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The original documents are located in Box 5, folder "New York City, November 8, 1975" of
the White House Special Files Unit Files at the Gerald R. Ford Presidential Library.
Copyright Notice
The copyright law of the United States (Title 17, United States Code) governs the making of
photocopies or other reproductions of copyrighted material. Gerald Ford donated to the United
States of America his copyrights in all of his unpublished writings in National Archives collections.
Works prepared by U.S. Government employees as part of their official duties are in the public
domain. The copyrights to materials written by other individuals or organizations are presumed to
remain with them. If you think any of the information displayed in the PDF is subject to a valid
copyright claim, please contact the Gerald R. Ford Presidential Library.
Digitized from Box 5 of the White House Special Files Unit Files at the Gerald R. Ford Presidential Library
THE PRESIDENT HAS
SEEN
THE WHITE HOUSE
WASHINGTON
November 8, 1975
MEMORANDUM FOR THE PRESIDENT
FROM:
L. WILLIAM SEIDMAN
gws
SUBJECT:
New York City
This memorandum contains a set of materials designed to provide you with
an analysis of legislation pending in Congress to provide financial assist-
ance to New York City, the legislative status of your proposed amendment
to the Federal Bankruptcy Act, a review of New York State's financial
condition, possible ways of providing financial assistance under existing
legislation for the New York Housing Finance Agency, the current condi-
tion of the municipal bond market, the impact of a New York City default
on the national economy, and draft legislation to authorize Federal guar-
antee of debt certificates issued to fund essential services in event of a
New York City default.
The specific papers, prepared in coordination with the Departments of
Treasury and Justice and the Council of Economic Advisers, are as
follows:
1. Pending Legislation to Provide Financial Assistance to New York
City (Tab A)
2. Legislative Status of the Administration's Proposed Amendment to
the Federal Bankruptcy Act (Tab B)
3. New York State's Financial Condition (Tab C)
4. Assistance to the New York State Housing Finance Agency (Tab D)
5. Impact of a New York City Default on the National Economy (Tab E)
6. Condition of the Municipal Bond Market (Tab F)
7. Draft Legislation on Provision of Essential Services (Tab G)
8. Questions and Answers on New York (Tab H)
A
Pending Legislation to Provide
Financial Assistance to New York City
Bills to provide financial assistance to New York City
have been favorably reported by both the Senate (S.2615)
and House (H.R. 10481) Banking Committees. The House Bill
has been referred to Ways and Means. Floor action in the
House was initially scheduled for November 11. Reports
suggest that in light of the AFL-CIO opposition, House
floor action will be delayed. Senate Banking Committee
sources indicate that no attempt will be made to bring the
bill to the Senate Floor until there is some indication
of what the House will do.
Summary of Bills
Both bills authorize the Federal Government to
guarantee local obligations to prevent default and also
confer authority to provide assistance after a default.
Authority under both bills is delegated to a Board
chaired by the Secretary of the Treasury
The fundamental difference between the two bills is in
the amount of flexibility given to the Board. The Senate bill is
highly restrictive: the Board cannot authorize a guarantee unless
stringent pre-conditions are met. The House bill gives the Board
substantially more flexibility, in recognition of the possibility
that the City may not be able to meet very stringent guidelines
between enactment and the time a guarantee would be necessary
to avert default.
Issue Analysis
1. Pre-Default Assistance
Senate
-- authorizes $4 billion in Federal guarantees
of new 1-year State securities to prevent
default;
-- guarantee authority is phased out over
4-year period
House
-- authorizes full or partial emergency
guarantees of obligations of a State or
State instrumentality to prevent default;
- 2 -
-- authorized amounts: $5 billion maximum
outstanding until 1989; $3 billion
thereafter
Comment
The advantages of the Senate bill are (1) more
control over the City is provided; since the
guarantee is limited to one year there is the
opportunity to terminate the program if the
City is not complying with the guidelines; and
(2) the program is shorter. The Senate program
expires in 4 years; under House version, program
could continue for 24 years.
The advantage of the House bill is that
by authorizing a longer guarantee period, it
eliminates the necessity for reapplications for
assistance.
Suggested Improvements
Because of our position in opposition to any
assistance to prevent default, no changes would make
these provisions palatable.
2. Preconditions to Assistance
Senate
-- voluntary restructuring of the City's debt:
-- at least 65% of present MAC obligations
must be exchanged for non-guaranteed bonds
with longer maturities (at least 5 years)
and lower interest rates
-- at least 40% of the City's obligations
maturing before June 30 must be exchanged
for similar long-term, low interest bonds
- 3 -
-- State must cover 1/2 of City's operating
deficit out of general tax revenues,
over and above any assistance previously
given
-- Board must determine that neither City nor
State can practically obtain credit from
other source and that default is imminent
-- Board may impose any other conditions
deemed necessary
- - City must balance budget by 1977, including
reductions in cost of employee pension plans
and maximum feasible participation by such
funds in the restructuring of the City's
debt
- - State must assume control of City's fiscal
affairs while Federal guarantee is outstanding
- - guarantee must be satisfactorily secured,
inter alia, by future revenue sharing payments
to City and State.
- - City must open books to Federal audit and use
accounting procedures prescribed by the Board
- - State must pay guarantee fee of up to 31/2%
of total obligations guaranteed if tax
exempt, and up to 1% if made taxable by
subsequent Act of Congress
House
- - credit markets must be closed as a practical
matter to both City and State
- - City must submit and follow plan for fiscal
solvency from recurring revenues
-- State must have authority to control City's
fiscal affairs during life of Federal
guarantee. (New York's Emergency Financial
Control Board is stipulated as satisfying
this requirement.)
- 4 -
-- State must supply additional aid up to 1/3
of City's deficit, as determined by Board
-- allows for guarantee fee up to 3/4 of 1%
per year in discretion of Board
-- Board may require City to renegotiate
outstanding obligations (e.g. by exchanges
for longer maturity, lower interest paper)
including outstanding contracts for
services
-- authorizes GAO audits of municipality and/or
relevant State instrumentality
Comment
The flexibility issue is most squarely presented with
respect to these provisions. While the exchange of debt,
higher state tax and pension benefit renegotiation features
of the Senate bill can be seen as forcing the City to take
stringent measures, they may be so stringent as to make the
guarantee authority unworkable. The House bill authorizes
the Board to attach whatever condition it deems appropriate,
but does not require the Board to deny assistance if extreme
conditions are not met.
Suggested Improvements
None.
3. Post-Default Assistance
Senate
-- guarantees up to $500 million of 3-month
City notes to meet City's short-term
credit needs for continuing essential
services
-- obligations secured by a first lien on City's
future revenues
- 5 -
House
-- no separate authority. In a default
situation, Board may issue guarantees and
may, for a six month period, waive above
preconditions in providing guarantees
Comment
House bill not specifically limited to essential
services.
Suggested Improvements
If it is determined that we will carry out
essential services pledge via guarantees, should
limit guarantees to court-authorized debt certificates.
Should also consider raising authorization to $1
billion or $1.5 billion.
4. Tax Status of Guaranteed Obligations
Senate
- - to avoid necessity for Finance Committee
action, does not require that guaranteed
paper be taxable
-- language presupposes that later legislation
will require taxable feature.
-- - - provides that Federal Financing Bank must
purchase any tax-exempt guaranteed paper
House
-- makes all guaranteed securities taxable
Comment
The Senate bill is needlessly cumbersome. Any
guaranteed paper should be taxable.
Suggested Improvements
None
- 6 -
5. Governing Board
Senate
-- 3-member Board consisting of Secretary of
Treasury (Chairman), Chairman of Federal
Reserve Board, and Secretary of Labor
House
-- 5-member Board consisting of Secretary of
Treasury (Chairman), Secretary of HUD,
Chairman of Federal Reserve Board, and
Chairman of SEC
Comment
None.
Suggested Improvements
If only post-default assistance will be provided,
a full Board may be needlessly cumbersome.
B
LEGISLATIVE STATUS OF THE ADMINISTRATION'S PROPOSED
AMENDMENT OF THE FEDERAL BANKRUPTCY ACT
Statements comparing the Senate and House bills with the Administra-
tion's proposed amendment of the Federal Bankruptcy Act are attached.
H.R. 10624 has been approved by the Edwards Subcommittee and will
receive the attention of the full House Judiciary Committee Monday,
November 10, at 10:30 a.m. Minority Counsel for the Subcommittee
expects the full Committee to ratify the action of the Subcommittee.
S. 2597, as amended, has been approved by the Subcommittee on
Improvements in Judicial Machinery. In the Thursday meeting of the
full Judiciary Committee, Senators Kennedy and Mathias argued that
the legislation was not urgent. Senator Mathias exercised his personal
privilege, thus putting over a vote on the bill until Thursday,
November 13. Minority Counsel advises that there are sufficient votes
to bring the bill out of Committee.
