Commentary Magazine

New York's Crisis-and Washington's

Only a few months ago—on July 1, precisely—New York’s city government was able to announce that it had almost $1 billion in the bank after having paid off the last of its seasonal borrowings from the United States Treasury. This good news had been preceded by the passage, but not yet the implementation, of a new and more generous federal-aid bill which would ultimately guarantee long-term city bonds expected to encourage a total of $4.5 billion in new financing. Further, economic soothsayers, gazing into the murky depths of their statistics on employment and trade, were reporting signs of an upward turn in the ability of the city’s people to produce wealth. Flushed with these happy auguries, President Carter journeyed to New York to sign the new federal-aid bill on the steps of City Hall, and to celebrate with Mayor Koch the end of the fiscal crisis.

For the occasion, a desk once used by George Washington was trundled out onto the steps. There, in front of Governor Carey and a goodly company, Koch and Carter, the heads of two governments very different in size but similar in their inability to balance their budgets, conducted their ceremony. It marked the triumph and culmination of an effort to persuade Congress to take the unprecedented step of guaranteeing a municipality’s general obligations. And the two principals generously paid tribute to the ingenious and tireless people who had devised schemes enabling an all but bankrupt city to refund $5 billion in short-term notes without having to run for the sheltering arms of federal judges.

Ultimately the sun went down; the crowd dispersed; Washington’s desk disappeared inside the building. The media people folded their notebooks and tripods. And yet if the celebration was over, the crisis whose end it had been called to mark most assuredly was not; and soon it was making its persistence known.

In September, the city comptroller was talking about difficulty in meeting the end-of-the-month payroll. Ultimately it was met in part from real-estate taxes, paid ahead of schedule by large real-estate owners who were given a substantial discount in compensation. More ominous, but less noticed, were signs that the city’s budget balance for the year that began on July I was slipping rather badly. The four-year financial plan that the city had prepared to go with its federal-aid program acknowledged that each of its last three years would result in a deficit which it proposed to cover from a list of possible actions to be chosen later. But if the balanced budget for the first year were to go askew, all the subsequent deficits would become larger and harder to manage. The current slippage resulted from factors over which the city had little or no control: a reduction in the Comprehensive Employment and Training Act (CETA) grants, through which the federal government had been paying for a number of municipal services throughout the country; the reluctance of Congress to renew its “contracyclical” assistance to cities in trouble, presaging a loss this year of about $105 million to New York; and a rise in the calculated cost of the 1978 labor settlement, so intricate and complex in its application that experts disagreed over the dollars involved.

These developments—unlike those related to bridging the embarrassing time gap between the city’s need for cash and the arrival of tax money and other revenues—go to the heart of New York’s problem. If New York cannot balance its budget, it will not be able to cover its debt payments; if it cannot cover them, the federal government will have to make good on the limited guarantees it has just authorized. But after that there will be no more special help for New York. This was a principle firmly emphasized by members of Congress during consideration of the aid bill, and just as firmly promised by the spokesmen for New York. Thus we come back to the question of whether New York can continue to sustain a government providing the services now provided, and if not, what the consequences will be.

To many serious observers, however, news of the budget slippage, though disconcerting, was by no means the last word on the city’s vitality. They pointed out that municipal tax revenues, as well as expenses, depend on the state of the city’s economy, and that for the first time in years New York’s economy was beginning to breathe easier. These observers noted that in Manhattan, the city’s crucial central business district, the renting of expensive space on the most desirable thoroughfares had picked up dramatically. Prices were far higher than would have seemed possible only two years ago. Strong demand had developed, too, for luxury housing in Manhattan. The purchase prices of cooperative apartments were soaring. Wealthy foreigners to whom, allegedly, New York’s streets seem as safe as Disneyland’s, swelled the ranks of would-be buyers. Another phalanx of invaders, armed with checkbooks and local bank credit, had come marching over the bridges from Brooklyn, Queens, and the Bronx.

In addition to all this, the optimists could point to a demand for housing which had stimulated the conversion of raggedy, largely unusable factory buildings in Manhattan’s obscure industrial sections into useful and safe apartments, initially for artists, but now open to anyone who could pay. That city residents could find use for obsolete structures promised a solidification of New York’s real-property tax base; that the city could retain within its borders households with the money to move elsewhere presaged well for its economy. So too with the phenomenon of young couples, primarily with professional backgrounds, investing in the purchase and rehabilitation of older one-family homes for their own use.

