The Streets Were Paved with Gold (42 page)

Today, there is a tendency among city politicians and others to suggest that the city is a victim of forces beyond its control. While there is some truth to this claim—no single devil theory explains what happened to New York—New York suffered from a leadership blackout. “I know only two tunes,” Ulysses S. Grant declared. “One of them is ‘Yankee Doodle,’ and the other isn’t.” The dominant tune—the common denominator for most of the fateful local decisions leading to New York’s fiscal crisis—was
politics.
Simply defined,
politics
was the absence of leaders who thought about the long-term public interest. They were always thinking about the next election. It didn’t matter whether you sported a Democratic or Republican label, whether you were a liberal or conservative, a banker or union leader—most everyone sang the same tune: Protect your ass. Don’t be a martyr. Worry about the next election. Avoid blame. Take credit.

In New York, good politics was at war with good sense. To pay for their short-term election promises, officials raised business taxes—undermining the city’s long-term economy. More often, they resorted to inflated revenue estimates and borrowing—socking future generations with the tab. When resources were limited but public and union officials wished to show constituents they had delivered,
lavish new pension settlements were publicly announced, while, privately, both sides agreed to underfund them. To escape political attack (and continue receiving handsome tax-free profits), the banks and their bond counsels sealed their eyes to city budget fraud. State officials encouraged puffed-up city revenue estimates and borrowing to avoid increased state taxes or state aid. All this was deemed good politics. Like attending bar mitzvahs.

Yes, as we’ve seen, the system failed. But New York’s leaders failed as well. When it came to long-term decisions, New York was ruled by political midgets. To assist his political ally, Democrat Robert Wagner, Governor Rockefeller approved the first scheme to hide expense items in the capital budget. Amendments to the State Local Finance Law, which were required to approve much of the city’s budgetary legerdemain, won bipartisan approval in Albany. As did most pension sweeteners. Conservative members of the legislature, including Senator John Marchi, voted to enrich the pensions of cops and firemen, two groups which tended to support conservative candidates. Governor Malcolm Wilson, a knight in the conservative cause, urged Mayor Beame in 1974 to borrow $800 million to paper over the city’s budget hole. He couldn’t, he said privately, raise taxes or appear to be helping New York City too much in an election year. His base, you see, was the suburbs and upstate.

Governor Rockefeller manufactured “moral obligation” bonds—sticking future taxpayers with debts he told present taxpayers they wouldn’t have to pay for. In 1974, the Republican-controlled legislature approved and Governor Wilson signed a record $307 million school aid increase. To pay for it, they opened what has come to be called “the magic window,” frontloading the cost into the first quarter of the state’s fiscal year, which begins on April 1—the last quarter of the fiscal year for most school boards and municipalities. After the November election, Wilson’s successor, Hugh Carey, inherited a $250 million deficit because of this trick.

To win favor with their lower- and middle-income constituents, the City Council skewed the property tax system to extract lower rates from homeowners and apartment buildings and higher rates from commercial property in Manhattan. To show they favored education—and the powerful teachers’ union—state legislators timidly voted for the Stavisky-Goodman bill imposing city educational costs. One of the sponsors of the bill, Republican State Senator Roy Goodman, who would later run for mayor as the “fiscally
responsible” candidate, admitted at a
Daily News
editorial luncheon that the bill was “irresponsible.” Nevertheless, he meekly told startled editors, it was “good politics.”

Among its many distinctions, New York boasts its own foreign policy. Justifiably outraged at the Arab boycott of American firms doing business with Israel, the state legislature in 1975 passed and Governor Carey signed an anti-boycott statute, preventing firms from complying. Proudly, New York politicians proclaimed they were the first to do so. But because the federal government did not pass a similar statute, New York politicians took their bows while New York’s port took its lumps. After one year, according to Clifford B. O’Hara, Director of Port Commerce for the Port Authority of New York and New Jersey, the port lost 300,000 tons of export cargo—mostly, he said, because of the anti-boycott law. Much of this business merely shifted to American ports with no such law. The business, he feared, was permanently lost: “Once a shipper and a buyer set up a way of doing business, it’s hard to change the pattern.”

