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Bankrupt Cities Using Emergency Financial Managers to Recover

Comstock/Thinkstock(BENTON HARBOR, Mich.) -- A growing number of cities have been saved from bankruptcy by private-sector, for-profit consultants granted sweeping powers to modify, reject, terminate and renegotiate contracts, including union contracts.

They can also amend budgets, determine staffing, eliminate departments and remove members of local pension boards, as well as overrule mayors, city councils and other elected officials.

What Old Man Potter tried to do to Bedford Falls in the movie It's A Wonderful Life -- get his fingers around every single aspect of municipal life -- they are doing routinely in towns such as Benton Harbor, Michigan.

Some of them go by the name of emergency financial managers, or EFMs for short.  Critics have other descriptions, however, including dictators.

"Most definitely," Benton Harbor commissioner Dennis Knowles said of last month's appointment of an EFM, though conceding that the city needed help after making a series of bad financial decisions.  "But the city now is under a dictatorship.  We aren't able to make our own decisions.  All we [the commissioners] can do is meet, approve minutes of the meetings, and adjourn.  It's a blatant disregard of the democratic process, the voice of the people."

In Michigan, such managers, appointed by the governor, control not just cities -- including Hamtramck and Ecorse outside Detroit -- but Detroit's public school system as well.

The phenomenon isn't limited to Michigan.  Indiana is in the process of creating its own version of EFMs.  In New York and other states, comparable powers have been granted to receivers and to oversight boards.

The budget of New York State's Nassau County, for example, which suffers from a $176 million deficit, has been put under the control a state-appointed six-member oversight board.

Michigan's emergency managers were created by the Local Government and School District Fiscal Accountability Act, introduced by Republican Gov. Rick Snyder and signed into law March 16.

Terry Stanton, information officer for Michigan's Department of the Treasury, said the intention of the law is simple: to protect the health, welfare and safety of local government.

As for charges of "dictatorship," he said, "No one likes to see their authority taken away.  But it's important to note that often times it was the elected officials who were the ones unable or unwilling to address financial problem before they got crisis stage."

The act, he said, has information-gathering provisions designed to give towns early warning they are headed for financial trouble.  That way, they would never need to call in an emergency manager or to have one assigned to them.

Copyright 2011 ABC News Radio

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