Other signs of economic revival: the State Labor Department reported 7,000 more payroll jobs in the city in June 1978 than there had been in June 1977, a gain of 2/10 of 1 per cent. (True, the city had been losing jobs for ten years at an annual rate of 2 per cent, ten times greater than the last year’s rate of gain, but at least the loss had not grown.) In the same period, too, unemployment dipped from more than 9 to 8 per cent. Retail sales in the city increased by about $60 million between April and June of this year, outpacing the increase in the consumer price index. The Broadway season was spectacularly successful during the winter of 1977-78, a good sign for the city’s tourism. Hotels were full, and more were being built or remodeled at great expense. Most encouraging of all, the Department of Social Services reported that in September 1978 the welfare rolls contained only 900,000 names, the lowest total in ten years.



These statistical indices of a healthier economy can be confirmed visually, particularly by those whose prospect of New York City is limited to central Manhattan, and especially its East Side. The midtown streets are jammed; plazas that abut new office buildings are thronged with young people at lunch time; they seem able—ingeniously or miraculously—to afford a share of Manhattan’s sophisticated and expensive bounties, though in payment they lunch on hot dogs in the open air, weather permitting. And, at a glance, they represent, in fair proportion, all of New York’s racial groups and sexes. On every hand, new restaurants are opening, new boutiques appear, and Rollses and Mercedeses are as numerous as bicycles.

Unfortunately, there are two major troubles with the happy picture. The first is that this good news, even if it were to continue, would be far too slow in producing income for the city government. The budget deficits for the next four years (including the one which started July 1, 1978) could not possibly be closed by a projection of these improving trends over the same period. A 5 percent decline in welfare would reduce the city’s present $1 billion-a-year expenditure by only $50 million a year; not peanuts, surely, but not nearly enough to eliminate the estimated gaps, even if the drop could in confidence be expected to continue. New York’s past concern with social values leads to the prediction that as the number of welfare recipients declines, the pressure to increase benefits for those remaining will grow. And the connection between the other improving trends and municipal revenues is even less close—indeed, much of the new construction to which the optimists point has been stimulated by immense local tax concessions.

The second major trouble with optimism on the basis of these observations is that they tend only to support the hope that a thriving headquarters / cultural-center / tourism / professional-service city is rising in the center of what is now New York. Perhaps it will continue to rise. But such a city will not be able to employ a population equivalent to those who once worked in New York’s industrial areas and on its piers, docks, and freight railroads. The headquarters city—to shorten the prolix description—will of course require a small army of service workers who need not demonstrate office or professional skills. But it appears unlikely that the wealth produced by the headquarters industries could yield enough government revenue to support, with present services and benefits, the larger number of people now living in New York boundaries who will not be usable in headquarters jobs. Thus, for some years to come, the emerging headquarters city will have to be relieved of many of the present burdens of New York’s past. Otherwise, the national government will have to assume the costs of carrying those burdens on an even greater scale than it already has.

Such, at least, are the arguments of those who are persuaded that just as the present population of New York exceeds its ability to create wealth, so the present upward trends in its economy cannot be matched to its need for funds.



Sanguine observers look to the heartening bustle of central Manhattan for visible support of their theory; so gloomier analysts look to other parts of Manhattan, and to the other boroughs, for confirmation of their pessimism. The Lower East Side of Manhattan, dotted now with burned-out and abandoned buildings, is far less crowded than it was fifty or a hundred years ago, but even shabbier. Its land, furthermore, is generally worth fewer dollars today (perhaps no more than one-quarter as many) than it was worth in the 1870’s, when immigrants poured into the city. Conditions are hardly better in Harlem, many of whose middle-class citizens are now leaving, resettling in outlying single-family-home neighborhoods or in the suburbs. Large sections of the Bronx have been almost entirely burned out, though some families continue to hang on in even the most depressing-looking sections. Formerly prosperous neighborhoods like the Grand Concourse are, in fact, rotting from the inside out; rent control discouraged the owners of apartment houses from putting new capital in the buildings, and while the resulting low rents encouraged their tenants to stay on amid the deterioration, the time inevitably came when personal danger seemed more decisive than a modest rent.

