The Local Government and School District Fiscal Accountability Act, MCL § 141.1501 et seq., (the “Act”) was intended to assist local governments in financial trouble. An emergency financial manager can be appointed under the Act to resolve the government’s financial situation. The Act gives the manager very expansive authority. The Act states:

“An emergency manager may … make, approve, or disapprove any … contract” and may “reject, modify, or terminate 1 or more terms and conditions of an existing contract.” MCL § 141.1519(1)(g) & (j).

This incredibly broad legal power could be used to invalidate existing agreements related to Brownfield financing and other economic incentives. No Court has yet to clarify how far this power extends. There are several cases which are challenging the constitutionality of the Act. In Valenti v. Snyder, No. 2:12-cv-11461-AJT-MJH, pending in the U.S. District Court for the Eastern District of Michigan, the Coalition of Unions of the City of Detroit alleges the Act violates the Contracts Clause of the U.S. Constitution because the Act empowers an emergency manager to terminate or modify collective bargaining agreements. In Brown v. Snyder, pending before the Michigan Supreme Court, No. 11-685-CZ, the plaintiffs, 28 Michigan residents, allege that the Act violates the non-delegation doctrine and elector’s rights.

We are unaware if there is any situation where an emergency financial manager has terminated a brownfield related arrangement. However, there are many communities who have had managers appointed and may others who are at risk. We are undertaking a survey of our clients’ situations in communities that are currently being managed by the financial managers and those governments which are could have one appointed in the near future.

There are several strategies, from a legal perspective, to reduce the risk of a brownfield plan or agreement from being terminated under the Act. A comprehensive review of the particular situation along with careful attention to legal issues can manage these problematic situations.

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Tax increment financing (“TIF”) is used by many owners of property to finance previously incurred eligible environmental costs. In essence, TIF uses increased tax revenue to reimburse owners for eligible costs. Developments of obsolete or contaminated property often result in an increase in the taxable value of real property which, in turn, cause additional tax revenue to be generated. Under a Brownfield TIF arrangement, instead of a source of additional funding for governments, the incremental increase in the tax revenue is used to pay eligible costs incurred by a developer through a reimbursement agreement with the local community.

Now that the City of Detroit has an EFM, those involved in Brownfield Plans should be aware of potential consequences. The new EFM, Kevyn Orr, has yet to use his incredibly broad legal powers to invalidate Brownfield plans or reimbursement agreements or portions of them in Detroit, but he has started to use these powers to assert control over union contracts (see Detroit News, 4/23/13). A unilateral termination of the entire agreement or portions of it are clearly within his powers. This means that developers counting on reimbursement through a TIF arrangement may be disappointed when a EFM terminates such arrangements.

A strategy that might be employed by an EFM, based on our sources, is to request a status report from each person benefitting from a Brownfield plan or reimbursement agreement. If the audit shows little or no economic benefit to the local community, the agreements could be terminated and TIF would no longer be available and, as a result, the governmental entity would not be obligated to reimburse those owners for such costs.

It might be wise for Brownfield plan beneficiaries to consider how to respond when such questions are asked. Further, it may be important for one to proactively communicate directly with the EFM to stave off any potential for such documents to be terminated or rejected. We will continue to monitor not only Detroit’s situation but others as EFMs are appointed for governments throughout Michigan.

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