Cleveland's default: how $14 million in bank notes broke a city's credit

Borrowing to stay afloat

Cleveland's finances were slipping before Dennis Kucinich became mayor. Under Ralph Perk, from 1972 to 1977, city spending rose about 45% while revenue lagged, and officials borrowed $17.8 million from Water Department bond funds to cover operating costs. Kucinich continued the practice. ^[1]

In July 1978, after $50 million in bond money could not be accounted for, rating agencies downgraded the city's credit. A month later Kucinich narrowly survived a recall election that followed his firing of the police chief. ^[1][2]

Dec. 15, 1978

On Dec. 15, 1978, the city could not repay $15.5 million in short-term notes. Six local banks held $14 million of them, and the city held the rest. Cleveland Trust rejected the mayor's plan to guarantee the notes, seeing it as a stopgap rather than a fix for the city's long-term finances. ^[1]

The standoff was bound up with Muny Light, the city's electric system. Kucinich was under pressure to sell it to its private rival, Cleveland Electric Illuminating Co., and refused, arguing that its competition kept rates reasonable. ^[2][3]

Votes and a refinancing

On Feb. 27, 1979, voters raised the city income tax from 1% to 1.5% and rejected selling Muny Light, but the default dragged on. In November 1979, Republican George Voinovich defeated Kucinich. ^[1][2]

In 1980, Voinovich arranged a three-year, $36.2 million refinancing that paid off the $14 million in bank notes. The default formally ended on Nov. 16, 1980. ^[1]

The cost

For almost two years Cleveland could not sell bonds, and national investors would not buy the debt it needed for improvements. The city also had to accept financial supervision from the state of Ohio. ^[1]

Muny Light survived. It became Cleveland Public Power in 1983 and remains a city-owned utility. City officials and the U.S. Senate later found that CEI and the banks had acted improperly in the fight over it. ^[3]