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A Christmas Story: How New York City Went Broke

A Christmas Story: How New York City Went Broke image A Christmas Story: How New York City Went Broke image A Christmas Story: How New York City Went Broke image
Parent Issue
Day
17
Month
December
Year
1975
OCR Text

It's Christmas time in New York City, and everyone is looking for a Santa Claus to save the financial capital of the world from bankruptcy, as well as a Scrooge to blame the whole mess on.
Our President, at this writing, appeared to be reluctantly wriggling into his red suit to deliver $2.3 billion in federal loans so Tiny Tim, played by New York Mayor Abraham Beame, won't go without his Christmas turkey.
Candidates for the role of the villain in the tragicomedy of New York are quite numerous. Some politicians would like to suggest the city's nearly one million welfare recipients. Others pin it on aggressive labor leaders like Albert Shanker of the American Federation of Teachers.
To give everyone a fair chance in the tryouts, however, it would be best to take a close look at Scrooge's business, who's been running it, and where the profits have been going. For this depression epic, a single villain will never do.
To be impartial, we would have to consider former New York Governor, now Vice President Nelson Rockefeller; Beame's two predecessors. Robert Wagner and John Lindsay; Felix Rohatyn, the investment banker who heads the state's caretaker government for the city, the Municipal Assistance Corporation ("Big MAC"); and a host of others, íncluding ex-President Richard Nixon, ex-Attorney General John Mitchell, and the

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How New York continued front the cover

