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The original documents are located in Box 78, folder "New York City, May - October
1975 (2)" of the L. William Seidman 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 R. 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States of America his copyrights in all of his unpublished writings in National Archives collections.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 78 of the L. William Seidman Files at the Gerald R. Ford Presidential Library
THE WHITE HOUSE
WASHINGTON
August 8, 1975
MEMORANDUM FOR THE PRESIDENT
FROM:
L. WILLIAM SEIDMAN fws
SUBJECT:
New York City Financial Situation
Attached for your information is a memorandum from Acting
Secretary Gardner on the New York City financial situation. It
may be useful to have a brief discussion with you about the con-
sequences of a default by New York City which have been pur-
posely left out of the attached memorandum.
We will be prepared for a short meeting with you after tomorrow's
8:15 Economic Policy Board meeting if you desire. I recommend
that the meeting include Dick Dunham, Stephen Gardner, and
Arthur Burns.
Attachment
FORD LIBRARY
OF
DEPARTMENT TREASURY
THE SECRETARY OF THE TREASURY
WASHINGTON 20220
August 8, 1975
1789
MEMORANDUM FOR THE PRESIDENT
SUBJECT: New York City Financial Situation
As part of our continuing process of monitoring
New York City's financial situation, George Mitchell
of the Federal Reserve, Bill Seidman, Dick Dunham
and I met with representatives of the Board of Directors
of the Municipal Assistance Corporation (MAC). The
Board outlined the steps which the City has undertaken,
which include: 1) a freeze on wages; 2) an increase
in the subway fare to 50 ¢; 3) a freeze on controllable
expenses, and 4) the imposition of an independent
management structure.
Due to these and other efforts, MAC has been able
to raise the necessary August financing requirement of
approximately $1 billion. However, they are most
fearful that they will not be able to meet the large
September requirement and that there may be a default.
The State Budget Director reported that the net
1976-77 budget imbalance of projected revenues over
projected expenditures was $600-800 million.* This
projected imbalance does not include $500 million of
operating expenses included in the capital budget of
$1.5 billion. Thus, from an accounting standpoint
(not from a legal standpoint) the imbalance is about
$1.2 billion. If funds cannot be borrowed to finance
the capital budget items of $1.5 billion later this
year the total cash imbalance will be around $2 billion.
Therefore, the City or Big MAC must borrow about
$2 billion to cover the current imbalance (the capital
budget items and the short term cash flow needs). The
total borrowing by one or the other to cover all these
needs during the period September until about March of
*Within a $200 million accuracy.
GERALD FORD LIBRARY
- 2 -
1976 is in the neighborhood of $4-5 billion. Assuming
the City can't borrow on its own, MAC will have to seek
an enlargement of its authority from $3 billion to $6
billion to attempt to handle another large portion of
the City's cash need.
Given their fear of an inability to raise the
necessary funds in September, they again raised the
question of a federal guarantee or insurance program.
We offered no encouragement at all for such a request.
We continue to feel that any form of federal guarantee
or insurance is objectionable substantively. Among
other things, it would be impossible to contain and
in effect could result in the federalization of all
municipal financing. Even if we sought to move in
this direction, it would require legislation which it
would be virtually impossible to enact in time for
their September requirements and may not be achievable
at all.
The Board asked if we would be willing to state
that we were considering proposing legislation. We
believe that such an indication would be misleading
and thus potentially even more damaging. We feel
strongly that we should continue to offer no encourage-
ment for federal financial assistance.
We are now in the process of reviewing alternatives
short of federal assistance. These will include the
possibilities of: 1) further New York State action,
and 2) the mobilization of private sector support
through federal governmental urging.
If the City in fact goes through with the program
outlined, it will have met the substantive objections
which caused the closing of the market in April. The
problem then becomes one of convincing the investing
pbulic that the reforms have taken hold. Nevertheless,
given the fact that a default may, in fact, occur we
are also assessing that contingency.
I am attaching a copy of the statement we issued
after the meeting. It is supportive of New York State,
New York City and MAC in their efforts to move things
in the right direction. We will keep in close touch
with the officials on this situation and keep you advised.
Stopher Breduce Stephen 8. Gardner
Acting Secretary
FORD LIBRARY GENALD
Attachment
FOR IMMEDIATE RELEASE
August 8, 1975
MEMORANDUM FOR CORRESPONDENTS
As part of a continuing process of monitoring
New York City's financial situation, a meeting was
held today at the Treasury Department.
Representatives of the Board of Directors of
the Municipal Assistance Corporation (MAC) met
with Acting Treasury Secretary Stephen S. Gardner,
Federal Reserve Board Vice Chairman George W.
Mitchell, Assistant to the President for Economic
Affairs L. William Seidman, Deputy Director of the
Domestic Council Richard L. Dunham, Under Treasury
Secretary (Monetary Affairs) Edwin H. Yeo, III, and
Assistant Treasury Secretary Gerald L. Parsky.
The New York group consisted of Thomas Flynn,
Chairman, MAC Audit and Control Committee; Felix
Rohatyn, Chairman, MAC Financial Committee; Herb
Elish, Executive Director, MAC; and Peter Goldmark,
New York State Budget Director.
The Government officials expressed their support
for the efforts of the officials of New York State,
New York City and MAC. The Government officials felt
that the steps being undertaken by the City are sound.
The progress shown to date clearly is in the direction
which is necessary to place New York City on a sound
financial basis. A further step in this process is the
finalization of MAC's second financing plan, which
was outlined by the New York group.
o 0 o
LIBRARY
OF
Department of the
TREASURY
NEWS
WASHINGTON, D.C 20220
TELEPHONE W04-2041
THE TREASURY THE
1789
For IMMEDIATE RELEASE
July 25, 1975
MEMORANDUM FOR CORRESPONDENTS
New York City's financial problems were reviewed
today at a meeting at the Treasury Department.
At the invitation of Treasury Secretary William E.
Simon, representatives of the Board of Directors of the
Municipal Assistance Corporation (MAC) met with him,
Federal Reserve Board Chairman Arthur Burns, Assistant
to the President for Economic Affairs L. William Seidman,
and Assistant Treasury Secretary Gerald L. Parsky.
The New York group consisted of William Ellinghaus,
Chairman of the Board of MAC; Thomas Flynn, Chairman, MAC
Audit and Control Committee; Felix Rohatyn, Chairman, MAC
Financial Committee; and Peter Goldmark, New York State
Budget Director. They provided the Government officials
with a situation report on New York City's financial
problems.
The Government officials expressed their appreciation
for the information they received relating to the efforts
to work out the long-term solutions to the problems of
New York City.
Mr. Simon ended the meeting with the following statement:
"The MAC Board is performing a most critical public
function and I am most supportive of the tentative program
outlined to me. It is my hope that such a program will be
implemented, for it is only through tough measures that
New York City will be able to restore its financial
credibility."
o0o
WS-368
GERALD FORD
THE WHITE HOUSE
WASHINGTON
July 25, 1975
MEMORANDUM FOR THE PRESIDENT
FROM:
L. William Seidman fws
Secretary Simon asked me to forward to you the attached
memorandum on the New York City financial situation.
We will have an up-to-date report for you on the effect of
the New York City situation on other cities when you return.