To summarize, the Senate bill gives us almost all of what we want; the
House bill very little.
COMPARISON OF H.R. 10624 WITH THE ADMINISTRATION'S
BILL FOR BIG CITY BANKRUPTCIES
The House Bill, following the personal plea of Chairman
Rodino before the Subcommittee, opts for a revision of the
debt adjustment provisions of Chapter IX of the Bankruptcy
Act rather than a new Chapter XVI to deal with major munici-
palities. The style of the bill, its arrangement and many
of its particulars are different from the Administration's
bill though much of the substance is similar.
Sec. 81 includes definitions of nine terms used in the
bill, only three of which are the same terms defined in the
Administration's bill--and even these three definitions are
different. The changes are not substantial, and we have no
objection.
Sec. 82 (a) on jurisdicition is the same as the last
sentence of Sec. 801 (a) of the Administration's bill.
Sec. 82 (b) (1) of H.R. 10624 permits the petitioner to reject
executory contracts and unexpired leases. The Administra-
tion's bill expressly permitted this only in conjunction
with the consummation of the plan. We think, however, it
would be permitted even without express provision, and SO
have no objection to the new language. Sec. 82 (c), limiting
interference by the court with the political and governmental
powers of the city, omits the proviso contained in Sec. 805 (e)
of the Administration's bill specifically authorizing the
court to enforce the conditions attached to certificates of
-1-
indebtedness and the provisions of the plan. We object to
this change.
Sec. 84 would permit any political subdivision, public
agency or instrumentality of a State, without regard to size,
to file a petition for relief; the Administration's bill is
limited to cities in excess of 1,000,000 population and
certain subentities thereof. We object to the change
strenuously, since its adoption will substantially lessen
the possibility of including some of the substantive provi-
sions we think necessary for New York. Sec. 84 would permit
filing so long as the petitioner is "not prohibited by State
law from filing a petition". The Administration's bill
would require the specific approval by the State before a
petition could be filed by a major municipality but sub-
entities could file if not prohibited. We object to the
change.
Sec. 85 would require any party in interest desiring to
challenge the filing of a petition to do so within fifteen
days. The Administration's bill would permit such challenges
up to ten days before the hearing on confirmation of the
plan, unless the judge imposed further restrictions. We
object to the change, since it eliminates the possibility
of dismissal for failure to submit a good faith, reasonably
feasible plan. Sec. 85 (a) permits a governing authority or
board for certain special taxing or assessment districts to
-2-
file on behalf of such districts. No objection. Sec. 85 (c)
gives the city a wider choice of venue than does the
Administration's bill. We think the opportunity to forum
shop is undesirable. Sec. 85 (d) uses different phraseology
for the notice required as to the filing or dismissal of a
petition and is specific as to use of publication. No
objection. Sec. 84 (f), unlike the Administration's bill,
makes certain "bankruptcy" clauses in contracts and leases
unenforceable if the petitioner cures prior defaults and
provides adequate assurance of future performance. This is
acceptable if a reasonable time limitation for curing
defaults is added.
Sec. 88 (b) uses somewhat different language than that
used in the Administration's bill as to the classification
of creditors. Sec. 88 (c), unlike the Administration's bill,
seeks to spell out the limits on damages for breach of an
unexpired lease. No objection to these changes.
Sec. 90 (a) permits the petitioner to file the plan with
its petition or at such later time as the court may specify.
The Administration's bill requires the filing of the plan
with the petition together with a statement of present and
projected revenues and expenditures sufficient to show that
the budget of the petitioner will be in balance within a
-3-
reasonable time after adoption of the plan. H.R. 10624 does
not call for a balanced budget as a requirement for confirma-
tion of the plan, though the requirement that the plan be
"feasible" may supply this requirement. We oppose these
changes.
Sec. 92, governing the acceptance of a plan, uses lan-
guage and arrangement that is different from that in the
Administration's bill. However, voting is much the same
except that the court could temporarily allow disputed
claims for the purpose of voting. Both bills permit "cram
down" as to nonassenting classes of creditors. H.R. 10624
follows the language of current Chapter IX and this would
make it somewhat more difficult for the city to dispose
of nonassenting classes of creditors by "cram down". No
objection to these changes.
Sec. 93 allows the SEC to file a complaint objecting
to a plan but SEC could not appeal. The Administration's
bill provides for notice to the SEC but would not make it
a formal party to the proceedings. Presumably it could
file papers in the proceeding as amicus curiae with the
same result as to appeal. We have no objection to the
changes.
Sec. 94 (b), setting forth the conditions for confirma-
tion of a plan, omits the Administration's requirement that
-4-
petitioner's current and projected revenues and expendi-
tures forecast a balanced budget within a reasonable time
after adoption of the plan. The language of the Administra-
tion's provision also calls for the dismissal of the
proceeding if these conditions are not met. As indicated
earlier, we object to this change.
Sec. 95, dealing with the effect of confirmation, is
the same as in the Administration's bill except for specific
language that the plan and the discharge will not be binding
on certain creditors who did not have timely notice or
actual knowledge of the petition or plan. We have no strong
objection to this change, though it may produce considerable
litigation. Sec. 95(b) spells out conditions for discharge
of debts which are implicit in the Administration's bill
but not spelled out.
Sec. 96 (a), dealing with the deposit of cash or
securities, is not spelled out in the Administration's bill
though its substance is covered by the requirement that
the petitioner comply with the plan. Sec. 96 (f), making a
certified copy of any order or decree evidence of the
jurisdiction of the court and effective to impart notice
when recorded, is not found in the Administration's bill
and seems unnecessary. No objection to these changes.
Sec 97, covering the effect of the exchange of debt
-5-
securities before the date of the petition, is not found in
the Administration's bill and seems of little utility. We
have, however, no objection.
The Subcommittee draft did not have a dismissal pro-
vision initially. Sec. 98 now contains five discretionary
bases for dismissal, though couched in language which is
different from that in Sec. 806 (b) of the Administration's
bill. Dismissal for default in any of the terms of the
approved plan is an issue we are studying further. Otherwise
we have no objection.
-6-
COMPARISON OF S. 2597 WITH THE ADMINISTRATION'S BILL
FOR BIG CITY BANKRUPTCIES
As amended to date the Senate Bill follows the Administra-
tion's bill in most particulars, including arrangement and
identical language in a number of sections. The following
changes have been made in the Administration's draft:
Sec. 801 includes authority for the court to permit
the rejection of executory contracts even before the
approval of a plan of composition or extension, whereas
the Administration's bill authorized rejection of executory
contracts and unexpired leases in the city's plan (Sec. 813).
We do not object. Sec. 801 (c) of S. 2597 would require the
chief judge of the district court to notify the chief judge
of the circuit court of the filing of the city's petition.
The later would then designate the judge who would conduct
the proceedings. The Administration's bill did not have
this provision. We support the change.
Sec. 802 defines "claim" and "creditor" a bit differ-
ently than the Administration's bill and adds definitions
of "plan" and "person". We do not object.
Sec. 803 (a) still limits eligibility to municipalities
of 1,000,000 or more population and requires specific
State authorization for the city to file. An amendment
adopted on Senator Scott's motion modifies the latter pro-
vision to permit the chief executive, the legislature or
such other governmental officer or organization as is
empowered under State law to authorize the filing. This
would presumably allow the Control Board now overseeing the
city's finances to provide the necessary State consent--
which is probably not enough for our purposes.
Sec. 804 drops the Administration's jurisdictional
requirement that the city submit a good faith plan with
its petition together with a statement of current and pro-
jected revenues and expenditures adequate to establish that
the budget will be in balance within a reasonable time after
adoption of the plan. However, that requirement is still
retained as condition for confirmation of the plan. Sec.
817 (c). We prefer the original Administration proposal,
but realistically think it has little chance of survival.
Sec. 804 (b) gives the city a choice of the district in
which the petition can be filed. The Administration's bill
would deny this choice; the change is acceptable, however,
if Sec. 801 (c), discussed above is adopted.
Sec. 805, dealing with stays, goes beyond the Adminis-
tration's bill in denying recognition or enforcement of
setoffs occurring within three months before the filing
of the petition. We think this goes too far.
Sec. 806 would require any creditor wishing to challenge
the petition to do so within thirty days of its filing and
-2-
an interlocutory appeal could not be taken from the court's
finding of jurisdiction. This is intended to increase the
marketability of debt certificates. We oppose the inter-
locutory appeal provision.
Sec. 807, dealing with notices, is much the same as
the Administration's provision except for an express require-
ment for publication of the notice. Throughout the bill
provision is made for notices to be given by the petitioning
city or such other person as the court designates rather
than by the court clerk as in the Administration's bill.
We do not object to these changes.
In Sec. 812, the second priority accorded claims for
services or materials furnished shortly before the filing
of the petition is limited to claims arising within two
months of the filing rather than to claims arising within
four months of filing as in the Administration's bill. No
objection.
