The Streets Were Paved with Gold (48 page)

Compared to past practices and rhetoric, much changed in New York during the first three years of the crisis. But given the magnitude of the city’s problems, little had changed. “I would say we’ve only moved the ball from our own seven- or eight-yard line to our own 15 yard line,” observed Ray Horton, principal author of the Temporary Commission’s reports, in November 1977. In their final report of June 1977, the Commission used the word “decremental” to describe the actions of the Beame administration between 1975 and 1977. Which means going backwards. In the years since, Koch has tried to throw some passes. But the yards are gained slowly. “When I came here,” he told me after his first three months in office, “I thought, you know, I would look at something and say, ‘This is the reasonable, rational thing to do’—and I’d say, ‘It’s done.’ Oh, no. You have to every day go out there and ask, ‘What’s happened?’ And even then, it’s only half done.”

A review of the city’s finances suggests the snail-like pace of reform. In 1975, the city’s three-year fiscal plan predicted that by 1978—excluding the approximately $700 million of expense items sequestered in the capital budget—the city’s budget would be honestly balanced and the credit market reopened. By mid-1978, the public credit market was still closed and the city’s four-year fiscal plan projected that the budget wouldn’t be balanced till 1982. Despite the promises made in 1975, by early 1978 Mayor Koch announced that the city’s real deficit—the gap between what it took in and what it spent—would be $1,022 billion in fiscal 1979, and
this tidy sum did not include the cost of expiring labor contracts.

The city’s future budget projections were still predicated on some big ifs. They cautiously allowed that local revenues would grow slowly. But the city’s chief revenue source, the property tax, was expected to decline between 1978 and 1982. And, according to a study by Ray Horton for the Lehrman Institute, “total proceeds from the four other general fund taxes are projected to grow only 22.7 percent” in that period—“a rate that may approximate the rate of inflation but will fall short of the ‘natural’ rate of expenditure increase by a substantial amount.” The budget plan also assumed no further subsidies for the City University, the Health and Hospitals Corporation or the Transit Authority, though in April 1978 the city agreed to increase its transit subsidy by $18 million; and experience suggests the others, particularly the deficit-ridden Hospitals Corporation, will also win increases. The city’s budget plan also assumed the continued expansion of federal and state aid, ignoring President Carter’s January 1978 budget message with its promise to curb aid, his anti-inflation pledge to slash federal spending; it also ignored the city’s dwindling share of the state’s population (down from 53 percent in 1950 to 42 percent in 1975) and pledges to cut state taxes; ignored the spreading taxpayer rebellion which threatened Congressional renewal of revenue sharing and helped eliminate countercyclical aid (costing the city $34 million in fiscal 1979), and placed new curbs on the Comprehensive Employment Training Act (CETA).

After the House and Senate passed new federal loan legislation, cracks in the city’s four-year plan began to surface. A June 21, 1978, Control Board staff report, which received scant press notice, projected a city budget gap of $928 million in fiscal 1981 and $1,014 billion in fiscal 1982, the year budget balance is supposed to be achieved. In fairness to the city, the staff report did not take into account Koch’s projected attrition savings, which would reduce the gap by $272 million in 1981 and $422 million in 1982; nor did it count local revenues, swollen by inflation, or such unanticipated windfalls as the $24.6 million the city received from Penn Central for back taxes in the fall of 1978. On the other hand, the Control Board report warned that their computations did not take into account the cost of new labor contracts which begin on July 1, 1980, when union leaders say they will seek “substantial raises.” (The same 8 percent wage hike won in 1978 would cost about $700 million.) The city’s first four-year
plan, for instance, made no allowance for continuation of cost-of-living or COLA II payments (now called “bonuses”). The staff report said these, alone, would consume an additional $335 million in 1981 and $310 million in 1982. By July, officials were beginning to raise the possibility that the city would not achieve a balanced budget by 1982. “Factoring in the full costs of the new contract for city employees and taking into consideration the likelihood of additional costs in the next round of bargaining two years from now,” an analysis from Jac Friedgut, vice president of Citibank and one of the active “partners,” alerted customers, “true budget balance in fiscal 1982 cannot be considered a foregone conclusion.… The city must run very fast to stand still … to close what now looks like a rapidly growing budget gap after fiscal 1980.” In October 1978, Senator Moynihan—who thanked the President for “saving” the city in August—warned the budget gap was “as bad as it’s ever been, and it’s gonna get worse.”

