The Streets Were Paved with Gold (49 page)

New York’s economic and social indicators did not appreciably change during the first three years of the fiscal crisis, despite Mayor Koch’s ludicrous claim that the city was on the brink of a “renaissance.” Yes, the local economy showed a gain of 7,000 private jobs from February 1977 to February 1978, the first gain in eight years. But one year does not make a trend. The city’s job growth in this year was, we should note, the slowest of any major city in America. And it came in a period when the nation’s economy was expanding at a faster rate than projected for the remainder of this decade. And the Bureau of Labor Statistics continued to predict future job losses for New York.
The Economist
, an admired British publication, completed a twenty-two-page survey of the city’s economy, optimistically concluding: “New York is not so much declining as changing.” The survey was trumpeted by those who affix Big Apple stickers to their lapels. The weakness of this upbeat analysis is that it focused on mid-Manhattan, which is not New York (except to the British chap who wrote the survey). The hotel and restaurant and retail and foreign investment boom in Manhattan is foreign to the other four boroughs, which comprise 80 percent of the city’s population and 93 percent of its land mass.

There was little prospect that the conditions which made New York unattractive for many businesses and for people with the means to move—high taxes, high energy and living costs, high crime, reduced services—would suddenly disappear. Though Candidate Koch suggested he would reduce “excessive” city taxes, Mayor Koch’s four-year recovery plan called for no such reduction. And, as noted earlier, the tax bite was steeper in 1978 than in 1975. By 1978, the most dangerous people in New York were the same as they were in 1975 and before: those who acted as if they believed the horse thief. Or as Margaret Mead, thinking in a world context, once said, “If we build … thinking in too rosy terms, people will become apathetic and not do the things that need to be done. We have to realize that everything we say about the future will influence the future.”

It is hard to be sanguine about the city’s future when we recall that there were, in the spring of 1978, 25,000 abandoned buildings
or lots, each no longer paying property taxes. Another 27,300 buildings, according to Koch’s Community Development Budget, would be abandoned by landlords—caught between inflation and impoverished tenants on the one hand and rent control on the other—by June 1979. A total of 71,000 occupied dwelling units would fall into the city’s hands by then—four times the number in January 1978—Koch ominously reported later in the year. Thus the City of New York will, conservatively, become the landlord for approximately 500,000 people—a population larger than that of all but twenty-four American cities. Besides not paying taxes, these properties will require City Hall to provide fuel and maintenance. And, as experience dictates, the city will fail to collect rents from many tenants who live in these buildings. Worse: “My biggest worry is, what happens on the first cold day of winter?” says Housing Commissioner Nat Leventhal. Will the city be able to turn on the heat? That this cancer was allowed to fester and multiply can be traced, in part, to the Beame administration, which treated abandoned buildings as it treated budget gaps. They didn’t exist. Instead of gearing up to cope with and try to manage these properties, Beame and Deputy Mayor John Zuccotti ignored a confidential April 1977 report from their own Office of Management and Budget. In fact, someone ordered most copies destroyed. It was an election year and abandoned buildings were bad news. Perhaps they would go away.

Another problem that won’t go away is the underclass, which few public officials dare talk about. One of the few progressives who has is Senator Edward Kennedy. This problem, he told Detroit’s 23rd annual NAACP dinner in May 1978, is “the great unmentioned problem of America today—the growth, rapid and insidious, of a group in our midst, perhaps more dangerous, more bereft of hope, more difficult to confront, than any for which our history has prepared us. It is a group that threatens to become what America has never known—a permanent underclass in our society.… They are the other side, the untold side, of our statistics of self-congratulatory progress.” Kennedy produced data revealing that more than 50 percent of all New York blacks were born to mothers without husbands (vs. 20 percent in 1956); among Hispanics, almost 50 percent of all children were born out of wedlock (vs. 11 percent in 1956). “But the life of welfare,” Kennedy continued, “is not the life of independence and freedom. When Martin Luther King spoke of his achievement, and yours, and we thrilled to his
words, he did not say ‘Comfort at last’ or ‘Welfare at last.’ He said, ‘Free at last.’ … There is ample evidence that the welfare system itself, in combination with other factors, has helped to produce the very disease we now must seek to cure.”

