The Streets Were Paved with Gold (11 page)

In all, according to the business-dominated Committee for Economic Development, between 1960 and 1970 the state enacted (usually at the city’s urging) fifty-four city pension bills. Between 1961 and 1976, the Temporary Commission on City Finances found, retirement costs rose 469 percent—from $260 million to $1.48 billion. Retirement benefits began to hog the city’s budget. From 1971 to 1976, for instance, the Commission calculated that the city’s budget rose 66 percent while its retirement costs rose 99.7 percent. The growth of these costs, like the growth of debt service,
meant there was less to spend on the delivery of services. It meant that pensions, which were supposed to protect people when they grew old, when the kids were grown and they presumably needed less, came to rival their work salary. The city also came to ignore their Social Security pension, which was on top of their city pension.

It also meant the introduction of another gimmick. Since public officials didn’t have to pay for pension settlements right away, they successfully hid expensive labor agreements from the press and public, bequeathing the true costs to future generations. The SEC staff report on city finances cited one such gimmick. By claiming “excess interest” on pension fund earnings, they said, the city reduced its annual pension contribution by $361.6 million between 1972 and 1975. By 1977, the city’s unfunded pension liability—money owed future retirees but not fully provided for—was over $8 billion. “The results of such gimmickry are almost tragic,” observed a New York State Pension Commission study. “They deceive the public employee and the taxpayers into believing that pension costs (and costs of government in general) have been met. In fact, such costs have not been met—they simply have not been paid. Therefore, next year’s taxpayer not only must shoulder his proper share of government costs, but also the costs which have not been paid in prior years and which unfairly have been shifted to him.”

The deception was not just the fault of short-sighted “politicians.” Union leaders, anxious to show results at the bargaining table, also acted like politicians. They, too, run for office. They, too, winked and went along with the game. It was a problem their successors would have to worry about.

Worrying that pensions were out of control, in 1973 the state legislature voted to cap future sweeteners—in time to block a move by the Patrolmen’s Benevolent Association for half-pay pensions after fifteen years’ service. But since the state constitution has a special provision preventing a rollback in pension benefits already won, pensions became an untouchable item when it came time for New York to cut its budget. City services would have to go instead.

Most politicians like to build things. It’s a simple way to quantify a record in office. After all, how do you quantify judgment or saying
no? A dam is a tangible achievement. So is a road, a bridge, the Albany Mall, the World Trade Center. Or Westway. Whatever social or economic good these projects were designed to serve, they also provided monuments to their benefactor.

Nelson Rockefeller, particularly, liked to build things. But he had a problem. The state constitution required that all bonds carry “the full faith and credit” of the state and be approved by the voters. This was a time-consuming process and risked voter disapproval of many worthwhile projects, particularly new housing. There was another problem. All new Authority projects were expected to be self-sustaining, as they had been since the creation of the bi-state Port Authority in 1921.

But the Governor was nothing if not inventive. Drawing on the counsel of a then little-known bond lawyer, John Mitchell, and a housing task force consisting of such luminaries as the City Club’s I. D. Robbins, now Congressman James Schuer, and labor leader Harry Van Arsdale, Rockefeller persuaded the legislature to break tradition. A new agency would be created. It would build nothing. It would have broad authority to raise money by creating a new “moral obligation” bond, which would not require voter approval. Nor would the buildings have to prove they were self-sustaining.

On April 18, 1960, the Governor signed a bill creating the State Housing Finance Agency. The intent was noble: to build more housing; to help solve social problems by freeing the state from the cumbersome strait jacket of voter approval. The “moral obligation” device was hailed as an innovation. But without the check of rigorous management and voter approval, the new power would come to be abused. Rockefeller wanted to build now. He would figure out later how to pay for it. To explain his innovation, the Governor was not above dissembling.

“How can they [the State Housing Finance Agency] get the money if the builder can’t get it at lower interest rates?” Rockefeller asked state Housing Commissioner James Gaynor in a March 2, 1960, televised colloquy.