Pessimists also find their attitude confirmed by what they see beneath the physical structures on the land. Below the Grand Concourse, for example, runs a subway line, built on the supposition that it would carry garment workers from their Bronx apartments to their Seventh Avenue jobs. The jobs have gone; as a result, the subway system as a whole has lost a million riders a day. Operating costs have soared. The city remains obligated to pay the interest on debts incurred in the course of buying or building the lines, maintaining them, and replacing their rolling stock. Although fewer trains are provided now on some subway lines because of the revenue crunch, any saving is lost in the morass of fixed charges.

Alongside the subway, sewer and water pipes represent a precious but wasting asset in which millions were originally invested: maintenance schedules have been stretched to the point of absurdity (a 199-year cycle for some pipe systems and the roads above them) because the city government chose to spend money on other projects that more immediately affect the lives of people in need. But in the long run, neglect of the city’s physical plant—the roads and water-transportation systems, the bridges and subways—menaces human welfare just as certainly.

Making choices between “hard” assets—to strengthen and secure money that has already been spent on structures and “things”—and investment in “soft” assets—people, their comfort and training—is not easy. The city has opted for “soft” programs, but the debts incurred to build its “hard” structures remain to be paid. And the city’s new financial plan must include large additional sums to keep these neglected hard structures from collapse.

Finally, the pessimist glimpses the city’s immense staff, now protected in its tenure by civil-service law and union contract. Perhaps even more significant is the political protection of public resistance to service cuts, even while the same public decries waste and extravagance. A headquarters city with a smaller working population than that of the New York which had 600,000 more manufacturing jobs would surely be able to support only a smaller municipal staff. But it is very difficult to see how the force can be reduced below the present 300,000 level. Substantial cuts, amounting to about 60,000, have been made since the onset of the fiscal crisis, but further cuts have been opposed vigorously by the same labor unions whose pension-fund trustees must authorize loans to the city if the financial plan for the next four years is to be followed. The unions object less strenuously to a reduction by attrition, but their meekness on this subject is perhaps traceable to their belief that attrition cannot work. They reason—probably correctly—that since attrition depends on voluntary departure from the work force—people leaving city employment for their own reasons—some of these will inevitably have to be replaced to keep the rest going at reasonable efficiency.

So the city of New York, having persuaded the administration and Congress that it should be supported by the new loan guarantees, appears to face great problems in adjusting to the future. Even optimistic forecasts of the city’s central business economy leave it short of putting its present population to work. Cutbacks in its physical facilities will not lighten the heavy burden of debt incurred in building them. Its maintenance programs require immense new investment. Its web of public services cannot be reduced without major changes in its way of life. Cutting its present employment levels will be extremely difficult.

To all of this, the optimists have a simple rebuttal: things were bad in the past as well and yet New York managed to thrive, and its response to the sudden crisis that hit it three years ago has shown that the city can thrive again.




There was, however, nothing really sudden about the onset of New York’s fiscal crisis in 1975, nor anything truly mysterious about how the city thrived before. Up to 1930 it thrived because it provided limited services, using employees who were paid wages that were lower than the comparable standards in private employment. It survived the postwar decline in industrial activity, expansion of services, and higher wages for employees by concealing, even from itself, that its budget was never truly balanced.

It is possible to pore over the annual report issued by the comptroller of the city for each year since the end of World War II without learning until the 1974 report that the city’s income had never covered its expenses. Each year’s report, solemnly signed by the elected comptroller, and kept in full conformity with the laws, shows income and expenses to be almost precisely balanced. Fiscal authorities—including the present comptroller—who have studied the city’s accounts since the crisis started, have now concluded that New York’s cumulative deficit stood at $5.1 billion on June 30, 1975. The figure is in a sense arbitrary; its precision makes it appear that the examiners are all-wise in determining the difference between a capital investment and an operating cost, or can determine the real value of a mortgage—of which the city owns hundreds—covering the costs of constructing or rehabilitating an apartment house. In any case, using consistent rules, the accountants have decided that the city’s deficit increased by another $3 billion between then and July 1, 1977.

