Attorney General, for the defendant.

Miller, Canfield, Paddock and Stone, P.L.C. (by Clifford T. Flood, Cynthia B. Faulhaber, and Polly Ann Synk), Lansing, for amicus curiae Michigan Municipal League.

Before: OWENS, P.J., and HOLBROOK, Jr., and O'CONNELL, JJ.

Submitted on special motion docket September 20, 2002, at Lansing.

PER CURIAM.

Following this Court's order reversing the circuit court order, in which the circuit court had granted plaintiffs' request for injunctive relief, and remanding the matter for review consistent with M.C.L. § 141.1217, defendant state of Michigan seeks peremptory reversal of the circuit court's decision on remand pursuant to MCR 7.211(C)(4). We agree that error is so manifest that an immediate reversal of the order should be granted without formal argument or submission, and reverse in this final decision entered pursuant to MCR 7.205(D)(2).

I. Factual Background

A. Introduction

This case arises in the context of the Local Government Fiscal Responsibility Act, M.C.L. § 141.1201 et seq., and presents questions of first impression. Senate Resolution 184, 2002 Journal of the Senate 576 (No. 23, March 13, 2002), sponsored by Senator Robert L. Emerson, the state senator for the district that includes the city of Flint, sought a preliminary review by the state treasurer of the city of Flint's financial condition pursuant to M.C.L. § 141.1212(1) of the act. At the conclusion of his review, the state treasurer reported to the Governor that a serious financial problem existed in the city of Flint. As required by M.C.L. § 141.1213(1)(b) when such a report is received, the Governor appointed a financial review team to conduct an assessment of the city's fiscal situation.

B. The Financial Review Team's Report

The review team found that the city's general fund deficit had doubled from $13 million to $26 million in the fiscal year ending June 30, 2001. In addition, the city had borrowed money from special purpose funds to supplement the general fund to a point where the other funds were not sufficient to permit the performance of major functions such as street repair, water and sewer services, and maintenance or replacement of equipment. The financial audit reports for the last three fiscal years showed that the city's actual revenues and expenditures varied significantly from the budgeted revenues and expenditures, rendering the adopted budget for those years "meaningless as a financial management tool." The review team concluded that city officials demonstrated an inability "to accurately monitor revenues and expenditures throughout a given fiscal year and to amend city budgets accordingly." The 2000 and 2001 financial audit reports indicated that "the city failed to maintain an accurate and timely general ledger, failed to perform timely reconciliations of bank balances to the general ledger, and incurred an excess of expenditures over revenues."

The city still owed the state approximately $12 million in uncollected taxes for the years 1986 through 1991. It had also failed to timely file annual financial reports with the Department of Treasury, as it was required to do by statute, for the past five fiscal years. The audit reports were due on December 30 of each year and were sometimes not filed until August or October of the following year. The review team expressed concern that the proposed budget for fiscal year 2003 did not address the accumulated general fund deficit. Although a deficit elimination plan was approved by the Department of Treasury for fiscal year 2001, the city had not adhered to it. The review team report noted that "there was a surprising difference of opinion among city officials regarding what the general fund deficit will be for the current fiscal year ending on June 30th [2002]." The report concluded that the fact that "city officials could not even agree upon the magnitude of the accumulated deficit, let alone upon a credible plan for its elimination, was troubling and suggestive of an inability to resolve the serious financial problem confronting the city."

Although city officials had proposed issuing financial stabilization bonds, the report opined that "the capacity of the city to issue further debt is substantially limited." In order to finance such bonds, the city would most likely have to pledge future state revenue sharing proceeds; however, because seventy-five percent of these anticipated funds had already been pledged for existing debt and the city expected that it would have to issue additional obligations to meet state and federal drinking water requirements, further pledging of that revenue source would be forestalled and the issuance of such bonds was "unlikely." The report also noted that the city was currently involved in arbitration proceedings regarding its collective bargaining agreement with police officers, and that city officials had failed to budget for any salary increases that may be awarded; the award "may be retroactive to 1998 and any award greater than zero will immediately add to the existing deficit."

The report concluded that three of the conditions for state intervention set forth in M.C.L. § 141.1214(2) existed: that the city failed to eliminate an existing deficit within the two-year period preceding the end of the current fiscal year [MCL 141.1241(2)(e)]; that the city was delinquent for more than thirty days in remitting $12 million in tax payments to the state for the years 1986 through 1991 [MCL 141.1214(2)(b)(ii)]; and that the general fund deficit for fiscal year 2002 is likely to exceed ten percent of the general fund revenues for that year [MCL 141.1214(2)(f)]. The review team determined, in accordance with M.C.L. § 141.1214(3)(c), that a local government financial emergency existed "because no satisfactory plan exists to resolve the serious financial problem," and recommended that the Governor appoint an emergency financial manager pursuant to M.C.L. § 141.1218.

C. The Governor's Review Hearing

On May 22, 2002, as required by M.C.L. § 141.1215(2),¹ the Governor notified city officials in writing that he concurred in the review team's finding that a financial emergency existed. The notice informed the officials of their right to request a hearing. The acting mayor of Flint requested a hearing on the determination, which was held on June 24, 2002.

As permitted by M.C.L. § 141.1215(2), the Governor's designee, Julie Croll, deputy director of the Department of Treasury, served as hearing officer. Ms. Croll began the proceedings by informing the parties that the hearing was "not ... an original fact-finding situation," but was in the nature of an appeal, and that the standard of review would involve the determination whether the review team's findings were supported by the evidence or whether the findings were arbitrary or capricious. At the hearing, the city's representatives did not dispute the findings of the review team, and acknowledged that there was a need for immediate action. However, they claimed that since the review team's report, they had made substantial progress toward resolving their financial problems.

On July 2, 2002, Ms. Croll issued her report to the Governor. She reviewed the evidence and arguments presented by the city, but noted that "any efforts that may have taken place since the review team submitted its report ... are outside the scope of review." The hearing officer concluded that the review team's determination that a financial emergency exists in the city was supported by the evidence and recommended the appointment of an emergency financial manager. On July 3, 2002, the Governor notified Flint city officials in writing that he was adopting the hearing officer's conclusions and directing that an emergency financial manager be appointed. The specific findings that were cited as supporting this action were that the city's general fund deficit doubled from $13 million to $26 million in one year, the city's cash reserves had been depleted by $74 million over three years, audit reports during the last three fiscal years reflected the city's inability to accurately budget revenues and expenditures, and the city's inability to adhere to its current deficit elimination plan. Pursuant to the Governor's directive, Edward J. Kurtz was appointed on July 8, 2002, as the city's emergency financial manager.

D. The City's Appeal to the Circuit Court

On July 9, 2002, the city filed an appeal and complaint in the Ingham Circuit Court, along with a motion to show cause and a request for issuance of a preliminary injunction against the appointment of the emergency financial manager. Ingham Circuit Judge James R. Giddings, in a ruling from the bench, concluded that the Governor violated the statute because the Legislature intended that the Governor's hearing under M.C.L. § 141.1215(2) be an evidentiary, adversarial hearing using the preponderance of the evidence standard, in which the city could present evidence not available to the financial review team. On July 22, 2002, the court amended its order to include remand of the matter to the Governor with instructions that the Governor provide the city with a new hearing of the type outlined in its previous ruling and without limitations on the city's right to present evidence. The court stated that it would...