Michigan consent agreements: What you need to know
With many local communities and school districts currently facing financial issues, understanding consent agreements is important to determining a local government’s potential future choices.
As local property taxes continue to fall, more and more communities and school districts are finding their finances in stress, if not actual crisis. Michigan P.A. 4, Local Government and School District Fiscal Accountability Act, outlines specific actions if a local government or school district finds itself in financial crisis. However, many citizens and some local government officials do not understand what a consent agreement is, how to determine if an entity should enter into an agreement and what the requirements of an agreement are.
A Consent Agreement is a legal agreement negotiated between a local government or school district and the designated state financial authority (SFA) to address the local unit’s fiscal problems. The SFA for municipalities is the State Treasurer. For school districts, it is the Superintendent of Public Instruction.
Prior to a consent agreement, a preliminary review is done by the SFA at the request of the local Chief Administrative Officer (CAO), the local government body or the SFA itself to determine if a financial problem exists. If a preliminary review finds probable financial stress, then a Financial Review Team is appointed to do a more thorough review of the finances of the local government or school district. There are three possible outcomes to a financial review:
- No further action because there is no stress or mild stress but the government is able to provide essential services for the next two years and the case is closed
- Severe stress exists which shows that one or more stress factors exist or will exist within one year which threatens future ability to provide essential services if not addressed.
- Financial emergency exists which means two or more stress factors exist or will exist within one year which threatens current and future ability to provide essential services if not addressed.
If the Financial Review Team determines either severe stress or a financial emergency exists, it has the authority to negotiate and sign a consent agreement with the local government or school district’s CAO. The consent agreement also must be approved by resolution by the local entity’s governing body.
The goals of a consent agreement are to:
- Provide remedial measures to address the local financial problem(s)
- Provide financial stability to the local unit
A consent agreement allows elected officials to remain in charge during the consent agreement period while setting conditions and actions that must be followed to alleviate the financial crisis.
There are two types of Consent Agreements: Continuing Operations Plan (COP) or a Recovery Plan. The actions and activities are basically the same in both types of plan.
With a COP, the local government or school district prepares and submits its own plan to the SFA. The SFA has 14 days to approve or disapprove the plan. If the plan is rejected, the local entity has 30 days to revise the plan.
Conversely, with a Recovery Plan, the State Financial Authority develops and adopts the plan for the local government or district.
A consent agreement must contain the following information:
- A detailed projected budget of reasonable revenues and expenditures for a minimum of three years showing that expenditures will not exceed revenue and that any existing deficit will be eliminated
- A cash flow projection for the same budget period
- An operating plan that insures fiscal accountability for the budget period
- A plan for reasonable and necessary maintenance and capital expenditures
- An evaluation of pension and retiree health care costs and how those costs will be addressed during the budget timeframe.
- A provision for submitting quarterly compliance reports to the SFA showing compliance with the COP
In summary, a consent agreement outlines the process, terms and conditions for developing and implementing a financial plan to guide the local government or school district toward financial stability. Compliance with the agreement ultimately rests with the local elected body with oversight by and reporting to the designated state financial authority.