Coring out the Big Apple: New York’s Fiscal Crisis
Sam Roberts is urban affairs correspondent of the New York Times.
‘I have been advised by the comptroller’, the statement by the mayor began, ‘that the City of New York has insufficient cash on hand to meet debt obligations due today. This constitutes the default that we have struggled to avoid.’
The prepared statement for Mayor Abraham D. Beame, a London-born immigrant and the city’s first Jewish mayor, was ready to be released on 17 October 1975 if city and state officials could not persuade the teachers’ union to invest $150 million from its pension funds in municipal securities. That’s how close New York City came to bankruptcy in 1975: the margin between solvency and default by the largest city in the United States turned out to have been only paper-thin.
The city avoided a formal default, although the State Legislature imposed a debt moratorium that amounted to default in all but name. That moratorium was later declared unconstitutional by state courts, but only after it bought enough time for New York to restructure its debt and impose rigorous fiscal discipline that convinced a reluctant federal government to guarantee city debt.
Even without a formal default, the legacy of what would become known universally in New York as The Fiscal Crisis (like The War, even 70 years later no one would have to ask which one) would endure for decades with decidedly mixed results. The formal fiscal discipline would persist, allowing the city to return to the credit markets within four years, but the impact of the first mass layoffs of municipal employees since the Depression and other budget cutbacks for vital services would within a decade or so precipitate social, financial and political crises that, arguably, were even more severe than The Fiscal Crisis itself.
‘A crisis denotes a single incident’, said Governor Hugh L. Carey, who was widely credited with rescuing the city. ‘This was an atmosphere.’
The Causes
‘The New York City fiscal crisis seemed at the time like a unique interplay of disparate forces’, the journalist Steven R. Weisman, who covered the crisis for the New York Times, would later write:
… but it was quite similar to other modern debt crises. Like Latin America in the 1980s and Asian countries in the 1990s, and European and American banks in 2008, the city courted disaster by financing ongoing expenses with short-term debt. A reckoning almost always comes in such circumstances.
Lord Bryce, the British historian, wrote in the 1880s that municipal government in the United States was the most conspicuous failure of American life. That helps explain why no former mayor of any city has been elected President since Calvin Coolidge, of Northampton, Massachusetts, in 1924 and why, since the nineteenth century, the mayoralty of New York has been a political dead end. In their seminal Governing New York City, Professors Wallace Sayre and Herbert Kaufman wrote that while the presidency can elevate the most mediocre of men – even former mayors like Calvin Coolidge – ‘the mayoralty is the highly vulnerable symbol of all the defects in the city and its government.’ By the 1960s, New York was being widely denigrated as ungovernable, but some astute commentators reached that conclusion years earlier. After Fiorello H. La Guardia, a Republican, had been elected mayor of the heavily Democratic city in 1933, H.L. Mencken expressed the hope if La Guardia ‘is well-advised he will make his will, get a shave and haircut, burn all the letters that he has ever received from women’ and leap off the Empire State Building.
In 1965, the challenges facing the city seemed so overwhelming that New Yorkers were willing to gamble again on a maverick Republican, as they had with La Guardia three decades earlier. As the year began, a New York Times editorial expressed hope that one of the city’s few phenomenal Republican vote-getters – perhaps that young East Side congressman John V. Lindsay – might be induced to go down what was admittedly ‘suicide road toward City Hall’. That same month, the old New York Herald Tribune proclaimed ‘New York, Greatest City in the World, And Everything Is Wrong with It’. When the year ended, John V. Lindsay would inherit what was, as the Tribune’s series dubbed it, a ‘City in Crisis’.
That January, welfare workers struck for 28 days, disrupting relief to 500,000 New Yorkers. Twelve separate agencies were overseeing a vast array of anti-poverty programmes. Factories were haemorrhaging 18,000 jobs a year. One-third of the city’s public schoolchildren were testing below the norm in reading and arithmetic. Antiquated garbage trucks were out of service 40 per cent of the time. Standard and Poor’s lowered the city’s credit rating and the city’s comptroller, Abraham D. Beame, whom one Lindsay supporter, Democratic Socialist Michael Harrington, dismissed as having ‘accountancy as a political philosophy’, was warning about ‘the treacherous fiscal path being followed by our city’.
