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New York City, May - October 1975 (6)
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The original documents are located in Box 78, folder "New York City, May - October
1975 (6)" 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States of America his copyrights in all of his unpublished writings in National Archives collections.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
October 24, 1975
Dear Charly:
Thank you very much for providing me with your
candid assessment of New York City's financial
problems. I understand you have discussed your
views more fully with Bill Seidman, who is keep-
ing me advised.
As you point out, it is both a difficult and delicate
problem, and I appreciate having the benefit of
your advice.
As always, thanks for your encouraging words of
support.
Sincerely,
Jay
Ford
Mr. Charls E. Walker
Charls E. Walker Associates, Inc.
1730 Pennsylvania Avenue, N.W.
Washington, D.C.
GEREAD FORD CIGRANI
OCT 2 4 1975
Dear Charly:
Thank you very much for providing me with your
candid assessment of New York City's financial
problems. I understand you have discussed your
views more fully with Bill Seidman, who is keep-
lag me advised.
As you point out, it is both a difficult and delicate
problem, and I appreciate having the benefit of
your advice.
As always, thanks for your encouraging words of
support.
Sincerely,
JERRY FORD
Mr. Charls E. Walker
Charls E. Walker Associates, Inc.
1730 Pennsylvania Avenue, N.W.
Washington, D.C.
GRF:LWS:RBP:1c
GERALD LIBRARY a FORD
MEMORANDUM FROM
CHARLS E. WALKER
DATE 10/7/75
DEAR MR. PRESIDENT:
1
Some thoughts on the
NYC problem.
2
I think your "+ax-
spending ceiling" pockage
IS great!
CN
LIBRARY
THE PRESIDENT HAS SEEN
October 7, 1975
C.F.
MEMORANDUM FOR THE PRESIDENT
I am getting very, very worried about the New York City financial problem.
Bill Simon may be right about the minimal impact of default, but I personally
believe that there's simply no way of knowing in advance just what the economic
and financial fallout would be. I am convinced that it would be much more than
the "ripple effect" that the press talks about. And in a recovery period that
has to be handled with much T.L.C., the impact on confidence in an economy in
which many, many things are still "out of whack" could be very damaging.
Politically, there seems to me to be real dynamite here. My conversations on
the Hill indicate that the odds of Congressional action are growing. I can
therefore envisage your having on your desk by Christmas a bad bill (Lud would
handle in the House, but Prox could really foul it up in the Senate). Then, if
you vetoed it in the public interest, NYC defaulted, and the roof fell in - I
don't like to think about all of that happening at the beginning of a Presidential
election year.
I have discussed this at some length with Governor Connally and I think he agrees
with me (but I'm sending him, and Simon, a copy of this, and the Governor can speak
for himself). I also think he agrees that the approach outlined in copy I've pre-
pared for my next newsletter represents the safest approach (i.e., gets the job
done without tying Uncle Sam into long run municipal fiscal support) and also one
perhaps most acceptable to the Congress.
There are false rumors circulating that I have agreed to take on a massive lobby-
ing job for the mayors and bankers on this issue. Those rumors are false. I've
talked to Hugh Carey about the problem. And I was approached by a representative
of the mayors (but no bankers), made no commitment whatsoever, but did outline the
thoughts in the enclosed copy. Bill Simon called me about the rumors and I pledged
to him that I would not commit our firm to any such project without further discus-
sion with him and The White House. I repeat that pledge.
I think this needs your early and earnest attention. A bad bill to save NYC on
your desk around December 25 would be a lousy Christmas present.
As always, yours to count on.
CC:
The Honorable John B. Connally
Charly
The Honorable William E. Simon
P.S.-Almost forgot to mention that a simple amendment to the Securities Act of 1933,
requiring State and local governments to disclose information in the same manner
as business would (according to a leading accountant) prevent fiascos of the NYC
type.
-1-
NEW YORK CITY: PART II
In our last issue we suggested that the financial problems of New York City
will not disappear (and in fact, they have worsened); that the problem is not con-
fined to Fun City but is national in scope; that the proposals now before the
Congress are not likely to be enacted ("Super Mac" or Federal guarantees of
municipal securities); and that there was a chance--but only a chance--that
legislation could be fashioned which would draw the support of "people in
Paducah, Podunk and Pocatello," a euphemism for all those voters "out yonder"
who believe that the Big Apple is getting just what it deserves. Not surprisingly,
our statements that existing legislative proposals wouldn't fly prompted queries as
to what might get off the ground. And, having been consulted by some interested
people on this matter, the fact is that we do have some ideas on what Congress
might be willing to do. In fact, a variation of our suggestions was presented
of
by the executive committee of the Conference Mayors to President Ford two
weeks ago.
Reports last week that Secretary of the Treasury William E. Simon was soften-
ing in his opposition to helping NYC were promptly knocked down by the White House.
However, the statement by highly respected Dr. Arthur F. Burns that a NYC default
could impede recovery--beyond which he refused to elaborate--bolstered the
hopes of New York officials and their supporters in Congress that something might
well be done. To this end, both the Senate and House Banking Committees are gear-
ing up for hearings on the issue.
An RFC for Cities? If Congress and the Administration feel compelled to
do something about municipal financing problems in general and NYC's in
-2-
particular, then an adequately funded, toughly managed, 1975-model RFC appears to
be the preferable approach (let's call it a "Municipal RFC," or "MRFC"). What
follows is not a specific plan, but some of the major considerations that would
have to be dealt with in mounting any such approach.
First, without doubt, the authority of MRFC should be "generic" that is,
its aid should be available to any eligible city, county, or State local assistance
authority that is able and willing to meet its terms and conditions. The chances
of getting legislation through that zeroes in on the NYC problem alone is, in our
view, next to nothing.
Second, an MRFC should provide assistance only through lending cold cash--every
effort should be made to make certain that it has no guarantee authority, however
circumscribed, that might be twisted around as a back-up for State and local securi-
ties. This provision would answer the Treasury's major objection to direct Federal
guarantees (that these would create securities as good or better than U.S. obliga-
tions).