The gap remained because the city’s expenditure patterns did not appreciably change during the first few years of the fiscal crisis. According to the city’s Budget Bureau, between 1975 and 1977 the local budget grew annually by 7.7 percent, compared to a 12 percent average over the previous fifteen years. Thus retrenchment, as defined in New York, meant not cutting but slowing the budget growth rate. Despite an almost 50 percent increase in federal dollars over these years, city spending rose to sponge up the extra funds. Instead of dramatically altering its spending patterns—drastically cutting back the broad range of city services, eliminating whole departments, slashing taxes to make the city more economically competitive—like one of Parkinson’s plants, the budget simply sprouted new leaves. By 1978, New York was back before the Congress requesting fresh federal loans it said in 1975 it would never again need. It would not be unreasonable for a member of Congress to wonder how the city could truly balance its budget by 1982 when it had failed to do so, as promised, by 1978.

Were New York a private business, it would be a classic candidate for bankruptcy—with lagging revenues and rising expenditures and debt. As the Municipal Assistance Corporation struggled to provide financing, over the first three years of the fiscal crisis the city’s debt grew almost 20 percent—from $12.3 billion in April 1975 to $14.2 billion in April 1978. This sum did not include the $753 million (as of February 28, 1978) that the City Comptroller says was owed for “debt-like commitments to public benefit corporations.” Despite fiscal progress, despite a dramatic reduction in
short-term debt, despite assurances to the Congress and the public that in four years the horses would in fact fly, MAC board member Richard Ravitch told me that private MAC calculations—based on the city’s original four-year plan—projected that New York’s debt burden could swell to $16.5 billion in fiscal 1983. These calculations were shared with neither the Congress nor the public. Were these calculations true? “It sounds a little high,” responded MAC’s Executive Director Gene Keilen, “but $16.5 billion is not out of the ball park.” Several days later, he phoned to report that new arithmetic, based on fairly optimistic assumptions, showed the total debt could reach $14.4 billion by 1990. None of these figures, he cautioned, were fixed, since this was “not a scientific exercise.” No one knows what the interest rate will be, what the size of the city’s future capital budget will be.

The bad news was not offered to the Congress because “the game,” in the words of one principal, “was to get the feds in. I think Senator Proxmire was right. The city had the local resources. We didn’t need to borrow $4.5 billion of long-term aid, including $2 billion in loan guarantees from the federal government. We don’t even know how to spend the $4.5 billion.” According to this official, who said he would jeopardize his career by publicly speaking out, Rohatyn and Goldin and Bigel and a few others probably knew this but chose to keep quiet. Why? Because once the federal government bit the bait and was hooked for a long-term loan guarantee, it wouldn’t be able to free itself without taking responsibility for the city’s bankruptcy. In three or four years, the city could then go back and ask the feds to take another bite. Then another …

The city’s annual debt service payments continued to devour an astounding portion of the budget—24¢ of each locally raised dollar in 1978. The $2 billion tab was the same the city paid in 1975, though slightly less than the $2.3 billion paid in 1976. In the long run, admitted Keilen, “total debt service will rise somewhat.” MAC had succeeded in stretching out the city’s debt repayments, but such stretches also swell the interest charges for future taxpayers. In July 1977, for instance, MAC refinanced $2.5 billion of city and MAC securities held by the banks and city pension funds. MAC Chairman Rohatyn boasted that between 1978 and 1984, the city had reduced its debt service payments by $1.3 billion. What he didn’t advertise was that this stretch would burden future taxpayers with an additional $1.7 billion in interest over the longer life of the new bonds. To gain breathing room, the city was doing what it had always done: pay less now, pay more later.