Attachment
GERATE FORD CLERARY
THE SECRETARY OF THE TREASURY
WASHINGTON 20220
July 25, 1975
MEMORANDUM *FOR THE PRESIDENT
Subject: New York City Financial Situation
Pursuant to your request, Arthur Burns and I
have been monitoring New York City's financial
situation. Today he, Bill Seidman, and I met with
representatives of the Board of Directors of the
Municipal Assistance Corporation (MAC) to get an
update on their efforts to develop a long-term
solution to the problems of New York City.
The Board outlined to us a program which they
will be discussing with Mayor Beame, the labor
unions, and the banking institutions. It involves
a number of stringent measures, in addition to the
personnel layoffs which Mayor Beame has apparently
imposed (the Mayor has used a figure of 28,000 lay-
offs. This number must be audited, however.) The
program outlined includes:
1. Wage rollbacks to June 30th and freeze
on all wages;
2. Increase the New York City transit fare
from 35 ¢ to 45¢;
3. Reduce budget expenditures for the City
University (the City would decide whether
to accomplish this by imposing tuition
charges or by reducing expenses through
teacher layoffs, etc.) ;
4. Have the State take over the Court and
Corrections System of New York City;
5. Impose a 3-year freeze on all expenditures
for the City.
GERALD
- 2 -
They also outlined what they will be asking of the
commercial banks. Briefly, it involves increasing
MAC credit by $250 million and converting August
and September maturities into a $1 billion term loan
at the prime rate.
They asked that the Federal Government consider
playing a part by increasing the Comprehensive Employ-
ment and Training Act allotment to New York City. We
have looked into this already, and for Fiscal Year 1976,
New York City has been allocated about $165 million.
Of that total, about $33 million was a discretionary
allocation, which is one of the largest in the country.
All the discretionary funds have been committed for
Fiscal Year 1976, and so it would appear very unlikely
that such help could occur. I will discuss this,
however, with John Dunlop.
I am encouraged by what MAC is trying to do. If
all of the steps outlined are taken, the City will be
moving in the right direction. I am not convinced,
however, that these actions will restore public con-
fidence quickly enough to allow MAC to sell its bonds
immediately. I believe something more must be done to
convince the public that the reforms at the City level
will be real and permanent. One possibility might be
to place decision-making authority in the hands of
MAC's Board and not the Mayor. That's a pretty drastic
step and would require State legislative action, but
I wouldn't rule it out.
The Board did not come to us asking for federal
assistance. However, they did touch on the idea of
either federal insurance or help from the Federal
Reserve. Neither Arthur Burns nor I gave them any
encouragement at all. We did not say that under no
circumstances would we consider action. I told them
that it would be your decision, but that until we saw
a viable, concrete program of self-help, it would be
counterproductive to discuss federal financial aid.
In any event, I noted that we would need legislation
and the chances for that were practically non-existent.
They agreed to characterize our meeting publicly
by saying that we were given a report on a proposed
program, but that no program had yet been implemented.
Further, they would state that any talk of federal
assistance at this point was premature.
- 3 -
I am attaching a copy of the statement we issued
after the meeting. It is supportive of MAC's efforts
(as it should be), but makes clear that the real answer
to the City's problems is in its taking steps to help
itself.
I will be staying in close touch with this situation,
and will keep you advised.
William E. Sinon
Attachment
vono
LIBRARY
THE WHITE HOUSE
WASHINGTON
August 1, 1975
MEMO TO:
Bill Seidman
FROM:
Jim Cannon
Bill:
If you have any comments, additions
or changes, please let me know before
the pouch closes at 3 p.m.
Jun
Attachment This looss
good to me.
furs
163RA & FORD LIGHARY
THE WHITE HOUSE
WASHINGTON
August 1, 1975
MEMORANDUM FOR THE PRESIDENT
FROM:
JIM CANNON
SUBJECT:
New York City Financial Situation
Here is a status report by Dick Dunham on the financial
situation of New York City as it stands today.
This was prepared by Dick in consultation with Treasury
officials and Bill Seidman.
Attachment
CC: The Vice President
Secretary Simon
Mr. Seidman
GHO : & LIBRARY GERALD
THE WHITE HOUSE
WASHINGTON
August 1, 1975
MEMORANDUM TO:
JIM CANNON
FROM:
DICK DUNHAM
SUBJECT:
New York City Financial Crisis
The purpose of this memorandum is to bring you up to date on
the New York City financial crisis.
The central question was and is will New York City go into
default, either in August, through the failure of Big MAC
to market additional securities for the City, or later
in the fall when New York City must market its own securities.
The first test will be on August 4 when the underwriting
group headed by Chase Manhattan tries to organize for a sale
on August 7. The success or failure of next week's sale
is, therefore, the first hurdle.
Since this sale and any subsequent issues of New York City
or Big MAC depend primarily on investor perception, as much
as the actual accounting facts, the acid test is the
credibility of the Mayor's actions to correct the enormous
imbalances and accumulated deficits of the City's finances.
City Actions
The Mayor has taken, or is taking, a series of steps which,
if actually put into effect, will have both a substantive
fiscal effect of restoring balance and also a dramatic
effect which will help to restore investor confidence.
The steps announced include a wage freeze, cuts in the City
University budget, capital budget cuts, abolition of a few
agencies, a $.15 subway and bus increase, and bridge toll
increases. The value of these proposals to the current
City budget is around $500 million. Whether or not this
amount is sufficient to balance the current City budget
and/or to restore investor confidence in New York City
finances is, of course, unknown.
FORD
GERALD
LIBRARY
- 2 -
Two points in regard to these proposals must be kept in mind.
First, they must be enacted and implemented by the Mayor and,
secondly, the union rank and file and the general public
must accept them before their impact can be completely
evaluated.
That is, if the Mayor backs down or the City Council fails
to enact the wage freeze or if there is a substantial dis-
ruption in city services by union member action, investor
confidence will not be restored.
August Big MAC Sale
The underwriting group handling the August 7 sale of $1 billion
in Big MAC bonds has of this time, Friday p.m., put together
a tentative package which will provide the funds needed to
cover the August cash flow needs of the City and to prevent
default of the large note issue coming due on August 22.
The package includes $250 million by the banks, a $100 million
rollover of August notes held by the banks, $120 million
State welfare advance, $270 million in State pension fund
investments and a $250 million public offering, of which
insurance companies and other institutions will take a
major part.
This package, however, cannot be characterized as a "successful
underwriting" since only half of the issue is new public
investment. The balance is an advance, a rollover and a
State-controlled investment.
It can, therefore, be characterized as only a postponement,
which is desirable, but neither a permanent solution nor an
indication of investor confidence. If successful, it will
prevent an August default and allow more time to evaluate
the City's actions.
Broader Effects of Municipals
Treasury is monitoring and attempting to evaluate the
spillover effect of the New York City situation on other
municipals. At this time we do not see any other major
city experiencing similar difficulties.
FORD LIBRART
- 3 -
Other New York State agencies, including the Housing
Finance Agency, may be experiencing difficulty and liquidity
problems this month. In large part this is due to the
publicity of the New York City situation and also because
there is market recognition that a large portion of their
cash inflows is from New York City and City projects.