Sec. 813 permits the petitioner to file a plan either
with the petition or at such later time as is set by the
court. Sec. 804 (b) of the Administration's bill required
that the plan be filed with the petition. We prefer the
Administration's proposal, but realistically think it has
little chance of acceptance.
Sec. 814 changes voting requirements to further protect
small creditors. Thus the petitioner must obtain approvals
-3-
from two-thirds in amount and 51 per cent in number of each
class of creditors, unless other provision is made for their
claims. The Administration's bill required approvals only
from two-thirds in amount. Both bills permit the majorities
to be counted on the basis of those eligible to vote who
actually vote. We think the change is undesirable.
Sec. 814 (c) of S. 2597 covering the division of
creditors into classes, is somewhat more flexible than the
Administration's provision. No objection.
Sec. 816 includes Senator Abourezk's amendment which
would let the court allow a labor organization's or employee's
association representative to be heard on the economic sound-
ness of the plan. No provision is made for voting or appeals
by such representatives. No objection.
Sec. 817 omits the requirement found in the Administra-
tion's bill at Sec. 816 (a) that the court make written find-
ings in connection with the confirmation of the plan. We
think this change is undesirable. The balanced budget con-
cept is retained as a condition for approval of the plan.
Sec. 820 uses somewhat different language from that
contained in Sec. 806 (b) of the Administration's bill in
stating the grounds for dismissal of the proceeding and
adds as a mandatory ground for dismissal the fact that an
adopted plan has not been consummated. Dismissal is impor-
tant as this is one of the few levers the court has to force
-4-
the city to move forward and come up with a balanced budget.
We think, however, that this provision requires further
analysis, which we are now conducting.
Sec. 823, on conversion of a pending Chapter IX pro-
ceeding to one under this new chapter, is new, as is Sec. 824
on effective date. No objection.
-5-
C
NEW YORK STATE'S FINANCIAL CONDITION
Fundamentally, New York State is in reasonably sound financial
condition on the basis of underlying factors. It does have difficulties,
attributable to (1) its own deficit for the fiscal year ending March 31,
1976, now officially estimated to be $611 million; (2) substantial
short term borrowing to aid New York City; and (3) the unsound
financial condition of some of the agencies of the State, particularly
the Housing Finance Agency.
The State must act to remedy these difficulties by establishing new
revenue sources to cut the deficit and by taking the steps proposed by
the Financial Community to strengthen the Housing Finance Agency.
However, these difficulties will not result in an immediate crisis for
the State, even if a default by New York City were to trigger an adverse
psychological reaction. While the State does have note maturities in
December and January, its cash flow, according to State estimates, is
adequate until late March, when it must borrow to refund notes issued
to raise the funds loaned to the City and to fund its own deficit.
In the April-June period (the first three months of the following fiscal
year), the State typically borrows $4-5 billion (State estimate) against
revenues to be received later in the year. The proceeds of this
borrowing are used primarily to provide assistance payments to local
governments and school districts. The State's ability to borrow such
funds will depend in part on what steps it takes with respect to the
problems outlined above.
D
ASSISTANCE TO THE NEW YORK STATE
HOUSING FINANCE AGENCY
There are four mechanisms which could be employed to provide
assistance to the New York State Housing Finance Agency (HFA):
1.
Facilitate HFA borrowing by Federal guarantees and sub-
sidies for taxable HFA bonds under Section 802 of the 1974
Housing Act.
2. Reduce HFA borrowing needs and provide cash by GNMA
purchase of unfunded mortgages owned by HFA.
3. Strengthen backing of HFA's bonds by FHA insurance and
subsidies on mortgages owned by HFA.
4. Federal Reserve loan to HFA.
I.
Section 802 Guarantee
Section 802 of the 1974 Housing Act authorizes HUD to guarantee
an aggregate amount of $500 million of taxable state housing
agency debt and to provide a 33-1/3 percent interest subsidy on
the bonds. None of this guarantee authority has been used. Such
a guarantee would make HFA debt fully marketable at low rates.
This approach has the dual advantage of being the easiest to
implement and providing the most substantial benefit.
II. GNMA Purchase
We estimate that HFA owns approximately $200 million in market-
able mortgages; that is, mortgages on viable projects which have
not been fully or partially funded by HFA bonds. We believe
GNMA has the legal authority to purchase these mortgages.
A sale of mortgages to GNMA would lessen HFA's funding (and
thus borrowing) requirements and would also provide cash which
HFA could use to meet other commitments.
III. FHA Insurance and Subsidies
FHA could provide mortgage insurance and interest reduction
subsidies under its Section 223(f) and Section 8 programs. This
would require unraveling the original mortgage arrangements
2
between HFA and the private project owners and the issuance of
a new mortgage at current rates. The interest reduction subsidy
notwithstanding, HUD believes that few project owners would
agree to give up their 5, 6 and 7 percent mortgages for a new
market rate loan. We understand that HFA and HUD staff have
discussed this approach, but have not reached conclusions as to
its viability.
IV. Federal Reserve Loan
Under its emergency lending authority, the Federal Reserve could
lend HFA whatever amounts are required. Governor Carey has
requested a $576 million, 90 day loan. Paul Volcker, President
of the Federal Reserve Bank of New York, has not closed the door
but has indicated that the request was "incomplete" in terms of
the information provided.
E
IMPACT OF A NEW YORK CITY DEFAULT
ON THE NATIONAL ECONOMY
Several studies have claimed that a New York City default would have
a severe negative impact on the national economy. An analysis of
these studies by the Council of Economic Advisers concludes that the
studies are deficient in several respects.
The studies generally assume that default will lead state and local
governments to rapidly balance their operating budgets by raising
taxes and lowering expenditures. But state and local governments have
already made substantial adjustments to their budgets and little or no
further adjustment is likely. With no further steps we believe that the
combined operating and capital account deficit of state and local govern-
ments will be eliminated by the fourth quarter of 1976. A moderation
in the growth of state and local expenditures has, therefore, been long
anticipated and has been taken into account in our recommendations
concerning national tax and expenditure policy.
The various studies also assume that default would mean a lower rate
of money supply growth, even though some of them assume that the
Federal Reserve would intervene to prevent disruption to financial
markets. We do not believe that if default were to occur that the Fed
would pursue a more restrictive monetary policy. Consequently, part
of the impact which some of the studies ascribe to default is in reality
the impact of a more restrictive monetary policy assumption.
We also do not see as sharp an increase in interest rates resulting from
a New York City default as is assumed in some of the studies. Yields
on municipals have already risen some, and while it is impossible to
foresee future changes with confidence, we believe that most of the
impact of a possible default is already reflected in current rates.
In summary, therefore, while we acknowledge a number of unknowns
in the current outlook, we do not believe that the impact of a New York
City default, should it occur, would have a significant impact on the
developing economic recovery. Clearly there are some risks in the
current situation. But there are no Federal policies which can
eliminate those risks without creating others.
F
CONDITION OF THE MUNICIPAL BOND MARKET
The municipal bond market has performed extremely well over the past
year. In the first nine months of 1975, state and local governments
have raised approximately $45 billion in bonds and notes. Moreover,
such funds have been raised at a cost not disproportionate to historical
levels.
As a general rule, we expect interest rates on tax-exempt instruments
to be 70 percent of the rates on taxable instruments of comparable
quality. In October, rates on prime and medium grade municipals were
exactly 70 percent of the rates on AAA and A utility bonds.
What has taken place is a shift in the quality preferences of investors:
a tendency to prefer higher grade instruments. This change -- in
market parlance a "flight to quality" has resulted in lower costs for
better quality borrowers and relatively higher costs for the lower grade
issues.
The excellent performance of the market notwithstanding, certain
improvements can be made. In recent years the growth rate in demand
for funds by state and local governments has exceeded the growth rate
in the supply of funds from traditional institutional purchasers of tax-
exempts: commercial banks and fire and casualty insurance companies.
These entities have had reduced needs for tax-exempt income as a con-
sequence of underwriting losses in the case of fire and casualty com-
panies and loan losses, leasing activities and foreign tax credits in the
case of banks.
Accordingly, to broaden the market and reduce borrowing costs, it
would be desirable to afford state and local governments the option of
issuing debt on a taxable basis, with an automatic interest subsidy
from the Federal Government. Such an option would in effect open the
market to new classes of lenders which do not need tax-exempt income
-- e. g., pension funds, charitable foundations, etc.
Secondly, partially in recognition of the fact that there is greater
individual investor participation in the market, state and local issuers
of substantial amounts of debt should be required, under Federal law,
to report their financial condition on a current, accurate and comparable
basis.
DRAFT LEGISLATION ON
PROVISION OF ESSENTIAL SERVICES
A proposal to authorize the Secretary of the Treasury to guarantee
debt certificates issued to fund essential services is attached.
The draft language does not define essential services nor does it
resolve the question of whether assistance should be in the form of
a guarantee or a loan.
