Wednesday, December 29, 2010

How a Republicans Asks a City to Drop Dead

Fred Ferretti. The Year the Big Apple Went Bust: The Intimate Blow-By-Blow Account of New York’s Financial Follies. New York: G.P. Putnam’s Sons. 1976.

The New York financial crisis has many notable characters.
There was Mayor Abraham Beame, who knew how to use accounting tricks to get accounts in books to match while hiding problems of funds not existing.
There was the Mayor before him, John Lindsay, who kept racial harmony yet allowed union and pension agreements to exist without determining how to pay for them, thus leaving paying for them to become Beame’s problem.
There was President Gerald Ford, who refused to be seen assisting a city for its spending blunders during a time of growing national fiscal conservatism who refused assistance for years before finally deciding Federal loans indeed were necessary.
There was Hugh Carey, who brought parties together, forged compromises, and used deceit and quiet deals to attain what he wanted.
There was Ford’s Vice President, Nelson Rockefeller, who was Governor before Carey, who approved the existence of many moral obligation bonds that contributed to the crisis who attempted to create a dubious story that his being replaced as Ford’s running mate was due to his independence in seeking to help New York.
Senator Jacob Javits avoided the problem until it was a crisis.
Senator James Buckley avoided the issue and argued the Federal government should not assist New York.
Rep. Herman Badillo studied how the city should enter bankruptcy.
Treasury Secretary William Simon sided with Ford in arguing New York did not deserve Federal help.
Federal Reserve Bank Chairman Arthur Burns considered the problem for several months before deciding the banks needed help. Masny of the bankers had profited well from selling New York city securities and then warned that the securities were questionable.
Controller Harrison Goldin, who wanted to be Mayor, squabbled with Beame.

Mayor Beame announced in 1975 that New York City government had $3.3 billion in accumulated debt, $12.3 billion in outstanding notes, and was borrowing to pay current bills. Welfare accounted for one quarter of the city government’s budget of $3 billion. The city offered free tuition city universities and free public hospitals that obviously cost money.

The city budget often hid what actual expenses were. The budgets often shifted funds around so it was difficult to determine what the actual amounts in accounts were. In 1974, looking at the same budget, Mayor Beame declared the city deficit was $430 million while Controller Goldin claimed it was $650 million. Mayor Lindsay’s Budget Director admitted numbers could be off by $50 million. Others believed the numbers were off by as much as $400 million per year.

The city budget had been running at a deficit ranging from 6% to 15% for a decade. Short term borrowing was $3.2 billion in Fiscal Year 1968-69, $6.5 billion in Fiscal Year 1970-71, and $8.4 billion in Fiscal Year 1974-75. Debt was being used to pay debt.

In 1965, Mayor Robert Wagner determined the city deficit was $255.8 million out of a $3.87 billion budget. He proposed increasing the city real estate tax by 20%. An outcry against increased taxes came from then Controller Abe Beame and others.

Governor Rockefeller and the state legislature, instead of approving a tax increase, gave New York the ability to issue revenue anticipation notes (RANs) that were backed by estimates of anticipated revenues. The city government under Mayor Walker issued $56 million of RANs. Still, Mayor Lindsay claimed when he became Mayor the budget gap had grown to just under $1 billion. Mayor Beame later declared Mayor Lindsay had let the gap grow to $1.5 billion.

The borrowing to pay debt further meant spending on interest was increasing. This was met with more borrowing and the cycle continued.

Beame, as a product of the Democratic Party, awarded patronage jobs to organization Democrats. John Zuccotti was close to banking and business interests and was named Chairman of the Planning Commission.

The state authorized the city to issue $520 million of bonds. Half were considered unstable by Controller Goldin. Goldin wanted longer term bonds issued. Courts refused to allow them to be issued.

The city was borrowing in anticipation of receiving Federal and state funds before the funds were received. Beame stated $1.29 billion of Federal and state funds were needed. Problems developed when these funds were not provided.