Conclusion
The situation is still serious and tenuous, but there is
cause for some optimism because of both the City's actions
and the fact that there will likely be a sale of the second
Big MAC issue, thus avoiding an August default.
LIBRARY
THE WHITE HOUSE
WASHINGTON
August 28, 1975
MEMORANDUM FOR THE PRESIDENT
FROM
L. William Seidman sws
SUBJECT
New York City
John McCloy called to relay Governor Carey's message with respect
to the current situation. Governor Carey knows that the Federal
Government cannot provide assistance. He does believe that they
could be helpful by taking "a less cavalier" attitude. Governor
Carey will be meeting with Chairman Burns to discuss this further
tomorrow.
McCloy has just returned from Europe where he reports that
European bankers and governme nt officials are very concerned
about the possible effects upon them of such a default. McCloy
also reports that Paul Volcker, President of the New York Fed,
points out that a default while the IMF is meeting in Washington
would be particularly unfortunate.
I told him I would relay the message to you.
GERALD
DEPARTMENT OF THE
THE TREASURY
ASSISTANT SECRETARY OF THE TREASURY
WASHINGTON, D.C. 20220
1789
July 24, 1975
NOTE FOR BILL SEIDMAN
ASSISTANT TO THE PRESIDENT
FOR ECONOMIC AFFAIRS
FROM: Gerald L. Parsky IS
Attached is an updated summary of
the New York City situation prior to our
being briefed tomorrow.
Attachment
LIBRARI
LIMITED OFFICIAL USE
Update on New York City Financial Situation
On Thursday, July 17, the underwriters informed the
MAC Board that a second $1 billion issue would not be
marketable unless "drastic" fiscal measures were imposed.
The underwriters also emphasized that any such action would
not be credible (and therefore not effective) unless the
City, the State and MAC fully participate in the announce-
ment and implementation of such measures.
1. Cash Flow Situation. Without new money, the City's
cash flow turns negative on approximately August 4. By
juggling accounts, it can probably operate beyond that
date, but will default on August 14, when a major payroll
comes due. On August 22, $792 million in notes are due.
2. Budget Situation. In view of the market situation
(see below), it now appears that a budget reduction far
larger than those previously discussed -- i.e., more than
$500 million -- will be required to break the impasse.
The following specific budgetary actions are being dis-
cussed:
- - wage freeze
- - pay cut for higher salaried employees
-- -- lay-offs
-- tuition charges at City University
Late last week, the Mayor -- for the first time -- conceded
that measures other than lay-offs were probably necessary.
The unions remain adamant. They contend that they
are being asked to go "cold turkey" -- to remedy in one
year a problem which has built up over 15 years -- while
everyone else proceeds on a business as usual basis. They
point specifically to the banks -- which continue to accrue
high rates of tax-exempt interest -- and to the welfare
recipients -- whose payments will remain at the same high
level.
GERALA FORD LIBRARY
UMITED OFFICIAL USE
- 2 -
MAC views its current role as attempting to mediate
between the City and the unions. It is reluctant to take
it upon itself to develop and announce a compromise pro-
posal because it believes that would be the final step
in emasculating the City administration.
The alternative to a compromise is a solution imposed
on the employees by the City and/or the State. Apart
from lay-offs, any such measures (i.e., a wage freeze)
would involve the breach of existing labor contracts.
Especially in view of a recent court decision, it is
doubtful that the Mayor has the authority to take such
steps unilaterally. We understand that Governor Carey,
as a last resort, is willing to call a special session
of the State Legislature to grant the City such authority.
The Role of the Banks
It appears clear that no voluntary agreement will be
reached without some form of concession by the New York
banks. The apparent options are:
1. Roll over short term debt holdings at a
reduced interest rate.
2. Agree to a moratorium on long term debt
amortization payments.
3. Provide large, low interest rate, loan.
Since the third option requires a substantial commitment
of new money, it is obviously the least desirable from the
banks standpoint. With respect to the first two options,
there is doubt - - especially at MAC -- that the amounts
involved will be "enough" to satisfy the other participants
in any compromise.
*/The Treasury General Counsel's office believes that uni-
lateral action would violate the Federal constitutional
prohibition against state impairment of contracts. However,
MAC's lawyers believe that there would be authority under
the state's general police powers.
- 3 -
The banks are also reluctant to increase substantially
their already large holdings of MAC debt. They fear that
the more they hold, the easier it will be for the State
Legislature to refuse to make the annual appropriation
required to meet MAC's debt service obligations.
Condition of the Market
All parties appear to agree that there will be no
market for MAC debt in August without the "drastic"
measures. When the first MAC syndicate was broken on
July 21, the two long maturities (1985 and 1990) each fell
10 points. Although a small portion of the drop can be
attributed to unrelated factors (e.g., Federal Reserve
bill sales), the price drop primarily reflects lack of
investor confidence in any security associated with
New York City. This lack of confidence was tangibly en-
hanced by the weekend statements of union leaders indicating
they would hold out, even if it meant default. Our sources
indicate that most market participants cited this apparent
tolerance of the possibility of default as a primary reason
for selling or for cancelling purchases.
The Outlook
All of our contacts are extremely pessimistic. There
is considerable doubt that the City administration is
capable of providing the leadership required to achieve a
compromise and to restore confidence. With respect to the
unions, there is doubt that (i) individual leaders will
make the necessary concessions, (ii) that the leaders can
agree among themselves as to the concessions, and (iii) that
the leaders, even if they do agree, can deliver the rank
and file.
There appears to be little prospect of further state
financial assistance. First, the state has virtually no
funds available, and certainly not enough even to make a
dent in the City's problem. Second, the state will argue
that it fulfilled its obligations through the creation of
MAC and that it is up to the other parties to act.
UNITED OFFICIAL USE
- 4 -
The Federal Role
In light of the above, all parties are again beginning
to look in our direction. Our options have not changed
much since May. They include:
1. Guarantee or purchase of City securities
(requires legislation)
2. Guarantee or purchase of MAC securities
(requires legislation)
3. Federal Reserve purchase of City securities
4. Federal Reserve purchase of MAC securities
5. Advance Revenue Sharing and Medicaid
6. Assistance under Disaster Relief Act
The new options involve providing money to MAC rather
than the City and the Disaster Relief Act approach. It
would not appear that Congress' probable reaction would
be influenced by MAC's participation. However, in view
of the fact that MAC's borrowing is secured by a legisla-
tive grant of tax revenues, the Fed might be more
comfortable with a loan to MAC, as opposed to the City.
The utility of the Disaster Relief Act is less clear.
Certainly, if civil strife or widespread loss of services
occurred, the Act (as well as other provisions of law)
would authorize the USG to provide assistance. However,
the Act does not specifically authorize the provision of
cash, which would be necessary to meet payrolls and debt
service obligations.
Of course, identifying the options does not answer the
threshold question whether the Federal Government should
act to prevent a default. On the one hand, many of the
same concerns which existed in May -- e.g., expense and
impact on Federal budget and borrowing, breach of faith
with respect to other local governments which have taken
stringent measures, etc. , -- are still present. However,
since the City has already withstood so much pressure
UNITED OFFICIAL USE
- 5 -
for reform, this time we cannot conclude with the same
degree of confidence that a default would serve as a cata-
lyst for immediate and effective action at the local level.