Third, although some sort of public/private board might have overall responsi-
bility for the policies of MRFC, it should be run by a hard-nosed, take-charge finan-
cial type accustomed to driving hard bargains and making them stick. The chairman
of the board might well be the Secretary of the Treasury, but the president and chief
operating officer--the hard-nosed manager--would be in charge of making and
enforcing the deals, and we do mean deals, with supplicant governments. To help guard
against the danger that a politically-oriented operating officer might sooner or later
come to head MRFC, the policy board should contain no elected officials, but perhaps
be patterned after the Emergency Loan Guarantee Board which has done an excellent
job in monitoring the Lockheed loan guarantee. That board is chaired by the Secretary
of the Treasury, and includes the chairmen of the Federal Reserve Board and the
-3-
Securities and Exchange Commission. Also, the Congressional mandate for MRFC
should specify that its president and chief operating officer be an individual
with impeccable credentials in financial and fiscal matters.
Fourth, rather than providing MRFC with authority for either "on-" or "off-
budget" financing on its part, it should simply be able to "tap" the Treasury
for an amount specified by Congress. If the full faith and credit of the U.S.
backs up MRFC, then there is no reason to go through the charade of providing
it with its own financing authority. Moreover, this approach, through the
appropriations process, would show the Congress and the people just what the
effort costs. This is in contrast to so many loan or guarantee programs whose
real economic impact is difficult to determine.
Fifth, although the grant of Congressional authority to MRFC should be rela-
tively broad, there should be the strongest of statements concerning the strict
terms on which MRFC assistance is to be provided. Those terms (including fully
competitive interest rates) should be tough, tough, tough! In essence, any
applicant should be forced to relinquish its "sovereignty" to MRFC in exchange
for emergency financing.
The reasons for this are obvious. New York and some other cities are in
trouble because they've been living far beyond their means. (Uncle Sam would
have been in deep trouble long ago but for one important distinction. The
Federal Government has the power to print money, while States and localities
do not.) In the absence of unlimited credit and/or money-creating powers, a
family, business or governmental unit can eat too high on the hog for only
SO long--then the time comes to pay the butcher.
Although it is unfair to point to the militant New York City unions as the
sole culprit (many other factors are important, some of which, such as a heavy
-4-
welfare load, are perhaps beyond the city's control), their demands and power
illustrate the point. Their political and economic power (including that of
endangering the safety and health of the city's inhabitants) is so great that no
elected mayor or city council can stand up to them. Thus the logic of transferring
some degree of sovereignty from NYC to the State (through Big Mac) is apparent.
But NYC's problems are now so huge that, as noted, the State may be pulled down
with it.
Objection will be raised that the MRFC would be in no position to monitor
and enforce these necessary tough conditions relating to taxes and spending in
general, and services and payrolls in particular. Not SO. Our hard-nosed
financial type, the chief operating officer, should be so severe in drawing
up what is essentially a "trust indenture" with the supplicant city that any
elected official who approaches MRFC would be committing political suicide. As
a result, the number of applicants should be few indeed and the "enforcement"
problem easily manageable. Indeed, the function could probably be handled by
a relatively small group of retired city controllers and bankers with a reputa-
tion for skill and toughmindedness.
A final consideration relating to operations of MRFC involves the maturity
of the loans a president is authorized to make. Although he should be given
some latitude in this respect, generally the loans should be of very short term,
perhaps for no more than a year. The purpose of such short maturities would be
to keep a leash on the local politicians and city power brokers and blocks.
MRFC would be saying, in effect, you must get on the fiscal straight and narrow
not only to get the loan, but stay on that path or your credit line will be
revoked. In addition, short-term loans would reduce the danger of Uncle Sam
coming to play a long-run role in bolstering the fiscal positions of a large
number of cities. In other words, the loans from MRFC would be for the sole purpose
of "bridging the gap" while the city took the bitter medicine necessary to put its
fiscal affairs in order.
-5-
Businessmen who have got into financial trouble and have had to scramble
for emergency bank credit will recognize the considerations as having almost
their exact counterpart in the non-governmental sector. When a corporation
is in trouble, extension of bank lines of credit are frequently so laden with
restrictions on management that it's not much of an exaggeration to say that
the head of the company can't even go to the wash room without his banker's
permission.
We submit that, if Uncle Sam is going to do something about NYC, that
type of arrangement represents the most desirable approach--and one that might
well be sold to a majority in the Congress.
Some Political Problems. First, it will be objected that MRFC is not
really generic, but only a thinly veiled effort to bail out the Big Apple.
Answer: Both the level of funding and directives to management should provide
strong indications that any distressed city could qualify for help--provided
its leaders were to lay certain "sovereign" powers on the line.
Second, some will argue that the nation's governors would never support such
an approach, because cities are creatures of the state, and the MRFC would by-pass
State Capitals. Answer: This objection, if valid, could easily be handled by
bringing the governor of the particular state into the action through a certify-
ing and auditing role, etc. But is it really a problem? Do the governors want to
be the financial court of last resort for their cities? We don't think SO.
Third, others may maintain that with many small businesses and homeowners in
distress Congress will refuse to enact what is likely to be viewed as "bail-out"
legislation for some profligate cities while their individual and business con-
stituents suffer. Answer: If so, an additional title (or titles) can be added to
provide assistance--but still on tough terms--for distressed businesses and/or
homeowners. There is considerable support for this idea on Capitol Hill.
-6-
Fourth, many believe that the Ford Administration is set in concrete on this
issue and is not about to accept any legislation along these lines, even if it
applies across-the-board to all cities. Answer: Maybe SO. But a tightly
drawn bill, to meet legitimate and pressing city problems at a time of overall
economic and financial malaise, would be very hard to veto. Any such veto, if
followed by near-calamitous developments in the financial affairs of a number
of major cities, would have a strong negative political impact on The White House.
Conclusion. The point of all the preceding discussion is not to lay out in
specific terms a legislative proposal. It is instead to recognize that legisla-
tion to help New York and other cities may pass the Congress. And, if that be
the case, it should be drafted with extreme care. Given all our other pressing
economic and financial problems, this is no time to throw the vaults at Treasury
wide open to New York or any other hard-pressed city.
LIBRARY
[10-24-75]
THE CHASE MANHATTAN BANK. N.A.
Public Relations Divrsion 3 Chase Manhatten Field New York, H.Y. 10015
release:
IMMEDIATELY
Idaa Sims - 212-552-4407
STATEMENT BY CHASE CHAIRMAN DAVID ROCKEFELLER
ON MUNICIPAL ASSISTANCE CORPORATION
"Two days ago, a letter was sent to the Municipal Assistance
Corporation from the selected underwriters for the next HAC issue,
The Chase Manhattan Bank and Merrill Lynch, Pierce, Fenner and Smith
Incorporated. We believe there is an obligation, &S the lead under-
writers, to make the contents of that letter public," stated David
Rockefeller, Chairman of the Board of The Chase Manhattan Bank.
