Cities borrow money (municipal bonds) to build the infrastructure of the city, so it’s residents can enjoy their life in the city. The bonds offer a low interest rate, usually tax free, so the city can afford to build the sewer or water plant, and the residents agree to tax rates to pay off the bonds.
Bond buyers are assured by the full faith of the city, that they will be repaid. Cities must adjust their tax rate to comply with its obligations to repay the bonds. If taxes alone won’t accomplish the repayment then the city must cut services, police, fire, education and employees.
When a major city defaults on their bonds, thousands of other cities will have to pay much higher interest on their bonds. This translates into a stagnation of growth across America on top of the current lack of economic growth will add years to the recovery.
Answer: The city has to give a 20 or 30% hair cut to its pensioners and renegotiate their current employee contracts.