New York was still reeling from riots that erupted in Harlem and Bedford-Stuyvesant the year before, after a 15-year-old black youth was shot to death by a white police officer on the Upper East Side. Major crime had soared by nearly 15 per cent in the past year alone. During the campaign, Lindsay visited the site in Kew Gardens, Queens, where 38 neighbours failed to respond to the screams of Kitty Genovese, a 28-year-old woman who was being attacked. What the murder ‘tells us’, Lindsay said, ‘is that something has gone out of the heart and soul of New York City’. Time magazine grimly concluded:
New York seemed a shiftless slattern, mired in problems that had been allowed to proliferate for decades. Its air was foul, and so were its surrounding waters – and there was barely enough water to drink. Its slums rotted away undisturbed, its new apartment buildings and public housing were as shoddy as rapacity and bureaucracy could make them. The city was deep in hock and going deeper; interest on its debt alone was $1.4 million daily – more than the cost of police, fire and sanitation services combined. More and more, it was a place where only the rich and the welfare-dependent poor could afford to live. Its crime rate was rising as inexorably as its traffic slowed down. East Side, West Side, male and female prostitutes seemed like shades of prewar Berlin. Even the fabled skyline had lost much of its old majesty. As Architect Edward Durrell Stone lamented: ‘If you look around and you give a damn, it makes you want to commit suicide.’
The problems, nor the solutions that would lead to more problems, did not begin with Lindsay. Arguably, they could be traced to the New Deal, when New York became more dependent on federal largess, and to the reverberations of cyclical global economic upheavals. The publisher Jason Epstein wrote later that New York seemed to have survived only by dint of ‘a kind of anarchic common sense’. But, Epstein continued,
… by the middle sixties you could see the city changing all around you. New construction was going up everywhere, herding the old residents and their businesses into ever narrower enclaves, or driving them out of the city altogether. Meanwhile, the expanding ghettos were overflowing with refugees driven here by the mechanization of Southern agriculture and by Southern welfare practices that made Northern cities seem deceptively generous by contrast. … Between 1960 and 1970, the proportion of blacks in the city had risen from 14 percent to 21 percent, most of them trapped here by a city that didn’t need their labor and that had, in fact, begun to export its menial and routine work to less costly labor markets, often to the same areas which these new arrivals had recently abandoned.
The 1960 census was the first ever in which New York City registered a decline in population – the result of an exodus of mostly white middle-class taxpayers to suburbia. By 1965, exactly 100 years since the Civil War had ended, black impatience with the fruits of emancipation was coupled with another phenomenon, a profoundly divisive one, which Daniel Patrick Moynihan and Nathan Glazer astutely described in the preface to their updated edition of Beyond the Melting Pot in 1970: ‘The Protestants and better-off Jews determined that the Negroes and Puerto Ricans were deserving and in need and, on those grounds, further determined that those needs would be met by concessions of various kinds from the Italians and the Irish … and the worse-off Jews.’
Former Mayor Robert F. Wagner’s credo that ‘a bad loan is better than a good tax’ was epitomised by his decision to issue nearly $256 million in short-term notes to balance the 1965–1966 budget of $43.9 billion – ‘borrow now, pay later’, the mayor explained. In effect, the city was taking out a loan against a property tax increase that had neither been imposed nor even approved. It was the first step on a slippery slope that would bring New York to the brink of default a decade later. Many of the costly ‘good intentions’ that ultimately got the city into trouble for overspending and that would be identified with Lindsay, began under Wagner. After he broke with the Democratic Party bosses in 1961, Wagner’s progressive instincts were galvanised by his new alliance with reformers and their social agenda and with municipal unions, to which he had already granted the power to bargain collectively. His dependence on these ‘expenditure-demanding political forces’, Martin Shefter, the political scientist, wrote, ‘helps explain why locally financed municipal expenditures rose twice as rapidly during Wagner’s third term as during his first and second terms’. Short-term debt during Wagner’s third term soared by what Ester Fuchs, the Columbia political scientist, wrote was ‘an alarming’ 79 per cent, adding: ‘The city was saved from fiscal crisis during this period by new revenue in the form of inter-governmental aid, and a prosperous national economy.’