It would be a tough cure to bring off even if we were willing to talk about it. Though New York has reduced welfare rolls and fraud, the number of people on welfare remains staggering. Almost one of every seven city residents—930,000—was on welfare in 1978. Another 500,000 to 1.5 million illegal aliens, many of them desperately poor, were, in effect, declared non-persons—not counted, not taxed, ignored. There are too few job opportunities for these aliens or for the hard-core unemployed and teenagers. And what growth there is in jobs tends to be in the white-collar service sector, which doesn’t match a blue-collar population.

The picture was considerably brighter for the banks. The major New York banks emerged in far better shape in 1978 than they were in three years earlier. During this period, they liberated their portfolios of most of their city notes and reduced their investment in city securities, converting the majority to more secure MAC bonds (unlike employee pension funds, which invested three times as much but got stuck with more precarious city paper). The banks had reason to celebrate.
The Wall Street Journal
, in a June 29, 1978, editorial, explained why, despite the city’s spreading deficit, the banks agreed in the summer of 1978 to purchase $500 million of MAC bonds to help the city through 1982. “It grows increasingly plausible,” the
Journal
said, “that the answer lies in what is known to insiders as the ‘10–b–5 issue.’ That is the section of the securities law that outlaws fraud. The banks underwrote huge volumes of New York City notes just before its fiscal crisis exploded in 1975; their critics have charged that they knew the crisis was mounting and made fraudulent misrepresentations to buyers of the notes. The significance of 1982 is that by then the statute of limitations will have run out.… As long as there’s a strong public market for MACs, the banks can argue that money losses were relatively small.… The [banks’] liability would obviously be far more serious in the event of a city bankruptcy, which could drag down MAC as well. So the bank defendants have an obvious interest in keeping the city afloat until a Friedlander settlement [noteholder suits] or the statute of limitations closes off any more damage suits.” Though the
Journal
overstated the case—all current suits will be adjudicated and
will not be cut off by a 1982 statute of limitations—it is true that a city bankruptcy would invite a flood of lawsuits.

Senator Proxmire revealed still another reason to celebrate: the assets of the largest city banks jumped by 23.5 percent between September 30, 1975, and September 30, 1977. Yet their holdings of city and MAC securities dropped 3.4 percent. By the spring of 1978, the six major city banks had less than 1 percent of their assets tied up in city paper, compared to a scheduled 38 percent by the city’s pension funds. If the banks simply returned to their 1975 level of investment (0.92 percent of assets), Proxmire complained in 1978, “this would net New York City about $2.3 billion in long-term financing over the next four years.” “Certainly,” Proxmire and Massachusetts Senator Edward Brooke wrote in a joint letter to President Carter on December 23, 1977, “there is no reason to assume that such investments would be more risky than some of these banks’ foreign loans, which consume a far larger proportion of assets.”

Despite unprecedented “sacrifices,” the municipal unions didn’t do as badly as their rhetoric suggests. “The unions have been without any increase for almost three years,” declared PBA President Sam DeMilla in late 1977. A 1978 advertisement signed by Victor Gotbaum, Executive Director of D.C. 37, wailed: “After three years without raises …” Jack Bigel thundered, “We haven’t had a wage increase in three years.” These views were echoed by and widely believed both by the general public and the press. After all, the Emergency Financial Control Board legislation, passed in September 1975, ordered a three-year “pay freeze.”

Or so we were told. Buried in a black, 300-page transition briefing book for Mayor-elect Koch, was a five-page memorandum which suggested there was no “freeze.” Since December 1974, the memorandum revealed, city employment had been slashed almost 23 percent—yet city labor costs, which totaled $5.5 billion in 1977, declined by less than 1 percent.

How could it be? There had been 25,000 layoffs, another 36,000 workers had retired or resigned, there was a one-year 6 percent pay deferral, a three-year “pay freeze.” If all this were true, it would be as if the city had been on a treadmill for three years—pumping its legs, straining, sweating, yet standing still.

“How could it be that labor costs did not go down?” Edward Costikyan, at that time slated to be first deputy mayor for Koch, asked me in November 1977, revealing the memo. “It can’t be!”
exclaimed Deputy City Comptroller Martin Ives when I called. After a day of computations, he called back to say it appeared to be so. Who was lying? In a sense, no one was. When union leaders refer to a “pay raise,” they’re talking about their pay rate or base salary. Pay rates were frozen. But the take-home pay of workers was not.