In simple terms, New York got into trouble as Mr. Micawber said anyone might: it spent more than it earned. It thrived for years by borrowing the difference from the banks, the public, and the pension funds of its employees. In every one but three years between 1960 and 1975, its bonded debt was greater at the end of the year than at the beginning. After the world came to recognize the city’s budgetary imbalance in 1975, it survived by borrowing still more. Uncounted in the chronicle of its deficits is about $3 billion which represents the money it, in a sense, has borrowed from the pension funds without their knowing if by paying in less money than it should to put those funds on an actuarially sound basis.

The next question, of course, is how, with a series of balanced budgets, the city could pile up a deficit of $8 billion (not counting the pension underfunding, but taking into account a two-year lag in even the present level of pension payments). There are two answers. The city (unintentionally) overestimated its income. It also underestimated its expenditures by calling them investments.

Overestimating income was easy. Each year’s budget must be based on a projection of taxes the city expects to receive, but in the 1970’s, unanticipated delinquencies in real-estate taxes rose sharply. Similarly, it was—and remains—easy for the city to overestimate the revenues it is entitled to receive from Albany and Washington. Only a relatively small part of the money contributed by the state and national governments to the city can be precisely determined in advance; the rest of the money is conditional on the performance of certain acts, or the accomplishment of certain qualifying payments by the city in support of the joint aims which the programs are intended to foster: public assistance, education, health care, manpower training—the list is very long. Frequently, the city in good faith believes it will qualify for intergovernmental payments which, later on, it finds disapproved by the governments involved. Or there is a dispute between the city and other governments over the meaning of a law. Or auditors going over the books refuse to accept the documentation of the city’s expenditures.

The city also imprudently overestimated the proceeds of future bond sales. Once again, the basic notion of selling short-term notes to finance the construction of a building or a road is intelligent: it prevents the borrower from overselling long-term bonds to raise money for a capital investment which may, in the end, cost less than anticipated. These bond-anticipation notes were particularly attractive to city officials for use in the Mitchell-Lama middle-income housing program because, on top of everything else, they minimized the debt service which the tenants of such projects had to pay to the city. Many Mitchell-Lama projects were financed with bond-anticipation notes in the expectation that when the time was right, permanent long-term bonds would be sold and the proceeds used to repay the temporary financing. When the crisis came in 1975, and no one would buy city bonds, the city was stuck with nearly $1.4 billion in housing bond-anticipation notes, due within a few months, that could not possibly be replaced with city long-term bonds, or extended on any terms whatsoever.



The city’s underestimating of its expenditures involves a more sophisticated and complex form of reasoning. In ordinary corporate accounting, a difference is drawn between operating expenses and capital investments. If an electric utility company buys coal, and burns it to create steam that generates electricity, it charges the cost of the coal actually burned in any year against the revenues it receives from its customers. If, however, in the same year it builds a power station, it charges against its income only the amount that its accountants believe (and the regulatory commissions accept) to be the depreciation of the plant’s value due to its aging one year. Of course the purpose of making the investment in the plant is to increase the ability of the utility company to produce electricity for which its customers must pay.

The national government, in its basic accounting, does not make this same distinction between operating expenses and capital investments. If the navy buys an atomic-powered aircraft carrier, the cost is charged to the year or years in which the money is appropriated to pay for it. But big-city government, lacking the credit rating and the money-creating powers of the federal government, could scarcely afford to build any major capital improvements if it had to pay for them completely out of tax revenues in the years of their construction. New York State recognizes this in its constitution and permits cities to borrow for their capital expenses, paying the cost out over the long-term use of the improvement. New York City is allowed to borrow up to 10 per cent of the adjusted value of its real estate for capital improvements, and there are certain categories for which the city can borrow without limit—for example, sewage-treatment plants and self-liquidating projects in general.

This is not unreasonable but it overlooks two basic facts. First, the interest on the repayment of these bonds become annual expenses of the city government, but the improvements rarely contribute, as does a new power plant in the case of a utility, to the ability of the city to earn revenue. Indeed, most capital investments—like schools, parks, swimming pools—increase the municipality’s operating costs because they require staff to run them. Second, as a city ages, its physical plant tends to deteriorate, just as an industrial plant does. But no political credit generally attaches to a city official for maintaining an old building well; his pay-off—in political kudos—comes from new construction with his name on the billboard in front of it. Thus, the capital-budget system, which sets forth how much the city can spend for major, long-term improvements, tends to be heavy on new structures, light on necessary reconstruction of existing facilities.