“Well, it’s a state agency,” said Gaynor. “It’s a public agency.”

“That’s a major factor in being able to sell the bonds at a low rate,” the Governor prompted.

“Oh, yes,” responded the Commissioner. “There is a reserve fund which would ensure the payment of principle and interest.”

“Which the state would stand in back of,” said Rockefeller, “so
that if anything happened the state would be able to help out,
but it would not be taxpayers’ money.
”

“This would eliminate the need of the voters approving a bond and having to bond the State of New York for fifty years,” explained Gaynor.

“That’s exactly it!” thumped Rockefeller.

The Governor was having it both ways. On the one hand, the public was being told it would cost taxpayers nothing. On the other, investors were being told that if revenues were insufficient the taxpayers would pay for them. “The decision on moral obligation bonds,” later observed Donna Shalala, the Treasurer of the Municipal Assistance Corporation, “reinforced and led to the era of avoiding constitutional requirements. It was difficult for the state to say to the city, ‘Look, you’re avoiding statutory or constitutional requirements in preparing your budget’ when the state ignored the constitution by not going to the voters on bond issues. In a sense, the state was violating the law. The state said to local governments, ‘When your structure doesn’t work for you, don’t stop. Go around it and we’ll help you—like we’re doing.’ ”

The city took the cue. Beginning in the 1960’s, to cite one example, the city tried to save money by rolling over middle-income Mitchell-Lama housing mortgage notes rather than selling bonds which would have carried higher, but fixed, rates of interest. Later, when interest rates soared from 4 to 8 percent, the city was cornered and forced to borrow just to meet annual interest payments on this public housing. The consequences were seen in Brooklyn’s Cadman Towers. In 1973, according to then Deputy Housing Commissioner Ruth Lerner, this project was paying 3.8 percent interest and rents averaged $65.30 per room. Mortgage repayments consumed 57 percent of the rent money. But by early 1977, interest more then doubled to 8.01 percent and rents rose to $83.20 a room. Mortgage payments now made up 79.1 percent of the rent. Later that year, the city felt compelled to sell many of its Mitchell-Lama mortgages, at a considerable loss, in order to repay noteholders.

The state paid dearly for its “trick.” In early 1975, the “moral obligation” debt of state public authorities reached $7.4 billion. Public authorities proliferated across the state. In February 1975, the state Urban Development Corporation—an offspring of the Housing Finance Agency—defaulted on its “moral obligations.” Within a month, the city found itself unable to borrow money.

Another “good government” decision was made on November 7, 1961. On that day, voters reelected Robert Wagner as mayor. One may debate whether this was a clear victory for good government. Voter approval of a new city charter was.

With the active support of such good government groups as the City Club and the League of Women Voters, the charter passed by a margin of two to one. For the first time in twenty-five years, the procedures and structure of city government were overhauled. Among the charter changes were several amendments granting the mayor unprecedented powers. One allowed the mayor alone to estimate revenues, a power formerly shared with the comptroller, Board of Estimate and City Council. A second change allowed the mayor to estimate the maximum debt the city could incur for capital projects, also a power formerly shared with the comptroller, Board of Estimate and City Council. The charter strengthened as well the mayor’s control of his own Budget Bureau, no longer requiring that the budget director clear any line item budget change with the Board of Estimate.

The new charter was consistent with the prevalent view in New York and Washington that strong chief executives were required. New York strengthened the mayor’s office, as John Kennedy sought to strengthen the Presidency from Congressional restraints. But by removing an institutional check of the mayor’s powers, later budget abuses were invited.

The charter took effect on January 1, 1963. Three months later, city officials proclaimed a “budget crisis” and Mayor Wagner proposed to balance the city’s $3 billion budget by waiving, for one year, payment of $15 million to the Stabilization Reserve Fund. The City Council dutifully rubber-stamped this gimmick, as did the state legislature. But Comptroller Abe Beame was unhappy. The man who years later would tell the SEC that he never got involved in revenue projections, called on Mayor Wagner to employ other tricks. The Mayor now had the power, he said, to unilaterally increase his revenue estimates. Beame’s proposal called for the creation of $13.75 million by inflating revenue estimates and changing the payment dates on state aid from one fiscal year to the next. Wagner, saying little, skillfully allowed the idea to germinate. “A way must be found to replace a $40 million loss from the out-of-city
sales tax,” he solemnized on May 7, still offering no answer. Eight days later, he invented one. Foreseeing a “brighter economic outlook,” he announced that the city was increasing its revenue estimates by $26.3 million.

