In 1975, New York City suffered a financial crisis similar to the one Detroit is in now, and city leaders found themselves under the auspices of a state authority. An inordinate amount of municipal debt left the city unable to fund basic services and default appeared imminent.
Headlines from Time Magazine from the period included: “How to save New York,” “Last-minute bailout of a city on the brink,” “Saved again from the jaws of default.”
The scenario in 1975 was that NYC had a fiscal shortfall and almost defaulted on its long-term debt worth $14 billion and short-term debt worth $6 billion. Adjusted for inflation NYC had long-term debt worth $59.9 billion and short-term debt worth $25.6 billion.
Comparatively, as The Economist reports, Detroit has long-term debt worth $14.9 billion. Also like NYC in 1975, Detroit has a budget deficit—the difference between revenues and expenditures—of over $100 million. In its time of crisis, NYC had a budget deficit of $600 million, adjusted for inflation that is $2.5 billion.
Under Michigan law, localities are required to report when they run budget deficits and submit a plan to eliminate that deficit by the end of the budget cycle. Detroit’s “general fund has not been in the black at year-end since fiscal 2004, and has instead been relying on debt to pay for day-to-day operations,” reports The Economist.
New York had similar requirements of its governmental subdivisions; they are required to have
balanced budgets. Despite rules which limited debt, the two cities were able to become deeply indebted.
In the 1970s, a report by the Federal Reserve Bank of St. Louis was issued to the Joint Economic Committee of Congress with policy options for NYC’s financial crisis. “At this late stage in New York City’s financial crisis there are very few options available to the City acting on its own behalf.”
By this time, Hugh Carey, then-governor of New York, established and appointed members to the Municipal Assistance Corporation.
MAC had control over the city’s finances and could borrow on behalf of the city, which was shut out of the municipal bond market. Further state control over the city was initiated when the Emergency Financial Control Board was created to take unilateral control of city finances, remove elected leaders from office and alter union contracts.
The story of Detroit followed a similar trajectory when, on March 7, Gov. Rick Snyder of Michigan announced that Detroit was in financial crisis and that a state appointed emergency financial manager would soon oversee the city.
“I believe it’s important to declare the city of Detroit in financial emergency,” Snyder said at a press conference, as reported by The Atlantic. In response, the mayor of Detroit and members of the City Council threatened to sue in order to stop or delay a state takeover.
Beyond the state control, which upset city leaders in Detroit, NYC’s financial crisis took intervention by the federal government. Former President Gerald Ford resisted all efforts to intervene in NYC’s crisis until in November 1975, $2.3 billion worth of short-term loans were extended to NYC. There has been no indication by comparison that President Barack Obama would support the bailout of a city.
New York City eventually returned to solvency in the 1980s after an arduous process.
In “Detroit’s Future: What Would You Do?” by Time Magazine, Detroit native and renown economist Jeffrey Sachs said, “With its concentration and tradition of top engineering talent, Detroit can branch out into intercity rail, advanced batteries, renewable-energy systems and smart grids linked to transport.”
Sachs admitted his premise might seem utopian, but that the transformation of Detroit is doable due to the country’s need for these technologies.
