essays

Oct 1, 1977

The Decline of New York

“How much longer do the people of New York intend to suffer such liars?”

Twelve years ago, John Lindsay, Republican candidate for mayor, promised the people of New York that he would cut the city’s bloated budget by $300 million. He promised them that he would not repeat outgoing Mayor Robert Wagner’s recent act of borrowing short-term to cover a gap in the expense budget. Sixteen months ago, Abraham Beame, incumbent Democratic candidate for mayor, proclaimed that his administration had finally “weathered the storm” of its persistent financial troubles. He presented what he claimed was a balanced budget for fiscal year 1977-78. How much longer do the people of New York intend to suffer such liars?

Taxpayers across the country should be concerned with this duplicity, if only because it is their own money which is being squandered. In July of this year, upon the nod of Treasury Secretary W. Michael Blumenthal, the Federal Government advanced the city government $750 million in short-term loans under the New York Seasonal Financing Act. This is the third consecutive year that such a loan has been made. The Congressional General Accounting Office (GAO) has already warned that New York officials will be back begging for more Federal help when the Act expires next summer. In contrast to Abe Beame’s rosy prognosis, a GAO report issued in April claims that “substantial financing needs and continuing budget pressures will likely present the city with a continuing crisis for some years to come.” In short, the nation’s taxpayers have not heard the last of New York City’s woes.

What the government of New York got away with— rampant growth in bureaucracy, budgets, and borrowing—is only an extreme example of what state and local governments haye been getting away with across the country for years.

In 1975, state and local governments spent $318.5 billion—more than three times the $101 billion they spent ten years earlier. They consumed more than 14 percent of the GNF. Between 1965 and 1975, state taxes rose from $26 billion to $80 billion. Local taxes climbed from $25 billion to $61 billion. The number of state employees has risen from 2 million to 3.3 million; of local government employees has skyrocketed from 6 million to nearly 9 million. Over the decade, average wages of state and local government employees doubled, so that $2.6 billion and $7 billion is now funneled every month to state and local government employees, respectively. Debt, too, was on the march: state and local debt mounted to more than $200 billion in 1975, more than half of it accumulated since 1965. New York City, in short, was not alone, but because of the national media and its own prominence, it was the first to have its crunch reported to the American people at large.

BACKGROUND TO THE FISCAL CRUNCH

The immediate cause of Mayor Beame’s fiscal crisis was the wild growth of New York City’s indebtedness during the previous ten years, especially the proliferation of short-term notes issued to paper over budget deficits. The paper game continued in 1975 with the creation of the Municipal Assistance Corporation (MAC), to replace these notes with long-term bonds, and each summer, too, with the extension of Federal credit.

Debt restructuring cannot end the crisis, however; it can only delay its final resolution. Nor can it ease the plight of New York’s taxpayers: they must ultimately pay both the principal and the extra interest. Nor does it go to the root of the crisis, because it does nothing to dissolve the alliance of interests which brought New York to the brink of bankruptcy two years ago, where it teeters still.

The fiscal deceit of New York’s rulers began at least as far back as 1963, as Ken Auletta related in his excellent chronology of “Twenty Critical Decisions That Broke New York City” in New York magazine (October 27,1975). The constitution of New York has always required the mayor to submit a balanced budget, but when the city charter was amended in 1963, certain safeguards against his doing so by fictional accounting practices disappeared. Mayor Robert Wagner soon proposed to balance his $3 billion budget by pushing an expenditure item into the next year’s budget.

His comptroller, none other than Abraham Beame, suggested that Wagner rearrange the numbers instead, to pull the following year’s state aid into the upcoming fiscal year. Beame also suggested that estimates of tax revenue be inflated, a tactic which Wagner also adopted. The sleight-of-hand had begun.