In part the letter to MAC said:
"It makes no sense whatever to propose that the New York City
commercial banks make a further bridge loan in the hope that
the problems will disappear before the City needs additional
funds. MAC is, in essence, a bridge but to this point the
basic problems have not been solved. Modest bridge loans as
a part of an overall package, as done in the past, are clearly
constructive, but such a tactic in the absence of at total plan,
can only be construed by investors ae temporizing and, therefore,
self-defeating.
In order to have a chance at at solution, the following steps must
be taken:
(1) An immediate, dramatic and creditable program putting
a firm, spartan control on the total expenses of the
City, which is endorsed and visibly supported by the
Governor and the legislative leaders, and implemented
by the Mayor and the KAC Board.
(2) A highly accelerated effort on the part of KAC to put
GERALD FORD LIBRARY
in place the monitoring and accounting efforts as
authorized by the Legislation and outlined in the
Prospectus."
-2-
Mr. Rockefeller went on to say, "The facts of the matter are
Jii clear to everyone. What is desperately needed is concrete action
now. À definitive program, strongly endorsed by the Governor, the
Legislature, the Kayor, and the MAC Board, must not only be announced
in full detail, but agreed to and acted upon by all parties with no
further delay."
"Every hour's delay makes the task more difficult. If there is
to be any chance of a successful financing in August, decisive action
must be taken st the earliest possible moment," Mr. Rockefeller con-
tinued.
"Until the comprehensive program has been implemented, I see no.
ossibility of & bank loan. In any event, It is our judgment that
ny bank loan could only be part of & total credible fiscal program,
as
I. Rockefeller concluded.
Letter attached)
***
/24/75
FORD & LIBRARY GERALD
Owen V. Frisby
Vice President
The Chase Manhattan Bank, N.A.
900 17th Street, N.W:, Suite 706
Washington, D.C. 20006
CHASE
Telephone (202) 833-1070
Mr. Chapin
10/24/75
[CONFIDENTIAL SUBCOMMITTEE PRINTI
[DISCUSSION DRAFTI
OCTOBER 23, 1975
94TH CONGRESS
1ST SESSION
H. R.
IN THE HOUSE OF REPRESENTATIVES
OCTOBER , 1975
Mr.
introduced the following bill; which was referred to the Com-
mittee on
A
BILL
To revise chapter IX of the Bankruptcy Act.
1
Be it enacted by the Senate and House of Representa-
2 tives of the United States of America in Congress assembled,
1
3 That chapter IX of the Bankruptcy Act is amended to read
4 as follows:
5
"CHAPTER IX
6 "ADJUSTMENT OF DEBTS OF POLITICAL SUBDIVISIONS AND
7
PUBLIC AGENCIES AND INSTRUMENTALITIES
8
"SEC. 81. CHAPTER IX DEFINITIONS.-As used in
9 this chapter the term-
J. 60-106-1
LIBRARY RERALD
2
1
" (1) 'claim' includes any bond, note, judgment,
2
demand, obligation, evidence of indebtedness, or certifi-
3
cate of beneficial interest in property;
4
" (2) 'court' means court of bankruptcy in which
5
the case is pending, or a judge thereof;
6
" (3) 'creditor' means holder of a claim against the
7
petitioner;
8
" (4) 'claim affected by the plan' means claim as
9
to which the rights of its holder are proposed to be
10
materially and adversely adjusted or modified by the
11
plan;
12
" (5) 'debt' means claim allowed under section
13
88 (a) ;
14
" (6) 'petitioner' means agency, instrumentality,
15
or subdivision which has filed a petition under this
16
chapter;
17
" (7) 'plan' means plan filed under section 90;
18
" (8) 'special tax payer' means record owner or
19
holder of title, legal or equitable, to real estate against
20
which has been levied a special assessment or special
21
tax the proceeds of which are the sole source of pay-
22
ment for obligations issued by the petitioner to defray
23
the costs of local improvements; and
24
" (9) 'special taxpayer affected by the plan' means
25
a special taxpayer with respect to whose land the plan
GERAL
BRARY
3
1
proposes to increase the proportion of special assess-
2
ments or special taxes reerred to in paragraph (8) as-
3
sessed against that land.
4
"SEC. 82. JURISDICTION AND POWERS OF COURT.-
5
"(a) JURISDICTION.-The court in which a petition is
6 a petition is filed under this chapter shall exercise exclusive
7
filed under this chapter shall exercise exclusive original jur-
8
isdiction for the adjustment of a petitioner's debts, and for
9 the purposes of this chapter, shall have exclusive jurisdiction
10 of the petitioner and its property, wherever located.
11
" (b) POWERS.-Upon a filing of a petition under this
12
chapter the court may-
13
"(1) permit the rejection of executory contracts,
14
including unexpired leases, of the petitioner upon notice
15
to the parties to such contracts and to such other parties
16
in interest as the court may designate; and
17
" (2) upon such notice as the court may prescribe
18
and for cause shown, permit the issuance of certificates
19
4
of indebtedness for such consideration as is approved
20
by the court, upon such terms and conditions, and with
21
such security and priority in payment over existing
22
obligations, secured or unsecured, as in the particular
23
case may be equitable.
24
(c) LIMITATION.-Unless the plan SO provides, the
GERALD FOND CIRRAPY
4
1 court shall not, by any order or decree, in the case or other-
2 wise, interfere with-
3
" (1) any of the political or governmental powers
4
of the petitioner;
5
" (2) any of the property or revenues of the peti-
6
tioner; or
7
" (3) any income-producing property.
8
"SEC. 83. RESERVATIONS OF STATE POWER TO Con-
9 TROL GOVERNMENTAL FUNCTIONS OF POLITICAL SUB-
10 DIVISIONS.-This chapter does not limit or impair the power
11 of any State to control, by legislation or otherwise, any politi-
12 cal subdivision or public agency or instrumentality of or in
13 such State in the exercise of the political or governmental
14 powers of that subdivision, agency, or instrumentality, in-
15 cluding expenditures for such exercise, but no State law
16
prescribing a method of composition of indebtedness of such
17
an agency, instrumentality, or subdivision shall be binding
18 upon a creditor who does not consent to such composition,
19
and no judgment shall be entered under such State law which
20
would bind a creditor to such composition without that
21 creditor's consent.
