Many American cities now face the travails and uncertainties that existed in the 1970s. After a respite in the late 1980s, when the financial and credit condition of cities was generally healthy, we have returned to a time when many cities face more difficult times.
Indeed, some cities confront lower ratings, routine and large deficits, and even -- for a handful -- the prospects of default and bankruptcy.
Since the two of us participated in the 1970s in assisting many cities that then faced major financial hardships, we have asked ourselves: "What have we learned about cities that can be applied to better examine the ability of an American city to meet its debt service and other financial obligations during problem periods>"
In the mid-1970s, New York City defaulted on a large amount of notes, had no access to the credit markets and was borrowing directly from the U.S. Treasury to meet its continuing operating expenses.
Further, there was an abiding assumption, in many quarters, that New York City could be the first of a long list of equally grave urban credits.
In fact, over the subsequent period, ending in the mid-1980s, the nay-sayers were proven to be at least partially correct, as Cleveland, Boston, and Detroit, among others, all fell into the non-investment grade categories for a period of time.
Except for Philadelphia recently, large American cities have enjoyed investment grade ratings since the mid-1980s. What was the experience over this period, spanning the 1970s and 1980s, that can be helpful at this time?
As urban finance specialists, we have learned at least three practical lessons that now bear particular relevance.
No 'Urban Finance'
First, we believe that there is no such thing as urban finance, at least from a credit perspective.
Quite simply, there are separate and discrete local finance issues, problems, and opportunities.
Yet when one generalizes to a much higher and broader level of conclusion, that person has done nothing to improve the capability of understanding the particular, local challenge.
In fact, sufficient evidence exists to establish that part of the anti-state and -local attitude that has prevailed in Congress throughout much of the 1980s was created by those who, like Chicken Little, kept exclaiming -- time and again -- that tha sky was falling for cities and for state and local governments.
Of course, it would be both dumb and naive not to recognize that national and regional economic trends have a major, common effect on urban governments and their finances.
Yet, was it a general urban finance condition that caused either Boston or Detroit to lose their investment grade ratings in the early 1980s?
Absolutely not.
For Boston, it was the combination of a court decision and a tax initiative.
For Detroit, it was fallout from the implosion of the automotive industry.
Except for the fact that the two are American cities, any similarity of the credit issues that then confronted the two cities disappears.
In this connection, it is best to be warned of the consequences of the general approach in the words of William Manchester, in his most recent book [the second volume of "The Last Lion," his biography of Winston Churchill]: "The present is never tidy, or certain, or reasonable, and those who try to make it so, once it has become the past, succeed only in making it seem implausible."
Political Will
The second lesson we have learned over the period is that political will plays a far more important role in the basic creditworthiness of an American city than we had previously acknowledged.
While the lesson is not accepted universally today, even at the rating agencies, we believe that a city's financial integrity undoubtedly rests on political will.
In Detroit, for all its problems, and they have been substantial, Coleman Young has shown again and again his political will to protect Detroit's financial integrity by taking actions quickly and decisively.
Similarly, Ray Flynn in Boston has demonstrated the political will to balance the city's budget from year to year, while the commonwealth continued to flounder, and this will has translated into a tangible asset.
Conversely, does anyone now deny that Cleveland's default was essentially a political abdication? And should Philadelphia default, will economic and financial explanations come immediately to mind?
Credit structures retain their integrity only atop political will.
Political Stability
The third lesson worth emphasizing is related to, though separate from ,the second.
It is the credit importance that we now believe should be given to political stability.
Several volumes have already been written connecting the New York City fiscal crisis and default in the mid-1970s with the erosion of political stability in New York City.
With reference to this subject, Charles R. Morris wrote in "The Cost of Good Intentions," an analysis of the descent of New York City into its insolvency, that "It was the inability to grasp the totality that permitted officials to walk straight ahead, eyes wide open, and plunge directly off the financial cliffs".
Admittedly, political stability is not fully quantifiable, but neither is love nor hate, which everyone also knows exist.
In fact, it leads even smart officials to make decisions that will not be in the long-term best interests of their constituents, and yet they continue to forge ahead.
For example, the political instability that became apparent in the Lindsay administration manifested itself through actions implemented by governmental officials whose capabilities would have been the envy of most urban administrations.
Immediate vs. Important
The immediate obviously displaced the important.
The two of us have tilled the ground of urban credit issues long enough to realize that near-term accommodation, in an environment of political instability, is addictive and will, more often than not, obscure the damaging end result.
Peter Goldmark, who was the state budget director during New York City's fiscal crisis, used an image to dramatize the process of self-deception that preceded the fiscal crisis: "Remember the fourteenth century and the advent of the plague. Was it possible for those people to stand on the docks in Genoa or Venice, watch the rats pouring off the ships, and not understand?"
It is our belief in the context of political instability, the capacity for governmental operatives to achieve a clear-eyed perspective is routinely lost.
In our opinion, if there is one credit feature that is given much too minimal attention, it is this factor of political instability, notwithstanding the persuasive and preponderant evidence to support the conclusion that money is always most at risk wherever political storms reign.
While we are sure that these three lessons have made their way into the ratings for major American cities, their impact has differed significantly from credit to credit.
We recommend that as the credit markets move through this more vulnerable period for many American cities, the industry would do well to bear in mind the conditions and events that surrounded the emergencies and defaults by American cities in the recent past and the essential lessons we should have learned.
Mr. Johnson and Ms. Johnson are president and special consultant, respectively, at the Government Finance Associates Inc. Mr. Johnson was responsible at the Treasury Department for administering the federal loan program to New York City in 1977-78. Ms. Johnson was head of the public finance department at Moody's Investors Service from 1979 to 1990.