An independent commission – appointed by Wagner – was projecting a deficit of more than $315 million in 1965–1966. A New York Times editorial complained that ‘the city is living on a credit card.’ Less than four weeks into Lindsay’s first term, the city borrowed $253 million, the largest financing in the history of the municipal bond market, and was forced to pay the highest interest rate since 1932.
Lindsay governed at ground zero of the 1960s culture wars. Even given Cold War competition from the Soviets, this was an era when, as Donald H. Elliott, the chairman of Lindsay’s City Planning Commission put it, ‘government was expected to make society better and everybody believed it could do so.’ That was the underlying conceit of the Lindsay administration’s 1969 futuristic strategic plan for New York. For all the administration’s naiveté, its utopian illusions and its reputation for taking itself too seriously, the commission’s master plan was paradoxical and prescient in defining Lindsay’s constituency and in rendering its verdict on his mayoralty. ‘We are, in sum, optimistic’, the planners wrote. ‘But we are also New Yorkers. We cannot see utopia. Even if all of these recommendations were carried out, if all the money were somehow raised, 10 years from now all sorts of new problems will have arisen, and New Yorkers will be talking of the crisis of the city, what a near-hopeless place it is, and why doesn’t somebody do something.’
The fact is, the crisis came even sooner.
Budgets were generally balanced during Lindsay’s first four-year term. By 1969, a recession struck; inflation rose. The budgetary gimmicks begun under Wagner were honed by Lindsay and his colleagues into an art. As Steve Weisman would later write, ‘Though poorly understood at the time, these bookkeeping devices – like artificially deferring costs or borrowing against dubious or non-existent receivables – produced hidden deficits that drove up the city’s short-term borrowing from a negligible amount in 1970 to more than $6 billion in 1975.’ During Lindsay’s two terms, the municipal budget nearly tripled to more than $10.2 billion, while the municipal work force grew from 247,000 to 291,000 (New York City is contiguous with its constituent five counties and performs many of the functions that other cities and counties do separately). Complicity abounded. Why cut budgets to demanding constituents when the day of reckoning could be postponed indefinitely? The city borrowed to pay for expanded welfare rolls and generous labour contracts. The banks looked the other way.
The budget would be balanced by what Charles Morris, in his The Cost of Good Intentions, described as $700 million in ‘gimmicks and questionable borrowings’. The budget was adopted despite Lindsay’s dissent. ‘Over the next several years’, Morris wrote, ‘budget gimmicking was raised from the level of haphazard expedient to an arcane art form, and the practical limits of irresponsibility were pushed further and further out on the horizon.’ Day-to-day operating costs were deftly shifted to the capital budget, financed by long-term bonds for major public works projects. Delivering a belated verdict on the fiscal crisis, the United States Securities and Exchange Commission staff concluded that Abe Beame, who succeeded Lindsay as mayor, had ‘misled public investors’.
By 1975, the city’s $12.3 billion budget was second in size only to the federal budget. The work force had soared to more than 300,000 in a decade and labour costs had doubled to $4 billion in just five years.
In retrospect, everyone saw it coming. Weisman quoted Edward V. Hamilton, a former deputy mayor now working in California, as likening the fiscal crisis to an earthquake: ‘We know there is going to be a major earthquake in Los Angeles in 50 years’, Hamilton said. ‘But we really won’t know until the earth starts shaking when it’s going to happen.’