22
"SEC. 84. ELIGIBILITY FOR RELIEF.-Any State's
23
political subdivision or public agency or instrumentality
24
which is not prohibited by State law from filing a petition
25
under this chapter is eligible for relief under this chapter
FORDS & LIBRARY GERALD
5
1 if it is insolvent or unable to meet its debts as they mature,
2 and desires to adjust its debts. An entity is not eligible for
3 relief under this chapter unless—
4
" (1) it has successfully negotiated a plan of adjust-
5
ment of its debts with a majority in amount of claims
6
of its creditors;
7
" (2) it has negotiated in good faith for a reasonable
8
period of time with its creditors and has failed to obtain
9
the agreement of a majority in amount of claims of its (3) such nego-
10
creditors to such a plan of adjustment; X
is
imprac
11
4 (3) it has reasonable fears that a creditor may
12
act to obtain payment of that creditor's claim in prefer-
13
ence to another creditor.
14
"SEC. 85. PETITION AND PROCEEDINGS RELATING
15
TO PETITION.-
16
" (a) PETITION.-An entity eligible under section 84
17
may file a petition for relief under this chapter. In the case
18
of an unincorporated tax or special assessment district having
19
no officials of its own, the petition may be filed by its govern-
20 ing authority or the board or body having authority to levy
21
taxes or assessments to meet the obligations of the district.
22
" (b) LIST.-The petitioner shall file a list of its credi-
23
tors, insofar as practicable, and of its special tax payers.
24
If an identification of all the petitioner's creditors is im-
25
practicable, the petitioner shall state in the petition the
GERALD
6
1 reasons such identification is impracticable. If the list is not
2 filed with the petition, the petitioner shall file the list at such
3 later time as the court, upon its own application or upon
4 application of the petitioner, prescribes.
5
" (c)* OFFICE OF FILING AND FEES.-The petition and
6 any accompanying papers, together with a filing fee of
7 $100, shall be filed with the court in a district in which
8 the petitioner is located.
9
" (d) NOTICE.-The court shall give notice of the filing
10
or dismissal of the petition to the State in which the peti-
11
tioner is located, the Securities and Exchange Commission,
12
creditors, and special tax payers. The notice shall also state
13
that a creditor or special tax payer who files with the court a
14
request, setting forth his name and address and the nature
15
and amount of his claim, shall be given notice of any other
16
matters in which that creditor or special tax payer has a
17
direct and substantial interest. The notice required by the
18 first sentence of this subsection shall be published at least
19
once a week for three successive weeks in at least one news-
.
20
paper of general circulation published within the jurisdiction
21
of the court, and in such other papers having a general
22
circulation among bond dealers and bondholders as may be
23
designated by the court. The court may require that it
24
be published in such other publication as the court may
25
deem proper. The court shall require that a copy of the
LIBRARY
7
1 notice required by the first sentence of this subsection be
2 mailed, postage prepaid, to each creditor and special tax
3 payer of the petitioner named in the list at the ad-
4 dress of such creditor or special tax payer given in the
5 list, or, if no address is given in the list for any creditor or
6 special taxpayer and the address of such creditor or spe-
7 cial tax payer cannot with reasonable diligence be ascer-
8 tained, then a copy of the notice may, if the court SO
9 determines, be mailed, postage prepaid, to such creditor
10 or special tax payer addressed as the court may prescribe.
11 All expense of giving notice required by this subsection
12 shall be paid by the petitioner. The notice shall be first
13 published and the mailing of copies of the notice shall be
14
completed, as soon as practicable after the filing of the
15 list required by subsection (b) but not later than transmission
16
of the plan under section 90 (b)
17
" (e) STAY OF ENFORCEMENT OF CLAIMS AGAINST
18
PETITIONER.-
19
" '(1) EFFECT OF FILING A PETITION.-A petition
20
filed under this chapter shall operate as a stay of the
21
commencement or the continuation of a judicial or
22
other proceeding against the petitioner, its property, or
23
an officer or inhabitant of the petitioner, which seeks
24
to enforce any claim against the petitioner, or of an act
25
or the commencement or continuation of a judicial or
GERALD LIEVER FORDS
8
1
other proceeding which seeks to enforce a lien upon
2
the property of the petitioner, and shall operate as a stay
3
of the enforcement of any set-off or counterclaim relating
4
to a contract, debt, or obligation of the petitioner.
5
"(2) DURATION OF AUTOMATIC STAY.-Except
6
as it may be terminated, annulled, modified, or condi-
7
tioned by the court under the terms of this section, the
8
stay provided for herein shall continue until the case
9
is closed or dismissed.
10
(3) RELIEF FROM AUTOMATIC STAY.-Upon the
11
filing of a complaint seeking relief from a stay provided
12
for by this section, the court may, for cause shown, ter-
13
minate, annul, modify, or condition such stay.
14
(4) OTHER STAYS.-The commencement or con-
15
tinuation of any other act or proceeding may be stayed,
16
restrained, or enjoined by the court, upon notice to each
17
person and entity against whom such order would apply,
18
and for cause shown. The petitioner shall not be required
19
to give security as a condition to an order under this
20
paragraph.
& 21
"SEC. 86. REPRESENTATION OF CREDITORS PARTIES
22
IN INTEREST.-
23
(a) DISCLOSURE.-Every person representing more
24
than one creditor shall file with the court a list of the cred-
25
itors represented by such person, giving the name and ad-
GERALD LIBRATA
9
dress of each such creditor, together with a statement of
1
the amount, class, and character of the claim held by that
2
creditor, and shall attach to the list a copy of the instrument
3
4
signed by the owner of such claim showing such person's
authority, and shall file with the list a copy of the contract
5
6
or agreement entered into between such person and the
7
creditors represented by that person. Such person shall dis-
8
close all compensation to be received, directly or indirectly,
9
by that person. That compensation shall be subject to mod-
10
ification and approval by the court.
11
" (b) MULTIPLE COMPENSATION.-The court shall
12
examine all of the contracts, proposals, acceptances, deposit
13 agreements, and all other papers relating to the plan, specifi-
14 cally for the purpose of ascertaining if any person promoting
15 the plan, or doing anything of such a nature, has been or is
16 to be compensated, directly or indirectly, by both the peti-
17 tioner and any of its creditors, and shall take evidence under
18 oath to determine whether any such compensation has
19 occurred or is to occur. After such examination the judge
20 shall make an adjudication of this issue, and if it be found
21 that any such compensation has occurred or is to occur he
22 shall dismiss the petition and tax all of the costs against the
23 person promoting the plan or doing anything of such a
24 nature, or against the petitioner, unless such plan is modified,
J. 60-106-2
GERALE FORD
10
1 within the time to be allowed by the court, SO as to eliminate
2 the possibility of such compensation in which event the
3 court may proceed to further consideration of the confirma-
4 tion of the plan.
