The Streets Were Paved with Gold (18 page)

Because of this community of interest, New York, among its
other distinctions, boasts the biggest securities swindle in U.S. history. Bigger than Ponzi. Bigger than Billie Sol Estes. Bigger perhaps, if you count the prominent citizens involved, than even Teapot Dome or Watergate.

And though the city’s “crimes” do not rival those of a President who tried to subvert the constitution, they were not victimless. New York City lost its self-government. The public lost services and gained new taxes. Workers lost their jobs. Businesses closed their doors. Interest rates soared. Annual city debt service payments climbed from $402 million in 1961 to $2.3 billion in 1976, depriving the budget of money that could have paid for more services. Retired and current city workers saw their pension funds jeopardized to save the city from bankruptcy. The investments of 160,000 note and bondholders—including many retirees who invested their life savings—were endangered. Taxpayers in other jurisdictions were forced in 1975 to pay higher interest rates. In all, according to then Deputy Comptroller Steve Clifford, fraudulent budgets robbed city taxpayers of over $4 billion. Clifford arrived at this astounding sum by noting that the city’s cumulative deficit was agreed to be $3.5 billion in 1975. Assuming this deficit was financed through the sale of fifteen-year bonds at an average 9 percent interest rate (a modest assumption), he calculated that the annual debt service costs would be $525 million, or a princely sum of $7.875 billion over fifteen years. Subtract the $3.5 billion already spent—assuming taxpayers received its full value in services—and the excess cost to taxpayers is $4.375 billion. According to the
Fiscal Observer
, in fiscal 1979 44 percent of the city’s debt service costs—$875 million—was earmarked to cover old deficits.

Actually, this cost is considerably understated. The cumulative deficit figure agreed to by Mayor Beame and MAC in 1975 did not include almost $3 billion of expense items hidden, over the years, in the capital budget. Since the city borrowed these funds, they entailed a substantial additional cost to the taxpayers. These interest charges were, in effect, hidden, as was the city’s true cumulative deficit. The originally advertised figure—$3.5 million—was wrong. It excluded not just the almost $3 billion of expense monies, but, according to Clifford, the two-year lag in pension contributions of $2 billion for which no borrowing was necessary but which was money the city owed. In sum, the city’s true cumulative deficit was about $6.5 billion, almost twice the figure certified by the city’s fiscal watchdogs in 1975.

While it is true that city officials were not lining their pockets with this money, and that bad decisions were often made with good intentions, it is not true that these were “crimes” without profit. Money is not the only currency in politics. Power and reelection are profit enough. In addition, huge profits were earned by a lot of banks, underwriters and bond counselors. Some say the question of culpability is now meaningless; that the past is, well, the past. But if people are not responsible for their acts, then democracy—the voters’ ability to reward or punish public officials—is a charade.

The
previous chapter
attempted to show how the city was victimized. Now let’s briefly probe the motives.

A common denominator for past city budget decisions was
politics.
The actors worried about the next election, not the next generation. “There is a common theme running through all of these trends,” Comptroller Goldin, ignoring his own role, told the Treasurers Club in 1975, “the short-sighted approach of fiscal finagling which takes us one year at a time toward the day of reckoning.” The public and investors were told the city’s budget was balanced when it wasn’t. It was made to appear balanced through an array of Houdini-like tricks. This artistic energy inevitably resulted in snowballing but hidden deficits. To cloak them, the city, with the support of its banks, invented money by borrowing it. “Wall Street is only ten blocks from City Hall,” observes Senator Daniel Patrick Moynihan of the world’s financial capital. “From Wagner’s third term to Beame’s second year, the city was, in effect, printing money.”