board chairmen of New York's biggest banks.
It's a long Christmas story, one with many a twist and turn, so make yourselves comfortable, children, while we begin.
First, just to set the stage, let's take a look at the present state of New York City, the citadel of the western world, the gateway to the land of opportunity, the crowning achievement of the American dream.
New York is flat broke. It can't pay its bills-which presently total something like $3 billion.
It has something like $14 billion in loans to pay back.
The City is laying off workers, cutting back its services, raising its taxes, and generally thrashing about in a panic trying to prove that it might, at some time in the near future, become a safe investment again.
It is being run by a consortium of bankers, securities brokers, corporate executives, and state officials who are controlling its budget. lts Mayor, who is also its former Comptroller, is definitely on the hot seat, along with its deputy Mayor and former Deputy Budget Director, James Cavanagh.
How did all this happen? To begin at the beginning, as they say, let us return to 1960, when Governor Rockefeller was wondering how to win over voters with a spectacular social program without making them pay more taxes than he already had. In other words, how could Rocky enhance his position as the country's leading liberal Republican, indulge his predilection for the grandiose, and rise to still greater heights?
Rocky's idea was to turn to the private sector for the money he needed to finance the public projects he had in mind. He decided to embark upon the creation of a series of public authorities, backed by private investments-along the lines of the 40-year old New York Port Authority- which, once pushed through the State Legislature, would be accountable basically to himself. In this way, money could be raised and projects started without consulting the voters and without having to raise the debt limit fixed by the State Constitution.
The taxpayers, however, would back these investments only in the event that the projects failed to make enough money to pay interest on the money borrowed. This handy device, suggested by John Mitchell-then a prominent New York attorney specializing in municipal bonds-is called "moral obligation." The legislature would promise to appropriate the needed funds if necessary, and Rocky assured the lawmakers this was highly unlikely. So the public would get its services without more taxes, the banks would get tax-free bonds, and everybody would be happy.
The first of these new authorities was the Housing Finance Agency (HFA), created to build middle-income housing. The HFA went rapidly from a mandated borrowing ceiling of half a million dollars to a $5 billion limit, eventually taking on Rocky's scheme of converting the state's system of teacher colleges to a full-fledged university system. This agency is now nearing fiscal bankruptcy.
At the time, during what have since been called New York's "go-go years," Rockefeller found a ready market for his schemes. Once several of his authorities were off the ground, he launched a number of other imaginative ventures. Among these were the Albany Mall (now the Empire State Plaza), a massive development which has grown from an original $250 million cost figure to a projected final bill of $2 billion. Since the state guaranteed the county bond issue which raised the funds, the taxpayers will pick up the difference. Another ambitious scheme was the World Trade Center, the twin tax-exempt towers built by the Port Authority to provide high-class neighbors for Rocky's brother David, Board Chairman of Chase Manhattan Bank.
While Rockefeller's financial projects were saturating the bond market, New York City was developing money problems of its own. In the years following World War II, millions of immigrants poured into the Big Apple - blacks from the South and Puerto Ricans - in search of jobs, or failing that, welfare. The city was doing its best to provide for these legions, supporting more social services than any other city in the U.S.- including free city universities, hospitals, large portions of the welfare tab, and other functions performed elsewhere by the states and federal government.
The boom in high-rise office construction in midtown Manhattan was pushing out smaller businesses and industries, and whites, as everywhere, were running for the suburbs, taking with them the city's tax base. The skilled and unskilled manufacturing jobs filled by minorities were disappearing, a process which continues unabated today. Between 1969 and 1974, New York City lost 450,000 manufacturing jobs, and an incredible seven per cent of the manufacturing base was lost in the past year alone. The office jobs were taken by suburbanites.
Faced with rising service costs and decreasing revenues, in 1965 Mayor Robert Wagner made a deal with Rocky. In return for a state sales tax, Wagner got Rocky's help in persuading the state legislature to allow the city to borrow money in order to balance its budget. The deficit was $255.8 million, and the borrowing launched a pyramid scheme which a Village Voice writer has called "the nation's oldest, established, permanent, floating fiscal crap game." The city was supposed to pay the money back in three years, but by that time, even more borrowing had to be done.
When John Lindsay became Mayor, he disavowed such borrowing from Peter to pay Paul. But a transit strike in the first week of his administration resulted in a record settlement and got him thinking about the fiscal tricks of his predecessor. In order to keep the labor peace and build his political support, Lindsay, with Rockefeller's help, made even more generous settlements in succeeding strikes. The city's contribution to employee pension funds doubled, and has since doubled again, giving city employee unions better deals in some cases than their counterparts in private industry.
In 1971, Rocky helped Lindsay get the go-ahead for the same kind of borrowing Wagner had initiated. In the next few years, New York City borrowed hundreds of millions while raising old taxes and creating new ones, lobbying hard for increased funds in Washington and Albany, and juggling the books to make the budget balance - in accordance with the State Constitution. Beame, the Comptroller under Lindsay, and Cavanagh, a close advisor to both, practiced all kinds of fiscal sleight of hand, including the use of expense money for capital items, borrowing on revenues they knew wouldn't materialize, and underestimating expenses and overestimating revenues.