Accordingly, the adverse effects of default -- long term
impairment of the City's credit, risks of serious con-
sequences in the securities markets -- take on somewhat
more significance.
BERALD LIDERAY
MEMORANDUM FOR THE ECONOMIC POLICY BOARD
FROM:
William E. Simon
Secretary of the Treasury
James M. Cannon
Director, Domestic Council
SUBJECT:
New York City Financial Problem
Purpose
The purpose of this memorandum is to bring you up to
date on the New York City fiscal problem and the changes that
have occurred since the President met with Governor Carey
and Mayor Beame on May 13, 1975.
Because it is very likely that the Federal government
will be forced to become involved once again in the problem
and asked to participate in the solution, we propose that
a joint Domestic Council-Economic Policy Board Review
Group be established to monitor the situation and to deal
with urban problems in general. We also propose that the
EPB immediately establish a liaison with the N. Y. Municipal
Assistance Corporation.
Background
The fiscal problems which now beset New York City result
at least in part from circumstances which are common to most
major cities throughout the nation and in part from condi-
tions which are peculiar to New York. It is true, of course,
that the fiscal and/or management mess in New York City is
considerably more pronounced there than in many other major
cities, but it is also true that many of the symptoms lie just
below the surface in other major cities. Boston, for example,
has considerably increased its borrowing in the last few
years also to cover deficits.
If, therefore, a Federal role in the solution to the
New York City problem becomes necessary, the pattern of such
a role will create a precedent for Federal relationships with
other cities, and it will be extremely difficult, if not
impossible, to confine any such role uniquely to New York City.
- 2 -
New York City-New York State Action
Since the May 13 meeting, both the City and the State
have taken some action toward resolving the crisis.
(1) The State established the Municipal Assistance
Corporation to sell $3 billion of long term
debt which will replace an equivalent amount
of New York City short term debt and thus
solve the immediate (until September 30) cash
flow problem.
The Corporation, in addition, has some oversight
powers in regard to the management of the City
budget.
(2) The State has provided $330 million of new taxing
authority to help alleviate the FY 1975-76 City
operating budget problem.
(3) The adopted City budget does provide for some
cutbacks of personnel and some reduced services.
In May the problem was three-fold:
(a) An inability to borrow in the public market
resulting in inadequate cash to meet payrolls,
other operating expenses and debt service.
(b) The failure to present a budget for FY 1975-76
that was balanced and perceived to be credible.
(c) A long term imbalance between revenues and
expenses due in large part to fiscal mis-
management, but also due to structural weak-
nesses in the City's economy, such as shift
in the mix of population from middle class
to underprivileged, unionization,
extensive city services, etc.
Even though some tentative steps have been taken by the City
and State, basic financial problems still face the City.
They have been only slightly postponed.
LIBRARY
- 3 -
These financial problems can be broken down chronologically:
-- First, there is the question whether the Munici-
pal Assistance Corporation (Big MAC) will be
able to raise the additional $2 billion required
to meet the City's cash flow requirements
through September 30.
-- Second, the City itself must borrow from $4
to $5 billion in the short term market
between October 1 and the end of the fiscal
year.
- - Finally, there is the broader question of
market access for both short term needs and
capital improvements for future years.
I. MAC's Market Access
Two factors lead to concern about MAC's ability to
raise $2 billion in August and September. There continues
to be resistance to any security -- and particularly a
security not bearing the full faith and credit pledge --
carrying the words New York. This resistance was reflected
in the rather lukewarm response to MAC's first $1 billion
offering; it will be compounded with respect to later
issues by the sizeable quantities of MAC's debt already
in the market.
Moreover, the fact that the state legislature must
annually appropriate funds to meet MAC's debt service
obligations is another source of concern. Unlike the
typical "moral obligation" bond which requires a legisla-
tive appropriation only in the event the primary revenue
source backing the debt is inadequate, MAC's enabling
legislation requires annual legislative action merely to
provide MAC with access to the money in the debt service
fund specifically earmarked for debt service. Investors
are naturally concerned that future political considera-
tions -- even ones totally unrelated to MAC's activities --
may block or delay payments on MAC's debt.
Despite these very real problems, the consensus is
that MAC will be able to market the additional $2 billion
in August and September. It is likely, however, that the
borrowing cost for these issues will be even higher than
9+% net interest cost of the first issue. Since MAC's
debt service expenses directly reduce the City's revenues,
these high borrowing costs are a basis for concern.
- 4 -
II. The City's Market Access
Even after MAC's $3 billion "contribution" is
subtracted, the City's total short-term financing needs
during the period October 1, 1975 - March 1976 will
amount to approximately $4-5 billion. These amounts
are required primarily to refund outstanding short-term
debt and to finance the $1.6 billion capital budget
(including some $700 million in operating expenses). Such
capital financing must be done in the short-term market
since, even under the most optimistic assumptions, there
is no likelihood of the City having access to the long
term market this year.
The ability of the City to raise these funds in the
public market depends almost entirely on Mayor Beame's
actions over the next 45-60 days. If his conduct is
responsive to the market's judgment that
-- the payroll is too large;
- wage and benefit levels are too high; and
-- the range of services is too broad ------
then a market should exist in October. If not, another
source of outside funds must be found or the City will
default not later than late November or early December.
To quantify the budget picture, prior to late June,
the City could identify approximately $11.95 billion in
FY 75 - 76 revenues. Limiting expenditures to that level
through lay-offs alone would have required a reduction
in the City work force of approximately 50,000 employees.
Immediately prior to June 30, state legislative
leaders granted the City $150 million in taxing authority.
Again, looking only at the lay-off potential, this increase
reduced the required lay-offs to 30,000.
Finally, on July 3, the legislative leaders agreed to
increase the new taxing authority to $330 million. When
taken with a possible $55-60 million increase in state
aid to education, and additional state and Federal matching
funds occasioned by the revenue increases, the "final"
revenue level could be in the range of $12.35-12.40 billion.
FORD LIGRARY
- 5 -
Along with the general "flexibility" that exists in
the budget, * this revenue level would permit the Mayor
to rescind all lay-offs in the uniformed services (police,
fire, sanitation), leaving only some 4-8 thousand layoffs
in the clerical, education and health areas. And Victor
Gotbaum, president of the largest non-uniformed municipal
union, has proposed, in return for rescission of all
lay-offs in his area, that his members take their 1975-76
contracted wage increases in the form of new City short-
term debt. Mayor Beame has tentatively rejected this
proposal.
This analysis has focused on lay-offs largely because
the City has not suggested any alternative approach to
expenditure cuts -- e.g., wage freeze, tuition charges
at the City University, etc. And it is becoming more
clear that the Mayor, if left to his own devices, will
avoid any meaningful reductions in expenditures through
lay-offs or other means.
Simply stated, inattention to the expenditure side
in the next few months -- irrespective of whether a
"balanced" budget is presented - will result in the
continued unavailability of the public market in October
and beyond. The market has made the same judgment we
have -- namely that the City spends too much. Until
the City cuts its spending level significantly, there
is little likelihood of market access.