As drafted, the Secretary of the Treasury would have sole discretion
to determine what constitutes an essential service.
*Draft Legislation
(1) In connection with a proceeding under Chapter XVI of the
Bankruptcy laws, upon application of petitioner, the Secretary of the
Treasury may guarantee, in whole or in part, payments of principal,
of interest, or both, on certificates of indebtedness issued pursuant
to Section 811 of said Chapter XVI for the purpose of providing funds
for the maintenance of essential services.
(2) The provision of such guarantees shall be on such terms and
conditions as may be established by the Secretary of the Treasury in
his sole discretion.
(3) Any decision, rule or other determination by the Secretary of
the Treasury pursuant to the authority conferred under this section
shall not be subject to judicial review by any means.
(4) The aggregate amount of guarantees outstanding at any time
under this section shall not exceed [$1,500,000,000].
(5) No petitioner shall be eligible for guarantees under this
section unless such petitioner shall have first made application under
this section on or before January 31, 1976.
It would be possible to redraft this language to give the President
authority to delegate these powers to such officers as he desires.
H
DEFINITION OF ESSENTIAL SERVICES
Q.
In your address to the National Press Club you indicated
that the Federal Government would work with the Court to
assure the provision of services essential to the pro-
tection of life and property. What specific services were
you referring to?
A.
It would not be desirable to speculate at this time as to
each and every item on such a list. In the context of an
orderly proceeding to reorganize the City's debt, to the
extent our participation is required, we will work with
the Court, in cooperation with the parties, in identifying
the needs which do exist.
November 8, 1975
FEDERAL ASSISTANCE FOR ESSENTIAL SERVICES
Q.
How does the Federal Government intend to insure
essential services for the citizens of New York
City in the event of a default?
Alternative 1
The resources to meet the needs of the citizens of the
City remain available at the State and local level.
Any action by the Federal Government now could interfere
with the processes which I now understand are taking place
at those levels to deal with these possibilities. If
State and local officials abdicate their responsibilities
to meet these critical needs, then we will take the
necessary action.
Alternative 2
I will propose legislation authorizing the Secretary of
the Treasury to guarantee or purchase debt certificates
to meet essential services.
Such a guarantee would be available only after default,
in limited amounts and for a limited period of time to
insure that only essential services were covered.
November 8, 1975
AVOIDING A NEW YORK CITY DEFAULT
Q. You have indicated that New York City can avoid a
default if they take the necessary steps. What are
those steps?
A. I have often said that it would be improper for me to get
into the business of dictating what actions should be
taken at the State or local level. But let me give you
some possibilities.
First, the plan announced by MAC last week could be
pursued. That plan calls for institutional holders of
City notes to exchange their notes for long term City
bonds; individual City noteholders to exchange their notes
for MAC bonds; and for the banking and pension systems to
provide new loans during the period in which the City is
balancing its budget.
Second, the State could enact a temporary and emergency
tax -- perhaps an increase in the sales tax or an income
tax surcharge -- to provide revenues to bridge the gap.
When the City returns to a balanced budget, such taxes
could be repaid through refunds or other forms of tax
reductions.
Third, the nearly $20 billion in State and City employee
pension fund assets could be used to collateralize bridge
loans to the City.
As I said, these are only a few examples of what could
be done. They clearly belie the erroneous suggestion
that all State and local resources have been exhausted.
November 8, 1975
STATE OF MUNICIPAL BOND MARKET
Q. Hasn't the municipal bond market deteriorated in the
past two weeks? How do you account for this?
A. After its strongest and most sustained rally of the
year, prices in the municipal market have shown a
slight decline in the past two weeks; that is, interest
rates have risen slightly. Such a price decline is
neither surprising nor disturbing. After all, the
municipal bond market, like any other market, is subject
to fluctuations for a wide range of reasons. Profit-
taking, minor changes in demand for tax-exempt income,
a relatively heavy volume of new borrowing, have all
been factors. These events must be viewed in perspective.
The health of the municipal market is best reflected by
how it has performed recently: in the third quarter
alone, states and cities raised some $13.7 billion.
November 8, 1975
CONTAINING NEW YORK CITY'S PROBLEMS
Q. How can you be sure that New York City's problems won't
spread to New York State and to other cities and states
throughout the country?
A. New York City's problems have been caused by a con-
sistent pattern of failing to bring spending into line
with revenues, resulting in massive cumulative deficits.
No other major city has engaged in such practices and
thus no city faces the burdens New York faces. Indeed,
one way to insure that such problems will spread is if
the Federal Government signifies -- by adoption of an
assistance program -- that it stands ready to finance
the spending mistakes of America's cities.
November 8, 1975
CONGRESSIONAL LEGISLATION ON NEW YORK
Q.
The House is expected to take up soon a bill to provide
loan guarantees for New York City, tied to a municipal
bankruptcy bill similar to what you requested. Would
you consider signing this legislation?
A.
As I have indicated, I shall veto any bill which requires
the Federal Government to provide financial assistance
to prevent default. If Congress sends me a bill containing
that requirement, I will not sign it.
November 8, 1975
NEW YORK CITY
Q.
How will you prevent riots in New York City if paychecks and
welfare checks stop because of a default?
A.
The legislation which I have proposed to handle a New York
City default would permit the maintenance of services essential
to the protection of life and property. Furthermore, I have
indicated that the Federal Government will work with the court,
in the event of a default, to ensure that such services are
provided. There is no reason why New York City's financial
difficulties cannot be resolved in an orderly manner, and there
is no justification for concern over social disorders or
disruptions.
Porter
November 7, 1975
NEW YORK CITY
Q.
Why is Chancellor Schmidt so concerned about New York City?
A.
Chancellor Schmidt is the most appropriate and able person to
comment on his views. I might say that in a general sense
many concerns abroad regarding New York City are based on
psychological fears about a general disruption in financial
markets that could occur. As you know, I have proposed
legislation in the event of a New York City default, which we
all surely hope will not occur, that would provide for an orderly
procedure to handle the situation. Under this legislation there
need not be any major disruptions in the financial markets in
New York or anywhere else. Moreover, there are strong
indications that the markets have already made adjustments and
discounted for the possibility of a New York City default. In
short, the situation is manageable.
Porter
November 7, 1975
GOVERNOR CAREY LETTER 01 AID FOR Y. AGENCIES
Q. Will you support Governor Carey's request to the Federal
Reserve for a 90 day, $576 million loan for four agencies
of New York State?
A. I have received a letter from Governor Carey advising me
of his request to the Federal Reserve but, as you know,
the Federal Reserve Board is an independent body and the
Administration does not participate in or direct its de-
cisions. I have no control over whatever action the
Federal Reserve might take.
Background
For over a month, Governor Carey has had a detailed and care-
fully thought-out plan presented to him by the financial commun-
ity in New York to strengthen the credit of the New York State
Housing Finance Agency which would receive the great bulk of
the loan the Governor has requested. The plan is specifically
designed to put the Housing Finance Agency in the kind of fis-
cal condition necessary to restore market access. Press re-
ports of the Governor's request to the Fed indicate that he does
not intend to ask the Legislature to act on the plan until after
the State receives a loan from the Fed.
The financial community plan consists of the following:
1. Creation by State appropriation of an insurance fund in an
amount equal to 20% of annual debt service -- cost: approx-
imately $60 million.
2. Provide funding, by general fund appropriation, of the small-
er programs of the Agency -- $39 million.
3. Fund the $30 million shortage in the operating and mainten-
ance reserves of the component projects.
4. Finance the deficit in the Co-op City Project's debt ser-
vice -- $12.5 million.
5. Agree to fund deficits in O ther projects as a line item in
the state budget.
6. Effect improvements in accounting methods and management con-
trols.
-2-
There is, of course, no assurance that adoption of this program
would enable HFA to re-enter the market. As a practical matter,
however, the financial community could well be locked in: having
had their proposal adopted, they could not argue that financial
factors precluded their underwriting HFA securities.
Porter
November 6, 1975
THE PRESIDENT HAS SEEN
THE WHITE HOUSE
WASHINGTON
November 8, 1975
MEETING ON NEW YORK CITY
November 10, 1975
8:30 a. m.
Cabinet Room
From: L. William Seidman gws
I. PURPOSE
To discuss the New York City financial situation and pending
Congressional legislation.
II. BACKGROUND, PARTICIPANTS, AND PRESS PLAN
A. Background: This meeting is in response to a request from
Senator Mansfield for him and four other Senators to meet
with you to explain their views on New York City. A copy of
a memorandum on New York City previously sent to you is
attached.
An analysis of bills to provide financial assistance to New
York City which have been favorably reported by both the
Senate (S. 2615) and House (H. R. 10481) Banking Committees
is found at Tab A of the attached memorandum. The House
bill has been referred to the Ways and Means Committee.