5
"SEC. 87. REFERENCE AND JOINT ADMINISTRATION.-
6
" (a) REFERENCE.-
7
" (1) The court may refer any special issue of fact to a
8 referee in bankruptcy or a special master for consideration,
9 the taking of testimony, and a report upon such special issue
10 of fact, if the court finds that the condition of its docket is
11 such that it cannot take such testimony without unduly de-
12 laying the dispatch of other business pending in the court,
13 and if it appears that such special issue is necessary to the
14 determination of the case. Only under special circumstances
15 may references be made to a special master who is not a
16 referee in bankruptcy. The court shall not make a general
17 reference of the case, but may only request findings of specific
18 facts.
19
" (2) The court may allow reasonable compensation for
20 the services performed by any such special master, and the
21 actual and necessary expenses incurred in connection with
22 the proceeding, including compensation for services rendered
23 and expenses incurred in obtaining the deposit of securities
24
and the preparation of the plan, whether such work has been
25 done by the petitioner or by committees or other representa-
11
1 tives of creditors, and may allow reasonable compensation
2 for the attorneys or agents of any of them. No fees, com-
3 pensation, reimbursement, or other allowances for attorneys,
4 agents, committees, or other representatives of creditors
5 shall be assessed against the petitioner or paid from any
6 revenues, property, or funds of the petitioner except in the
7 manner and in such sums, if any, as may be provided for in
8 the plan of composition.
9
(b) If more than one petition by related entities are
10 pending in the same court, the court may order a joint
11 administration of the cases.
12
"SEC. 88. CLAIMS.-
13
(a) ALLOWANCE OF CLAIMS.-In the absence
14
of an objection by a party in interest, or of a filing of a
15 proof of claim, the claim of a creditor that is not disputed,
16
contingent, or unliquidated, and appears in the list filed
17 by the petitioner under section 85 (b) shall be allowed
18
by the court. The court may set a date by which proofs
19 of claim of other creditors shall be filed. If the court does
20
not set a date, the proofs of claim must be filed before the
21
entry of an order confirming the plan. Within thirty days
22
after the filing by the petitioner of the list under section
23
85 (b), the court shall give written notice to each person
24
entity whose claim is listed as disputed, contingent, or un-
25
liquidated, informing each such person that a proof of claim
CERALE FOND LIBRARY
12
must be filed within the time fixed under the subsection.
1
If there is no objection to such plan, the court shall allow
2
3
the claim. If there is an objection, the court shall hear and
4
determine the objection.
" (b) CLASSIFICATION OF CLAIMS.-The court shall
5
6
classify the claims according to their nature.
7
" (c) DAMAGES UPON REJECTION OF EXECUTORY CON-
8
TRACTS.-If an executory contract, including an unexpired
9
lease, is rejected under a plan or under section 82 (b), any
10
person injured by such rejection has a claim against the
11 petitioner. The claim of a landlord for injury resulting from
12 the rejection of an unexpired lease of real estate or for
13
damages or indemnity under a covenant contained in such
14
lease shall be allowed, but shall be limited to an amount not
15 to exceed the rent, without acceleration, reserved by such
16 lease for the three years next succeeding the date of the sur-
17 render of the premises to the landlord or the date of reentry
18 of the landlord, whichever first occurs, whether before or
19 after the filing of the petition, plus unpaid accrued rent, with-
20 out acceleration, up to the date of surrender or reentry. The
21 court shall scrutinize the circumstances of an assignment of a
22 future rent claim and the amount of the consideration paid
23 for such assignment in determining the amount of damages
24 allowed the assignee of that claim.
13
1
"SEC. 89. PRIORITIES.-The following shall be paid
2 in full in advance of the payment of any distribution to
3
creditors under a plan, in the following order:
4
" (1) The cost and expenses of administration
5
which are incurred by the petitioner subsequent to the
6
filing of a petition under this chapter.
7
" (2) Debts or consideration owed for services and
8
materials actually provided within four months before
9
the date of the filing of the petition under this chapter.
10
" (3) Debts owing to any person or entity, which
11
by the laws of the United States (other than this Act)
12
are entitled to priority.
13
"SEC. 90. FILING AND TRANSMISSION OF PLAN.-
14
" (a) FILING.-The petitioner shall file a plan for the
15 adjustment of its debts. If such plan is not filed with its
16 petition, the petitioner shall file the plan at such later time
17 as the court, upon its own motion or upon motion of the
18 petitioner, prescribes. At any time prior to the confirmation
19 of a plan, the petitioner may file a modification of the plan.
20
" (b) TRANSMISSION OF PLAN AND MODIFICATIONS.-
21 As soon as practicable after the plan or any modification of
22 the plan has been filed, the court shall transmit by mail a
23
copy of such plan or modification, or a summary and any
24 analysis of such plan or modification, and a notice of the
GERALD
14
1
right to receive a copy, if it has not been sent, of such plan
and modification, to each of the creditors, to each of the
2
3
special tax payers affected by the plan, and to each such
4
other party in interest as the court may designate. Upon
5
request by a recipient of such summary and notice, the court
6
shall transmit by mail a copy of the plan or modification to
7
that recipient.
8
"SEC. 91. PROVISIONS OF PLAN.-A petitioner's plan
9
may include provisions modifying or altering the rights of
10 creditors generally, or of any class of them, secured or un-
11 secured, either through issuance of new securities of any
12 character, or otherwise, and may contain such other provi-
13 sions and agreements not inconsistent with this chapter as
14 the parties may desire, including provisions for the rejection
15 of any executory contract, including unexpired leases.
16
"SEC. 92. ACCEPTANCE.-
17
" (a) GENERAL RULE.-Except as otherwise provided
18 in this section, the plan may be confirmed only if it has
19 been accepted in writing by or on behalf of creditors hold-
20 ing at least two thirds in amount of the claims of each class.