A fair question, however, is if the City in fact
balances its budget, is the market's judgment too harsh?
The fact is that the City's budget for FY 75-76 and later
years is far from balanced in any meaningful sense. In
evaluating the City's budget, the following factors,
among others, must be considered:
-- the City is continuously refunding a
cumulative short-term borrowing load
(created by past deficits) of at least
$2 billion.
-- some $700 million of operating expenses
GERATO FOAD (188427
are in the capital budget (the MAC
legislation requires that this practice
be phased out over ten years).
/ e.g. Approximately $200 million of the amount budgeted
for debt is allocated to interest on notes maturing prior
to September 30 and on notes which would have been issued
by the now defunct Stabilization Reserve Corp. Assuming
that MAC pays the interest on the maturing notes, all of
these funds will be available for other purposes.
- 6 -
-- the City includes as budget revenues all
employee pension fund earnings in excess
of 4%, more than $100 million in FY 75-76,
yet the pension funds are seriously under-
funded.
-- the City includes as budget revenues all real
estate tax liabilities, yet the delinquency
rate grew to 7% in FY 74-75 -- the total
delinquent amount may be as high as $500
million.
-- historically, the City's budget revenue
estimate has substantial overestimated state
and federal aid payments as reflected in the
large, but incorrect, "receivables" shown in
the City's annual statements.
-- historically, the City's budgets have shown
estimated revenues on an accrual basis and
expenditures on a cash basis; this practice
has the general effect of overstating revenues
and understating expenditures.
--- in FY 76-77 and beyond the City's sales tax
revenues will be reduced by substantial
amortization requirements on Big MAC debt.
Clearly, nothing the Mayor does in the next two months
will alleviate all of these conditions. But the market is
not asking for overnight miracles. What could reopen the
market is an expenditure level of $12.1 - 12.2 billion and
the application of the remaining "new money" (some $300-
350 million depending upon the size of the cuts and the
precise amount of the net interest savings referred to
in the footnote above) to certain highly visible
corrective steps. For example, the City could establish
a reserve against tax delinquencies, leave all or a portion
of the "excess" pension earnings in the funds, re-establish
its "rainy-day fund" (a general reserve against contingencies),
or remove a portion of the expense items from the capital
FORD
budget.
LIBRARY
Frankly, as implied by the above discussion, there is
little indication that the City government, left to its own
devices, is prepared to take such steps. It would appear
that only the state -- through MAC -- is in a position to
place any effective pressure on the City. MAC's ability
- 7 -
to provide meaningful direction for the City is in turn
dependent upon its awareness of the problems and its
willingness to incur the political risks involved. At
present, MAC has no staff and the Board itself is fully
occupied with the problem of raising its own funds.
Accordingly, at least on the basis of MAC's actions to
date, there can be little optimism that MAC will provide
the needed guidance.
Demands for a Federal Role
The key to restored access to the public market is
the steps the City itself takes to restore market confidence.
However, if the City is unable to sell its securities in
the fall, we will again be confronted with demands for
some form of Federal financial assistance to avoid a
default. Moreover, at that time, a default would
appear even more undesirable than it did in the spring.
A default at any time would have long term adverse effects
on the City's credit. However, in the spring it was at
least possible that a default could have served as a
catalyst for effective remedial action at the state or
local level. The intervening months have served to lessen
the catalytic potential of a default in at least two
respects.
First, the City's failure to act over the intervening
months will detract from the credibility of any action it
might take on its own. Second, the formation of MAC has
virtually exhausted the options available at the state
level. In short, the market is likely to conclude that
since the City and MAC were unable to take the necessary
steps during the six month "grace" period they received,
there is little reason to derive confidence from whatever
hasty actions they may take following a default.
In addition, any demand for Federal involvement will
probably be accompanied by a showing that some of the
problems that New York City faces can legitimately be placed
at the Federal doorstep. Mayor Beame has already begun to
use argumentation to that effect. If a major crisis occurs,
LIBRARY
- 8 -
such argumentation will be accelerated. For example, the
City can legitimately argue that the problems of illegal
aliens and policing the United Nations are Federal
responsibilities.
Recommendations
1. It is recommended that a joint Economic Policy
Board-Domestic Council Review Group be
established to monitor and study the problem
of cities or major urban areas.
By generalizing the study to include all major urban areas,
we can continue to monitor closely the New York City
situation, yet avoid the political problems inherent in any
direct attempt to pressure the City toward fiscal reform.
The agenda of such a Review Group could include:
- - Review of Federal fiscal initiatives that
may be proposed such as:
(a) Federal Insurance for Municipal debt.
(b) Federal Guarantees of Municipal debt.
(c) Federal purchase of Municipal debt.
- - Review of existing Federal powers in the event
of a major default in New York or any other
city:
(a) Federal Reserve action.
(b) Use of the Disaster Relief Act of 1974.
- - Review of existing and potential Federal programs
which may impact on the City's finances:
(a) Illegal alien problem.
(b) Cost of United Nations police.
(c) Public Assistance and Medicaid Administration.
- 9 -
(d) Improvement or speed up of Federal cash
flows.
(e) Narcotics control.
(f) Scholarships and/or tuition assistance.
(g) Review of other Federally mandated
standards and programs.
-- Review and consideration of direct or indirect
Federal involvement in financial management
improvements:
(a) Mediating or reviewing labor relations.
(b) Accounting improvements and reform.
(c) General management improvement assistance.
2. At the same time, recognizing the limited amount
of time available before another crisis develops
in New York City, it is recommended that the EPB
establish a liaison with MAC with the objective
of action by MAC to force the City to take reform
measures.
As indicated above, any direct Federal moves in this
direction would be counterproductive. Nothing would play
more into the hands of the unions and the City Administration,
which could claim - - to a highly responsive audience -- that
the Ford Administration was threatening and bullying the
City into actions designed to harm the low and middle classes.
However, MAC, if it moves quickly enough, does have
the power to force changes. While its statutory authority
is quite weak, between now and September its ability to
withhold cash provides it with substantial leverage. As
indicated above, however, to date MAC has not moved in this
direction and there is no indication that it has plans to do
so. The EPB should consider establishing contact -- probably
on a private basis -- with selected MAC Board members and
attempt to impress them with the urgency of the situation
and the importance of MAC acting while it still has the
financial leverage.
Office Memorandum
UNITED STATES GOVERNMENT
THE COMPTROLLER OF THE CURRENCY
TO
: Mr. Robert A. Mullin
Deputy Comptroller of the Currency
FROM : Mr. Thomas E. Zemke
Tn
National Bank Examiner
Secret DATE: 7/30/75
SUBJECT: New York City Obligations held by National Banks.
The following data covering banks holding New York City Bonds has been
encapsulated by the Victor staff per your request:
1,746 banks hold NYC obligations totaling 1,753,525M.
48 banks have holdings in excess of 50% of gross capital funds (see
attached list).
It was noted that numerous banks have holdings of between 10 to 20% of
capital. A detailed list of these banks could be made available if
desired. The two largest holders of bonds are Chase Manhattan Bank,
263MM and Bank of America, 113MM. Their proportionate investment to
capital is 14% and 6%, respectively.
