For N.Y. Fiscal Savior, It's Time for an Encore


The week before his inauguration as mayor, Michael R. Bloomberg lunched with Felix G. Rohatyn, principal architect of the strategy that saved New York City from bankruptcy in the mid-1970s.

The discussion at the Paper Moon, a midtown Manhattan restaurant, focused on a major problem facing New York's 108th mayor: how to bridge budget gaps of almost $4 billion in the years ahead, the biggest projected deficits in more than two decades.

It was deja vu--but with a difference.

No banker or political official believes the nation's largest city will teeter as it did in 1975 on the brink of insolvency--but there will be pain, magnified by large budget gaps faced by New York state.

"He saw the situation. He was very realistic," Rohatyn said of their discussion, an opinion validated by Bloomberg's inaugural address.

Speaking in stark terms from a podium outside City Hall, the mayor said: "The facts are clear. We will not be able to afford all that we want. We will not even be able to afford everything we currently have."

In essence, the same message was delivered by former Gov. Hugh L. Carey during the fiscal crisis decades earlier: The days of wine and roses are over.

It was Carey who picked Rohatyn to lead the effort to rescue the city in 1975. As a leading partner at the investment bank of Lazard Freres & Co., Rohatyn had earned the respect of the financial institutions that would have to play a key role in any recovery plan. He was known as a highly creative deal maker who could cut to the core of problems and possessed a keen sense of the politics of the possible.

As a bridge between eras, Rohatyn provides perspective to New York's current difficulties. His opinion has been sought not only by Bloomberg but also by Gov. George Pataki, who is seeking to deal with the state's projected budget gaps.

Rohatyn, who will address the winter meeting of the U.S. Conference of Mayors on Friday, also occupies an unusual vantage point as a member of a coalition that is seeking federal help for states and municipalities with serious budget problems. The panel's members include the top financial officials of New York and California, plus representatives of major public employee pension funds.

New York is not alone in its budget bind.

"Cities across the country definitely are feeling the financial pinch, both because the recession has depressed revenues and [because], in the wake of Sept. 11, cities are experiencing significantly increased costs for public security and sometimes for public health too," said Andy Solomon, a spokesman for the mayors conference. "Cities that already had tight budgets are in some cases being pushed over the edge by the additional cost."

Thirty-six states are facing budget gaps, according to the National Governors Assn.

New York City's problems were spelled out last month by the New York State Financial Control Board, created to ensure prudent practices when the threat of bankruptcy loomed.

Even before terrorists destroyed the World Trade Center, revenues showed the effects of the economic downturn, the board said. Business profits were declining along with the stock market, and an aggressive multiyear program to reduce taxes had further curtailed revenue growth.

Sept. 11 only worsened the picture.

"The deterioration of the economic outlook has had a profound impact on the city's tax revenue projections," the board concluded. " . . . This sudden compression of the tax base has no historical precedent and is a major factor contributing to the budget gaps in future years."

The board said sufficient revenues were available for the city to end the current fiscal year with a balanced budget. But it warned gaps approaching $4 billion--or 10% of future budgets--could occur for the next three years.

New York state also faces a 10% shortfall.

Rohatyn, 73, who recently returned to Manhattan after serving as ambassador to France during the Clinton administration, spoke about New York City in the library of his Fifth Avenue apartment.

"I find the city putting a brave face on still a very painful wound," he said of the World Trade Center attack.

Focusing on the city's budget problems, he said: "I think one of the biggest differences between now and '75 is that in '75, the state was in a very strong fiscal and financial position . . . to help the city. . . . I think the state could be of significant detriment this time because the state's fiscal condition is roughly as bad as the city's. . . .

"Half the economy of the state is the city. So it is hard to see how the state can deal with its budget gap without inflicting some pain on the city."

When New York City faced the pain of near bankruptcy in the 1970s, Rohatyn helped piece together a complicated financing package to pull it back from the brink. It included the creation of a new entity, the Municipal Assistance Corp., that refinanced the city's debt by purchasing bonds guaranteed by streams of city revenue that were set aside.

Part of the answer to today's widespread city and state budget problems, Rohatyn believes, lies in bringing together a broad coalition of interests to deal with national issues of deficits, unemployment and lack of investment.

"In an ideal world, you would come up with a multiyear, combined city and state plan," he said of New York. "I am not sure that is practical. I am not sure how you do it. But that is really conceptually what you look at. Can both of these entities close their budget gaps without inflicting pain on the other?"

Before Christmas, Rohatyn met in Manhattan with state financial officials and pension fund managers representing about $700 billion in assets.

The group included H. Carl McCall, New York state comptroller, California Treasurer Phil Angelides and Alan Hevesi, who was New York City's comptroller at the time. Also present were representatives of public employee pension funds from Florida, New York and Oregon.

They discussed lobbying for federal guarantees for state and municipal infrastructure bonds, which the pension funds would then purchase. The money would be used for badly needed projects, such as repairing school buildings, improving mass transit and upgrading security at nuclear power plants.

"We are talking about public construction," Rohatyn said. "The physical state of our schools is worse than the physical state of our sewer systems. We're teaching kids in public schools that have leaky roofs and rats running around."

Members of the coalition plan to travel to Washington to share its financing ideas with members of Congress.

Time has diminished memories of just how close New York came to bankruptcy.

The attitude of the White House, which eventually changed, contributed to the tension in the 1970s. President Ford's administration was openly hostile, prompting a headline in the New York Daily News: "Ford to New York: Drop Dead."

At one point during the crisis, the United Federation of Teachers threatened to walk away from its commitment to buy hundreds of millions of dollars of city bonds. The situation became so tense that Rohatyn arranged for a bank to remain open until midnight in case the teachers changed their mind.

At the last minute--well past the hour banks normally close--the union relented.

"They took us right to the edge and practically over the edge," Rohatyn recalled.

At times, Mayor Abraham D. Beame's administration seemed unable to comprehend the dimensions of the crisis.

"I think there is much more confidence today that the city is in control of its facts, that we know the numbers, which we didn't in 1975," Rohatyn said. "And that there is willingness on the part of city administrations to manage the city for fiscal prudence and economic growth. Nonetheless, the problems are serious."

FOR THE RECORD Los Angeles Times Friday January 25, 2002 Home Edition Main News Part A Page 2 A2 Desk 1 inches; 31 words Type of Material: Correction New York story--An article in Thursday's Section A gave an incorrect headline from the New York Daily News in the mid-1970s. Instead of "Ford to New York: Drop Dead," the headline actually was: "Ford to City: Drop Dead."
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