21
" (b) COMPUTING ACCEPTANCE.-The two-thirds ma-
22 jority required by subsection (a) is two thirds in amount of
23 the claims-
24
"(1) with respect to which an acceptance or re-
GERALD FORD
15
1
jection has been filed, whether or any of those claims
2
have been allowed under section 88; and
3
" (2) which are not owned, held, or controlled
4
by the petitioner.
5
" (c) EXCEPTION.-It is not requisite to the confirma-
6 tion of the plan that there be such acceptance by any creditor
7
or class of creditors—
8
" (1) whose claims are not affected by the plan;
9
" (2) if the plan makes provision for the payment
10
of their claims in cash in full; or
11
" (3) if provision is made in the plan for the pro-
12
tection of the interests, claims, or lien of such creditor
13
or class of creditors.
14
" (d) ACCEPTANCE OF MODIFICATION.-If the court
15 finds that a proposed modification does not materially and
16 adversely affect the interest of a creditor, the modification
17 shall be deemed accepted by that creditor if that creditor
18 has previously accepted the plan. If the court determines that
19 a modification does materially and adversely affect the inter-
20 est of a creditor, that creditor, if entitled to accept or reject
21 the plan, shall be given notice of the proposed modification
22 and the time allowed for its acceptance or rejection. The
23 number of acceptances of the plan as modified required by
24 subsection (a) shall be obtained. The plan as modified shall
16
1 be deemed to have been accepted by any creditor who
2 accepted the plan and who fails to file a written rejection of
3
the modification with the court within such reasonable time
4 as shall be allowed in the notice to that creditor of the pro-
5 posed modification.
6
"SEC. 93. OBJECTION TO PLAN.-A creditor affected by
7 the plan or a special tax payer affected by the plan may file a
8 complaint with the court objecting to the confirmation of the
9 plan. The Securities and Exchange Commission may also file
10 a complaint with the court objecting to the confirmation of
11 the plan, but in the case of a complaint filed under this sec-
12 tion, the Securities and Exchange Commission may not seek
13 appellate review. A complaint objecting to the confirmation
14 of the plan may be filed any time prior to ten days before the
15 hearing on the confirmation of the plan, or within such other
16
time as prescribed by the court.
17
"SEC. 94. CONFIRMATION-
18
" (a) HEARING ON CONFIRMATION.-Within a reason-
19 able time after the expiration of the time set by the court
20
within which a plan and any modifications of the plan may
21 be accepted or rejected, the court shall hold a hearing on the
22
confirmation of the plan and any modifications of the plan.
23
The court shall give notice to all parties entitled to object
24
under section 93 of the hearing and time allowed for filing
25
objections,
GERALD
17
1
" (b) CONDITIONS FOR CONFIRMATION.-The court
2 shall confirm the plan if satisfied that-
3
"(1) the plan is fair and equitable and feasible and
4
does not discriminate unfairly in favor of any creditor or
5
class of creditors;
6
" (2) the plan complies with the provisions of this
7
chapter;
8
" (3) all amounts to be paid by the petitioner
9
or by any person for services and expenses in the case
10
or incident to the plan have been fully disclosed and
11
are reasonable;
12
" (4) the offer of the plan and its acceptance are
13
in good faith; and
14
" (5) the petitioner is not prohibited by law from
15
taking any action necessary to be taken by it to carry
16
out the plan.
17
"SEC. 95. EFFECT OF CONFIRMATION.-
18
" (a) PROVISIONS OF PLAN BINDING.-The provisions
19
of a confirmed plan shall be binding on the petitioner and
20
on all creditors who had timely notice or actual knowledge
21
of the petition or plan, whether or not their claims have been
22
established under section 88, and whether or not they have
23
accepted the plan.
24
" (b) DISCHARGE.-The confirmation of a plan,
25 the deposit by the petitioner of the consideration to be dis-
GERALD
18
1 tributed under the plan with a disbursing agent appointed
2 by the court, and the determination by the court that any
3 security SO deposited will constitute upon distribution a valid
4 legal obligation of the petitioner, and that any provision made
5 to pay, or secure of, the obligation, is valid shall discharge
6 the petitioner from all claims against it provided for by the
7 plan other than-
8
" (1) those excepted from discharge by the plan or
9
the order confirming the plan; and
10
" (2) those whose holders, prior to confirmation,
11
had neither timely notice nor actual knowledge of the
12
petition or plan.
13
"SEC. 96. POSTCONFIRMATION MATTERS.-
14
" (a) TIME ALLOWED FOR DEPOSIT UNDER THE PLAN.-
15 Prior to or promptly after confirmation of the plan, the court
16
shall fix a time within which the petitioner shall deposit with
17
the disbursing agent appointed by the court any consideration
18
to be distributed under the plan.
19
" (b) DUTIES OF PETITIONER.-The petitioner shall
20
comply with the plan and the orders of the court relative to
21
the plan, and shall take all actions necessary to carry out the
22 plan.
23
" (c) DISTRIBUTION.-Distribution shall be made in
24
accordance with the provisions of the plan to creditors whose
25
claims have been established under section 88. Distribution
GERALD
19
1 may be made to holders of securities of record at the date the
2 order confirming the plan becomes final whose claims have
3
not been disallowed.
4
"(d) COMPLIANCE DATE.-When a plan requires pre-
5 sentment or surrender of securities or the performance of
6 any other act as a condition to participation under the plan,
7 such action must be taken not later than five years after
8 the entry of the order of confirmation. A person who has
9 not within such time presented or surrendered that person's
10 securities or taken such other action shall not participate
11 in any distribution under the plan and the consideration
12 deposited with the disbursing agent for distribution to
13 such person shall become the property of the petitioner.
14
(e) EXECUTION OF INSTRUMENTS.-The court may
15 direct the petitioner and other necessary parties to execute
16 and deliver or to join in the execution and delivery of any
17 instruments required to effect a transfer of property under
18 the confirmed plan, and to perform such other acts, including
19 the satisfaction of liens, as the court may determine to be
20 necessary for the consummation of the plan.
21
(f) CONTINUING JURISDICTION.-The court may re-
22 tain jurisdiction over the case for such period of time as the
23 court determines is necessary for the successful execution of
24 the plan.
20
1
"SEC. 97. EFFECT OF EXCHANGE OF DEBT SECURITIES
2 BEFORE DATE OF THE PETITION.-The exchange of new
3 debt securities under the plan for claims covered by the plan,
4 whether the exchange occurred before or after the date of the
5 petition, shall not limit or impair the effectiveness of the
6 plan or of any provision of this chapter. The written consents
7 of the holders of any securities outstanding as the result of
8 any such exchange under the plan shall be included as
9 acceptances of such plan in determining the percentage of
10 the claims that have accepted the plan.".
