When Cities Go Bankrupt?

Dear Commons Community,

Over the past week, the media covered extensively the bankruptcy declaration by the City of Detroit.  A  good deal of speculation has been made about what bankruptcy would mean for the city, its residents and its workers.  Some speculated that it would be a good thing and would force Detroit to get its fiscal house in order.  Others saw it is as a path to pain with many people suffering with the loss of city services, vendors not getting paid, and workers losing their pensions.  Several other American cities that have recently filed for bankruptcy such as San Bernardino, Stockton and Birmingham are in the early throes of slowly making their way back to solvency.

I keep thinking back to the mid-1970s when New York City was on the fiscal brink and literally hours away from declaring bankruptcy. Sam Roberts of the New York Times recalled in an article written in 2006:

“A statement of default by Mayor Abraham D. Beame was drafted and typed and ready to be released on Oct. 17, 1975…

“I have been advised by the comptroller that the City of New York has insufficient cash on hand to meet debt obligations due today,” the statement said. “This constitutes the default that we have struggled to avoid.”

The statement…went on to say that the city had applied for and obtained a court order to preserve its assets from creditors.

It said that “rational and humane” priorities had been approved to make payments in this order: police, fire, sanitation and public health services; food and shelter for people dependent on the city; hospital and emergency medical care for those with no other resources; bills from vendors of essential goods and services; school maintenance; interest on city debt; and payments due the retired and aged, beyond those from pension funds.

The Beame statement was never distributed because, after the most tense episode in months of fiscal crisis, Albert Shanker, the teachers’ union president, finally furnished $150 million from the union’s pension fund to buy Municipal Assistance Corporation bonds.

Mr. Shanker had resisted …but relented after meeting with Gov. Hugh L. Carey.”

While New York never declared bankruptcy officially, it acted as if it did and it took about a dozen years of belt-tightening and a fiscal watch dog before it  got back on its feet.  New York did not die nor will Detroit, San Bernardino, Stockton or Birmingham but the road will be long and hard.



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