The Crisis
Hugh L. Carey delivered a blunt warning when he was inaugurated as governor of New York on 1 January 1975. ‘The days of wine and roses’, he said, ‘are over’. Those halcyon days ended even sooner than he could have imagined. The press release on default that would be drafted the following October would be merely the midpoint in a crisis that had been percolating for months of debilitating death marches to the brink of bankruptcy and agonising negotiations over a longer-term solution. It began not with the city but with an agency of New York State, the Urban Development Corporation (UDC), created by Governor Nelson A. Rockefeller in 1968 in the wake of the Reverend Martin Luther King Jr.’s assassination to provide housing and other relief for the poor.
Most bonds issued by the state government in Albany were backed by the full faith and credit of New York State and were subject to constitutional limits. The UDC’s commitment to repay its lenders was more creative and less binding. It depended on the state’s ‘moral obligation’ to repay, a concept originated by a Rockefeller adviser, John Mitchell, before he became the Nixon administration’s attorney general. ‘This was one of the original “structured investment vehicles”’, Weisman would write, ‘like the ones that brought down several Wall Street houses in 2007–08 by establishing the principle of off-the-books debt’.
By January 1975, with revenues from its housing projects failing to keep pace with the expense of aggressive construction, the big banks informed Carey that they would no longer lend the UDC money or to underwrite its bonds. A month later, the UDC defaulted on a loan and on $100 million in bond anticipation notes. Carey recruited a prominent New York builder, Richard Ravitch, to bail out the agency out, meet its contractual obligations and restructure its debt by creating the Project Finance Agency to sell long-term bonds. That agency became the model for the Municipal Assistance Corporation (MAC) created later that year to save the city.
‘We can’t assume, as we did in the past’, Ravitch said, who might just as well have been referring to New York City as to the state agency, ‘that because a program is socially desirable it is credit-worthy’. New York, for the first time in a generation, was forced to acknowledge its limitations.
That May, Ravitch was again summoned to a meeting with the governor. Reeling from the UDC’s default, the bankers were back. After months of warnings and after dumping their own holdings, they dropped a bombshell: they would no longer underwrite city bonds or short-term notes, which were being marketed at a rate of $600 million a month. The market was shut for what had been its biggest supplier. The bankers’ decision triggered what became known as The Fiscal Crisis and immediately prompted the Beame administration to fire 20,000 workers, close eight fire houses and impose wage freezes and deferrals. Carey recruited the financier Felix G. Rohatyn who, inspired by Ravitch’s Project Finance Agency, conceived the Municipal Assistance Corporation – Big Mac, it was soon dubbed – to lay legal claim to city tax revenues and restructure city debt. But by the summer, even the MAC was being shunned by the bond market. Washington spurned entreaties to help. Furtive hints were dropped about declaring bankruptcy and removing the mayor. Neither developed traction.
‘The fiscal crisis was misnamed’, Rohatyn would say later. ‘It was a bankruptcy crisis’, but without bankruptcy, because of the near-unanimity that the precedents for a government bankruptcy were so rare that the prospects made it the most alarming alternative. Nobody knew for sure what it would entail, but Rohatyn memorably likened it to ‘stepping into a tepid bath and slashing your wrists: You might not feel yourself dying, but that’s what would happen.’
Carey imposed an Emergency Financial Control Board, with himself as its chairman – ‘my sign to Washington that the state was taking over’, he would say – and accompanied his coup with higher taxes, an agreement with the banks to convert notes and bonds to lower interest rates and with municipal employee unions to purchase MAC securities and established a moratorium on repaying the principal on short-term debt.
By 3 p.m. on 17 October, the city had to pay off $449 million to bondholders and a state loan, but Albert Shanker, the teachers’ union president, was balking at investing the pivotal $149 million in union pension funds in MAC bonds. (Shanker had been immortalised a few years earlier in the Woody Allen film Sleeper when the protagonist travels to the future only to learn that the world was destroyed after ‘a man named Albert Shanker got hold of a nuclear warhead’.)
