Neutral Evaluation Process available to fiscally-stressed communities

The Neutral Evaluation Process is one of the four options available under P. A. 436 to help communities work through their financial emergency.

In previous articles, Michigan State University Extension has outlined and described options available to financially challenged communities under P.A. 436, “The Local Financial Stability and Choice Act.” Those options include a consent agreement, an emergency manager and chapter 9 bankruptcy.

The fourth option, Neutral Evaluation Process, is “a form of alternative dispute resolution or mediation between a local government and interested parties” (P.A. 436, section 2 (o)). In layman terms, the local government and its debtors agree to try to work out a settlement for what is owed.

A local government may initiate a neutral evaluation process by giving notice to all interested parties through certified mail of the request to proceed with this option. An interested party may be a trustee, individual and collective creditors, an indenture trustee, a pension fund, bondholder, union, or retired employees of the local government. The local government must give notice within seven days of selecting this option. If they fail to meet this deadline, the state treasurer may require the local government to go into receivership and proceed under Section 9 of P.A. 436, which is the Emergency Manager option.

All interested parties must respond to this request within ten days of receiving the notice. Interested parties of the local government are not required to participate in the process.

The participating parties and local government must jointly select and agree upon a neutral evaluator to oversee this process and facilitate the discussions. If the two sides cannot agree on a neutral evaluator, the local government selects five qualified evaluators and provides their credentials to the participating parties. Each party may disqualify up to four of the five candidates. If one name remains, that person becomes the neutral evaluator. If less than four names are disqualified, the local government selects one of the remaining names to become the evaluator.

Any interested party can appeal the local government’s choice based on their qualifications. If the state treasurer determines the evaluator does not meet the qualifications outlined in the statute, he chooses the new evaluator.

The role of the neutral evaluator is to assist participants in reaching a satisfactory resolution. They may make written or verbal recommendations to each side individually or jointly. The evaluator is required by law to outline to both sides the provisions of Chapter 9. The neutral evaluator cannot force either side to accept a settlement.

The neutral evaluator may be removed during the process if the local government and a majority of the interested parties agree to remove them. It they can agree on the replacement, that person becomes the new evaluator. If an agreement between both sides is reached, the neutral evaluator may assist in negotiating a plan of adjustment. This plan must be approved by a bankruptcy judge before it goes into effect. The two sides have sixty days from the date the neutral evaluator is selected to come to agreement. One 30-day extension may be requested for a total of ninety days.

If the two sides have exceeded the time limit (including any extensions) and no settlement is reached or the local government’s financial condition has deteriorated significantly, the governing body of the municipality must adopt a resolution recommending Chapter 9. This resolution must include a statement indicating that the condition of the local government finances jeopardizes the “health, safety and welfare” of its residents.

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