But since the capital budget merely limits the total indebtedness that can be outstanding, and does not precisely define what is considered a capital improvement, New York’s mayors have found capitalizing expenses and taking them out of the expense budget an easy way to lower the apparent expenses of government during a specific fiscal year. Mayor Robert Wagner did this with operating expenses which were connected with capital structures—painting government buildings, for example. His successors expanded the practice until, in 1975, at least a billion dollars in operating costs were classified as one-time capital investments and removed from the annual budget. That budget, of course, already contained a provision for the debt service on all the earlier borrowings that paid for recurring operating expenses misclassified as capital investments.



Such a system of overestimating revenues and underestimating costs could go on, but not forever. Nothing the city did in the first two months of 1975 was grossly worse than what it had done previously, but the numbers were growing like weeds. In 1964 the city’s temporary debt at year’s end was only $316 million. At the end of fiscal 1975 it stood at $4.54 billion, a 1300 percent increase. Of course, inflation of incomes had increased the number of investors in the nation who wanted tax-exempt notes; New York was their biggest supplier. If the temper of the times had remained propitious, New York’s refinancing of a steadily increasing load of temporary debt might have continued for years. But in 1974 interest rates reached unheard-of levels, recession was at hand, there was a temporary default on the notes of the New York State Urban Development Corporation, and when the city tried to sell some of its own notes in March, its own bond counsel refused to certify the accuracy of its accounting information. Nobody would buy the notes. With $4.5 billion in such notes due in the next twelve months or less, the city faced default and an inevitable bankruptcy, an eventuality for which no political leader had prepared the electorate.

Claiming that the city’s general assets were adequate to pay the notes but were badly frozen, city officials called the crisis a “cash-flow” problem. All the principal participants in the crisis—city and state officials, bankers, union leaders, and the members of Congress—had a natural interest in propagating this narrow definition of the city’s position. The bankers would not be asked why they had sold questionable obligations to their customers. Government officials would be spared the career-blighting ignominy of presiding over the bankruptcy of the nation’s largest city, after having issued no warning of its imminence. For the labor leaders, defining the crisis as a cash-flow problem protected the wage levels of their members and defended them against catastrophic firings. Men of conscience, who by no means exclude the other categories, were terrified of a bankruptcy involving so large a government, one that provides health and welfare services, transportation, education, police and fire protection for a population of over 7 million, services which cannot be interrupted without immense risk, and for which bankruptcy procedures would be most difficult to work out.

The state government therefore had to find a way to segregate enough of New York’s revenues to protect those who would lend it $4.5 billion in long-term money, with which the temporary notes could be paid off. It established the Municipal Assistance Corporation and ultimately assigned to it the city’s sales and other business taxes. This stream of tax revenue was enough to support a large public borrowing while the city’s employee pension funds were persuaded to buy both city bonds and the corporation’s long-term securities. The state loaned the city $800 million, secured by a lien on the aid payments that it would make in the year following, and then made another loan against the security—far below face value—of the city’s mortgages on its Mitchell-Lama housing projects.

By now it was perfectly clear that the financing would be needed not only to cover the maturing temporary notes, but the additional operating deficits which the city would inevitably run up until it could get its budget balanced. As we have noted, this came to an additional $3 billion. The state passed a law which permitted the city to phase out its capitalized operating expenses over a long period of years—these cash deficits would presumably be covered by selling the city’s own paper when that became marketable. Mayor Koch had announced his plan to end this practice sooner. But the total of all these devices was too small to give the city the money it needed, and the federal government was then persuaded to make its two-and-a-half year arrangement for seasonal borrowings.



The sole purpose of all these ingenious arrangements—grossly simplified in this summary—was to permit the city to come to a time when it could maintain a balanced budget over the years. No one seems ready to admit that, from this perspective, the effort has failed. Even if it is possible to restore the balance of the current year’s budget under the terms of state law, it remains at least $690 million in deficit under generally accepted accounting rules. Next year’s budget is projected with a deficit under those same rules—and with the highly dubious assumption that the city’s other than personal expenses will not go up, and that wages and salaries will be fixed at their present level—of $882 million ($472 million under state law).