The draft press release, which pointedly invoked the city comptroller, Harrison J. Goldin, a sometime Beame adversary, as the bearer of the bad news, went on to say that the city had applied for and obtained a court order to preserve its assets from creditors. It said that ‘rational and humane’ priorities had been approved to make payments in this order: police, fire, sanitation and public health services; food and shelter for people dependent on the city; hospital and emergency medical care for those with no other resources; bills from vendors of essential goods and services; school maintenance; interest on city debt; and payments due to the retired and aged, beyond those from pension funds. But Shanker finally relented (Beame would later reveal that another union leader was waiting in the wings just in case). A formal default was averted, but the city still had not resolved all of its $6 billion or so in short-term debt. After demanding more concessions, President Gerald Ford and recalcitrant members of Congress finally – if warily – went along with a programme to guarantee a $1.7 billion union pension fund investment in MAC bonds (at 7 per cent interest) after having been warned by, among others, Chancellor Helmut Schmidt of Germany and President Valéry Giscard d’Estaing of France that the bankruptcy by New York – jeopardising the investment of banks around the world that the city was indebted to – would trigger a global financial crisis.
‘Bankruptcy was averted in stages over the following six months, finally with President Gerald Ford and Congress agreeing to participate with a package of short-term “seasonal” loans’, Weisman wrote. Carey brought:
… unions, banks, and political figures together to accept a package of shared sacrifices. … Could these steps have been taken in the absence of a crisis? That is highly doubtful. But the austerity and decline in city services (and quality of life) ushered in by the actions under Governor Carey probably contributed to the tarnishing of Lindsay’s image in the eyes of New Yorkers, who also generally became disenchanted with his form of liberalism in later years.
The Consequences
The fiscal crisis cost tens of thousands of city workers their jobs, including Abe Beame, who in 1977 became the first elected mayor in half a century to be defeated for a second term. New Yorkers were also instrumental in the defeat of President Ford, whose onerous conditions for federal aid prompted the tabloid Daily News to famously proclaim: ‘Ford to City: Drop Dead!’ Other fallout from the fiscal crisis would be less dramatic, perhaps even invisible for a time, although there was ample physical evidence, too, that something had gone terribly wrong in city government. Construction abruptly stopped on thirteen schools. Enrolment at the City University of New York plunged by 70,000 to 180,000. Layoffs of police officers inflicted deep psychological damage on a force that considered itself immune from dismissals. The Narcotics Division would be decimated. From July 1975 to November 1979, no new police officers would be hired. The ratio of students to teachers in public schools soared by 5 to 25. The Fire Department scrapped a fleet of vans that ferried fire-fighters when shifts changed, forcing them to hire dial-a-cabs to race to fires. The police force shrank from 32,000 to 22,000. Crime went up, manpower went down, parks were transformed into dust bowls, maintenance was deferred ….
‘If there are life-and-death services the city of New York provides – and there are – then you have to sort of assume a fire wasn’t responded to as quickly as if you had 20 percent more fire coverage’, Raymond D. Horton, a Columbia University business professor and research director for the Citizens Budget Commission, a business-financed research organisation, would say with a decade’s worth of hindsight. ‘You have to assume at some point in time a police officer couldn’t get to a crime as quickly because he was answering another call, or you have to assume that a nurse didn’t get to a patient on time because her patient load increased.’
Under Beame’s successor, Edward I. Koch, the city adopted generally accepted accounting principles in 1980, a year earlier than required, and balanced its budget in 1981, also a year earlier than required. That same year, the private credit market reopened its spigot; the city sold $100 million in short-term notes backed only by anticipated tax revenue. The federally guaranteed loans were repaid eight years early. ‘In the 60s, in the early 70s, there was a breakdown of any system of checks and balances’, a Koch administration official, Robert F. Wagner Jr., a son of the former mayor, recalled. ‘Nobody was able to say no. Institutionally built back into the system is not only the ability to say no, but the legal requirement to say no.’
