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The New York City Fiscal Crisis

New York’s chronic mismanagement caught up with City Hall in early 1975, when Mayor Abraham Beame acknowledged that the city was on the brink of bankruptcy. As has become all too customary when any significant part of the American body politic is faced with a fiscal crisis of its own making, he turned to Washington for a bailout. This put me on a very hot political spot because I saw no constitutional or prudential justification for such a bailout. The following paper deals with the crisis and my role in it. The paper itself is something of a mystery. I had obviously put a great deal of work into it; but when I came across it in my files, I had no recollection of it. I must have written it for publication sometime in early 1977, but I don’t know whether it was ever published. I believe, though, that it raises important points about state and local responsibilities and the dangers of looking to Washington for help.

One school of thought has it that a single year-old headline cost Gerald Ford the presidency. It appeared in the October 30, 1975, issue of the New York Daily News, and it read: “FORD TO CITY: DROP DEAD.” As for my own role in the city’s financial crisis, a widespread perception was summarized in a New York Times editorial as follows: “When this City was about to lurch into bankruptcy, he ... bestirred himself enough to wave the City on to its apparent doom.” I suggest that this was a bum rap; and so, lest the medium be the entire message, I think it useful to record some of the facts and issues as I saw them unfold in the fall of 1975, with special emphasis on the all-important distinction between what was in the best interests of New York City’s people and what was in the interests of its politicians and creditors.

Now, the first part of wisdom in coming to understand the causes of New York City’s desperate condition is to realize that the city was the victim not of impersonal forces, but of its own breathtaking mismanagement sustained year after year. During the preceding decade, the city had run up its overhead costs to levels impossible to sustain. Between 1966 (the beginning of John Lindsay’s tenure as mayor) and 1975 (the second year of Abraham Beame’s tenure), the budget had more than trebled, with labor costs alone increasing from an estimated $2.1 billion to $6.4 billion. The cost of higher education had gone from $92.5 million to $585 million. Even with sharply increased taxes, City Hall had to borrow ever-larger amounts to make ends meet, with the result that by 1976 debt-service costs had reached $1.9 billion a year, exceeding the combined cost of the police force, the fire department, and sanitation services.

Yet when the banks at long last shut their credit windows in the spring and summer of 1975, Mayor Beame presented himself and the city as very much the aggrieved parties. No further economies were possible, he warned, without jeopardy to essential services; the fears expressed by the city’s bankers were wholly unjustified; the city could and would get by, if only the federal government would “lend its credit” to New York City through the device of guaranteeing its obligations.

The mayor’s protestations notwithstanding, by September it was clear that the city was in deep, serious, long-term financial trouble. The state government in Albany had undertaken a series of emergency measures designed to keep the city afloat for a few more months, stretching its own credit to dangerous limits. By now, major bankers were joining city officials in pilgrimages to Washington to plead for federal loan guarantees, warning that a default by New York City would prove catastrophic for the entire U.S. economy. In time, they even enlisted the support of West Germany’s Chancellor Helmut Schmidt, who solemnly suggested that a default by America’s premier city would create a crisis of confidence that could plunge Western Europe into a serious economic downturn.

I spent a major portion of my time in September 1975 trying to search out the facts of the situation. This was anything but easy, given the incredibly sloppy—and misleading—condition of the city’s books. I spoke to any number of informed persons, including Secretary of the Treasury William Simon, Federal Reserve Board Chairman Arthur Burns, and specialists in municipal financing, to try to assess the consequences of the dreaded default. I came to certain tentative conclusions, among them the following: First, it was inaccurate to describe the proposals for federal loan guarantees as programs for bailing out New York City. They were, more accurately, programs for bailing out New York City’s creditors, because by now the city was operating under tight constraints imposed by the state. Second, the long-suffering millions who lived, worked, and paid their taxes in New York City would be best served by maintaining maximum pressure on the city and state governments to substitute managerial and fiscal prudence for the political expediency that had brought the city to its knees. Third, the financial skies would not fall if the city were simply to admit its inability to meet all its obligations as they fell due and seek the appropriate remedies under the bankruptcy law.

