The Motor City’s bankruptcy proves that even big cities are not too big to fail.

What New York Should Learn from Detroit

by Nicole Gelinas

What a difference a few decades makes. In the mid-seventies, New York City’s looming bankruptcy was a horror that the state, feds, and city ultimately avoided. Last week, Detroit declared bankruptcy because Michigan thought it was the best choice available—and Washington stayed out of it. The Motor City’s default should spur New York’s bondholders, public-sector workers, and residents to take a fresh look at our own financial burdens.

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.

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