[CONFIDENTIAL SUBCOMMITTEE PRINT]
[DISCUSSION DRAFT]
OCTOBER 23, 1975
94TH CONGRESS
1ST SESSION
H. R.
A
BILL
To revise chapter IX of the Bankruptcy Act.
By Mr.
OCTOBER ,1975
Referred to the Committee on
10/24/75
A BILL
To amend the Bankruptcy Act to add a new chapter thereto providing
for the adjustment of the debts of major municipalities.
Be it enacted by the Senate and House of Representatives of
the United States of America in Congress assembled, That the
Bankruptcy Act of 1898 (30 Stat. 544), as amended, is hereby
amended to add a new Chapter XVI thereto reading as follows:
CHAPTER XVI - ADJUSTMENT OF INDEBTEDNESSES
OF MAJOR MUNICIPALITIES
JURISDICTION AND RESERVATION OF POWERS
SEC. 801. (a) This Act and proceedings thereunder are found
and declared to be within the subject of bankruptcies and, in
addition to the jurisdiction otherwise exercised, courts of
bankruptcy shall exercise original jurisdiction as provided in
this chapter for the composition or extension of the debts of
certain public agencies or instrumentalities or political sub-
divisions, provided however, that if any provision of this chapter,
or the application thereof to any such agency, instrumentality, or
subdivision is held invalid, the remainder of the chapter, or the
application of such provision to any other agency or instrumen-
tality or political subdivision shall not be affected by such
holding.
&
(b) Nothing contained in this chapter shall be construed to
limit or impair the power of any State to control by legislation
BEBALA LIBRARY
2
or otherwise, any public agency or instrumentality or political
subdivision of the State in the exercise of its political or
governmental powers, including expenditure therefor.
DEFINITIONS
SEC. 802. The words and phrases used in this chapter have the
following meanings unless they are inconsistent with the context.
(1) The term "attorney" means an attorney licensed to
practice law by any State and includes a law
partnership.
(2) The term "claim" means a demand for performance of an
obligation to pay money, whether matured or unmatured.
(3) The term "composition" means a plan for payment of less
than the full amount of debts provided for by the plan,
with or without the extension of time for payment of
such debts.
(4) The term "court" means United States District Court
sitting in bankruptcy, and the terms "clerk" and "judge"
GERALD
3
shall mean the clerk and judge of such court.
(5) The term "creditor" means any person who owns a
claim against the petitioner. With respect to such
claims owned by a trustee under a mortgage deed of
trust, or indenture, pursuant to which there are
securities outstanding, other than voting trust
certificates, the term "creditor" means only the
trustee.
(6) The term "lien" means a security interest in property,
a lien obtained on property by levy, sequestration
or other legal or equitable process, a statutory
or common-law lien on property, or any other variety
of charge against property to secure performance of
an obligation.
ELIGIBILITY FOR RELIEF
SEC. 803. (a) Any municipality with a population in excess
of 1,000,000 inhabitants is eligible for relief under this
chapter, if the municipality is first specifically authorized
by the State to file a petition initiating a proceeding under
this chapter.
GERALD
4
(b) Any public agency or instrumentality or political sub-
division subordinate to such municipality or whose responsibilities
are restricted to the geographical limits thereof, including incor-
porated authorities, commissions and districts, for whose debts
such municipality is not otherwise liable, is eligible for relief
as a separate petitioner in the same processing in which such
municipality seeks relief under this Chapter if such agency, instru-
mentality or subdivision is not prohibited from filing a petition
by applicable State law.
PETITION FOR RELIEF AND ITS FILING
SEC. 804. (a) Any entity eligible for relief under Section
803 may file a voluntary petition under this chapter. The petition
shall state that the petitioner is eligible to file a petition,
that the petitioner is insolvent or unable to pay its debts as they
mature and that it desires to effect a plan of composition or
extension of its debts. If the list of claims required by Section
809 is not filed with the petition, the petition shall specify the
type of claims proposed to be affected and the claimants shall be
identified to the extent possible.
(b) The petition shall be filed with the court in whose
territorial jurisdiction the municipality or the major part there-
of is located.
(c) The petition shall be accompanied by payment to the clerk
of a filing fee of $100, which shall be in lieu of the fee required
GEBALE R.FORD GRAND
5
to be collected by the clerk under other applicable chapters of
this title, as amended.
STAY OF PROCEEDINGS
SEC. 805. (a) A petition filed under Section 804 shall
operate as a stay of the commencement or the continuation of any
court or other proceeding against the petitioner or any officer
or inhabitant thereof, on account of the claims proposed in the
petition or plan to be affected by the plan; and as a stay of any
act or the commencement or continuation of any court proceeding to
enforce any lien on taxes or assessments, or to reach any property
acquired by petitioner through foreclosure of any such tax lien or
special assessment lien, for the payment of obligations pursuant to
such claims.
(b) Except as it may be terminated, annulled, modified, or
conditioned by the court under Subsection (c) of this Section, the
stay provided by Subsection (a) of this Section shall continue until
the case is closed or dismissed or the property subject to the lien
is, with the approval of the court, abandoned or transferred.
(c) On the filing of a motion seeking relief from a stay
provided by Subsection (a) of this Section, the court shall set a
hearing for the earliest possible date. The court may, for cause
shown, terminate, annul, modify or condition such stay.
1030
6
(d) The commencement or continuation of any act or proceeding
other than described in Subsection (a) of this Section may be
stayed, restrained, or enjoined pursuant to Rule 65 of the Federal
Rules of Civil Procedure, except that a temporary restraining
order or preliminary injunction may be issued without compliance
with subdivision (c) of that rule.
(e) No stay, order, or decree of the court may interfere with
(1) any of the political or governmental powers of the petitioner;
or (2) any of the property or revenues of the petitioner necessary
for essential governmental purposes; or (3) the petitioner's use
or enjoyment of any income-producing property, unless the plan of
composition so provides.
CONTEST AND DISMISSAL OF PETITION
SEC. 806. (a) Any creditor may file a complaint in the bank-
ruptcy court contesting the petition for relief under this chapter
or stating any objection he has to the plan. The complaint may
be filed at any time up to ten days before the hearing on the
confirmation of the plan or within such other times as may be
directed by the court.