And so it came to pass that when a reporter asked me whether I would support Mayor Beame’s and Governor Carey’s efforts to secure a federal guarantee of New York City’s obligations, I answered, “No,” citing my aforementioned conclusions. I also said that the proposal would undercut the principle of a division of governmental responsibilities, because it was inconceivable that Congress would authorize the guarantee without imposing guidelines and conditions—i.e., imposing federal judgments—on the people of New York City.

The New York Times ran the story the next day under the headline: “BUCKLEY OPPOSES/U.S. INTERCESSION/IN THE CITY’S CRISIS.” Members of the New York City congressional delegation expressed shock and dismay. Editorial comments in the Times and the New York Post were as one would expect; but even the Daily News, which was usually quite sensible, raked me over the coals for not seeking for New York the sort of special treatment that it would have equally raked me over the coals for supporting if the city in question had been Detroit or Philadelphia or Boston.

No doubt about it, I was the bad guy. And so, in the ensuing weeks, I redoubled my efforts to inform myself about and think through every aspect of the city’s rapidly deteriorating situation. I spoke with a dozen experts on the city’s finances. I met with President Ford on two occasions and kept in close touch with his key advisors. I even read a history of municipal defaults and reorganizations during the Great Depression.

In the course of all this, I learned that the city’s financial situation was far worse than the public had originally been given to understand, even by critics of City Hall. By the end of October, it was clear that the city would be hard put to make ends meet even if it were to suspend all debt-service payments—on interest as well as on principal. At the same time, I became more convinced than ever that the nation and (Chancellor Schmidt notwithstanding) the Western world could weather the shock of a New York City default. Local governments would continue to be able to borrow money at rates consistent with the historic spread between federal and municipal paper, and it seemed to me irrational to believe that a default by New York City would send shock waves through the market, in the light of the now long-recognized fact that the city was indeed insolvent.

What became a major concern for me, as I examined the options that faced New York, was that the alternative I had come to believe the most appropriate was one that, for purely technical reasons, was not then available. Under existing law, a municipality’s access to the remedies offered by Chapter XVI of the Bankruptcy Act required the consent of the owners of more than 50 percent of its outstanding debt. But as the great majority of New York’s debt was held in bearer form, it was impossible as a practical matter to secure that consent. There were other deficiencies in the law, but this was the critical one. I found myself working in tandem with Congressman Herman Badillo of the Bronx (who shared my worries) on appropriate amendments, and I introduced them in the Senate in the latter part of October with the plea that they be considered by the Judiciary Committee on an emergency basis.

In the meantime, the Senate Banking Committee had voted, by a majority of one, to take up a proposal for a federal guarantee of $4 billion of city obligations, subject to a number of conditions. And here I had the melancholy satisfaction of finding my predictions not only realized but exceeded, as the proposed conditions were even more draconian than I had suggested thirty days earlier. They were so harsh, in fact, that just a month after I had been cast into outer darkness by various members of the New York congressional delegation, three congressmen representing districts in the city—Badillo, Benjamin Rosenthal of Queens, and Ed Koch of Manhattan’s East Side—declared the Banking Committee’s proposal to be totally unacceptable. In Ed Koch’s words, “I could not support legislation that turned us over to those guys, or anyone else that was not elected in the State of New York.” Reporter Richard Reeves summarized the case for federalism better than I could have in an article in New York magazine: “Can’t fight City Hall? Wait until the Feds are running towns and cities and you try to get through to the White House because nobody picked up Tuesday’s garbage.”

On October 31, I called a press conference to present my conclusions about the most responsible way in which to approach the incontrovertible fact that, despite massive infusions of state and local loans, the City of New York was rapidly approaching the end of the line.

The best way to present the position I took is to quote extensively from the statement I issued at the press conference:

As a practical matter ... New York faces two alternatives: to accept the conditions that Congress will impose on any substantial guarantee of city obligations or to pursue the alternative course that I would recommend.

The Senate Banking Committee proposal would require the state to increase its contributions to the city (out of new taxes) by an estimated $425 million [a year], in addition to paying a substantial fee (as much at $120 million the first year) for the federal guarantee on New York City obligations. The residents of New York State are already staggering under a state and local tax burden that is dramatically higher than that of adjoining states. The result has been to drive job-producing and tax-paying businesses out of New York. The cost of government and the resulting taxes need to be lowered, not raised.