The philosophy behind this stratagem was once succinctly stated by James Cavanagh: “It is better to borrow than to tax.” “For a number of years,” said the SEC staff report, “the City was incurring increasing deficits in its operations. In order to finance these deficits and to appear to comply with the legal requirement that it balance its operating budget, the City, among other things, increasingly resorted to the sale of ‘short-term’ debt securities.” It didn’t take long before the city was borrowing to repay borrowing. The note addiction became so acute that by 1975 the city needed to borrow $800 million in notes each month—all repayable within a year. A January 21, 1975, memorandum from Clifford to Comptroller Goldin warned of the “massive increase” of $5 billion in
short-term debt since 1970 and said that $2.4 billion of this was due solely to “budget gimmicks (i.e. disguised deficit financing) and recognized deficits.”

Most of these gimmicks were sanctioned by the state. The
how
and
why
is contained in—of all places—the voluminous legal briefs prepared by Mayor Beame and Comptroller Goldin’s two law firms (at a cost to taxpayers of more than $1 million in legal fees) to challenge the SEC’s charges:

Using the Local Finance Law, the state permitted the city to squirrel expense items into the capital budget, as it permitted the city to issue budget notes to balance the budget. The Local Finance Law, for instance, once set a ceiling of 2 percent of the average assessed five-year value of taxable real estate against which the city could borrow for housing construction. But in 1968, the legislature passed, and Governor Rockefeller signed, an amendment allowing the city to raise the ceiling on housing debt from 2 to 10 percent. The Governor’s Office of Local Government protested, dispatching a confidential letter warning that the amendment “would be clearly unconstitutional.” No matter. The state proceeded to help the city print money.

Not that the city needed much coaxing. Two 1975 audits by state Comptroller Arthur Levitt disclosed that in fiscal 1973, city officials borrowed money by claiming as collateral $324 million in fictitious state and federal aid. The audits revealed that by June 30, 1975, the city had overstated—by a staggering $408.3 million—its real-estate taxes. The city accomplished this feat by including in its tax base properties that paid no taxes: “diplomatic properties … vacant land, city-occupied office buildings, an urban-renewal land site, Carnegie Hall, and even a public park and high school.” The audit showed that these “receivables” were then knowingly pledged to repay $380 million of tax anticipation notes issued on June 11, 1975.

To borrow, the city claimed revenues it did not have and had no hope of getting. An October 1, 1974, memo from Clifford to Comptroller Goldin stated: “to balance the expense budget, the City employs a series of unsound budgeting and accounting practices including carrying forward bogus receivables … [and] overestimation of revenues.… In New York City, we create a receivable not when we bill for services, not when we deliver reimburseable services, but when we estimate revenues.… In this method overestimations of state and federal aid need never be recognized, they can simply be rolled over.… The total amount of bad receivables which may have been rolled forward may exceed $500 million.”

Some years ago the government of Czechoslovakia issued a decree:

The city of New York did something like that—sometimes arbitrarily lengthening its year, sometimes shortening it. The SEC report marveled at how the city “changed billing dates on water charges and sewer rates to recognize 18 months of revenue in a 12 month period” and “used a 364 day year in computing payroll liability”—postponing “recognition of one additional day of payroll
(or two in leap years) each year.” This last gimmick, they said, led to an accrued city liability of $130 million as of June 30, 1975.

Abe Beame even took credit for inventing the 364-day year. During his successful 1973 campaign for mayor, Beame ran full-page newspaper ads proclaiming
Abe Beame. He Doesn’t Need Lessons in How to Be Mayor.
Beame reminded voters: “Then there was the time the schools almost closed. We needed 25 million dollars to keep them open. I found it. 6,500 teachers kept their jobs. And your children stayed in school.” Beame didn’t mention that he “found it” by charging the salaries of this year’s teachers to next year’s budget. At the time, he was hailed for doing it.