Floor action in the House was initially scheduled for November
11th. Reports suggest that in light of the AFL-CIO opposition,
House floor action will be delayed. Senate Banking Com-
mittee sources indicate that no attempt will be made to bring
the bill to the Senate floor until there is some indication of
what the House will do.
A review of the legislative status of the Administration's
proposed amendment of the Federal Bankruptcy Act is found
at Tab B of the attached memorandum. In short, the Senate
bill gives us almost all of what we want; the House bill very
little.
2
B. Participants: Senators Mansfield, Muskie, Proxmire,
Robert Byrd and Stevenson, John O. Marsh, Max
Friedersdorf, L. William Seidman, Alan Greenspan,
Bill Kendall.
C. Press Plan: White House Press Corps photo opportunity.
III. TALKING POINTS
A. New York City's problems have received a great deal of my
attention in recent weeks and I have been closely monitoring
developments there, as I am sure you have.
B. I continue to believe that a responsible and adequate solution
to New York City's problems is possible. I have made my
specific views on New York City quite clear and am interested
today in having the benefit of your thinking on this problem.
THE WHITE HOUSE
WASHINGTON
November 8, 1975
MEMORANDUM FOR THE PRESIDENT
FROM:
L. WILLIAM SEIDMAN
SUBJECT:
New York City
This memorandum contains a set of materials designed to provide you with
an analysis of legislation pending in Congress to provide financial assist-
ance to New York City, the legislative status of your proposed amendment
to the Federal Bankruptcy Act, a review of New York State's financial
condition, possible ways of providing financial assistance under existing
legislation for the New York Housing Finance Agency, the current condi-
tion of the municipal bond market, the impact of a New York City default
on the national economy, and draft legislation to authorize Federal guar-
antee of debt certificates issued to fund essential services in event of a
New York City default.
The specific papers, prepared in coordination with the Departments of
Treasury and Justice and the Council of Economic Advisers, are as
follows:
1. Pending Legislation to Provide Financial Assistance to New York
City (Tab A):
2. Legislative Status of the Administration's Proposed Amendment to
the Federal Bankruptcy Act (Tab B)
3. New York State's Financial Condition (Tab C)
4. Assistance to the New York State Housing Finance Agency (Tab D)
5. Impact of a New York City Default on the National Economy (Tab E)
6. Condition of the Municipal Bond Market (Tab F)
7. Draft Legislation on Provision of Essential Services (Tab G)
8. Questions and Answers on New York (Tab H)
Pending Legislation to Provide
Financial Assistance to New York City
Bills to provide financial assistance to New York City
have been favorably reported by both the Senate (S.2615)
and House (H. R. 10481) Banking Committees. The House Bill
has been referred to Ways and Means. Floor action in the
House was initially scheduled for November 11. Reports
suggest that in light of the AFL-CIO opposition, House
floor action will be delayed. Senate Banking Committee
sources indicate that no attempt will be made to bring the
bill to the Senate Floor until there is some indication
of what the House will do.
Summary of Bills
Both bills authorize the Federal Government to
guarantee local obligations to prevent default and also
confer authority to provide assistance after a default.
Authority under both bills is delegated to a Board
chaired by the Secretary of the Treasury
The fundamental difference between the two bills is in
the amount of flexibility given to the Board. The Senate bill is
highly restrictive: the Board cannot authorize a guarantee unless
stringent pre-conditions are met. The House bill gives the Board
substantially more flexibility, in recognition of the possibility
that the City may not be able to meet very stringent guidelines
between enactment and the time a guarantee would be necessary
to avert default.
Issue Analysis
1. Pre-Default Assistance
Senate
-- authorizes $4 billion in Federal guarantees
of new 1-year State securities to prevent
default;
-- guarantee authority is phased out over
4-year period
House
-- authorizes full or partial emergency
guarantees of obligations of a State or
State instrumentality to prevent default;
- 2 -
-- authorized amounts: $5 billion maximum
outstanding until 1989; $3 billion
thereafter
Comment
The advantages of the Senate bill are (1) more
control over the City is provided; since the
guarantee is limited to one year there is the
opportunity to terminate the program if the
City is not complying with the guidelines; and
(2) the program is shorter. The Senate program
expires in 4 years; under House version, program
could continue for 24 years.
The advantage of the House bill is that
by authorizing a longer guarantee period, it
eliminates the necessity for reapplications for
assistance.
Suggested Improvements
Because of our position in opposition to any
assistance to prevent default, no changes would make
these provisions palatable.
2. Preconditions to Assistance
Senate
-- voluntary restructuring of the City's debt:
-- at least 65% of present MAC obligations
must be exchanged for non-guaranteed bonds
with longer maturities (at least 5 years)
and lower interest rates
-- at least 40% of the City's obligations
maturing before June 30 must be exchanged
for similar long-term, low interest bonds
- 3 -
-- State must cover 1/2 of City's operating
deficit out of general tax revenues,
over and above any assistance previously
given
-- Board must determine that neither City nor
State can practically obtain credit from
other source and that default is imminent
- - Board may impose any other conditions
deemed necessary
- - City must balance budget by 1977, including
reductions in cost of employee pension plans
and maximum feasible participation by such
funds in the restructuring of the City's
debt
-- State must assume control of City's fiscal
affairs while Federal guarantee is outstanding
-- guarantee must be satisfactorily secured,
inter alia, by future revenue sharing payments
to City and State
-- City must open books to Federal audit and use
accounting procedures prescribed by the Board
-- State must pay guarantee fee of up to 3½%
of total obligations guaranteed if tax
exempt, and up to 1% if made taxable by
subsequent Act of Congress
House
-- credit markets must be closed as a practical
matter to both City and State
City must submit and follow plan for fiscal
solvency from recurring revenues
State must have authority to control City's
fiscal affairs during life of Federal
guarantee. (New York's Emergency Financial
Control Board is stipulated as satisfying
this requirement.)
- 4 -
-- State must supply additional aid up to 1/3
of City's deficit, as determined by Board
-- allows for guarantee fee up to 3/4 of 1%
per year in discretion of Board
-- Board may require City to renegotiate
outstanding obligations (e.g. by exchanges
for longer maturity, lower interest paper)
including outstanding contracts for
services
-- authorizes GAO audits of municipality and/or
relevant State instrumentality
Comment
The flexibility issue is most squarely presented with
respect to these provisions. While the exchange of debt,
higher state tax and pension benefit renegotiation features
of the Senate bill can be seen as forcing the City to take
stringent measures, they may be so stringent as to make the
guarantee authority unworkable. The House bill authorizes
the Board to attach whatever condition it deems appropriate,
but does not require the Board to deny assistance if extreme
conditions are not met.
Suggested Improvements
None.
3. Post-Default Assistance
Senate
-- guarantees up to $500 million of 3-month
City notes to meet City's short-term
credit needs for continuing essential
services
-- obligations secured by a first lien on City's
future revenues
- 5 -
House
-- no separate authority. In a default
situation, Board may issue guarantees and
may, for a six month period, waive above
preconditions in providing guarantees
Comment
House bill not specifically limited to essential
services.
Suggested Improvements
If it is determined that we will carry out
essential services pledge via guarantees, should
limit guarantees to court-authorized debt certificates.
Should also consider raising authorization to $1
billion or $1.5 billion.
4. Tax Status of Guaranteed Obligations
Senate
-- to avoid necessity for Finance Committee
action, does not require that guaranteed
paper be taxable
-- language presupposes that later legislation
will require taxable feature.
-- provides that Federal Financing Bank must
purchase any tax-exempt guaranteed paper
House
makes all guaranteed securities taxable
Comment
The Senate bill is needlessly cumbersome. Any
guaranteed paper should be taxable.
Suggested Improvements
None
- 6 -
5.
Governing Board
Senate
-- 3-member Board consisting of Secretary of
Treasury (Chairman), Chairman of Federal
Reserve Board, and Secretary of Labor
House
-- 5-member Board consisting of Secretary of
Treasury (Chairman), Secretary of HUD,
Chairman of Federal Reserve Board, and
Chairman of SEC
Comment
None.
Suggested Improvements
If only post-default assistance will be provided,
a full Board may be needlessly cumbersome.
LEGISLATIVE STATUS OF THE ADMINISTRATION'S PROPOSED
AMENDMENT OF THE FEDERAL BANKRUPTCY ACT
Statements comparing the Senate and House bills with the Administra-
tion's proposed amendment of the Federal Bankruptcy Act are attached.
H.R. 10624 has been approved by the Edwards Subcommittee and will
receive the attention of the full House Judiciary Committee Monday,
November 10, at 10:30 a.m. Minority Counsel for the Subcommittee
expects the full Committee to ratify the action of the Subcommittee.
S. 2597, as amended, has been approved by the Subcommittee on
Improvements in Judicial Machinery. In the Thursday meeting of the
full Judiciary Committee, Senators Kennedy and Mathias argued that
the legislation was not urgent. Senator Mathias exercised his personal
privilege, thus putting over a vote on the bill until Thursday,
November 13. Minority Counsel advises that there are sufficient votes
to bring the bill out of Committee.