With constitutional restrictions on borrowing and spending weakened, New York’s mayors succeeded in accelerating their expenditures even faster than they increased their tax plunder. Between 1965 and 1975, tax receipts rose by 6.8%, but expenditures rose at a much faster rate— 13.1%. Wagner hid $26 million of current expense items in his capital budget—financed by long-term borrowing—in fiscal year 1964-65. This strategy soon became a favorite of the next two mayors: $2.4 billion in current expenditures was financed this way over the next ten years, adding $250 million in interest charges to the burden borne by the city’s hapless taxpayers.

For the first time ever, in 1965-66, Wagner proposed to cover a $256 million deficit in his $3.87 billion budget by outright short-term borrowing. His scheme required the approval of the state legislature; Governor Nelson Rockefeller corralled Republican votes in its favor.

Despite his campaign pledge, five years later John Lindsay was also issuing short-term notes to cover a deficit of $308 million. Every year these notes were simply refinanced, rather than repaid. Further notes were issued to cover fresh deficits. They were issued in anticipation of tax revenues which would never materialize—particularly taxes on real estate which had been abandoned due to rent control. They were issued in anticipation of taxes which had in fact already been received and spent. Over a nine-year period, the city government piled up over $2.6 billion in budget deficits. The Big Apple’s finances began to rot.

FROM LINDSAY TO BEAME

John Lindsay blamed Wagner for the deficits he inherited. Abe Beame blamed Lindsay. But Beame was not only Wagner’s comptroller, he was the City Comptroller during Lindsay’s second term: as Ken Auletta put it, “his fingerprints were all over the document.” Lindsay and Beame were jointly responsible for a 1973-74 budget which smuggled a record $564 million share of current expenses into the capital budget, postponed statutory payments, rolled over the outstanding notes once more, and still outdistanced revenues by an additional $211 million. It was a remarkable feat.

In his first year as mayor, Abe Beame put even John Lindsay to shame. His $11.9 billion budget for 1974-75 jacked up the nation’s highest taxes by another $44 million, raised $280 million by prematurely collecting sewer fees, pushed $722 million of current expenses into the capital budget, and with state approval created a Stabilization Reserve Corporation to raise another $520 million through long-term borrowing. Racketeers must have been envious.

In 1965, the city government’s short-term debt stood at $526 million; by 1975 that debt had swollen more than tenfold to $5.7 billion. Total debt more than tripled to $13 billion. With under 4% of the nation’s population, New York City was issuing 18% of the nations municipal bonds and 39% of its short-term tax-exempt notes.

In the spring of 1975, the market for those notes finally collapsed. The city government could sell only $375 million of a $912 million offering even at high gross interest rates.

The confidence of municipal bond-and-note-holders was shaken by the temporary default of New York State’s Urban Development Corporation (a Rockefeller pet project) in February, 1975, and they were awakened to the precarious state of the city government’s finances. The city government was no longer able to find buyers for its notes, and MAC was created by the State of New York on June 10, 1975, as a proxy borrower. The agency was to issue $3 billion of its own bonds, backed by city sales tax and stock-transfer tax revenues, in order to convert the municipality’s maturing short-term debt into long-term debt.

MAC raised $1 billion in July—aided by the report that Federal Reserve Board chairman Arthur Burns had promised city officials the Fed would bail them out if necessary—but soon ran into its own borrowing difficulties. On September 9, the state legislature passed the Financial Emergency Act, which provided for purchase of MAC bonds by city and state employee pension funds and the state treasury, and which created the Emergency Financial Control Board (EFCB) to oversee the administration of the city government’s financial affairs. The EFCB was to steer the city’s rulers to a no-gimmicks balanced budget by the fiscal year 1978-79, thereby restoring their creditor’s confidence, and thus enable them to return to the credit market on their own.

But the crisis continued to mount.

 

THE MORATORIUM ON DEBT

At the height of the crisis, in November, 1975, New York City went into virtual default as it declared a “moratorium” on redemption of close to $1 billion in notes coming due in December. The default was part of a new fiscal rescue package which also included a great deal more: new and higher tax levies designed to add $200 million more to the $5 billion the city government seized annually, the purchase of $2.5 billion in city obligations by municipal employee pension funds, the roll-over by the banks of $1 billion in maturing city notes, and the promise of $2.3 billion over the next three years in federal “seasonal” loans.