Similar political posing is fundamental to New York’s past housing policies. This reporter once phoned John Heimann—then the state housing czar and now federal Comptroller of the Currency—to solicit his thoughts on the abbreviated housing platform of an unnamed political candidate. The office-seeker promised: (1) “to assure that mortgage assistance loans can be granted to existing Mitchell-Lama housing to keep rents down”; (2) to “change the formula for income limitations for Mitchell-Lama tenants which, because of inflation, are now unrealistically low”; (3) that all Mitchell-Lama tenants could “withhold rents if the apartment is in need of serious repair”; (4) to “promote new building in the state.”

The campaign promises, Heimann sneered, were totally “unrealistic.” He audibly gulped when informed these were the 1974 campaign promises of his boss, the Governor. Those promises helped Hugh Carey capture the votes of many of the state’s 500,000 Mitchell-Lama tenants. Not surprisingly, tenants want to avoid rent increases. Not surprisingly, public officials prefer denouncing rather than acting like landlords and raising rents. The result: rents don’t keep pace with costs, thereby threatening foreclosure. Rather than confront this no-win political problem, public officials assumed an ostrich pose—ignoring it, appointing study committees and mediators, appropriating a few million here or there, all with bipartisan support, of course.

The state’s middle-income housing program presupposes that Mitchell-Lama projects are at least self-sustaining, though in places like Co-op City they clearly are not. The city, with broad political support, long ago abandoned the legislative intent of the MitchellLama law, financing their projects not from rents but from the issuance of city debt. To hold down rents, and hoping long-term interest rates would decline, the city began rolling over this debt rather than floating new bonds. Interest rates rose. The deficit spread. “As a consequence,” UDC Chairman Richard Ravitch wrote Governor Carey, in a confidential January, 1977, report, “the successive Housing and Development Administrators were free, as a practical matter, to impose rent increases in amounts they decided should be imposed regardless of the fact that mortgage debt service defaults had to inevitably result from the low increases.… The result in the overall has been that without legislative authorization, the City’s program has been transformed into a partial direct subsidy program, although the continuing and increasing shift of costs of the program from the City Mitchell-Lama tenants to City taxpayers has not been publicly acknowledged as deliberate City social policy and is only dimly perceived by the public.”

The city altered the program in another significant way. Though state law requires income affidavits to certify that tenants are eligible to move into a middle-income project, or are paying a fair rent once they do, the City Council, with the support of past mayors, prohibited the use of income affidavits as a violation of privacy. The Council, also with mayoral support, regularly rushed through legislation strictly limiting rent increases. After surveying this dismal history, the Housing Committee of the New York City Bar Association concluded, “It is an understatement that the program early on became highly politicized.”

The financial consequences were profound. By 1976, according to an audit by State Comptroller Levitt, 98 of the city’s 140 projects were delinquent in their mortgage payments. According to Mayor Koch’s fiscal 1979 budget message, “By June 30, 1975 the City had outstanding $1.1 billion in BAN’s [bond anticipation notes] issued for Mitchell-Lama purposes and another $118 million of BAN’s issued for municipal loans to owners of multiple dwellings. And yet another $200 million in debt issuance remained to complete the financing of projects already in construction.” In late 1977, after the state Court of Appeals declared the city moratorium
on the repayment of notes unconstitutional, the city undertook to sell these mortgages, at a considerable loss.

It is good public policy to seek to retain the middle class. But it is also good politics to promise to hold down rents. In New York, the politics preceded the policy. During his 1977 campaign, Mayor Beame made a rare appearance at a Board of Estimate hearing, and before a large, cheering audience of tenants, voted to exempt senior citizens from rent increases (for five years) and to offer tax exemptions to Mitchell-Lama housing companies to suppress rent increases. The measures passed unanimously. On another occasion, before 1,100 cheering tenants from Manhattan’s Lincoln Towers, mayoral candidate Ed Koch pledged solidarity in opposing federal rent increases ordered to meet rising costs. Obviously, many tenants cannot afford rent increases. Others can. The point, however, is that in New York this economic question is superseded by political considerations.

