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Chapter Five— The Default of Cleveland: Constructing Municipal Reality
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The Struggle Continues

While intense struggles ensued over the sale of MUNY, Kucinich appealed to the city council to approve an ordinance to get the six local banks to refinance Cleveland's defaulted $15.5 million. Cleveland Trust finally agreed to wait until after 27 February 1979 before instituting measures to collect $5 million on which Cleveland had defaulted (New York Times , 26 Dec. 1978, 16; 29 Dec. 1978, 10).

Meanwhile, in a move to raise more revenue, CEI requested a 25 percent rate increase for wholesale power it sold to Cleveland. Kucinich strenuously opposed the request (New York Times , 10 Feb. 1979, 8). In a federal setback, the U.S. Supreme Court refused to review Cleveland's appeal in a "dispute over its authority to pay off some electric bills," letting stand the Ohio Supreme Court's ruling that the city did not have the authority to issue bonds to generate revenue for payment of its debts to CEI (New York Times , 22 Feb. 1979, D5). This decision made it even harder for Cleveland to access the national bond market and increased the city's dependence on its creditor banks.


The city continued to suffer from the banks' collective definition of a crisis when it lost its largest annual convention. The Pittsburgh Conference, which annually brought 15,800 scientists and around $6 million to Cleveland, decided to hold its 1980 conference in Atlantic City for the first time since 1968 (New York Times , 3 May 1979, B8). Furthermore, as Cleveland's image plummeted, more and more firms moved out, including Diamond Shamrock Corporation, which moved its headquarters from Cleveland to Dallas, Texas (New York Times , 30 May 1979, D19).

Finally, after protracted feuding over the sale of MUNY almost destroyed the city financially, city council leaders and the Kucinich administration agreed on a six-step fiscal rehabilitation plan to offer to the banks. The plan required that the council approve legislation to establish "an escrow account for income tax money from about 20 of Cleveland's biggest companies," to be used for payments to the banks holding Cleveland's loans (New York Times , 10 June 1979, 31).

In July 1979 Cleveland avoided a second default when the city council unanimously passed a measure that gave the city an additional year to repay $7.6 million it borrowed "from its own agencies." Kucinich also requested that the council repeal the city law requiring the approval of a bond lawyer to refinance municipal notes, an approval the bond lawyers had refused to give (New York Times , 7 July 1979, 6).

Although the city avoided defaulting on loans by its own agencies, it headed into another default on 31 August 1979. After more squabbling over MUNY's sale, Kucinich and the city council finally agreed on a proposal to begin overdue repayments of loans, and the council approved Kucinich's repayment schedule of $3.75 million to Cleveland's six local banks (New York Times , 26 Sept. 1979, 16). The council later approved a plan to refinance $14.4 million in municipal debts, helping the city avoid a third default in less than a year (New York Times , 6 Oct. 1979, 11).

Kucinich became the most visible political victim of Cleveland's fiscal crisis when the Republican lieutenant governor of Ohio, George V. Voinovich (heavily supported by business interests), defeated him in a bitter 1979 mayoral election.[3] The election of


Voinovich smoothed the way to the governor's mansion and access to finance capital: "With Kucinich turned out of office, Governor James A. Rhodes, State Senate leadership, and the City Council [were] prepared to enact legislation that would allow the city to enter the debt market and gain some relief from a series of defaults that [had] plagued it for the last year" (New York Times , 8 Nov. 1979, 20). Unfortunately, that cooperation did not come soon enough. Cleveland's officials noted that despite the 50 percent increase in the city's income tax rate, the city ended 1979 with an even larger deficit than the previous year (New York Times , 15 Nov. 1979, 26; 18 Dec. 1979, 14).

Shortly thereafter, Cleveland hired a Wall Street banking firm and investment company, Lazard-Freres and Company, as its financial adviser. The firm had a reputation as an effective adviser to cities needing fiscal rehabilitation (New York Times , 18 Feb. 1980, D2). But in the fall of 1980 Voinovich announced the disheartening news that Cleveland faced another $7.1 million budget deficit for that fiscal year (New York Times , 10 Mar. 1980, D8). Cleveland's Financial Planning and Supervision Commission approved the mayor's financial bailout plan (New York Times , 30 Apr. 1980, 20). By June 1980 Cleveland had reached an agreement with the banks to refinance $36.2 million in debt, including the $10.5 million on which the city had already defaulted (New York Times , 8 June 1980, 24). In addition, the city council approved Voinovich's agreement to sell $36.2 million in fourteen-year bonds to eight banks to repay the city's overdue debts.

This plan would essentially convert Cleveland's debts from short-term notes to long-term bonds (New York Times , 9 Oct. 1980, 22). Ironically Voinovich had to ask voters once again to increase the city income tax from 1.5 to 2 percent to raise revenues to support the city's recovery (New York Times , 18 Feb. 1981, 12). These measures apparently worked. Cleveland managed to balance its budget in 1980 "for the first time in years," generating a $3.9 million surplus (New York Times , 13 May 1981, 28). Standard and Poor's, which had suspended Cleveland's bond rating in July 1978, resumed the city's bond rating in August 1981 with a


BBB (New York Times , 16 Aug. 1981, 35). Moody's Investor Service gave a Ba rating to the city's general obligations bonds (New York Times , 9 July 1981, D9), up from the Caa rating in 1979 (Moody's Municipal and Government Manual , 1979). This made the national bond market accessible to Cleveland once again. Finally, by 1982 Cleveland's downtown had begun to revive along with the "growth of the skilled service industry" (New York Times , 5 Feb. 1982, 10). This service sector expansion began well before 1982 and was strong even under Kucinich. The trend suggests that Cleveland's economy was fairly healthy under Kucinich, and that the critical factor in the city's fiscal crisis and default was not simply economics, but political economics.

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