Less than four months after the rescue plan was thrown together, the glue behind Beame’s attempt to paper over New York City’s insolvency was coming unstuck. The city government had fallen well behind its announced “budget-cutting” schedule.

In February, 1976, Mayor Beame revealed to the EFCB that the 1975-76 deficit was now estimated to be $1,021 billion rather than the $724 million originally claimed. The additional gap was due to false estimations of tax revenues and welfare costs. In June the city government seemed to be on the brink again when its first batch of federal loans approached maturity. Its “budget-balancing” plans were still filled with trickery, including as anticipated revenues some $302 million in state and federal aid which had never been promised and in one case had been explicitly denied.

Lindsay blamed Wagner for the deficits he inherited. Beame blamed Lindsay. But Beame was not only Wagner’s Comptroller, he was Comptroller during Lindsay’s second term

In December, 1976, the city officials were faced with yet another refinancing crisis when a State Court of Appeals ruled that the debt moratorium declared thirteen months earlier was unconstitutional. MAC bonds were now selling well to the public, since Jimmy Carter had been elected the previous month, but banks and pension funds were saturated with them. Felix Rohatyn, chairman of MAC and the designer of all the city’s refinancing schemes since MAC’s formation, came up with yet another package deal. The plan involved a “stretch” of the MAC bonds held by the major New York banks, to which the banks refused to accede with an agreement on a continuation and strengthening of the EFCB and the establishment of a mechanism to guarantee that the city government’s budget would be balanced.

The banks’ demands were unacceptable to Beame and the union leaders. Abe Beame responded by scraping together a surprising $600 million in cash and mortgages— three times the amount he originally claimed he could raise—and a plan to swap the remainder of the overdue notes for MAC bonds. The desperate scheme for selling mortgages—issued on subsidized housing built by the city— was so short-run in its focus that it represents a loss to the city’s taxpayers of close to $800 million, since the mortgages can only be sold at a fraction of their original face value. So petty and devious have city officials become that they announced plans in July, 1977, to sell at least half of the mortgages (insured by the FHA) in the form of tax-exempt bonds backed by the mortgages, so that they can pocket the difference between the interest rate on mortgages and the lower rate on tax-exempts.

Mayor Beame’s budget for the fiscal year 1977-78, which began July 1, is balanced only by dreams and deceptions. Fresh debt will be created to cover the more than $600 million of current expense items which have been smuggled into the capital budget. Wyndham Robertson, writing in Fortune (July, 1977), projects the deficit for 1978-79 at $600 to $800 million, depending on the outcome of the union negotiations this winter.

Beame needs to borrow a total of $8 billion this year. The outlook for the following year is no better. With millions in unfunded pension liabilities, hundreds of millions in MAC debt service requirements, and several billions on city notes all coming due in the next few years, the stories of New York City’s fiscal woes will return to the front pages before long.

 

SHOWCASE OF BIG GOVERNMENT

How the New York City government managed to spend itself into such a deep hole is a story in itself. The local government of New York has spent far more per capita than that of any other city in any other state. It spent $1286 per capita in 1972-73. In the same period, the local governments of Los Angeles spent $759, Philadelphia $653, Detroit $650, and Chicago $600. New York found an array of outlets for its taxpayers’ and creditors’ money matched by no other city government. When “Great Society” grants for day care centers, drug “treatment” programs, job training, “youth services,” and the rest ran out, other city halls cut back. New York shifted the burden onto its own taxpayers and kept spending.

Six hundred million dollars was lavished each year upon an open-enrollment tuition-free (now nominal-tuition) City University which gave one-sixth of its students stipends averaging $30 a week, and which found it necessary to spend $30 million annually on remedial schooling for students inadequately prepared by the city’s public school system. While providing inferior education, that school system last year spent an amazing $2600 per pupil, about four times what was spent in the church-affiliated schools of the Archdiocese of New York, and more than the tuition of good private schools in the city. Welfare-related expenditures, which amounted to $3.5 billion this year—about one-third of the total budget—are higher per recipient than in any other major city. As a result, there are now 1.1 million welfare recipients living in New York City.