Alarmed, the Citizens Budget Commission and the state Chamber of Commerce accused the Mayor, in October 1963, of using the new charter as “an iron curtain to conceal manipulation of the budget.” Comptroller Beame joined in the condemnation, charging that Wagner overestimated general fund revenues by $38.4 million. Beame’s solution? The city would have to borrow $69.3 million from the Stabilization Reserve Fund, a kind of rainy day resource. Wagner was silent for a time, finally conceding later in the year that general fund revenues were overstated by $68.4 million.

“The significance of the charter change,” says Herb Ranchburg, Research Director of the Citizens Budget Commission, “was that when you had a mayor operating with a Budget Bureau which was creative, the sky was the limit. There were no checks. You had creative budget officials playing the fifth violin, the piccolo and the kettle drum all by themselves.”

A repair truck carrying asphalt lumbered south along the elevated West Side Highway on December 15, 1973, its frame groaning as it bounced over the bumpy, battered pavement. Suddenly, the highway roadbed—which the city government had banned to trucks and said it had no money to repair—collapsed. Not a chunk at a time, not by sagging. As if a trap door had opened, the truck plunged through the gaping hole and crashed onto the street below, injuring fifteen persons.

That hole is a symbol of many critical capital budget decisions tracing back to April 3, 1964, when Governor Rockefeller signed into law an amendment to the New York State Local Finance Law, Chapter 284, Section 11. The amendment permitted city officials to hide expense items in the capital budget. This was significant because, unlike the expense budget, which is financed through tax revenues, capital budgets are financed through the sale of bonds. A capital budget is used to repair and build facilities whose probable usefulness exceeds one year. Thus the benefit—and the costs—will be shared by future taxpayers.

There had always been a barrier between the capital and expense budgets, but in 1964 Mayor Wagner had difficulty balancing his expense budget. His friend, Nelson Rockefeller, wanted to be helpful without supplying more state aid. Solution? It was proposed that the Mayor charge the costs of administering a special census against the capital budget. The Governor’s Budget Bureau objected, warning in a memo to the Governor: “It would not seem that a nontangible service such as this should be classified … as a capital expenditure.” Rockefeller ignored the advice, and Mayor Wagner sneaked $26 million into his capital budget.

This broke the barrier. In 1967, for example, Governor Rockefeller approved a bill (Chapter 634 of the Laws of 1967) permitting “the costs of codification of laws and the fees paid to experts [lawyers], consultants, advertising and costs of printing and dissemination” to be called capital expenses because they had a “three year period of possible usefulness.” Expense money in the capital budget went from $26 million to $84 million in 1968. The following year, when Mayor Lindsay was seeking reelection, it almost doubled to $151 million. Four years later, in Lindsay’s final year, it more than tripled to $564 million. By 1975, $835 million—more than half Mayor Beame’s entire capital budget—was earmarked for expenses. Over the course of eleven years, an estimated $2.4 billion of expense items was shifted to the capital budget.

Reasonable people can debate what is and is not a capital expense. Obviously, some expenses—textbooks, for instance—have a longer-than-one-year life. But if the textbook or salary has a life of only one year, then each year you are borrowing—and paying interest. Costs multiply. The public paid in several ways. First, it cost more; taxpayers were required to pay interest for expenses normally paid from current revenues. Second, as interest costs mounted, fewer dollars were available to provide city services. Third, this trick—like others—contributed to a relaxation of budget discipline; city officials were given a cushion under which they could hide expenditures. Fourth, it robbed the capital budget of funds for needed capital improvements.