To summarize, the Senate bill gives us almost all of what we want; the
House bill very little.
COMPARISON OF H.R. 10624 WITH THE ADMINISTRATION'S
BILL FOR BIG CITY BANKRUPTCIES
The House Bill, following the personal plea of Chairman
Rodino before the Subcommittee, opts for a revision of the
debt adjustment provisions of Chapter IX of the Bankruptcy
Act rather than a new Chapter XVI to deal with major munici-
palities. The style of the bill, its arrangement and many
of its particulars are different from the Administration's
bill though much of the substance is similar.
Sec. 81 includes definitions of nine terms used in the
bill, only three of which are the same terms defined in the
Administration's bill--and even these three definitions are
different. The changes are not substantial, and we have no
objection.
Sec. 82 (a) on jurisdicition is the same as the last
sentence of Sec. 801 (a) of the Administration's bill.
Sec. 82 (b) (1) of H.R. 10624 permits the petitioner to reject
executory contracts and unexpired leases. The Administra-
tion's bill expressly permitted this only in conjunction
with the consummation of the plan. We think, however, it
would be permitted even without express provision, and so
have no objection to the new language. Sec, 82 (c), limiting
interference by the court with the political and governmental
powers of the city, omits the proviso contained in Sec. 805 (e)
of the Administration's bill specifically authorizing the
court to enforce the conditions attached to certificates of
-1-
indebtedness and the provisions of the plan. We object to
this change.
Sec. 84 would permit any political subdivision, public
agency or instrumentality of a State, without regard to size,
to file a petition for relief; the Administration's bill is
limited to cities in excess of 1,000,000 population and
certain subentities thereof. We object to the change
strenuously, since its adoption will substantially lessen
the possibility of including some of the substantive provi-
sions we think necessary for New York. Sec. 84 would permit
filing so long as the petitioner is "not prohibited by State
law from filing a petition". The Administration's bill
would require the specific approval by the State before a
petition could be filed by a major municipality but sub-
entities could file if not prohibited. We object to the
change.
Sec. 85 would require any party in interest desiring to
challenge the filing of a petition to do so within fifteen
days. The Administration's bill would permit such challenges
up to ten days before the hearing on confirmation of the
plan, unless the judge imposed further restrictions. We
object to the change, since it eliminates the possibility
of dismissal for failure to submit a good faith, reasonably
feasible plan. Sec. 85 (a) permits a governing authority or
board for certain special taxing or assessment districts to
-2-
file on behalf of such districts. No objection. Sec. 85 (c)
gives the city a wider choice of venue than does the
Administration's bill. We think the opportunity to forum
shop is undesirable. Sec. 85 (d) uses different phraseology
for the notice required as to the filing or dismissal of a
petition and is specific as to use of publication. No
objection. Sec. 84 (f) unlike the Administration's bill,
makes certain "bankruptcy" clauses in contracts and leases
unenforceable if the petitioner cures prior defaults and
provides adequate assurance of future performance. This is
acceptable if a reasonable time limitation for curing
defaults is added.
Sec. 88 (b) uses somewhat different language than that
used in the Administration's bill as to the classification
of creditors. Sec. 88 (c), unlike the Administration's bill,
seeks to spell out the limits on damages for breach of an
unexpired lease. No objection to these changes.
Sec. 90 (a) permits the petitioner to file the plan with
its petition or at such later time as the court may specify,
The Administration's bill requires the filing of the plan
with the petition together with a statement of present and
projected revenues and expenditures sufficient to show that
the budget of the petitioner will be in balance within a
-3-
reasonable time after adoption of the plan. H.R. 10624 does
not call for a balanced budget as a requirement for confirma-
tion of the plan, though the requirement that the plan be
"feasible" may supply this requirement. We oppose these
changes.
Sec. 92, governing the acceptance of a plan, uses lan-
guage and arrangement that is different from that in the
Administration's bill. However, voting is much the same
except that the court could temporarily allow disputed
claims for the purpose of voting. Both bills permit "cram
down" as to nonassenting classes of creditors. H.R. 10624
follows the language of current Chapter IX and this would
make it somewhat more difficult for the city to dispose
of nonassenting classes of creditors by "cram down". No
objection to these changes.
Sec. 93 allows the SEC to file a complaint objecting
to a plan but SEC could not appeal. The Administration's
bill provides for notice to the SEC but would not make it
a formal party to the proceedings. Presumably it could
file papers in the proceeding as amicus curiae with the
same result as to appeal. We have no: objection to the
changes
Sec. 94 (b), setting forth the conditions for confirma-
tion of a plan, omits the Administration's requirement that
-4-
petitioner's current and projected revenues and expendi-
tures forecast a balanced budget within a reasonable time
after adoption of the plan. The language of the Administra-
tion's provision also calls for the dismissal of the
proceeding if these conditions are not met. As indicated
earlier, we object to this change!
Sec. 95, dealing with the effect of confirmation, is
the same as in the Administration's bill except for specific
language that the plan and the discharge will not be binding
on certain creditors who did not have timely notice or
actual knowledge of the petition or plan. We have no strong
objection to this change, though it may produce considerable
litigation. Sec. 95 (b) spells out conditions for discharge
of debts which are implicit in the Administration's bill
but not spelled out.
Sec. 96 (a), dealing with the deposit of cash or
securities, is not spelled out in the Administration's bill
though its substance is covered by the requirement that
the petitioner comply with the plan. Sec 96 (f) P making a
certified copy of any order or decree evidence of the
jurisdiction of the court and effective to impart notice
when recorded, is not found in the Administration's bill
and seems unnecessary. No objection to these changes.
Sec 97, covering the effect of the exchange of debt
-5-
securities before the date of the petition, is not found in
the Administration's bill and seems of little utility. We
have, however, no objection.
The Subcommittee draft did not have a dismissal pro-
vision initially. Sec. 98 now contains five discretionary
bases for dismissal, though couched in language which is
different from that in Sec. 806 (b) of the Administration's
bill. Dismissal for default in any of the terms of the
approved plan is an issue we are studying further. Otherwise
we have no objection.
-6-
COMPARISON OF S. 2597 WITH THE ADMINISTRATION'S BILL
FOR BIG CITY BANKRUPTCIES
As amended to date the Senate Bill follows the Administra-
tion's bill in most particulars, including arrangement and
identical language in a number of sections. The following
changes have been made in the Administration's draft:
Sec. 801 includes authority for the court to permit
the rejection of executory contracts even before the
approval of a plan of composition or extension, whereas
the Administration's bill authorized rejection of executory
contracts and unexpired leases in the city's plan (Sec. 813)
We do not object. Sec. 801 (c) of S. 2597 would require the
chief judge of the district court to notify the chief judge
of the circuit court of the filing of the city's petition.
The later would then designate the judge who would conduct
the proceedings. The Administration's bill did not have
this provision. We support the change.
Sec. 802 defines "claim" and "creditor" a bit differ-
ently than the Administration's bill and adds definitions
of "plan" and "person". We do not object.
Sec. 803 (a) still limits eligibility to municipalities
of 1,000,000 or more population and requires specific
State authori zation for the city to file. An amendment
adopted on Senator Scott's motion modifies the latter pro-
vision to permit the chief executive, the legislature or
such other governmental officer or organization as is
empowered under State law to authorize the filing. This
would presumably allow the Control Board now overseeing the
city's finances to provide the necessary State consent--
which is probably not enough for our purposes.
Sec. 804 drops the Administration's jurisdictional
requirement that the city submit a good faith plan with
its petition together with a statement of current and pro-
jected revenues and expenditures adequate to establish that
the budget will be in balance within a reasonable time after
adoption of the plan. However, that requirement is still
retained as condition for confirmation of the plan. Sec.
817 (c). We prefer the original Administration proposal,
but realistically think it has little chance of survival.
Sec. 804 (b) gives the city a choice of the district in
which the petition can be filed. The Administration's bill
would deny this choice; the change is acceptable, however,
if Sec. 801 (c), discussed above is adopted.
Sec 805 dealing with stays goes beyond the Adminis
tration's bill in denying recognition or enforcement of
setoffs occurring within three months before the filing
of the petition We think this goes too far.
Sec. 806 would require any creditor wishing to challenge
the petition to do so within thirty days of its filing and
-2-
an interlocutory appeal could not be taken from the court's
finding of jurisdiction. This is intended to increase the
marketability of debt certificates. We oppose the inter-
locutory appeal provision.
Sec. 807, dealing with notices, is much the same as
the Administration's provision except for an express require-
ment for publication of the notice. Throughout the bill
provision is made for notices to be given by the petitioning
city or such other person as the court designates rather
than by the court clerk as. in the Administration's bill.
We do not object to these changes.