In 1972-73, the city government spent more per capita on police and fire departments, much more on health and hospitals, and twice to five times more on pensions and on debt services—$2.4 billion last year—than any of the next four largest American cities. The city government even runs its own radio and television stations.

Half of the New York City budget goes to municipal employees, who recently numbered 336,000—the nation’s second largest bureaucracy—and whose salaries are the highest in the nation. According to U.S. News, the average annual gross-pay, not counting overtime, for a city sanitation worker is $28,033, which includes $11,684 in fringe benefits. A firefighter receives $35,288 ($15,719 of it in fringes), a teacher $30,288 ($9,638), a social worker $31,009 ($11,764), and a “climber and pruner” (for trees) $27,351 ($10,641). The average for all city workers is $16,311 in base pay plus $10,396 in fringes, for a total take out of their working neighbors’ pockets of $26,707 each year.

Growth in the number of city employees and in their salaries has been breathtaking. Between 1969 and 1974, New York’s population shrank steadily and the city’s private economy declined by 73,000 jobs per year, but the ranks of state and local government employees in the city swelled by 9000 annually. The net result was that the number of tax-generating private workers supporting each tax-consuming city employee dropped from twenty to nine. Between 1960 and 1974, the number of city employees per 100 citizens grew by 69.9 percent and their average remuneration shot up by 129 percent.

It is precisely this growth of the parasitic political sector which has choked the life out of New York’s social economy. The city’s absolute tax burden more than doubled between 1965 and 1975, and rose from 7.3 percent to consume more than 10.2 per cent of its residents’ disposable income. The municipal budget began the decade comprising about one-eighth of the total metropolitan economy, and ended the decade with twice that share, approximately one-fourth.

In short, the ratio of host to parasite fell from 7:1 to 4:1.

Higher state and local taxes have been pushed on people living in the City of New York than in any other spot in the United States: to $1025 per capita or $4100 per family of four. Residents face an 8 percent sales tax and a high state income tax, plus a city income tax which strips $179 from a family of four with an income of $15,000 per year.

Businessmen have faced levies on fuel, stock transfers and machinery and equipment rentals, to name just a few items. For businessmen, the municipal bureaucracy is among the most oppressive.

Not surprisingly, many of New York’s executives have sought relief by relocating themselves and their businesses across the borders in New Jersey and Connecticut. Ten years ago, Manhattan held the headquarters of 198 of the nation’s top 1000 companies; today it holds only 120. The number keeps dropping. The exodus has meant a loss of 645,000 jobs for the city since 1969 alone. The much-discussed “erosion of the tax base” of New York is thus notan independent event cruelly “victimizing” the city government, but rather the predictable result of a policy of victimization by that government.

It is a cruel hoax to point to government spending as a contributor to the city’s economy. Especially deceitful is the logic of GNF accounting, whereby the more a government spends while providing any level of services, the more it is said to “contribute.” It is impossible meaningfully to calculate an economic value for those facilities and services which the agencies of the city government provide, for tax-financed provision lies entirely outside the nexus of the social exchange economy. It is clear, however, that those municipal monopolies waste an incredible amount of the taxpayer’s money in operating schools, hospitals, courts, transit lines, and other facilities, and in providing fire protection, sanitation, street maintenance, police protection, and other services.

“Minimal effort”—i.e., goofing off—is a way of life for many city employees: their job tenure is rendered nearly inviolable by the sticky combination of civil service and public employee unionism. The number of city cops increased by 50 percent between 1940 and 1965, yet the total number of man-hours worked by the force was lower in 1965 because of shorter weeks, longer lunch hours, more holidays, vacation days, and sick leave days. Similarly, a 50 percent increase in the number of teachers, plus the hiring of teachers’ assistants, brought almost no reduction in the average size of the public school classrooms because teachers shortened their working hours and passed along their duties. Bus drivers for the Metropolitan Transit Authority work eight hours a day but receive pay for fourteen, because few drivers are needed between morning and afternoon rush hours; efficient splitshift scheduling has proved impossible to push through.