Furthermore, Deputy Comptroller Sidney Schwartz has officially called attention to uncertainties in other city assumptions that, he says, may increase the gaps still further. At the end of September, he estimated the “possible” deficit for fiscal 1982—the final year of the federal aid program—as $1.2 billion, without taking into account a general wage increase for city workers whose contracts expire before then.

If one overlooks the comptroller’s cautionary words, one can content oneself with the city’s own guess of a $l-billion deficit in fiscal 1982, and search for ways in which it might be closed. The city forecasts a 4 percent attrition rate in its employees which, cumulatively after three years, would save $500 million in that year. A 4 percent attrition of the city’s work force is about one-half of the natural rate of voluntary separations. It may not sound unreasonable to make do with such a loss each year, but the special circumstances of city government have to be considered.

The attrition of employees whose wages are paid partly or wholly by the state and federal governments does less good or no good at all, as the case may be. Large parts of the city work force—including the Department of Social Services (welfare)—fall into these categories. If a welfare caseworker quits his job, and is not replaced, the salary saved is offset by a corresponding drop in the aid payable by state or federal government or both. If the city pays one-quarter of the salary of a welfare caseworker, it must count on a 16 percent attrition rate in order to make a 4 percent payroll saving by attrition. Sixteen per cent is an unheard-of attrition rate; if it occurred, no department could function after three years.

If extraordinarily high rates were not achieved in welfare, then departments supported entirely by city tax levy or unrestricted government grants would have to allow their forces to be cut by more than 4 per cent to reach the target average rate. But the tax-supported departments are those concerned with public safety—fire, police, sanitation. They are protected in some cases by state law; and by the force of public fear.

As an alternative to attrition, the city could try to brave union wrath by cutting en bloc services which the city now provides. But which ones? Clearly not the public-safety services. Shall the blow fall then on departments of less generally accepted essentiality?

Thus, for example, the city might close down the housing-inspection agency, firing all the inspectors who mark clown violations of the housing laws. Unfortunately, this would offend the powerful constituencies of tenants and public-interest advocates who do not agree with a blanket condemnation of the inspection process. And similar constituencies spring up on behalf of every “soft” service: public libraries, the city university, day-care centers, old-age centers, manpower training. Largely supported by federal grants—sometimes categorically restricted, sometimes not—they are so small in their impact on a $1-billion deficit that a mayor who thinks of cutting them cannot really be blamed for quailing at the prospect of so much rage with so little saving.

If attrition or en bloc payroll cuts do not make it possible to balance the budget, a reduction in welfare benefits or a vast increase in federal assumption of welfare costs must be considered. The city’s share of welfare costs cannot be cut because the much greater sums distributed by the federal and state governments would disappear. But there could be an assumption by the federal government of a larger share of the welfare load. Nothing would give New York City more temporary relief than this. Such a shift could be justified on the grounds that welfare is a problem of national economic and demographic trends, and that it is unfair for New York City to carry so heavy a load. Justification does not constitute political acceptance, however. The problems in the way of national welfare reform seem insuperable; welfare reform is opposed just as vigorously by those who claim it will do too little for the poor as by those who claim it will do too much.

We are left, then, with only one strategy that might bring New York’s expenses into conformity with its present resources: a strategy of reductionism. New York City was laid out to serve a population of at least 7.8 million. Its total population may not much exceed 6 million today—a 25 percent reduction, greater than the reduction achieved in the city’s work force, approximately 320,000 today, down from about 360,000 at its peak.

In the very nature of human settlement, it is easier to expand than contract, and no one should expect that the number of public servants can be reduced in direct proportion to the number of inhabitants. A city which refuses to reconstruct the neighborhoods its citizens have largely abandoned might be able to reduce the ratio of present employees and present citizens more effectivly than a city which refuses to recognize both the geographic and economic results of population loss. Unfortunately, President Carter’s vow to rebuild housing in an abandoned section of the Bronx moves in the latter direction.

But even if the city concentrated its management efforts on reducing its manpower and purchase (electricity, for example) in depopulated sections, a major hole would remain in the bottom of its pocket; it is committed to paying interest and amortization on the money it borrowed to create the larger city of the past. The present city will be unable to continue the operations it requires today while paying for obligations it contracted during its years of growth.

