Someone Must Take A Painful Hit For Municipal Peace
Sir, To read Felix Rohatyn’s article "US cities have a choice – pull together or go bust" (Comment, April 25) is to come away with the mistaken impression that American cities do not have to make any choices at all. Rather, Mr Rohatyn says, municipal leaders should follow the example New York City set in its fiscal crisis of 1975, with "our government, company executives, labour leaders and employees [having] to co-operate on matters of common interest".
But the problem American cities face now is different from the problem New York faced almost four decades ago. The problem then was short-term liquidity; the problem today is long-term solvency.
In the 1970s, New York had an imbalanced operating budget papered over by short-term debt. The fiscal crisis came when banks refused to roll over that short-term debt until the city got its operating budget in balance and began to budget by acceptable accounting standards. The city largely achieved this feat by cutting current public services, not longer-term obligations such as capital debt, pension and healthcare contracts.
In short, the city entered into a sort of standstill agreement with all its long-term creditors, but did so only in service of restricting these obligations so that in time, everyone was paid. No one took a loss on a long-term obligation.
The problem today is different. In New York City, the problem is long-term obligations to various parties. The biggest single unfunded obligation is the $80bn-$85bn that the city government owes to public employees over the coming decades for retiree healthcare, a topic that has come up in the city’s mayoral race.
The answer cannot be a 1970s-style standstill in which New York restructures to push those obligations further into the future, because the problem is already there and coming closer. The answer is to start now to pare back future obligations. The sooner we do it the better, so that people have time to adjust to a changed future.
In cities such as Stockton and Vallejo, California, and Central Falls, Rhode Island, the problem is a combination of liquidity and solvency, but the latter problem is harder to solve.
Mr Rohatyn seems to imply that the problem can be fixed by good behaviour on all sides. Civility is admirable and desired. But it is easy to understand why people may be less polite and co-operative this time around. There are only two categories of long-term creditors to municipalities: retirees and bondholders. In many instances, from New York to California, one or both of these parties may have to take a very painful and permanent hit.
This piece originally appeared in Financial Times
This piece originally appeared in Financial Times