When demand for space in municipal hospitals began to decline in recent years, the agency which runs the hospitals reacted by holding onto patients who should have been discharged. All in all, the number of city jobholders increased rapidly in the decade prior to 1975 without any noticeable rise in the level of services provided. The productivity of those jobholders simply declined by some 30 percent. All of these services could be provided more cheaply and more responsively by private enterprise, which faces the incentives and signals necessary for productive and allocative efficiency.

While these facts and figures on New York’s fiscal distress can be found in establishment publications, a number of leftist authors have also pointed out the additional impetus to debt spending, chiefly on capital construction projects, given by the financial community. David Rockefeller of Chase Manhattan, Walter Wriston of Citibank, Ell-more Patterson of Morgan Guaranty, and others have indeed taken their cut underwriting and investing in city obligations and MAC bonds. The big banks were stung when the face value of city obligations dropped unexpectedly in the spring of 1975, and they were instrumental in establishing MAC and the EFCB to shore up the city’s credit. Their skittishness reflected the precarious state of their own finances under the fractional reserve banking system: close to 25 percent of their equity capital and 5 percent of their assets are held in the form of city obligations.

Eight of the nine original members of MAC were connected with banking or brokerage. Felix Rohatyn, who eventually became chairman of MAC and a member of the EFCB, is a partner in the prestigious investment banking firm of Lazard Freres. Rohatyn has been a leader among corporate liberal central-planning advocates in calling for a federal agency to bail out insolvent private firms, modeled after F.D.R.’s Reconstruction Finance Corporation. He evidently does not grasp the folly of throwing good money— and the evil of throwing taxpayers’ money—after bad.

In the two years which have passed since the peak of the fiscal crisis there has been much talk about budget cuts and wage freezes. The sad truth is that there have been neither. Even when adjusted for inflation, spending has risen by more than $1 billion and currently stands at more than $13 billion. “Despite all the maneuverings we’ve been through, we haven’t saved a penny,” Congressman Herman Badillo has commented. Savings of $250 million which Beame projected for 1976-77 somehow never materialized. For 197778 he has projected a rise of $100 million.

Though the city government has cut its full time work force by approximately 58,000, or somewhat less than 18 percent, there have been savings in the payroll of only 6 percent. For many city jobholders, wages rose by 8 percent in 1975, and a scheduled rise of 6 percent in 1976 was not cancelled but merely postponed by the EFCB and granted this year. True to their basic exclusionary function, the unions have shown a marked preference for layoffs rather than pay cuts; they have preferred to lose some of their membership rather than imposing on those who remain on the inside.

In 1965 the city government’s short-term debt stood at $526 million; by 1975 that debt had swollen more than tenfold to $5.7 billion

Mayor Beame added $50 million for raises to the budget for 1978, no doubt because he was running for reelection. But the people of New York have rejected Beame’s bid for a continuation of his power. Defeated in the primary campaign for the Democratic Party nomination for mayor in early September, Beame went before the citizens of New York to claim that he had “not let the city down.” While Beame was defeated, however, the underlying causes of New York City’s troubles linger on, and New Yorkers have yet to show any signs of demanding an honest and immediate cutting away of the government whose spending, borrowing, and taxing has been strangling them and their beloved city.

Until they do so, they will only show themselves quite ready to suffer liars—and worse—indefinitely.

 


 

Lawrence H. White has been a student of philosophy and economics at Harvard University, where he was editor of the Harvard Political Review. He is currently pursuing graduate studies in economics at UCLA. His monograph “The Methodology of the Austrian School” was published this year as an Occasional Paper of the Center for Libertarian Studies.