Here’s why: In the spring of 1974, the unions negotiated new citywide contracts calling for an 8 percent pay rate hike beginning July 1, 1974 (fiscal 1975) and another 6 percent hike for the year beginning July 1, 1975 (fiscal 1976). As an act of statesmanship, union leaders volunteered to defer this 6 percent increase for one year, beginning October 1975. But most workers did not defer the full 6 percent. Those who earned less than $10,000 were allowed to keep 4 percent, thus deferring only 2 percent; those earning between $10,000 and $15,000 got to keep 2 percent; only those workers whose base pay exceeded $15,000 actually deferred the full 6 percent. Since the deferral was for only one year, for two of the first three years of the crisis all workers got to keep their full 6 percent hike; and for that one year, the majority of workers received either 2 or 4 percent increases.

In addition, all city workers received annual cost-of-living bonuses. The first, called COLA I, was a carryover from the 1974 contract and provided annual payments averaging about $400 per employee. The second, called COLA II, was approved by the Control Board in 1976. It allowed further cost-of-living adjustments, provided that these were funded through increased productivity, “other savings” (budget cuts), or “other revenues” (increased state or federal aid). In the first year, 1976–77, COLA II added $199.50 to the paychecks of most city employees. In 1977–78, COLA II added another $672 per worker. To understand what this means, take the case of an accountant whose base salary was $11,550 in the spring of 1975. On July 1, 1975, the accountant was supposed to receive a 6 percent pay raise. Four percent of this raise was deferred for one year. Over the next three years, he or she received the full 6 percent, plus three COLA I payments ($1,200) and two COLA II payments ($872). By June 1978, the same accountant was receiving $13,413—a 14 percent increase from July 1975 to June 1978. Over the same period of time, the cost of living jumped 17.1 percent. Since cost-of-living adjustments were lump sums, the lower the pay of the worker, the greater the percentage jump in pay. According to the Office of Labor Relations,
a senior clerk in the middle of the salary scale got a pay raise of 17.4 percent over this period; a higher-paid patrolman 1st grade went up 12.6 percent.

From this, four conclusions can be deduced: (1) there was a “pay freeze” in name only since workers were bringing home more money in 1978 than in 1975; (2) the pattern of previous years—trading reduced public services for increased employee compensation—continued; (3) higher-paid workers did not keep pace with the cost-of-living increases; (4) lower-paid workers about kept pace. When I reported this in my
News
column in December 1977, Victor Gotbaum lashed back, writing in the same paper that it was “absolutely not true” that city “salaries have kept up with the cost-of-living since 1975.” Three months later, in a March 16 interview with the respected publication
The Fiscal Observer
, the very same Gotbaum matter-of-factly said, “In real wages over the past five years, lower-economic workers have about broken even.”

From the worker’s point of view, the scorecard is incomplete. It does not count the 2 to 2.5 percent extra the state legislature now requires each employee to contribute to his or her pension (a worker earning $11,000 pays an additional $300 annually) or the roughly $40 million in fringe benefits City Hall and the unions claim were sacrificed by workers; nor does it compare these raises against increases elsewhere, which have often grown faster; it neglects those low-paid city workers, mostly represented by Gotbaum’s union, whose pay is below that of comparable jobs in the private sector and, in some cases, even below the official poverty level. And it does not account for the perceptions of city workers, who blame their low wages for low morale—knowing or feeling they are slipping in the race with inflation.

But the scorecard is also incomplete from the taxpayer’s point of view. It does not include other parts of a worker’s compensation package: paid overtime, which cost the mayoral agencies $46 million in 1978; night-shift differentials ($45 million); pay increments, which are based on length of service ($30 million); pay differentials, which are based on education degrees ($5.5 million); and pay hikes due to promotions, which have been plentiful with the attrition of 36,000 senior employees. Counting longevity pay, night-shift differentials, uniform allowances, holiday pay and cost-of-living adjustments, the base pay of detectives, for example, jumps by more than $4,000. Yet union leaders exclude these benefits when moaning about their base pay.