In Sec. 812, the second priority accorded claims for
services or materials furnished shortly before the filing
of the petition is limited to claims arising within two
months of the filing rather than to claims arising within
four months of filing as in the Administration's bill. No
objection.
Sec. 813 permits the petitioner to file a plan either
with the petition or at such later time as is set by the
court. Sec. 804 (b) of the Administration's bill required
that the plan be filed with the petition. We prefer the
Administration's proposal, but realistically think it has
little chance of acceptance
Sec. 814 changes voting requirements to further protect
small creditors. Thus the petitioner must obtain approvals
-3-
from two-thirds in amount and 51 per cent in number of each
class of creditors, unless other provision is made for their
claims. The Administration's bill required approvals only
from two-thirds in amount. Both bills permit the majorities
to be counted on the basis of those eligible to vote who
actually vote. We think the change is undesirable.
Sec. 814 (c) of S. 2597 covering the division of
creditors into classes, is somewhat more flexible than the
Administration's provision. No objection.
Sec. 816 includes Senator Abourezk's amendment which
would let the court allow a labor organization's or employee's
association representative to be heard on the economic sound-
ness of the plan. No provision is made for voting or appeals
by such representatives. No objection.
Sec. 817 omits the requirement found in the Administra-
tion's bill at Sec. 816 (a) that the court make written find-
ings in connection with the confirmation of the plan. We
think this change is undesirable. The balanced budget con-
cept is retained as a condition. for approval of the plan
Sec. 820 uses somewhat different language from that
contained in Sec. 806 (b) of the Administration's bill in
stating the grounds for dismissal of the proceeding and
adds as a mandatory ground for dismissal the fact that an
adopted plan has not been consummated. Dismissal is impor-
tant as this is one of the few levers the court has to force
-4-
the city to move forward and come up with a balanced budget.
We think, however, that this provision requires further
analysis, which we are now conducting.
Sec. 823, on conversion of a pending Chapter IX pro-
ceeding to one under this new chapter, is new, as is Sec. 824
on effective date. No objection.
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NEW YORK STATE'S FINANCIAL CONDITION
Fundamentally, New York State is in reasonably sound financial
condition on the basis of underlying factors. It does have difficulties,
attributable to (1) its own deficit for the fiscal year ending March 31,
1976, now officially estimated to be $611 million; (2) substantial
short term borrowing to aid New York City; and (3) the unsound
financial condition of some of the agencies of the State, particularly
the Housing Finance Agency.
The State must act to remedy these difficulties by establishing new
revenue sources to cut the deficit and by taking the steps proposed by
the Financial Community to strengthen the Housing Finance Agency.
However, these difficulties will not result in an immediate crisis for
the State, even if a default by New York City were to trigger an adverse
psychological reaction. While the State does have note maturities in
December and January, its cash flow, according to State estimates, is
adequate until late March, when it must borrow to refund notes issued
to raise the funds loaned to the City and to fund its own deficit.
In the April-June period (the first three months of the following fiscal
year), the State typically borrows $4-5 billion (State estimate) against
revenues to be received later in the year. The proceeds of this
borrowing are used primarily to provide assistance payments to local
governments and school districts. The State's ability to borrow such
funds will depend in part on what steps it takes with respect to the
problems outlined above.
ASSISTANCE TO THE NEW YORK STATE
HOUSING FINANCE AGENCY
There are four mechanisms which could be employed to provide
assistance to the New York State Housing Finance Agency (HFA):
1.
Facilitate HFA borrowing by Federal guarantees and sub-
sidies for taxable HFA bonds under Section 802 of the 1974
Housing Act.
2. Reduce HFA borrowing needs and provide cash by GNMA
purchase of unfunded mortgages owned by HFA.
3. Strengthen backing of HFA's bonds by FHA insurance and
subsidies on mortgages owned by HFA.
4. Federal Reserve loan to HFA.
I.
Section 802 Guarantee
Section 802 of the 1974 Housing Act authorizes HUD to guarantee
an aggregate amount of $500 million of taxable state housing
agency debt and to provide a 33-1/3 percent interest subsidy on
the bonds. None of this guarantee authority has been used. Such
a guarantee would make HFA debt fully marketable at low rates.
This approach has the dual advantage of being the easiest to
implement and providing the most substantial benefit.
II. GNMA Purchase
We estimate that HFA owns approximately $200 million in market-
able mortgages; that is, mortgages on viable projects which have
not been fully or partially funded by HFA bonds. We believe
GNMA has the legal authority to purchase these mortgages.
A sale of mortgages to GNMA would lessen HEA's funding (and
thus borrowing) requirements and would also provide cash which
HEA could use to meet other commitments.
III. FHA Insurance and Subsidies
FHA could provide mortgage insurance and interest reduction
subsidies under its Section 223(f) and Section 8 programs. This
would require unraveling the original mortgage arrangements
2
between HFA and the private project owners and the issuance of
a new mortgage at current rates. The interest reduction subsidy
notwithstanding, HUD believes that few project owners would
agree to give up their 5, 6 and 7 percent mortgages for a new
market rate loan. We understand that HFA and HUD staff have
discussed this approach, but have not reached conclusions as to
its viability.
IV. Federal Reserve Loan
Under its emergency lending authority, the Federal Reserve could
lend HFA whatever amounts are required. Governor Carey has
requested a $576 million, 90 day loan. Paul Volcker, President
of the Federal Reserve Bank of New York, has not closed the door
but has indicated that the request was "incomplete" in terms of
the information provided.
IMPACT OF A NEW YORK CITY DEFAULT
ON THE NATIONAL ECONOMY
Several studies have claimed that a New York City default would have
a severe negative impact on the national economy. An analysis of
these studies by the Council of Economic Advisers concludes that the
studies are deficient in several respects.
The studies generally assume that default will lead state and local
governments to rapidly balance their operating budgets by raising
taxes and lowering expenditures. But state and local governments have
already made substantial adjustments to their budgets and little or no
further adjustment is likely. With no further steps we believe that the
combined operating and capital account deficit of state and local govern-
ments will be eliminated by the fourth quarter of 1976. A moderation
in the growth of state and local expenditures has, therefore, been long
anticipated and has been taken into account in our recommendations
concerning national tax and expenditure policy.
The various studies also assume that default would mean a lower rate
of money supply growth, even though some of them assume that the
Federal Reserve would intervene to prevent disruption to financial
markets, We do not believe that if default were to occur that the Fed
would pursue a more restrictive monetary policy. Consequently, part
of the impact which some of the studies ascribe to default is in reality
the impact of a more restrictive monetary policy assumption.
We also do not see as sharp an increase in interest rates resulting from
a New York City default as is assumed in some of the studies. Yields
on municipals have already risen some, and while it is impossible to
foresee future changes with confidence, we believe that most of the
impact of a possible default is already reflected in current rates.
In summary, therefore, while we acknowledge a number of unknowns
in the current outlook, we do not believe that the impact of a New York
City default, should it occur, would have a significant impact on the
developing economic recovery. Clearly there are some risks in the
current situation. But there are no Federal policies which can
eliminate those risks without creating others.
CONDITION OF THE MUNICIPAL BOND MARKET
The municipal bond market has performed extremely well over the past
year. In the first nine months of 1975, state and local governments
have raised approximately $45 billion in bonds and notes. Moreover,
such funds have been raised at a cost not disproportionate to historical
levels.
As a general rule, we expect interest rates on tax-exempt instruments
to be 70 percent of the rates on taxable instruments of comparable
quality. In October, rates on prime and medium grade municipals were
exactly 70 percent of the rates on AAA and A utility bonds.
What has taken place is a shift in the quality preferences of investors:
a tendency to prefer higher grade instruments. This change -- in
market parlance a "flight to quality" -- has resulted in lower costs for
better quality borrowers and relatively higher costs for the lower grade
issues.
The excellent performance of the market notwithstanding, certain
improvements can be made. In recent years the growth rate in demand
for funds by state and local governments has exceeded the growth rate
in the supply of funds from traditional institutional purchasers of tax-
exempts: commercial banks and fire and casualty insurance companies.
These entities have had reduced needs for tax-exempt income as a con-
sequence of underwriting losses in the case of fire and casualty com-
panies and loan losses, leasing activities and foreign tax credits in the
case of banks.
Accordingly, to broaden the market and reduce borrowing costs, it
would be desirable to afford state and local governments the option of
issuing debt on a taxable basis, with an automatic interest subsidy
from the Federal Government. Such an option would in effect open the
market to new classes of lenders which do not need ax-exempt income
e.g., pension funds, charitable foundations, etc.
Secondly, partially in recognition of the fact that there is greater
individual investor participation in the market, state and local issuers
of substantial amounts of debt should be required; under ederal law,
to report their financial condition on a current, accurate and comparable
basis.
DRAFT LEGISLATION ON
PROVISION OF ESSENTIAL SERVICES
A proposal to authorize the Secretary of the Treasury to guarantee
debt certificates issued to fund essential services is attached.
