SMART NEWS

How Other Cities Avoided Detroit’s Fate

Many places manage to avoid actually filing for bankruptcy, despite being in dire straits

Contributor

July 19, 2013

Yesterday, news broke that the city of Detroit was filing for bankruptcy. The news wasn’t a total shock, as the city has been skirting the decision for years. Nor is Detroit the first city to declare bankruptcy. Since January 2010, 36 municipalities and eight cities have filed for Chapter 9. But Detroit is by far the largest.

Of the cities eligible for bankruptcy, few file. Governing.com says that of only one out of 1,668 places eligible for filing for bankruptcy have done so since 2008. Which means that many places manage to avoid actually filing for bankruptcy, despite being in dire straits.

New York City is probably the most famous of those cities. In 1975, New York City had $14 billion in debt and a $2.2-billion operating deficit. Felix Rohatyn chaired a commission that got New York City out of that mess. He and his deputy were given the nickname “Batman and Robin of New York” for their work. Quartz explains how they did it:

First, municipal unions, as well as conceding pay cuts, used their pension funds to invest in the city. Then big Wall Street banks, which owned a lot of New York municipal debt and therefore had strong incentives to cooperate on restructuring, agreed to defer loan repayment and underwrote new securities on the cheap. And despite President Gerald Ford’s famous message to New York, pressure from Congress—and even from foreign governments fearing a default—led to federal guarantees on the city’s debt.

When the city of Stockton, California, went bankrupt last year, NPR ran a piece on how to avoid bankruptcy, including tips that sound like they’re out of a personal finance self-help book. Don’t spend money you don’t have, they say. Remember that markets rise and fall. Don’t wait until you’re on the brink of bankruptcy to do something about it. A bankruptcy lawyer who advises cities told the Wall Street Journal, “If you see it down the road, then you must cut your expenses right away. Go to the unions and start making concessions now and then go to creditors and start negotiations.” In places like Pittsburgh, they’ve privatized government operations and are changing pension laws.

Other places have some more creative ways to avoid bankruptcy. The city of Chicago has sold its 36,000 parking meters (many of them to Abu Dhabi).

Detroit, however, took the plunge into bankruptcy. And Rohatyn, the Batman who saved New York, says that what worked for him in 1975 would probably never be possible in Detroit, anyway. He told Quartz “The various stakeholders are no longer around the same table.”