Felix Rohatyn: Ford helped NYC
The year 1975 was a difficult one for the city. A new mayor, Abe Beame, and a new governor, Hugh Carey, were elected as the economy was faltering due to a recession, an Arab oil boycott, the war in Vietnam and inflation. At the national level, Watergate and the Nixon resignation suddenly elevated Gerald Ford to the presidency.
But a crisis had been building up here for some time. The city's financial condition was deeply concerning, running a significant deficit as a result of an exodus of private sector jobs and an influx of new municipal employees. Politically New York was always a Democratic city, a union city, with a strong Republican business community and little contact between the two. Morale was bad, the city was dirty, crime was up and the economy was weak.
In April, New York and its lead underwriter, the Bankers Trust Company, was preparing its spring financing when I took a call from a broker offering to sell short-term city notes. "It is a bargain," he said, "9.5% interest, triple tax free, backed by the city's credit. How can you say no?" The terms reflected desperation more than a bargain. Sure enough, soon thereafter, Bankers Trust refused to proceed with the offering to underwrite the city's financing on the grounds that there was "insufficient assurance of repayment." Almost without anyone noticing, the markets had closed on New York.
Year after year, and with the support of the state, the city spent more than it took in. It had the choice of raising taxes, cutting spending or borrowing. Naturally the politicians chose to borrow and, in addition, characterized tens of millions of expenses as capital investments. The result was to constantly reduce the city's ability to make capital improvements while, simultaneously, increasing the debt by $1 billion annually. While the mayor had just agreed to a major pay increase for the municipal work force, no one really knew the level of the city's deficit.
By the beginning of May we had little over a month to avoid a default -- the next debt maturity of $1 billion would occur on June 18. At that point, Gov. Carey, brilliant and courageous, stepped into the picture. Since the state did not have the wherewithal to bail out the city, he and Mayor Beame turned to Washington and to President Ford for an emergency loan. Ford was a man of decency and common sense. He was also in the middle of the presidential campaign of 1976, which pushed him further to the right. His most important advisers and cabinet members were ideological conservatives, led by Treasury Secretary Bill Simon. New York was viewed as the liberal capital of the U.S. and any thought of "bailing out" the city unleashed strong opposition in Congress. Secretary Simon rejected our request and suggested we return with a plan. His idea of a plan included large increases in sales taxes and transit fares, tuition at City University and significant cutback in labor costs and benefits, conditions no Democratic governor could accept....
[This article goes on at length.]
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But a crisis had been building up here for some time. The city's financial condition was deeply concerning, running a significant deficit as a result of an exodus of private sector jobs and an influx of new municipal employees. Politically New York was always a Democratic city, a union city, with a strong Republican business community and little contact between the two. Morale was bad, the city was dirty, crime was up and the economy was weak.
In April, New York and its lead underwriter, the Bankers Trust Company, was preparing its spring financing when I took a call from a broker offering to sell short-term city notes. "It is a bargain," he said, "9.5% interest, triple tax free, backed by the city's credit. How can you say no?" The terms reflected desperation more than a bargain. Sure enough, soon thereafter, Bankers Trust refused to proceed with the offering to underwrite the city's financing on the grounds that there was "insufficient assurance of repayment." Almost without anyone noticing, the markets had closed on New York.
Year after year, and with the support of the state, the city spent more than it took in. It had the choice of raising taxes, cutting spending or borrowing. Naturally the politicians chose to borrow and, in addition, characterized tens of millions of expenses as capital investments. The result was to constantly reduce the city's ability to make capital improvements while, simultaneously, increasing the debt by $1 billion annually. While the mayor had just agreed to a major pay increase for the municipal work force, no one really knew the level of the city's deficit.
By the beginning of May we had little over a month to avoid a default -- the next debt maturity of $1 billion would occur on June 18. At that point, Gov. Carey, brilliant and courageous, stepped into the picture. Since the state did not have the wherewithal to bail out the city, he and Mayor Beame turned to Washington and to President Ford for an emergency loan. Ford was a man of decency and common sense. He was also in the middle of the presidential campaign of 1976, which pushed him further to the right. His most important advisers and cabinet members were ideological conservatives, led by Treasury Secretary Bill Simon. New York was viewed as the liberal capital of the U.S. and any thought of "bailing out" the city unleashed strong opposition in Congress. Secretary Simon rejected our request and suggested we return with a plan. His idea of a plan included large increases in sales taxes and transit fares, tuition at City University and significant cutback in labor costs and benefits, conditions no Democratic governor could accept....
[This article goes on at length.]