I vividly recall another gimmick. In 1971, I served as executive director of the independent New York City Off-Track Betting Corporation. That spring, my boss, OTB President Howard Samuels, presented to Mayor Lindsay for city budget planning purposes a detailed projection for the next year of the number of offices, betting volume, types of bets, costs, tracks to be used, computer difficulties to be encountered. Based on these calculations, profits for fiscal 1972 were pegged at $25 million. A meeting was held in the Mayor’s office between Samuels and Lindsay and their staffs. Lindsay explained that Comptroller Beame and the Board of Estimate and City Council were unwilling to impose new taxes or slice the budget, and were insistent that revenue estimates be increased. OTB, they arbitrarily concluded, would earn $50 million the next year. Over Samuels’ and Lindsay’s objections, the $50 million figure was placed in the revenue column. Plagued by computer breakdowns, that next year OTB earned only $14 million for the city.

A similar scene took place the following spring. Samuels again visited City Hall and on the basis of a detailed analysis forecast profits of $43 million for fiscal 1973. Attending a public hearing of the City Council’s Finance Committee, the OTB President backed this estimate by noting that OTB was new and “still in the growing stage.” Finance Chairman Mario Merola, with no support other than a lively imagination, responded: “I can’t see why we can’t go to $70 million next year.” This warm, intelligent man then smiled and added, “I’ve got that much confidence in your operation.” Over OTB’s public protest, the $70 million was incorporated into the budget. That year, OTB earned half that amount—$34.3 million. In both years, OTB’s original forecasts were high. Since a budget, like a weather forecast, is based on educated guesses, the law permits mistakes—as long as they are backed by reasonably detailed
projections. Such projections were absent from the calculations of City Council and Board of Estimate leaders.

When city leaders forecast revenues on the basis of nonexistent evidence, how different are they from Anthony DeAngelis, the great salad oil swindler? You remember DeAngelis. In the early sixties, he claimed as collateral for his loans 161,111,881 pounds of soybean oil, which he said filled 100 tanks in Bayonne, New Jersey. Almost all the tanks were empty. But no one knew it because DeAngelis would sneak into the warehouse to steal blank receipts, forge signatures, and produce these as proof that there was oil in the tanks.

The city’s budget-balancing process worked somewhat the same way. Mayor Lindsay, for instance, began the 1973 fiscal year budget process by predicting in the winter of 1972 that the city would face a $1 billion budget gap. Then he disappeared to run for President. In April, Deputy Mayor Edward Hamilton speculated that “temporary fiscal mechanisms” would be needed to close the gap. The next day, they invented one, with Lindsay proposing that the city count as “revenue” $400 million in federal revenue-sharing and welfare-reform funds—though Congress had approved neither and there was no realistic prospect that it would. Lindsay said he was merely copying the same device used by the state to balance its budget.

In May, the Board of Estimate made its contribution, suggesting Lindsay increase general fund revenues by $50 million. Good. Then the Mayor found there would be $120 million in projected “welfare inefficiencies”—a sum he would soon increase to $162 million. By June 3, the $1 billion gap vanished. Deputy Mayor Hamilton announced that since the PBA had rejected a retroactive wage offer going back to 1971, $49 million could now be applied to close the gap. But, he was asked, wouldn’t the city eventually have to reach a retroactive pay settlement with patrolmen? In that case, he said, the city could borrow the money. “The effect,” he stated, “is to spread the cost over five years.” Council Majority Leader Cuite objected, holding that the “savings” should be used to allow the Council to avoid raising city real-estate taxes by $65 million. “An additional $16 million,” Council sources told Maurice Carroll of the
Times
, “would be ‘found’ perhaps simply by restating a revenue projection somewhere and worrying about raising the money at the end of the fiscal year.” With the deadline for approving a budget near, negotiations reached an impasse. The Board of
Estimate refused to take responsibility for raising water taxes by $35 million. Everyone refused to cut the budget. The Council refused to take responsibility for raising real-estate taxes. Councilman Matthew Troy pledged to go to jail rather than approve such an increase. His Council colleagues might have eagerly obliged Troy, but there was no way to punish him without punishing themselves. Finally, a compromise was reached: revenue estimates were raised. On paper, the $9.4 billion budget was balanced. A year later, the budgeted revenues fell short—the city, for instance, received only half the $400 million from revenue sharing and welfare reform (which never passed).