By 1985, Comer S. Coppie, executive director of the State Financial Control Board (‘Emergency’ had been dropped from its title), would render this verdict: ‘New York’s is perhaps the most comprehensive and substantial recovery in the history of American cities and perhaps for any jurisdiction at the state or local level.’ The continued loss of factory jobs was more than made up by the growth in finance, real estate and other white collar services (the strength of the dollar didn’t hurt either). ‘This is the city’s best recovery record in the post-World War II years’, said Samuel M. Ehrenhalt, regional director of the Bureau of Labor Statistics. ‘The good old days really have been these days.’
But the payoff came with a stiff price, the result of a Darwinian accommodation to fiscal realities. Within a decade, the poverty rate rose from 15 per cent in 1975 to 23.4 per cent ten years later. Layoffs and attrition eliminated one in five municipal workers; the real earnings of those who survived were reduced by inflation, which also eroded welfare grants, frozen at pre-fiscal crisis levels, by one-third. Professors Horton and Charles Brecher of New York University, who would succeed him at the Citizens Budget Commission, would conclude that the Koch administration’s forced austerity ‘yielded a balanced budget, but at what cost? And to whom? The greatest burden was borne by the city’s poor, whose standard of living was reduced.’
And by the late 1980s, with crack cocaine fuelling a crime epidemic and costs again outpacing tax revenues, the city was facing another crisis. A series of New York Times editorials branded New York as ‘New Calcutta’. In 1991, the murder toll reached a record 2,245. The trailer for a film titled King of New York declared: ‘Not everyone who runs a city is elected.’ It wasn’t about a banker. It was about a drug dealer. And this time there were fewer options. ‘Last time, part of the solution was an unbalanced budget for a couple of years, but a mechanism to work your way out of the hole’, said Philip R. Michael, the city’s budget director. ‘This time, there are no options to having a balanced budget.’ But David N. Dinkins, who succeeded Koch and served as the city’s first black mayor, cautioned: ‘We know from our experience in the 1970’s that the budget cuts of today lead to higher social costs a decade from now.’ Felix Rohatyn would put it another way years later when the city again faced looming deficits. Were there some things the city could no longer afford to do, he was asked. ‘It may not be able to afford to do them’, Rohatyn replied, ‘but if you stop doing them you may lose more than you gain’.
‘Because of the fiscal crisis, there won’t be another fiscal crisis’, Dick Netzer, a New York University professor, concluded. ‘Indeed’, said John E. Zuccotti, who was recruited as deputy mayor to save Abe Beame from his complacency, ‘maybe the things that had to be done could only be done by creating a crisis.’ Still others expressed regret that despite the strict fiscal framework that was imposed on the city, more fundamental changes in productivity, privatisation and governance – and public expectations – had not been effected. ‘We didn’t change the way we provide public services’, Professor Horton said. ‘We simply shrunk the system.’
In his book Political Crisis, Fiscal Crisis: The Collapse and Revival of New York City, Martin Shefter, a political scientist at Cornell University, argued that the events of 1975 were merely the latest manifestation of a recurring dynamic between two sets of goals of government officials: getting elected and preserving civil harmony, on the one hand; and nurturing the local economy and maintaining the city’s ability to pay its bills, on the other. In other words, there would be other crises, but they would manifest themselves in different forms. As Steve Weisman, now the editorial director and public policy fellow at the Peterson Institute for International Economics, wrote in 2011: ‘It is amazing, in retrospect, how so much of that crisis foreshadowed the debt and deficit crisis in the United States and Europe today.’ That year, several figures who were instrumental in resolving the crisis – Richard Ravitch, Felix Rohatyn and Paul Volcker, who was president of the New York Federal Reserve Bank in the mid-1970s – banded together to apply the lessons of The Fiscal Crisis to struggling state and local governments overwhelmed by public pension commitments. ‘New York in 1975, is kind of a microcosm for what’s going on in the U.S. generally now,’ Volcker told the Financial Times. ‘We borrow and borrow and continually spend and, so long as people are willing to lend, there is not sufficient pressure to do something about it in a timely way.’