TEZ:ryc
PALIER 18, JUL 3 11075 Helo
GERAL FORD LIBRARY
TOTAL N.Y.C. OBLIGATIONS OUTSTANDING PER REGION
AND NUMBER OF BANKS HOLDING SAME
REGION
OBLIGATIONS
NO. OF BANKS
1
42,962
74
2
587,706
172
3
215,123
130
4
41,580
114
5
143,637
117
6
137,895
138
7
90,234
206
8
75,083
162
9
34,692
197
10
71,019
151
11
57,757
183
12
46,475
44
13
20,128
41
14
189,234
17
1,753,525
1,746
PERIOD FORD LIBRARY
HOLDINGS OF N.Y.C. OBLIGATIONS
IN EXCESS OF 50% OF CAPITAL
(000's) omitted
Gross
Bonds
Capital
Par Value
As Percent
Name of Bank
Funds
NYC Bonds
Of Capital
Region 1
Citizens National Bank
Southington, Connecticut
1,149
650
56%
Harbor National Bank
Boston, Massachusetts
Y
2,624
4,060
154%
Columbus National Bank of Rhode Island
Providence, Rhode Island
V 5,796
11,300
194%
Region 2
Republic Natioral Bank of N.Y.
Brooklyn, New York City
93,156
50,760
54%
First National Bank of Dryden
Dryden, New York
1,560
1,195
77%
Deak National Bank
Fleischmanns, New York
963
1,060
110%
Citibank Suffolk N.A.
Islip Twp Bay Shore
2,874
4,230
147%
Century National Bank & Trust Co.
New York, New York
6,465
8,075
125%
Flushing National Bank
Flushing, New York
2,209
5,630
255%
Sterling National Bank & Trust Co.
New York, New York
41,259
51,215
124%
First National Bank of Norfolk
Norfolk, New York
601
338
56%
LIBRARY GERALD
Gross
Bonds
Capital
Par Value
As Percent
Name of Bank (Region 2 cont'd)
Funds
NYC Bonds
Of Capital
National Bank of Roxbury
Roxbury, New York
437
700
160%
National Bank of Stamford
Stamford, New York
1,487
805
54%
Tupper Lake National Bank
Tupper Lake, New York
1,642
910
55%
Citibank Mid Hudson, N.A.
Woodbury Twp., New York
2,646
1,915
72%
Hudson Valley National Bank
Yonker, New York
2,659
1,500
56%
Region 3
None
Region 4
None
Region 5
Industrial Bank of Washington
Washington, D.C.
2,651
1,500
56%
First National Bank of St. Marys
Leonardtown, Md.
2,915
5,300
181%
Dominion National Bank of Penins
York County, Virginia
1,278
2,000
156%
Citizens National Bank of St. Albans
St. Albans, West Virginia
1,241
675
54%
First National Bank of St. Marys
St. Marys, West Virginia
729
520
71%
First National Bank of South Charleston
South Charleston, West Virginia
2,782
4,015
144%
LIBRARY
- 3 -
Gross
Bonds
Capital
Par Value
As Percent
Name of Bank (Region 5 cont'd)
Funds
NYC Bonds
Of Capital
Gauley National Bank
Gauley Bridge, West Virginia
1,271
2,360
185%
Region 6
Boca Raton National Bank
Boca Raton, Florida
7,727
6,385
82%
First National Bank of Cape Canaveral
Cape Canaveral, Florida
2,844
4,150
145%
First National Bank of Crestview
Crestview, Florida
1,886
1,445
76%
Pan American of De Bary, N.A.
De Bary, Florida
1,084
660
60%
Flagship National Bank of Westland
Hialeah, Florida
1,277
1,000
78%
Jacksonville National Bank
Jacksonville, Florida
9,585
7,845
81%
Barnett Bank of Miami Beach
Miami Beach, Florida
7,474
5,480
73%
First National Bank of Princetown
Princetown, Florida
523
1,480
282%
Region 7
Columbia National Bank
Chicago, Illinois
2,921
2,100
72%
Roodhouse National Bank
Roodhouse, Illinois
520
955
184%
Region 8
First National Bank
Mena, Arkansas
1,597
850
53%
IBRARY
- 4 -
Gross
Bonds
Capital
Par Value
As Percent
Name of Bank (Region 8 cont'd)
Funds
NYC Bonds
Of Capital
First American National Bank
North Little Rock, Arkansas
4,194
53.5
2,245
Region 9
First National Bank of Fairfax
Fairfax, Minnesota
454
450
99.1%
Northfield National Bank
Northfield, Minnesota
799
400
50.0%
American National Bank & Trust Co.
Eare Claire, Wisconsin
6,069
5,000
82.4%
Hiawatha National Bank
Hager City, Wisconsin
540
280
51.9%
Region 10
Central National Bank & Trust Co.
Des Moines, Iowa
14,587
14,000
96.0%
National Bank of Caruthersville
Caruthersville, Missouri
844
420
49.8%
Region 11
Farmers & Merchants National Bank
Hennessey, Oklahoma
751
560
74.6%
First National Bank in Cameron
Cameron, Texas
513
350
68.2%
First National Bank of Cushing
Cushing, Texas
473
260
55.0%
First National Bank of Sanger
Sanger, Texas
735
500
68.0%
Region 12
Stockmans National Bank
Lask, Wyoming
686
450
65.6%
First National Bank of Powell
Powell, Wyoming
2,499
1,850
74.0%
- 5 -
Gross
Bonds
Capital
Par Value
As Percent
Name of Bank
Funds
NYC Bonds
Of Capital
Region 13
None
Region 14
San Luis Obispo National Bank
San Luis Obispo, California
1,911
1,830
96%
Security National Bank
Reno, Nevada
10,677
5,513
52%
FOND 2 LIBRARY
[8-753]
Possible actions with respect CONFIDENTIAL
to default by NY.C.
Determined to be Administrative Marking
Date 2/24/83 By Jr
for some (perhaps all) City security holders and for the
out
City's ability to borrow on its own credit, but having little
in the way of a broader direct social or economic impact.
Organization of USC Effort lestions consideration of usgat
At the request of the President, Secretary Simon has
Tab
designated Under Secretary Edwin Yeo as Chairman of the
Federal effort. He chairs a steering group consisting of
B
Richard Dunham, Deputy Director, Domestic Council, Roderick
Hills, Deputy Counsel to the President, Antonin Scalia,
Assistant Attorney General, and Calvin Collier, Associate
Director (Economics and Government) of OMB. Robert Gerard
of Treasury is acting as staff coordinator.
I. Financial Mechanism.
Insuring a workable mechanism for controlling the
financial affairs of the City in the event of default is
perhaps the most important priority. An effective mechanism
of this nature will in and of itself do much to satisfy the
remaining objectives.
The model for such a mechanism is the corporate
bankruptcy provisions of existing Federal law. Simply stated,
such provisions place in the hands of a Federal judge plenary
control over the financial inflows and outflows, as well as
TIBRARY
the assets, of a debtor,
Existing municipal bankruptcy provisions of Federal
law are inadequate in that they require prior written consent of
51% in interest of the city's security holders to a reorganiza-
tion plan before a Federal court can obtain jurisdiction.