“The cure for New York’s fiscal crisis may prove worse than the disease,” warned Howard Samuels in 1975. Instead of pushing for lower interest rates or demanding Washington’s help to radically restructure and reduce the debt service burden, or, more drastically, seeking relief in the courts, the city and its new fiscal overseers once again made decisions on the basis of short-term rather than long-term consequences. “In retrospect,” reflects a city official who has been at the center of the fiscal recovery effort, “bankruptcy would have been the best thing for the city in 1975. You could have refinanced the city’s debts rather than refunding more costly MAC bonds. The city could have received relief from costly pension contractual obligations. Bankruptcy would have ended the viselike power of the unions [and the banks]. It might have changed the political make-up of the city.” Maybe.

I have always believed bankruptcy was intolerable. But so is what the city has done. As was true in Vietnam, the city ignored past lessons and was pulled deeper and deeper into debt. By 1978, Rohatyn—ignoring the lessons of the UDC’s 1975 collapse—urged the state to place its “moral obligation” behind the city’s bonds because they could not be sold without it. When the State Comptroller and Senate Majority Leader Anderson wondered aloud why the state’s moral obligation backing was needed if the city’s bonds were truly secure, Rohatyn and others double-talked, obfuscating the issue. Simply put: New York bonds were not yet credit-worthy.

By 1977, Mayor Beame—ignoring the fiscal crisis and the city’s future deficits—acted as if the war was over. His reelection year budget was stuffed with goodies. Rather than slashing the city’s work force by 7,523, as he had promised on January 6, 1977, he announced the hiring of 9,400 additional workers. For the duration of his campaign, Beame stopped the attrition clock from running, temporarily ending the agreed policy of shrinking the work force. Many laid-off workers were given federally funded CETA jobs, with the city paying the difference between their former city pay and the federal CETA ceiling of $10,000. Workers were promised cost-of-living adjustments; taxpayers got longer library hours, more police, the reopening of subway toll booths; the crime-fighting District Attorney offices got a 20 percent budget boost. As Lindsay once shut his eyes to a shrinking tax base, Beame shut his to the city’s spreading deficit. “I estimate we came out of the year 1977 with an expenditure base that was $200 to $300 million higher than it had to be,” claims former State Budget Director Peter Goldmark.

The city’s new fiscal monitors—the state MAC and Control Board and the federal government, which were invited to police and check the excesses of City Hall—often did not blow the whistle. They chose to certify that Beame’s last budget was “technically balanced,” winking at the city’s use of gimmicks which included the ten years the state legislature and the Governor granted the city to remove expenses from the capital budget.
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But by that definition, each of the last seventeen city budgets would have been balanced as well. In truth, all the actors now had a stake in demonstrating the city’s progress, in justifying their own efforts, in convincing Washington the city deserved more aid. A fraternity was formed—the watchers and the watched were in it together.

“There was a time in 1975 and 1976,” recalls a former state official who was then an architect of the rescue efforts, “when all of us were very honest and called a spade a spade. Now we’ve gone back to buttering the apple even when we know it’s rotten.”

Seeing the firestorm unleashed by their 1975 opposition to city loans—
FORD TO CITY: DROP DEAD
, declared the October 30, 1975, front page of the
Daily News
—President Ford and Treasury Secretary Simon in 1976 began extolling “the progress the city was making.” Seeing how Ford was trounced in New York in the 1976 election, the Carter administration maneuvered to avoid the appearance of placing unpopular pressure on City Hall. Beame had a political stake in advertising the progress made under his tutelage. Governor Carey, Chairman of the Control Board, had a political stake in freeing himself from unpopular city decisions so he could plan his 1978 reelection campaign. Comptroller Goldin was scheming to run for state comptroller in 1978. Felix Rohatyn had a three-year record to defend, and was eager to return to private life before his financial artifice collapsed. The banks had investments to protect and an interest in keeping the city afloat until the statute of limitations expired on potential noteholder suits in 1982. The unions worried that bankruptcy not only would threaten their pension fund investments but might permit a judge to abrogate all of their contracts, something the state constitution prohibited—except in case of bankruptcy. The
Times
and the
News
, without informing their readers, purchased MAC securities and, more often than not, lauded their local gladiators. The only persistent and informed
opposition to this fraternity of interests came from Wisconsin’s Senator Proxmire. By June 1978, he was complaining of an inability to locate people of substance to testify against New York’s request for an extension of seasonal loans and for $2 billion of federal loan guarantees.