The city reduced costs. 3,725 employees lost their job. 2,700 employees were forced into retirement. The mandatory retirement age was changed from 65 to 62. It was later disclosed that at least 505 who were laid off were only transferred to other positions that were paid for out of the city’s share of state funds.

30% of teachers in New York City had administrative or research jobs. It was argued the school budget was bloated with too many upper level jobs when more employees in classrooms were needed. The city told the Board of Education to reduce by 995 but the Board declined to do so, stating they’d save by not hiring substitutes in classrooms. Pressured further, the Board declared that it would not hire 4,000 people it was planning to hire and that it would cut back on absenteeism.

In the midst of the financial crisis, banker David Rockefeller argued for more spending. He urged for creating a subway under Manhattan’s Second Avenue.

The city tried to delay paying $800,000 into the police’s Health and Welfare Fund. The Fund was at a $700,000 deficit and hadn’t made its payments to Blue Cross in four months. The administrators of this police fund refused to accept the delay.

The city sought to borrow almost one billion dollars over two weeks. A law suit delayed issuing the bonds and once they were able to be sold, the market mostly refused to buy them.

Beame showed his confidence in the city’s soundness by placing his entire personal wealth in $50,000 one year city notes. The city sold $1 billion in notes but at high interest rates over short terms. The city then realized it needed $1.7 billion more. Beame finally admitted the city’s finances were in trouble.

Governor Carey provided the city with a $400 million advance to allow it to sell bonds. Beame noted that otherwise the city would have to double the income tax or triple the commercial occupancy tax or increase the real property tax 10% or add 1.5 percentage points to the sales tax.

Senate Majority Leader Warren Anderson opposed granting $400 million in increased taxes. Beame stated 38,000 additional layoffs would happen if the money was not available. 35,000 employees were laid off, four of the five city zoos were closed, and the city sales tax was broadened to include beer, laundry, and haircuts.

Carey and state government aided by selling 5.75% notes. In addition, $200 million from the state in education funds were provided early, $28- million of 8% city notes were sold, $131 million cash in an account was used for payments, and $26 million was raised in prepaid city real estate taxes. The city still needed $4 million.

Sanitation workers fought layoffs and budget cuts. A court ruled 2,934 dismissed sanitation workers were to be rehired. A subsequent court ruling upheld their dismissals. 30 sanitation trucks were sabotaged. The sanitation workers went on strike.

A Municipal Assistance Corporation Program (MAC) plan was created in the state. Wages were frozen. Budgets were capped. Taxes were limited as they were considered too burdensome to increase. Beame, previously resistant to such ideas, agreed to this state plan. Union leaders were generally agreeable.

MAC was reminiscent of a 1933 state government assistance plan when New York City previously saw a recession reduce revenues, forcing it to survive on growing debt until the market stopped buying its bonds. The city urged that pension funds and bank financing be used for paying debt. Banks stopped buying city bills. The banks agreed to buy bonds after spending cuts were made by Mayor John O’Brien under financial plans constructed by Governor Herbert Lehman.

Governor Carey, with agreement from Controller Goldin, sought to impost budget cuts, wage freezes, and budget controls that Beame didn’t want. Senator Anderson became cooperative but sought deals for Senate Republicans.

President Ford was not favorable to aiding New York City. Sen. William Proxmire of Wisconsin, but neither of New York’s Senators, heralded a bill to assist the city. Ford relented and agreed to give financial credit to the city.

Carey argued the national recession caused the crisis, He felt the Federal government should help provide the solution. Beame appealed for assistance and let it be known the city was looking at every option in an appeal written mostly by Planning Commission Chairman Zuccotti. The city went into what the White House correctly called a "sham default" where principal on debt was frozen while payments were made on interest.

New York City had gone broke, being unable to pay debt on time, It avoided legal bankruptcy but yielded control over its finances to Federal loan decision makers and state administrators.


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