Rent control is a classic case. Privately, most public officials concede that it has hastened the city’s property tax base decline, encouraged abandonment, and squeezed many smaller landlords out of business. But the issue, they whisper, is political dynamite. What about a means test to ensure that those who could afford to, pay a fair rent and are not subsidized by other taxpayers? No, they say. It would be an invasion of privacy to check people’s income—something welfare does all the time. Presumably, conservative Republicans would take a different view, seeing it as an ideological issue—free enterprise, a free market, etc. Instead, they, too, see it as a political issue. To score political points, in April 1977, Albany Republicans pushed for and won agreement for a four-year extension of rent control. As reported by Linda Greenhouse of the
Times
, “The closed-door Republican conference at which the plan was adopted yesterday was reportedly an acrimonious one, with upstate Senators maintaining their philosophical stand against rent controls for more than an hour. ‘But we are practical people,’ one of those Senators said. ‘We realize the tremendous political problems.’ ” The bill sailed through the legislature, was signed by the Governor, and created still another commission to study the subject.

Nassau and Suffolk County Republicans, who dominate those counties by parading their fiscal conservatism as if it were manhood, also played the game when it suited their purposes. For years, Nassau and Suffolk Republicans have chided city Democrats for their profligate ways. Yet their cops, who generally vote Republican,
have been gifted more lavish pay and fringe benefits—including more days off, bigger longevity payments, more generous duty charts, noncontributory pensions—than have city cops. Proving that principle in the pursuit of votes is a vice.

Nationally, the most devout conservatives play the game. Senator Strom Thurmond of South Carolina voted against the federal seasonal loan program to assist New York City in 1975. It was, he said, a “give-away” to permissive liberals. No doubt, his constituents cheered, as they do when he supports “give-aways” to farmers. In 1976, for instance, farmers were victims of a severe drought, facing financial ruin without federal help. Congress broadened by $750 million the loan program of the Small Business Administration. With the loans in the pipeline, and the drought ended, the following year harvests were so bountiful that farmers were complaining about falling prices. So they called for new loan assistance and “disaster” aid to speed federal help, some of it necessary. Prodded by conservatives like Thurmond, the SBA overgenerously declared two-thirds of all U.S. farm counties disaster areas. (When New York, after heavy snows, sought such designation, the same members of Congress, and President Carter, said no. Presumably the difference between drought and snow is that one is God’s fault, the other New York’s.) Under the terms of the “disaster” loans, farmers were allowed to borrow up to $250,000 over twenty years at 3 percent interest (New York City paid more than 7 percent for its seasonal loans).

By early 1978, the farm loan program was expected to cost $4.6 billion. Reminding the Congress of the earlier $750,000 loan limit, Congressman Robert Giamo, Chairman of the House Budget Committee, was quickly outmaneuvered by conservatives who barreled across a $1.4 billion supplemental appropriation. Giamo told
Time
magazine he at least hoped to increase the interest rate to 5 percent—two-thirds the rate banks were charging corporations. But he wasn’t hopeful: “The SBA loan fund is set up to help people cope with an unusual disaster—one that happens once in a lifetime. What has happened is that it has turned into a crop insurance program for agriculture.” It was also a political insurance program for Thurmond’s reelection. He was playing the same game as New York pols who voted hidden housing subsidies for middle-income residents.

In a piece subtitled “The Sweet Smell of Pork,” Ward Sinclair of the Washington
Post
, in April 1978, sketched how members of a
House committee were seeking to amend a new federal highway law to aid their districts. James J. Howard (D-N.J.) submitted a $30 million request for a “seagoing jetfoil service to connect his district with New York City.” Don H. Clausen (R-Cal.) desired a $50 million road built as “a demonstration to determine how much the road would divert motor vehicle traffic around the Prairie Creek Redwood State Park” in his district. James C. Cleveland (R-N.H.) wanted federal law changed to allow New Hampshire to sell lottery tickets along its interstate highways. Robert C. McEwen (R-N.Y.) asked that the law be changed “to allow placement of a duty-free store on an interstate highway in his district near the Canadian border.” These were a few of the election-year requests, prompting a Congressional aide to exclaim, “They’re turning this bill into another Christmas tree!” Senator Edmund S. Muskie, Chairman of the Senate Budget Committee, in an emotional address to his colleagues in April 1978, warned that Congress was repeatedly ignoring its own formal spending guidelines. Like the city, it was spending according to perceived political need rather than estimated revenues. “During the debate last year on the energy tax bill,” Muskie chided, “we witnessed again this eagerness to sacrifice budget reform in favor of spending proposals when political opportunity becomes more attractive for the moment.”