BLINDSIDED / ORANGE COUNTY’S FINANCIAL CRISIS : Lessons From the Past: The New York Crisis
In 1975, the nation’s largest city teetered on the brink of bankruptcy. The causes of the worst fiscal crisis in New York since the Great Depression were cumulative, and the rescue almost two decades ago brought together an extraordinary coalition of government officials, banks, union leaders and the Wall Street investment community. Much of the machinery, born in the crucible of crisis, remains to ensure a cliffhanger like it never happens again.
An important thing to remember is that New York never got as far as filing for bankruptcy, but it came close. What were the lessons learned? For anyone who might have been watching, the New York debacle provides a cautionary tale for Orange County’s high-rolling public financiers.
HOW IT HAPPENED
Known as Fun City, New York had an economy thoughout most of the 1960s that outpaced the booming U.S. economy. Amid the wealth, spending was immense and financial controls were lax. That set the stage for what happened next:
* In 1969, a prolonged recession sets in. But as revenues shrink, spending for social services continues to grow.
* The city increases taxes, but it is a temporary solution. Municipal officials begin to rely on short- and long-term financing gimmicks.
* The city begins to use long-term bond sales, in effect borrowing money to fund operating expenditures. Officials also start selling short-term revenue anticipation notes. When there isn’t enough money to pay back the notes, the city rolls them over at ever-higher interest rates.
* By 1975, New York needs to borrow $6 billion in short-term debt at ever-increasing rates. At the same time, Wall Street sours on the city. One sad day, there are simply no bids from the investment banking community to further roll over New York’s debt.
* Bond rating agencies sharply downgrade the city’s paper, effectively slamming the door on city financing.
* Frenzy overtakes city government. State and city officials scramble to pay workers. Record keeping is so sloppy that no one knows how many employees are on they city payroll. One city official finds shoeboxes containing billions of dollars’ worth of negotiable securities in a closet.
* The crisis deepens. Then-President Gerald Ford turns down a request for $1.5 billion in short-term federal loans.
CLIMBING OUT OF THE HOLE
The once wealthy enclave starts living hand to mouth. Here are the steps involved in New York’s gradual recovery:
* The state of New York assumes the cost of key functions like the court system and some welfare payments.
* The municipal work force is reduced.
* Just about all capital spending by the city ceases. Badly needed repairs on such vital structures as roads and bridges and the subways are suspended--to be resumed many years later as deterioration mounts.
* Short-term debt is rolled over into long-term debt by a newly created Municipal Assistance Corp., with payments based on the city’s sales tax. The city borrows $1.6 billion from union pension funds, and the Administration of Democratic President Jimmy Carter--elected in 1976--provides loan guarantees.
AFTER THE CRISIS
Fallout from the debacle contines to this day. The most enduring legacy remains a series of oversight organizations that still scrutinize city finances. Among the safeguards:
* New York City must update its budget four times a year and issue four-year financial plans.
* A Financial Control Board, with representatives from the governor, the state controller and the city controller plus public members, oversees debt. It sounds the alarm when revenue projections are off course.
* A special New York State deputy controller also guards the city’s finances.
“You can’t finance yourself out of structural problems. You have to change the way the system works.”
-Raymond D. Horton, president of the Citizens Budget Commission Inc. a private watchdog group and a veteran of the budget crisis.