The draft language does not define essential services nor does it
resolve the question of whether assistance should be in the form of
a guarantee or a loan.
As drafted, the Secretary of the Treasury would have sole discretion
to determine what constitutes an essential service.
Draft Legislation
(1) In connection with a proceeding under Chapter XVI of the
Bankruptcy laws, upon application of petitioner, the Secretary of the
Treasury may guarantee, in whole or in part, payments of principal,
of interest, or both, on certificates of indebtedness issued pursuant
to Section 811 of said Chapter XVI for the purpose of providing funds
for the maintenance of essential services.
(2) The provision of such guarantees shall be on such terms and
conditions as may be established by the Secretary of the Treasury in
his sole discretion.
(3) Any decision, rule or other determination by the Secretary of
the Treasury pursuant to the authority conferred under this section
shall not be subject to judicial review by any means.
(4) The aggregate amount of guarantees outstanding at any time
under this section shall not exceed [$1, 500, 000, 000].
(5) No. petitioner shall be eligible for guarantees under this
section unless such petitioner shall have first made application under
this section on or before January 31, 1976.
It would be possible to redraft this language to give the President
authority to delegate these powers to such officers as he desires.
DEFINITION OF ESSENTIAL SERVICES
Q.
In your address to the National Press Club you indicated
that the Federal Government would work with the Court to
assure the provision of services essential to the pro-
tection of life and property. What specific services were
you referring to?
A.
It would not be desirable to speculate at this time as to
each and every item on such a list. In the context of an
orderly proceeding to reorgani ze the City's debt, to the
extent our participation is required, we will work with
the Court, in cooperation with the parties, in identifying
the needs which do exist.
November 8, 1975
FEDERAL ASSISTANCE FOR ESSENTIAL SERVICES
Q.
How does the Federal Government intend to insure
essential services for the citizens of New York
City in the event of a default?
Alternative 1
The resources to meet the needs of the citizens of the
City remain available at the State and local level.
Any action by the Federal Government now could interfere
with the processes which I now understand are taking place
at those levels to deal with these possibilities. If
State and local officials abdicate their responsibilities
to meet these critical needs, then we will take the
necessary action.
Alternative 2
I will propose legislation authorizing the Secretary of
the Treasury to guarantee or purchase debt certificates
to meet essential services.
Such a guarantee would be available only after default,
in limited amounts and for a limited period of time to
insure that only essential services were covered.
November 8, 1975
FEDERAL ASSISTANCE FOR ESSENTIAL SERVICES
Q.
How does the Federal Government intend to insure
essential services for the citizens of New York
City in the event of a default?
Alternative 1
The resources to meet the needs of the citizens of the
City remain available at the State and local level.
Any action by the Federal Government now could interfere
with the processes which I now understand are taking place
at those levels to deal with these possibilities. If
State and local officials abdicate their responsibilities
to meet these critical needs, then we will take the
necessary action.
Alternative 2
I will propose legislation authorizing the Secretary of
the Treasury to guarantee or purchase debt certificates
to meet essential services.
Such a guarantee would be available only after default,
in limited amounts and for a limited period of time to
insure that only essential services were covered.
November 8, 1975
AVOIDING A NEW YORK CITY DEFAULT
Q. You have indicated that New York City can avoid a
default if they take the necessary steps. What are
those steps?
A. I have often said that it would be improper for me to get
into the business of dictating what actions should be
taken at the State or local level. But let me give you
some possibilities.
First, the plan announced by MAC last week could be
pursued. That plan calls for institutional holders of
City notes to exchange their notes for long term City
bonds; individual City noteholders to exchange their notes
for MAC bonds; and for the banking and pension systems to
provide new loans during the period in which the City is
balancing its budget.
Second, the State could enact a temporary and emergency
tax -- perhaps an increase in the sales tax or an income
tax surcharge -- to provide revenues to bridge the gap.
When the City returns to a balanced budget, such taxes
could be repaid through refunds or other forms of tax
reductions.
Third, the nearly $20 billion in State and City employee
pension fund assets could be used to collateralize bridge
loans to the City:
As I said, these are only a few examples of what could
be done. They clearly belie the erroneous suggestion
that all State and local resources have been exhausted
November 8, 1975
STATE OF MUNICIPAL BOND MARKET
Q.
Hasn't the municipal bond market deteriorated in the
past two weeks? How do you account for this?
A. After its strongest and most sustained rally of the
year, prices in the municipal market have shown a
slight decline in the past two weeks; that is, interest
rates have risen slightly. Such a price decline is
neither surprising nor disturbing. After all, the
municipal bond market, like any other market, is subject
to fluctuations for a wide range of reasons. Profit-
taking, minor changes in demand for tax-exempt income,
a relatively heavy volume of new borrowing, have all
been factors. These events must be viewed in perspective.
The health of the municipal market is best reflected by
how it has performed recently: in the third quarter
alone, states and cities raised some $13.7 billion.
November 8, 1975
CONTAINING NEW YORK CITY'S PROBLEMS
Q. How can you be sure that New York City's problems won't
spread to New York State and to other cities and states
throughout the country?
A. New York City's problems have been caused by a con-
sistent pattern of failing to bring spending into line
with revenues, resulting in massive cumulative deficits.
No other major city has engaged in such practices and
thus no city faces the burdens New York faces. Indeed,
one way to insure that such problems will spread is if
the Federal Government signifies -- by adoption of an
assistance program -- that it stands ready to finance
the spending mistakes of America's cities.
November 8, 1975
CONGRESSIONAL LEGISLATION ON NEW YORK
Q.
The House is expected to take up soon a bill to provide
loan guarantees for New York City, tied to a municipal
bankruptcy bill similar to what you requested. Would
you consider signing this legislation?
A.
As I have indicated, I shall veto any bill which requires
the Federal Government to provide financial assistance
to prevent default. If Congress sends me a bill containing
that requirement, I will not sign it.
November 8, 1975
NEW YORK CITY
Q.
How will you prevent riots in New York City if paychecks and
welfare checks stop because of a default?
A.
The legislation which I have proposed to handle a New York
City default would permit the maintenance of services essential
to the protection of life and property. Furthermore, I have
indicated that the Federal Government will work with the court,
in the event of a default, to ensure that such services are
provided. There is no reason why New York City's financial
difficulties cannot be resolved in an orderly manner, and there
is no justification for concern over social disorders or
disruptions.
Porter
November 7, 1975
NEW YORK CITY
Q.
Why is Chancellor Schmidt SO concerned about New York City?
A.
Chancellor Schmidt is the most appropriate and able person to
comment on his views. I might say that in a general sense
many concerns abroad regarding New York City are based on
psychological fears about a general disruption in financial
markets that could occur. As you know, I have proposed
legislation in the event of a New York City default, which we
all surely hope will not occur, that would provide for an orderly
procedure to handle the situation. Under this legislation there
need not be any major disruptions in the financial markets in
New York or anywhere else. Moreover, there are strong
indications that the markets have already made adjustments and
discounted for the possibility of a New York City default. In
short, the situation is manageable.
Porter
November 7, 1975
GOVERNOR CARDY LETTER ON AID FOR N.Y. AGENCING
Q.
Will you support Governor Carey's request to the Federal
Reserve for a 90 day, $576 million loan for four agencies
of New York State?
A. I have received a letter from Governor Carey advising me
of his request to the Federal Reserve but, as you know,
the Federal Reserve Board is an independent body and the
Administration does not participate in or direct its de-
cisions. I have no control over whatever action the
Federal Reserve might take.
Background
For over a month, Governor Carey has had a detailed and care-
fully thought-out plan presented to him by the financial cornum
ity in New York to strengthen the credit of the New York State
Housing Finance Agency which would receive the great bulk of
the loan the Governor has requested. The plan is specifically
designed to put the Housing Finance Agency in the kind of fis-
cal condition necessary to restore market access. Press re-
ports of the Covernor's request to the Fed indicate that he does
not intend to ask the Legislature to act on the plan until after
the State receives a loan from the Fed.
The financial community plan consists of the following:
1.
Creation by State appropriation of an insurance fund in an
amount equal to 20% of annual debt service -- cost: approx-
imately $60 million.
2.
Provide funding, by general fund appropriation, of the small-
er programs of the Agency -- $39 million.
3.
Fund No in the operating mainted-
ance reserves of the component projects.
4.
Finance the deficit in the Co-op City Project's debt saft
vico $12.5 million
5. Agree to fund deficits in O ther projects as a line itom 1:
the state budget.
6. Effect improvements in accounting method is and management con-
trols.
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There is, of course, 110 assurance that adoption of this program
would enable HFA to re-enter the market. As a practical matter,
however, the financial community could well be locked in: having
had their proposal adopted, they could not argue that financial
factors precluded their underwriting HFA securities.
Porter
November 6, 1975