CONFIDENTIAL
- 3 -
Although certain constitutional provisions are implicated in
any revision of the municipal bankruptcy law, it appears
possible to amend the law to eliminate the 51% requirement,
thus assuring the opportunity for prompt and secure Federal
court jurisdiction over the City's financial affairs.
At the same time, there is one loophole in existing
law. If default occurs and the City is sued by a security
holder, it may seek a Federal stay of such suit by filing,
among other things, a reorganization plan and a statement to
the effect that there is a "reasonable prospect" that the 51%
consent requirement can ultimately be met. Such a stay may
be granted for sixty days and extended for an additional
sixty days. To effect a permanent solution, the requisite
consents would still have to be obtained. The stay route,
however, would prevent a major potential source of chaos:
a number of legal actions resulting in conflicting injunctions
- - e.g. one payment to court ordering note holders, not
the police; another ordering the reverse, etc.
Action Required. There is no indication that the
City is working on bankruptcy matters. Moreover, we under-
stand that Governor Carey has instructed counsel for MAC to
cease their bankruptcy-related preparation. While the Carey
report may in fact be intentionally incorrect, we must be
prepared on both fronts.
Mr. Hills - Draft legislation for review by
steering group by 9/1.
Mr. Gerard - Draft reorganization plan for
FGRD & LIBRARY GERALD
review by steering group by 9/5.
CONFIDENTIAL
- 4 -
Mr. Scalia - Draft other legal papers required
in connection with stay petition under Chapter 9
by 9/5.
Steering Group - to decide by 9/3 as to legis-
lative strategy concerning amendment.
II.
Public Order.
In the event of default, the City may be financially
unable to meet payrolls. In addition, there is a possibility
that the City's mechanism for making payments may cease to
function. This poses two threats. First, in the event
payrolls are not met (for either reason) or serious un-
certainties as to pay develop, a general or partial strike
could occur and could involve the police and/or firemen.
Second, in the event assistance payments are not made, there
could be rioting beyond the capacity of local authorities to
control.
Legally, the State has primary responsibility to
deal with such matters in the first instance. Accordingly,
our preparation must be along two lines. First, we must
assess the resources (and the mobilization time required)
of the state in this regard. Second, we must assess both
our legal authority and practical ability to act, both on
the assumption that the State will act and on the assumption
that it will not.
Action Required.
Mr. Dunham - Memorandum assessing Federal and
GERALD FORD LIBRARY
State authority and resources by 9/3.
CONFIDENTIAL
- 5 -
Steering Group - Decide on 9/3 whether and
out
when liaisons with DOD and the State should
be established.
III. Federal Payments.
As suggested above, one potential source of unrest
would be an interruption in the flow of Federal payments for
welfare, medicaid and other forms of assistance. Two issues
are presented. First, what legal impediments exist in the
event the City is unable to meet its matching share obligations.
Second, how can the USG and/or the State assure continuing
flows in the event the City's payment mechanism ceases to
operate because of strikes, etc.
OMB
Mr Collier has identified three HEW programs which
constitute the bulk of Federal payments potantially
affected by a default. With respect to these programs,
further work is required in determining the legal implications
(primarily as a matter of State law) of the City's possible
failure. to meet matching requirements. In addition, it is
necessary to develop a mechanism to administer these programs
in the event of the City's failure to do SO.
To date, very little is known about the remaining
Duretor
well
programs. At the least, enough information should be
developed to permit a determination whether coverage of such
programs is essential to the success of the plan.
-
Action Required.
out
Mr. Collier - overview of remaining programs
by 9/1.
GERAL FORD LIBRARY
CONHDENTAL
- 6 -
Steering Group - Decision by 8/29 concerning
whether Mr. Collier should pursue with other USG
out
personnel development of a mechanism for USG
or State operation of City assistance programs.
IV. Banking System.
The main threat to the banking system is psychologi-
NYC
cal. adefault would not meaningfully impair the capital of
any of the major banks.
We have identified
smaller
banks (deposit range
to
) which could suffer
significant or total capital impairment
The real risk is
that such potential failures, coupled with the other un-
certainties attending a default, could cause a worldwide lack
of confidence in the major U.S. institutions.
Accordingly, we must act to insure that no liquidity
problems arise and that bank failures are averted. The Fed
has already announced that discount windows will be open.
Mr Yee has been liscussing with the EDIC the possibility
the
be
to
FDIC purchase convertible capital notes of banks
n
threatened with large capital impairments. To avoid "bail
out" charges, such purchases would involve severe penalties
for bank officials responsible for the imprudent levels of
ownership.
Action Required.
Mr. Yeo - Finalize agreement with FDIC by 9/1.
Mr. Gerard -- Prepare "Impact on Banking System"
statement for possible public release by 9/5.
FORD
- 7 -
CONFIDENTIAL
V. Operation of Essential Financial Institutions.
In the event of civil disorder certain financial
institutions -- e.g. New York Fed, Stock Exchange -- may
be unable to open due to inability of employees to travel,
security concerns, etc. Such closings could impair
essential financial operations of the USG and undermine
national and international confidence in our markets.
We should explore hig possible contingency action
are
under two assumptions: (1) conditions force a closing of
1-2 days; (2) a closing of longer duration. We will have
to identify the specific functions which cannot be interrupted.
Alternative means, if any, for performing such functions must
be developed.
Action Required.
Mr. Yeo - Determine by 8/29 whether, and with
GERALD LIBRARY
whom, liaisons should be established.
out
Mr. Gerard - Establish liaison, identify functions
and formulate alternative plans by 9/5.
VI. Orderly Markets.
Overall order (or disorder) in the capital markets
will be largely a function of our success in implementing the
other elements of the plan. However, there is one area of
special concern. In mid-September, four housing agencies
(
YSHFA, NYS Dormitory Authority, New Jersey HFA and
Massachusetts HFA) will need to fund out or roll over maturing
short term securities. These agencies have recently had
difficulties in raising funds in the public market for two
reasons. First, overall market uncertainty caused by NYC's
- 8 -
CONFIDENTIAL
problems Second, lack of understanding of the underlying
financial resources of the agencies. Such understanding
was less necessary as long as the moral obligation commitment
was viewed as a reliable credit basis. In the wake of UDC,
this is no longer the case and these securities are generally
being looked at as straight revenue bonds.
FINANCE
New
/ew YORK
STATE
HOUSING
Our primary concern is with NYSHFA Most of the
Dormitory Authority's September obligation has been prefunded.
Massachusetts and New Jersey have experienced substantially
less difficulty than the NY agencies and will be less "tainted"
by further adverse events.
At Treasury's urging, An indepth review of HFA's
underlying financial soundness is being conducted in New York.
Although hard, audited, results will not be available in
time to meet September's requirements, we do expect to have
sufficient information to determine whether notes can be
privately placed in September.
Assuring the information is relatively positive,
Mr. Yeo and HFA representatives will meet privately with
bankers during the week of September 1.
In addition, consideration should be given to the
possibility of employing Section 802 of the Housing Act of
1974. Section 802 permits Federal guarantees of taxable
state housing agencies obligations and provides a 1/3 interest
subsidy. We do not think this authority has yet been exercised
by HOD.
end of B
LIBRARY
- 9 -
COMPETTE
Action Required.
