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Detroit and New York, a tale of two insolvent cities

Manfred Ohrenstein

The move by General Motors of its Cadillac division from Detroit to New York City is only the latest blow to the Motor City, now concluding a contentious bankruptcy proceeding.

Once the pride of the American automobile industry, Detroit is now a symbol of decline in a nation struggling to rebuild a recovering economy. Structural change cannot be successfully accomplished by constant controversy and adversarial proceedings. It requires consensus, cooperation and compromise.

Bankruptcy was not the appropriate vehicle to achieve this. That is why the manner in which the political leadership of the state of Michigan has dealt with Detroit and several other urban areas in Michigan is so perplexing.

New York state, in the 1970s, proved that financial reform can be achieved in a more effective way. From 1975 to 1977, New York City was insolvent.

When the New York City clearing house banks refused to extend further cash flow financing in the spring of 1975, the city, which had become addicted to debt, lost all financial credibility.

Many advocated bankruptcy, a path which could have led to severe economic decline and the loss of the city's pre-eminent role in international finance. Rejecting bankruptcy, Gov. Hugh Carey and the bipartisan leadership of the legislature chose the path of negotiation and conciliation rather than contention.

Carey and legislative leaders used the specter of bankruptcy as leverage. With the help of business and labor they created a series of what proved to be highly effective and long term institutions for the financial governance of the city that restored financial stability, credibility and led to sustained growth.

There was a firm exercise of political will on the part of both political parties: A Democratic governor, a Democratic majority in the Assembly and a Republican-Democratic coalition in the state Senate.

The state created the New York City Emergency Financial Control Board. This board created a forum for compromise among business, labor, political and financial interests and served effectively until its sunset long after the city fully recovered. The composition of the control board — the governor, the mayor, state and city comptrollers, and three gubernatorial appointees — provided political and electoral accountability. There were shared concessions by all stakeholders rather than judicial fiats.

The state also promulgated legislation which established accounting, financial reporting and budgetary reforms. The city sales and stock transfer taxes were dedicated to guarantee the obligations of the Municipal Assistance Corporation, which indirectly provided the city access to the capital debt markets.

By contrast, in Michigan such leadership and involvement has been absent. Gov. Rick Snyder appointed an Emergency Manager of Detroit, Kevyn Orr, with near dictatorial powers, thus overriding any elected leadership in the process and with it political accountability. Orr quickly opted for a bankruptcy filing under Chapter 9 of the U.S. Bankruptcy Code.

Detroit's Plan of Adjustment now approved in federal bankruptcy court was constructed by the emergency manager and various outside consultants earning, reportedly, more than $180 million. A judicial mediation effort led by five federal judges achieved an amalgamation of litigation settlements, which is the strength of the plan.

However, the rebuilding of Detroit awaits economic and fiscal policies best achieved through the political and public policy process, requiring participation by the electorate through its elected representatives.

To that point, one of the most decisive events in assisting Detroit came from Democrats in Washington despite ideological opposition by Republicans. This was the Obama administration's restructuring of General Motor's loans accompanied by an equity infusion which enabled the company to avoid bankruptcy.

The political skills and farsightedness of the Carey administration and the New York Legislature resulted in a total recovery of New York City.

But Detroit is still struggling. Other than a reduction of its long term debt, nearly all of the pre-bankruptcy problems of Detroit will persist. Bankruptcy as a tool for the recovery of troubled urban entities should be a last resort. Using it as a way of avoiding difficult and complex public policy decisions by elected public officials was and is the wrong approach.

Manfred Ohrenstein was the former minority leader of the New York State Senate. He is senior partner of the New York Law Firm of Ohrenstein & Brown, LLP.