BOSTON — Detroit's bankruptcy and Puerto Rico's default are similar to New York City's mid-1970s crisis, public finance veteran Richard Ravitch said Friday.
"Both Detroit and Puerto Rico are extraordinarily similar to what happened in New York in 1975," Ravitch, a Volcker Alliance board member and former New York lieutenant governor, said during the fourth annual Brandeis municipal finance conference at the Federal Reserve Bank of Boston.
Ravitch, credited with helping craft the plan that helped the city avoid bankruptcy, vividly remembers being in a room with Gov. Hugh Carey on May 2, 1975, when leading bankers said they would no longer backstop city bonds and notes. "I learned that day that the city had close to $8 billion in short-term debt with no way to pay it by continuing to borrow," he said.
"Detroit had 40 years of constant, persistent decline by any measure, but kept borrowing with some of the bonds fraudulent," Ravitch said.
On Monday, the Puerto Rico Public Finance Corp. defaulted on a $58 million bond payment because the island's government appropriated no money for the corporation.
The commonwealth's financial woes, said Ravitch, trace to the federal government ending its subsidy after the Cold War ended.
"They were never, ever able to use real revenue to balance their budgets," he said. "Don't ask me how or why, but last year they borrowed close to $3 billion at 9%, triple tax-exempt, that they absolutely had zero chance of repaying."
Ravitch repeated his call to subject municipal securities to the same kind of federal oversight as corporate debt, and for all states and municipalities to budget by generally accepted accounting principles, which New York did 40 years ago.
"That's the lesson we can learn from New York City. It has carried the city through three significant recessions, including the big one in 2008 and the 9/11 tragedy. It's a lesson nobody is willing to learn."
The Brandeis event features academics, practitioners, regulators and issuers discussing the changing landscape of municipal capital markets and how to adapt to the changing landscape. Brandeis business professor Daniel Bergstresser and Federal Reserve Bank of Boston vice president Robert Triest are organizing the event.
Volcker Alliance program director William Glasgall compared budgeting practices in California, New Jersey and Virginia. The states' behavior range prompted his choice of the three, which he rated by adequate pension funding, advance funding of other post-employment benefits obligations, rainy-day balances, online access, delayed payments to third parties and avoiding asset sales to replenish operating budgets.
"California's the comeback kid. They've got a lot of constraints through the voters and state legislative leaders. But California's revenues are notoriously volatile," said Glasgall. "Virginia is historically an example of fiscal behavior. They're the good guy, a triple-A state.
"New Jersey moves from crisis to crisis. If it's not the pension obligation, it's the roads falling apart."
New Jersey, according to Glasgall, has a sensible rainy-day policy but doesn't adhere to it. "In practice, it's down to zero and nobody's filling up the tank again soon. That's an issue we have to look into."
Chicago, he said, is the poster child for how not to conduct an asset sale. The city's inspector general concluded that its 75-year lease of 36,000 parking meters for $1 billion to a Morgan Stanley-led consortium, which the City Council hastily approved in 2008, closed for only half its value.
"The Chicago parking deal by all accounts was a pretty rotten deal. That was one of the worst ever," said Glasgall.