If the budget cannot be balanced, the city will ultimately take refuge in bankruptcy no matter what promises are made to the contrary. A federal judge would then determine how the city should treat all the classes of people and institutions to which it owes money. The judge’s job would be unprecedented. Public safety, public health, education, transportation in the city depend not only on the continuing service of the city’s employees, but also on the supplies and services provided by thousands of independent vendors and contractors, all of whom would, in the event of bankruptcy, be terrified that they would never receive payment of their bills past and future. In order to keep the people of the city alive, a federal /?/ would surely give precedence to necessary da day functions, but the administrative complexity of achieving this goal would be staggering. Probably the judge would ultimately approve a plan for stretching out the debt-service payments on the city’s obligations. Such a plan might also include scaled-down payments to unsecured creditors who had sold to and billed the city before the bankruptcy petition. The effect of their losses on the city’s economy would be immense, as would a debt stretchout affecting the commercial banks which hold city obligations, the employee pension funds that have also purchased them, and the general investing public. Because more of these obligations are outstanding now than in 1975, the pains would be even more pervasive than they might have been then.

The city expects to pay more than $2 billion on its debts this year, a sum almost twice as large as the projected budget gap for the fiscal year beginning in 1981. If one-quarter of the debt service could be eliminated by interest reduction, long-term postponement, or outright cancellation, the budget gap would be reduced to $500 or $600 million, subject to the uncertainties listed by the deputy state comptroller for New York City. This much smaller gap might be closed with additional federal money and attrition of the work force at a practical rate. Obviously, such a proposal would be greeted with screams of anguish from the banks, the pension-fund trustees, and other holders of the city’s obligations, for all of whom it would mean voluntarily settling for less than they were entitled to. Yet if they do not accept a settlement like this voluntarily, they may very well be forced to accept a similar one by a bankruptcy court. Indeed, if the whole fiscal crisis had not been misdiagnosed as a matter of cash flow, an accommodation of this kind might have been worked out three years ago. Possibly.




Several theories have attained wide circulation in the effort to explain what happened to the “richest city in the world.” Jack Newfield and Paul Dubrul have ascribed New York’s troubles to a cabal of bankers, real-estate interests, and politicians who, they say, conspired to sell bonds which they then rendered worthless and dumped on an unwitting public. It is surely correct to say that politicians and some real-estate people (in company with union members and many New Yorkers) urged development policies on the city which resulted in the issuance of bonds. It is also true that the bankers who were the major underwriters of the city’s debt obligations made money selling these bonds, and purchased them long after they should have stopped. It is probably also true that they sold New York securities after they became suspicious of them. Yet it is hard to formulate a motive which would have impelled the banks to make the securities /?/ worthless, or how they (or the real-estate developers) benefitted from a financial crisis which they, in this theory, fomented.

Another theory is that New York is different from the rest of the country, less “American,” and therefore more corrupt and dissolute. Its troubles, by this account, spring from gross malfeasance by the municipal government, graft on an immense scale, and huge programs intended to accomplish social goals which actually accomplished the enrichment of a few leaders at the very top of the government. Now, New York’s government is indeed swollen, and supervision of the details of its operations from any central point is difficult, perhaps impossible. But the remedy often proposed—the decentralization of more of its operations—produces the even worse difficulty of finding local people able to execute programs faithfully without using them to feather their nests or promote their political ambitions or both. In any event, it has not been proved that a greater degree of corruption or incompetence accounts for New York’s shakier position as compared with other of the nation’s older cities.

The charge of differentness, or exoticism, carries with it a whiff of nativist prejudice. Yet the magnitude of New York’s financial difficulties derives precisely from a widespread optimism about the American future which most Americans share; in this sense, New York is more rather than less American than the rest of the country. The difference is that in New York, optimism was not off-set by the restraining influences that affected most other local governments in the nation. Most New Yorkers, being tenants rather than home-owners like the majorities in every other large American city, did not fight real-estate tax increases. Moreover, the immense proliferation of New York’s professional activities—the lawyering, doctoring, teaching, architecting—meant that a large part of its leadership was not so immediately in contact with payrolls and cost evaluation as the business people who provide leadership in other American cities. As for New York’s business people themselves, they tended, as manufacturing activities in the city declined, to be at a high pinnacle of business life, the board room, where the subject is policies not payrolls.



