Bankruptcies, defaults, and other local government financial emergencies Page: 3
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result of carpetbagging governments and railroad-aid
bonds. The depression of 1893 caused another cluster of
defaults, with private-purpose improvement bonds especially
vulnerable. Again in the depression years of
1933 to 1935, defaults soared to a peak of 3,251 in 1935.
During the economically prosperous and untroubled
years from 1945 through 1972, there were only a limited
number of defaults, mostly small in amounts. The major
defaults during this period were three revenue bond
issues: the Chesapeake Bay Bridge and Tunnel, the West
Virginia Turnpike, and the Calumet Skyway. [For a
more detailed discussion of the number and causes of
defaults prior to 1970, see City Financial Emergencies,
Over the more than ten years since the 1973 report
was issued, a number of developments have occurred.
New York City had the financial emergency that was
implicitly predicted in the 1973 report. Cleveland also
had a financial emergency. Several other major cities
had serious problems, but overcame them before they
became financial emergencies. Several smaller cities
also had a variety of financial emergencies and close
Some of the developments were anticipated in the
1973 report, such as the emergencies in New York City
and other jurisdictions caused by heavy reliance on
short-term operating loans. But some of the developments
were not expected, such as the emergencies
caused by court judgments; the growing use of deficitfunding
bonds to avert emergencies; and the sale of assets
to realize funds needed to alleviate emergencies.
Other developments have not yet caused financial emergencies,
but clearly have the potential for doing so. For
example, several local governments have experienced
significant financial losses through imprudent investments
of idle cash or retirement funds. Other losses resulted
because some security dealers handling
government funds have gone bankrupt.
There were, of course, several notable defaults including
New York City and Cleveland, but these defaults
were cured with no loss of principal. Most of the other
default activity after 1973 centered on revenue bonds,
and especially private-purpose bonds; those issued by
small special-purpose districts; and those issued for
purposes that are marginally governmental: for example,
hospitals, nursing homes and housing projects. The
largest and most notable among the revenue bond defaults
was the Washington Public Power Supply
Since 1973 some states, such as Ohio and New York,
have taken significant actions to prevent or correct local
government financial emergencies. In others, state oversight
of local government finances remains minimal or
The national government overhauled the municipal
bankruptcy code in 1976 and 1978. There have been
several bankruptcies filed under the new law. Some of
the bankruptcy law changes paralleled ACIR's 1973 recommendations,
but others did not. The federal government
intervened directly to help New York City
overcome its financial emergency. It also added local
government auditing requirements to the General Revenue
Sharing law, thereby contributing to a significant
improvement in local financial management.
The 1973 finding that under funded, locally administered,
retirement systems posed a threat to the financial
health of local governments increased public awareness
of the problem and a series of studies of retirement systems
ensued. There has been a substantial increase in
the funding of major city retirement systems and some
improvement in their financial condition (see Chapter
6). No financial emergencies since 1973 have been
found to be directly traceable to retirement system
The finances of the 30 large cities showed relatively
strong financial health in 1982, compared to earlier
years. Several cities experienced especially serious budget
imbalances and fund deficits in the mid and late
1970s, but all of them successfully overcame their problems.
These jurisdictions cut costs and increased revenues,
thereby bringing their budgets back into balance.
The 1973 ACIR report touched only briefly on the use
of deficit funding bonds, the sale of assets to resolve a
financial emergency, and on emergencies caused by
court judgments and investment losses. Therefore, a
brief discussion of each of these new developments is
Deficit Funding Bonds
One of the most significant new developments in
treating financial emergencies has been the use of deficit
funding bonds. This device was pioneered by those who
converted New York City's huge operating deficit to
According to the Annual Report of the Comptroller,
1975-76 (p. 6), New York City had an accumulated deficit
of $5.1 billion on June 30, 1975, and the comptroller
estimated an additional operating deficit of $1 billion
for fiscal 1976. However, by June 30,1976, despite a $1.2
billion operating deficit for the year, the city had reduced
its accumulated deficit to $2.6 billion. This reduction
in accumulated deficit occurred because the
Municipal Assistance Corporation, acting on the city's
behalf, issued $2.4 billion of long-term bonds and used
the proceeds to eliminate an equivalent amount of current
short-term operating debt of the city. By June 30,
1981, the amount of long-term debt issued to eliminate
accumulated operating deficits had increased to $4.5
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United States. Advisory Commission on Intergovernmental Relations. Bankruptcies, defaults, and other local government financial emergencies, book, March 1985; Washington, D.C.. (digital.library.unt.edu/ark:/67531/metadc1317/m1/13/: accessed January 23, 2019), University of North Texas Libraries, Digital Library, digital.library.unt.edu; crediting UNT Libraries Government Documents Department.