Urban decline and recovery

 Manfred Ohrenstein and Peter Kiernan

The move by General Motors of its Cadillac division from Detroit to New York City is only the latest blow to the Motor City concluding a contentious bankruptcy proceeding. The results of the bankruptcy at best will be limited, while the hard work of re-engineering Detroit as a viable urban center is just beginning. Ironically, the threat of bankruptcy, which could have been employed to bring the contending political, civic, business and labor parties to the table, has been expended, leaving in its wake anger and frustration that may make required fiscal, economic and public policy agreements more difficult to achieve.

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 is 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. In 1975–1977 the City of New York 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 that could have led to severe economic decline and the loss of the city’s pre-eminent role in international finance. Rejecting bankruptcy, Governor Carey and the bi-partisan leadership of the state legislature chose the path of negotiation and conciliation rather than contention.

 Carey and the legislative leaders used the spectre of bankruptcy as leverage. With the help of business and labor, the state 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 on which the governor served personally along with the mayor, the state and city comptrollers, and three additional gubernatorial appointees, which gave the governor a voting majority. 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 provided political and electoral accountability, as each of its officials had to face the electorate as did the members of the legislature that empowered the board. There were shared concessions by all stakeholders rather than judicial fiats. 

The state also promulgated legislation that 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. 

The consensus approach to governance also served to rescue the insolvent cities of Troy, Buffalo, Yonkers, and the counties of Erie and Nassau in later years. New York’s bipartisan political leadership’s willingness to involve itself in problem solving at the local government level has been demonstrably effective. 

 By contrast, in Michigan such leadership and involvement has been absent. The Michigan governor appointed an emergency manager of Detroit with near dictatorial powers, thus overriding any elected leadership in the process and with it political accountability. The emergency manager quickly opted for a bankruptcy filing under Chapter 9 of the U.S. Bankruptcy Code. Thereafter, the governor and the Michigan legislature largely distanced themselves from further political and financial responsibility for Detroit’s survival. Several other cities in Michigan also have had to answer to unelected emergency managers

Detroit’s Plan of Adjustment 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 that 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 State Legislature resulted in a total recovery of the City of New York. 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. There can be no assurance of financial, fiscal, governmental and political recovery. 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 is the wrong approach. 

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Manfred Ohrenstein was the former Minority Leader of the New York State Senate. He is currently the Senior Partner of the New York Law Firm of Ohrenstein & Brown, LLP

Peter Kiernan was the former Counsel to the Governor of the State of New York. He is currently Of Counsel at the New York City Law Firm of Schiff Hardin