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Ed Driscoll

Standing in the Shadows of the Motown Meltdown

July 30th, 2013 - 11:46 pm

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“What New York Should Learn from Detroit” is the topic explored by Nicole Gelinas at City Journal:

In spring 1975, New York City couldn’t pay its bills. It had long covered over its deficits with short-term borrowing, and the banks, growing nervous, shut off the tab. The city turned to Albany for help; Albany went to Washington to request a federal bailout. Republican president Gerald Ford first vowed that he wouldn’t help the insolvent city, provoking the famous New York Daily News headline: FORD TO CITY: DROP DEAD. But Ford came through in the fall, after several months of negotiations. Why the about-face? Ford feared a global financial panic. Treasury secretary Bill Simon said default would be “awful.” Federal Reserve chairman Arthur Burns told Ford that Europe’s leaders considered bankruptcy “unthinkable.” The city got its bailout and repaid its debt—or, rather, refinanced it. We still owe $2.1 billion from that era.

Today, there’s no chance that Detroit will pay all or even most of the $18 billion it owes to bondholders and public-sector retirees. It killed one sacred cow when it included $530 million in general-obligation bonds as “unsecured debt,” preparing to offer bondholders seven cents on the dollar. It killed another when city officials said that pensioners will have to take a hit of up to 30 percent of expected income, if it turns out that the city’s past pension contributions indeed fall $3.5 billion short of covering future payments. As for the $5.7 billion Detroit owes public workers for retiree health care, the plan is for retirees to try Obamacare.

Back in the seventies, the specter of bankruptcy prophesied urban death. New York could never recover from such a cataclysm, many believed. Now, Detroit is pushing bankruptcy as the catalyst for a turnaround, telling locals that City Hall can do everything from fixing street lights to hiring police with the money that taxpayers save by stiffing creditors. Detroit should stand as a warning: New York’s bondholders and public-sector workers can never look upon their city as “too big to fail” again. As Mark Kaufman, co-chair of the municipal reform and innovation practice at the McKenna Long & Aldridge law firm, points out, Detroit highlights a critical question that other cities must grapple with: “What does general-obligation debt really mean? What does full faith and credit mean? It’s not worth a candle if you have a city that can’t meet that obligation.”

If New York’s bondholders, public-sector workers, and retirees apply this sobering thought to their own city, they could help fix things before it’s too late. New York, after all, is doing well compared with many other cities. The time to act is now.

Don’t worry about New York — its citizens and local government are taking these issues as seriously as they’re taking the races for mayor and comptroller…

Oh and by the way, I’m sure this is nothing: “Illinois Comptroller Can’t Pay Legislators Due To Pension Crisis, When Will Media Report?”

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