Mr. Yeo - by 8/28, decision whether to participate
in NYSHFA private placement effort. If yes,
arrange meetings for week of 9/1.
By 8/28, decision whether to pursue Section 802
option. If yes, meet ASAP with Secretary Hills.
Mr. Gerard - by 9/2, update on prospects for
other agencies.
VII. Other Matters.
A. State Legislative Liaison. The Steering Group
will want to consider whether a liaison in Albany (probably
with Senator Anderson) would be desirable in connection with
the upcoming special session of the legislature. We may be
able to help Anderson (and protect ourselves) by providing
him with our views as to the merits of the various proposals.
If we decide on a liaison, Mr. Dunham would appear to be the
best contact.
B. Public Statements. Statements will be required
as follows:
1. In the event of default: President,
Secretary Simon
2. In the event we decided to announce
GERALD LIBRARY
planning activities: Secretary Simon.
Mr. Yeo will prepare these statements for
review by the group.
C. Decisions Required. The following is a chronolo-
gical summary of the planning decisions outlined above:
- 10 -
COMPLETED
- - August 28
1. Action on HFA Private Placement
2. Section 802 option - - HUD contact
-- August 29
1. Collier contact with other USG personnel
re takeover of assistance programs
2. Liaison with NY Fed, other institutions
re emergency operation
-- September 3
1. Congressional contact on bankruptcy
amendement
2. Liaisons with DoD, NY State re preventing
unrest
3. Lizison with Anderson
GERALD FORD LIBRARY
DEPARTMENT OF THE TREASURY
THE
WASHINGTON, D.C. 20220
1784
ASSISTANT SECRETARY
AUG 6 1975
MEMORANDUM FOR THE ECONOMIC POLICY BOARD
FROM:
Gerald L. Parsky
Assistant Secretary
AS
SUBJECT:
Financial Condition of Large Cities Other Than
New York
At the Executive Committee's request, we have evaluated
the possibility that further deterioration of the municipal
market (such as might be caused by a New York City default)
might result in cash flow problems for other cities similar
to those of New York. We do not believe there is a basis
for serious concern.
The sole potential source of concern is the possibility
that the municipal market will be closed off to many
borrowers. Accordingly, cities that do not need to borrow
will not be endangered (although they may be forced to defer
capital spending). Cities that need to borrow fall into
two classes:
- - those which have issued bond anticipation
notes (BANs) to finance capital projects
and must refund maturing notes with long
term bonds or by rollover;
- - those which must borrow to pay operating
expenses.
With respect to the first class, we see little basis
for concern, except perhaps in New York State. All New
York State issuers have been severely tainted by New York
City's problems, but such taint has been principally
reflected to date only in price. Rochester, Buffalo and
Syracuse do have BANs outstanding. Moreover, in part
because of the NYC commitments of all large New York State
banks, bank credit may not be as readily available. On the
other hand, both Rochester and Eric County (Buffalo's
parent jurisdiction) successfully sold BANs on August 5.
LIBRARY
- 2 -
Elsewhere, BAN refunding does not appear to be a
problem. We have identified no city outside of New York
State with in excess of $100 million in BANs outstanding.
Even assuming temporary loss of market access, funding
for any short maturities should be well within the capacity
of the local banks to absorb.
Cities which need to borrow to finance operations
in turn fall into two subclasses. In one class, alone,
is New York City, which must borrow to finance massive
current and cumulative deficits.
The other class includes cities which borrow at one
point in a fiscal year to supply cash needs and repay
the debt out of revenues due later in the year. Among
others, Chicago, Boston and Philadelphia use such a device.
Because such borrowers are in a position to pledge an
identifiable source of revenue as security, we do not
believe they will experience difficulties in obtaining
loans, either through the municipal market or through the
banking system.
FORD
GERALD
LIBRARY
THE WHITE HOUSE
WASHINGTON
August 8, 1975
TO:
BILL SEIDMAN
FROM:
DICK DUNHAM
BERAES
LIBRARY
Proposed substitute for paragraph 3 of Treasury memo of 8/8
The State Budget Director reported that the net 1976-77
budget imbalance of projected revenues over projected
expenditures was $600-800 million.
This projected imbalance does not include $500 million
of operating expeses included in the $1.5 billion
capital budget.
Therefore, from an accounting standpoint, but not
from a legal standpoint, the imbalance is about $1.2
billion. Of course, if funds cannot be borrowed to
finance the capital budget items of $1.5 billion later
this year the total cash imbalance will be around
$2 billion.
Therefore, the City of Big MAC must borrow about
$2 billion to cover the current imbalance, the capital
budget items and the short term cash flow needs. The
total borrowing by one or the other to cover all these
needs during the period September until about March of
'76 is in the neighborhood of $4-5 billion.
Assuming the City can't borrow on its own, MAC will have
to seek an enlargement of its authority from $3 billion
to $6 billion to attempt to handle another large portion
of the City's cash need.
GERALD LIBRARY GERALD R. FORD
[8-28-75?]
MEMORANDUM FOR THE PRESIDENT
FROM
L. William Seidman
SUBJECTO
New York City
John McCloy called to relay Governer Carey's message with respect
to the current situation. Governer Carey knows that the Federal
Government cannot provide assistance. He does believe that they
could be helpful by taking "a less cavalier" attitude. Governor
Carey will be meeting with Chairman Burns to discuss this further
temorrow.
McCley has just returned from Europe where he reports that
European bankers and government officials are very concerned this
about the possible effects upon them of such a default. MsCley
also reports that Paul A. Veleker, President of the New York Fed,
points out that a default while the IMF is meeting in Washington
would be particularly unfortunate.
I told him I would relay the message toyon.
LWB: make
RBP: Chron
FORD is LIBRARY 074870
QUESTION: What are your views about the current situation
in New York City? Do Chairman Burns recent
comments signal a change in the Federal Govern-
ment's position?
ANSWER:
I am of course deeply concerned about New York
City's financial condition. In recent weeks,
a review of the City's finances by MAC and the
State has revealed deficits far larger than were
heretofore expected. These levels of deficit
mean that the problem must be attacked on two
fronts: there must be a credible current budget
as well as a longer range plan to eliminate the
cumulative burden from past years. But I
continue to believe that resources exist at the
State and local level to deal with the situation
successfully.
As he himself has pointed out, Dr. Burns'
recent statements reflect absolutely no change
in the Federal Government's position. When
Congress created the Federal Reserve System some
sixty years ago, providing a mechanism for main
taining the liquidity of our commercial banks was an
important objective. And Dr. Burns said nothing
more than that the Federal Reserve would perform
this traditional role with respect to banks
affected by New York, just as it has in so many
other cases.
BACK-
GROUND:
The essential distinction which must be kept in
mind is between providing liquidity and assuming
the risk. When the Fed provides liquidity --
"opens the discount window" -- it looks only to
the bank's credit as a source of repayment. If
the Fed, on the other hand, were to purchase
City or MAC securities from banks, its only
recourse would be against the City or MAC: the
Fed, not the banks, would bear the risk. The
Fed has never said it would purchase City or
MAC debt.
Gerald Hereld L. J. Parsky Parsby
Home: 686-1917
Office: x5164
August 28, 1975
FORD & LIBRARY GERALD