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The Domino Scenario: The Day New York City Defaulted

Another option was more state and federal aid, which supplied the city with 44 per cent of its revenues. But as the Great Society drive to reorder society through government action waned, once-burgeoning outside aid to the city had leveled off. Further, city budget gaps had never elicited much sympathy from upstate politicians in Albany. And even Democrats in Congress found in their home districts growing bias against the capital of the Eastern intellectual establishment. After years of subjugation to New Yorkers' haughty superiority and snobbery, many outsiders found the decline of New York deeply satisfying.

A third option was expense-cutting, but all available means of doing so posed difficulties. While the dispensing of city services was notoriously inefficient and wasteful, the system was so labor-intensive that it was relatively unresponsive to efforts to raise productivity. As the State Charter Revision Commission, which had studied the city's financial problems extensively, recently put it, "Had the City the best conceivable management, budgeting, and personnel systems, it would still face a fiscal crisis. The City's revenue base is simply inadequate to support all of its existing programs."

Yet wholesale abandonment of city services was so hazardous politically that over the past decade not a single major city program had been significantly cut back. Many, on the other hand, had been added or expanded. Reducing swiftly escalating employee costs was no easier. Wages and fringe benefits in fiscal 1975 totaled $6.5 billion, 55 percent of the expense budget. The city's very resourceful and vigorous municipal unions had been able to win such remunerative contracts through threats, job actions, and other displays of political power that city workers were paid an average of 25 per cent better than comparable workers in the private sector. Considering fringe benefits, the average first-grade policeman (five years or more on the force) made nearly $23,000 a year and could retire at half pay after just twenty years. Because of generous retirement benefits, pensions cost the city $1 billion a year. But no mayor in recent years had been willing to engage the unions in a major confrontation over wages.

". . . How could it have happened? Those involved were the country's best and brightest leaders. Why couldn't they prevent it? . . ."

Drawbacks of the first three gap-closing options caused growing reliance on two others. Accounting trickery evolved into a refined art at City Hall. The techniques were abstruse and varied. But basically most involved time warps—specifically, pretending that expenses the city was incurring now actually wouldn't be incurred until later and that revenues the city expected to receive later had already been received. Outgo, in short, was pushed forward in time, while income was pulled back. An illustrative example is water revenues. Prior to the 1973-74 fiscal year (July 1, 1973, to July 30, 1974), the city figured the amount of water revenues it received on a calendar-year basis. But during 1973-74, it switched the beginning of the water-billing year from January 1 to June 30. This permitted the city to consider as revenues during 1973-74 eighteen months of water revenues: the six-month period between January 1, 1973, and June 30, 1974, and the twelve-month period from June 30, 1974, to June 30, 1975. Result: $56 million more in revenues to help close the 1973-74 budget gap. Like other accounting gimmicks, this, of course, produced no new actual cash for the city, only the appearance of same.

The last, most popular, and ultimately fatal option was borrowing, principally through the sale of short-term notes. If the city, legitimately or through an accounting trick, could claim that taxes would arrive at some point later in the fiscal year, or even, in some cases, the next fiscal year, it would sell some "tax anticipation notes." If some revenues were due later from the state or federal governments, it would sell some "revenue anticipation notes." Over the years, the period and extent of anticipation had grown and the city had mortgaged itself further and further into the future.

The city had also been selling notes in anticipation of income it knew might never arrive at all. New York in 1975 was borrowing against $600 million in uncollected and largely uncollectible real-estate taxes. And about $460-million worth of short-term borrowing represented previous budget gaps which, despite state law, never were closed.

The consequence of all this had been a rapid expansion in short-term debt from $747 million in 1969 to $6 billion in the spring of 1975. Continuation of the current imbalance between revenues and expenses would have raised this figure by perhaps $500 million a year. Interest on the city's more than $13 billion in outstanding debt was running close to $2 billion, more than was spent for police and fire protection, libraries, parks, recreation, and cultural activities.


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  • Archive: “Features
  • From the Jun 2, 1975 issue of New York
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