In the expansive mood of the war’s end in 1945, New York’s political leadership responded to the visions of the greater postwar America that was expected to emerge as the altarpiece of the “American Century.” In pre-war days a major issue before the city had been the municipalization of the subway system that had been built and owned by private interests. The city’s purchase had taken years to effectuate, and was closely linked to the vital question of the 5-cent subway fare. In the greater vistas of the postwar world, city government gradually came to see that much bigger programs could be financed, and that when the state of New York was reluctant to undertake them, the city could. The city built up its own university system, greatly expanding the chain of four senior colleges that had existed before the war, and adding a community-college chain to it. It rebuilt and extended the municipal-hospital system. It built new schools to accommodate a population that was on the move. It perpetuated a wartime rent-control system, that, at the very least, tended to keep down the taxable value of its existing residential real estate, and then it provided tax exemptions to encourage the construction of new housing, adding its own mortgages, covering 90-95 per cent of cost, as a further incentive to private builders.

Bowing to state law, without serious protest, it undertook to pay one-quarter of the highest welfare stipends to which the federal government contributed anywhere in the United States, and half of the welfare assistance to employable people without other means of support, the Home Relief program, to which the federal government did not contribute. It took advantage of the federal government’s low-rent housing program on a scale disproportionately larger than that of any other big city. Its urban-renewal program disavowed any intent to raise the taxable value of the land cleared of blight; social policies dedicated the land to low-rent and middle-income housing, and to cultural and educational institutions free of taxes. It spent its money on manpower-training programs when black unemployment became its most serious socioeconomic problem; it added 8,000 men to its police force to fight crime. It established day-care centers, paying all the bills when other governments did not contribute, and old-age centers, also supported with municipal funds.

This is not to say that these programs were successful; nor does it mean that they were undertaken entirely for reasons of social benefaction. Every bit of school construction was supported not only by the contractors, building trades-union members, and building-materials dealers, but also by the unions of teachers and supervisory personnel, and by parent, good-government, and neighborhood groups. All the programs undertaken by the city increased somebody’s income; all represented the consensus of disparately motivated people essential to any but the most autocratic system of government.

The remarkable thing about the New York consensus was not that a majority supported it, but that in effect no minority effectively opposed it. To be sure, local groups opposed specific low-income housing projects which they considered threatening to their neighborhoods and their way of life. Fringe right-wing groups, by no means supported by business leadership in the city, cautioned about taxes, but no one consistently asked how the city government would discharge the debts incurred in bringing these noble schemes to fruition. If borrowing to build hospitals, schools, or colleges fell within the constitutional debt limit of the city, all discussion of the wisdom of such proposals ended before it began. If the debt limit did not permit a proposal, the discussion did not end: a way would be sought to stretch the limit or set up a class of projects outside it. The most useful purpose of the debt limit was to give the mayor, whoever he might be, an opportunity to avoid building a proposal to which he had objections.



Every year the mayor of New York City delivers a message to the city council setting forth his budget for the following fiscal year. During practically the entire thirty years between 1945 and 1975, mayors talked about the difficulty of providing the money to do all the things the city wanted or had to do; but no word appears in any of the budget messages to suggest that municipal government’s income depends not only on the imposition of taxes, but also on the production of wealth sufficient to pay the taxes. The final security for the bills New York was running up in the pursuit of its goals—the city’s continued ability to produce wealth—was taken for granted.

The inescapable fact is that New York’s policies—based on the theory that the richest can afford anything—coincided precisely with the policies of the national government as both came to a climax in the Lyndon Johnson years. The richest nation in the world could simultaneously engage the North Vietnamese in war, rally its allies in Europe, send economic assistance to the Third World, build a “Great Society,” redress the wrongs inflicted on black Americans for over three hundred years, improve the quality of life, rescue the physical environment from desecration, rebuild the cities, and enrich the humanities. If those were the major American imperatives in the 1960’s, then it must be said that New York’s policies in its own spheres were essentially American in their matching hubris.

Today, both governments are paying the price of their inability to admit that the limit on their capacities to spend is set by their capacities to produce; both have neglected the fundamental priority of their own economic health and productivity. In precisely the same way that foreign interests have proclaimed their doubts of the nation’s political wisdom by fleeing from its currency, so have interests outside New York City fled from its obligations. Thus, the problem is not so much whether the federal government will “save” New York City from its continuing crisis as whether the example of New York City will save the federal government from a similar crisis of its own.

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