Meanwhile, Rockefeller. fearful of being upstated by the ambitious Lindsay, in 1968 created another authority to address the "urban crisis." This was the Urban Development Corporation (UDC), which was to build low-income housing. It worked fairly well until Richard Nixon declared his moratorium on housing supplements and rent dies, and the stock market plunged in the throes of Watergate. Last February, the UDC finally defaulted on some $134million of obligations.
The banks, who had underwritten some $3 billion in New York City's municipal bonds and bought much of that for their own portfolios, with this failure became increasingly uneasy about continuing to do so. Late in 1974, they found no buyers for a city bond issue and took a collective $50 million loss on the transaction. They asked Beame for more information on the true condition of the city's budget, and when he refused, they declined to handle the next bond issue.
Finally, last spring, while Beame was talking in terms of a $400 million city budget deficit, the Voice allowed as how it was more like $3 billion - a figure which proved to be accurate. The chickens, so to speak, had come home to roost.
Cities have gone bankrupt before, notably in the Great Depression, but never on this scale. New York's twelve largest banks well know that if the city's bonds became worthless, they stood to lose something like 23 per cent of their assets. Not only would a default make it impossible for any other city to borrow money; it would leave the banks with nothing to loan corporations or individuals. Many smaller banks might even go broke themselves. People who counted on their city securities as collateral would be left out in the cold.
"The banks never warned the public about excessive borrowing," writes the Voice's Jack Newfield, "because they were busy making millions of dollars in commissions on underwriting the city's paper. The bankers made a pusher's profits, while the city slipped into addiction like a junkie. Then the banks suddenly ordered the city to withdraw cold turkey, or mug its own citizens."
Felix Rohatyn, head of Lazard-Freres, one of the country's largest and most powerful" investment banking houses, saw the handwriting on the wall. He expressed his concern to New York Governor Hugh Carey, who had taken office declaring that Rockefeller's years of "wine and roses" were over. Rohatyn, known among other things for "fixing" the IT&T case with John Mitchell and arranging the federal bailout of Lockheed Aircraft, called the city's top law firms and bankers into a Memorial Day huddle with Carey at the home of Metropolitan Life head David Shinn. The result was Big MAC, which would borrow $3 billion for the city over the summer, receive certain city taxes directly to cover the loans, oversee the city's budget and the reform of its accounting procedures, and get first claim on city revenues in the event of default. In effect, New York had turned its government over to the financial community and the state.
Carey got the financiers' plan through the legislature, and Big MAC found reluctant buyers for its bonds- at a record 11 per cent interest rate, in some cases- in time to avert default in a photo finish.
Three months late, with the city's loans coming due again and default imminent, Big MAC itself had to be bailed out. This time, Carey pushed the board's borrowing limit to $5 billion, forced the unions' pension funds to invest in MAC bonds, and provided direct state loans to New York City. Noting that if the city defaulted, the state would follow in thirty days, he established the Emergency Financial Control Board to oversee the city's revenues and expenditures.
In the nation's capital, President Ford (whose hometown, Grand Rapids, had defaulted in 1934), Vice President Rockefeller (who had helped orchestrate the city's financial ruin), Treasury Secretary William Simon (a former New York bond salesman), and Federal Reserve Board Chairman Arthur Burns turned a cold shoulder to the city's appeals for federal loan guarantees. They insisted the city would have to suffer for its sins, enforce austerity to prove its good intentions, and possibly even submit to bankruptcy and be run by a federal court before Washington would help. This, in spite of the fact that the boroughs of Brooklyn and Manhattan alone pay $27 billion in federal taxes a year, and the entire city gets only $2 billion back.
New York City, having already surrendered its local government to the banks and the state, increased its taxes to unprecedented levels, set a three-year debt ceiling, and consented to a management review by Metropolitan Life's Shinn, has apparently finally satisfied the federal government that it is worth gambling $2.3 billion on. Perhaps Ford was persuaded of the wide-ranging economic effects default would incur. In any case, with the city needing an extra half a billion dollars a month just to meet its most pressing obligations, and paying upwards of 17 cents out of every budget dollar for interest on its debts, a few billion won't go far. The city's per capita indebtedness has gone up 300 per cent in the past ten years, and 50 per cent is considered dangerous. So at this point, eventual bankruptcy seems a virtual certainty.
Leaving aside the economic repercussions, the social effects of default on New York's already overtaxed population will be devastating. In the event of full default, the banks will be paid back first. The city payroll and welfare checks will have to wait. Strikes, and probably riots, are inevitable. So is intensified flight from the city by business and white residents. The same ugly scenario can be expected to unfold in most of the nation's older urban centers- Philadelphia; Buffalo, possibly Detroit- unless federal priorities are drastically altered and an innovative economic program is undertaken to relieve pressure on city budgets, provide funds and incentives for rebuilding and revitalization and head off a second depression.

The banks never warned the public about excessive borrowing," writes the Voice's Jack Newfield, "because they were busy making millions of dollars in commissions on underwriting the city's paper. The bankers made a pusher's profits, while the city slipped into addiction like a junkie. Then the banks suddenly ordered the city to withdraw cold turkey, or mug its own citizens."