7
(b) The court may, upon notice to the creditors and a hearing
following the filing of such a complaint, dismiss the proceeding if
it finds that the petition was not filed in good faith, that it does
not meet the provisions or this chapter, that it has not been prose-
cuted with reasonable diligence, or that there is no substantial
likelihood that a plan of composition will be approved.
NOTICES
SEC. 807. (a) The clerk shall give prompt public notice of the
commencement of a case under this chapter; and shall as soon as cre-
ditors are identified, give all creditors notice of such commencement.
(b) The clerk shall also give notice to all creditors of the time
permitted for accepting or rejecting a plan or any modification thereof.
Such time shall be 90 days from the filing of the plan or modification
unless the court for good cause shall set some other time.
(c) The clerk shall also give notice to all creditors (1) of the
time permitted for filing a complaint objecting to confirmation of a
plan, (2) of the date set for hearing objections to such complaint,
(3) of the date of hearing of a complaint seeking dismissal of the
petition, and (4) of the date of the hearing on confirmation of the plan.
(d) The clerk shall also give notice to any person who will be
or may be adversely affected by the plan, of the pendency of the case,
and of any matters in which he has a direct and substantial interest.
(e) All notices given by the clerk shall be given in the manner
directed by the court; however, the court may issue an order at any
time subsequent to the first notice to creditors directing that those
GERALD
8
persons desiring written notice file a request with the court. If
the court enters such an order any creditor not so requesting will
receive no further written notice of proceedings under the chapter.
(f) Cost of notice shall be borne by the petitioner, unless the
court for good cause determines that the cost of notice in a particular
instance should be borne by another party.
REPRESENTATION OF CREDITORS
SEC. 808. For all purposes of this chapter any creditor may
act in person or by an attorney or a duly authorized agent or com-
mittee. Where any committee, organization, group, or individual
shall assume to act for or on behalf of creditors, such committee,
organization, group, or individual shall first file with the court
in which the proceeding is pending a list of the creditors repre-
sented, giving the name and address of each and describing the amount
and character of the claim of each; copies of the instrument or in-
struments in writing signed by such creditors conferring the authority
for representation; and a copy of the contract or contracts of agreement
entered into between such committee, organization, group, or individual
and the represented creditors, which contract or contracts shall dis-
close all compensation to be received, directly or indirectly for such
representation, which agreed compensation shall be subject to modifi-
cation and approval by the court.
9
LIST OF CLAIMS AND PERSONS ADVERSELY AFFECTED
SEC. 809 (a) The petitioner shall file with its petition, or
within such time as the court shall direct, lists of claims and
of persons who may be adversely affected by the proposed plan.
(b) The list of claims shall include the name of each known
creditor to be affected by the plan, his address so far as known
to petitioner, and a description of each claim showing its amount
and character, the nature of any security therefore and whether
the claim is disputed, contingent or unliquidated as to amount.
(c) If the proposed plan requires revision of assessments
so that the proportion of special assessments or special taxes
to be assessed against some real property will be different
from the proportion in effect at the date the petition is filed,
the petitioner shall also file with the court lists showing the
names and addresses, so far as known, of the holders of record
of title, legal or equitable, to such real property adversely
affected.
(d) The court may for cause modify the requirements of
Subsections (b) and (c) of this Section.
PROOFS OF CLAIM
SEC. 810. Unless an objection is made by any party in
interest, the claim of a creditor that is not disputed, is estab-
lished by the list of claims filed pursuant to Section 809.
6989 LIBRARY
10
The court may set a date by which proofs of claim of unlisted
creditors and of creditors whose listed claims are disputed must
be filed. If the court does not set such a date, the proofs
must be filed before the entry of the order of confirmation.
The clerk shall give notice to each person whose claim is listed
as disputed in the manner directed by the court.
PLAN OF ADJUSTMENT AND DEBT CERTIFICATES
SEC. 811 (a) The plan of composition or extension sought
under this chapter may include provisions modifying or altering
the right of creditors generally, or of any class of them,
secured or unsecured, either through issuance of new securities
of any character, or otherwise, and may contain such other provi-
sions and agreements not inconsistent with this chapter as the
parties may desire.
(b) The holders of all claims regardless of the manner in
which they are evidenced, which are payable without preference
out of funds derived from the same source or sources shall be of
one class. The holders of claims for the payment of which speci-
fic property or revenues are pledged, or which are otherwise
given preference as provided by law, shall constitute a separate
class or classes of creditors.
(c) If two thirds of the creditors of any class
materially and adversely affected by the plan who vote for
acceptance or rejection do not accept the plan,
11
the plan shall provide for payment in cash of the value of the
claims of such creditors, or for such method of protection as
will, consistent with the circumstances of the particular case,
equitably and fairly provide for the realization by them of the
value of their claims.
(d) If any controversy shall arise as to whether any
creditor or class of creditors shall or shall not be materially
and adversely affected, the issue shall be determined by the
judge, after hearing, upon notice to the parties interested.
(e) During the pendency of a proceeding for a plan of
composition or extension under this chapter, or after the
confirmation of the plan if the court has retained jurisdiction,
the court may, upon good cause shown, authorize the petitioner
to issue certificates of indebtedness for cash, property or
other consideration approved by the court, under such terms
and conditions and with such security and priority in payment
over existing obligations as in the particular case may be
equitable. Notwithstanding any other provision of law except
Section 820 of this chapter, the court shall have plenary juris-
diction of any action which may be brought against petitioner to
enforce compliance with the terms of any such certificates of
indebtedness.
FILING OF PLAN AND NOTICE OF TERMS
SEC. 812. (a) The petitioner shall file a plan with its
petition or at such later time as the court may direct.
12
(b) As soon as practicable the clerk shall transmit to the
creditors or other interested persons notice of the provisions of
the plan and any modification thereof in such manner as the court
may direct.
ACCEPTANCE OR REJECTION OF PLAN
SEC. 813. (a) Unless his claim has been disallowed, any
creditor who is included on a list filed pursuant to Section 809
or who files a proof of claim pursuant to Section 810 may accept or
reject a plan or modification thereof within the time set pursuant
to Subsection 807(b).
(b) Acceptance shall not be required from any creditor or class
of creditors whose claims are not materially and adversely affected by
the plan or whose claims are provided for pursuant to Section 811(c).
REFERENCE OF ISSUES AND COMPENSATION
SEC. 814. (a) The judge may refer any special issues of fact
to a referee in bankruptcy, magistrate or another special master
for consideration, the taking of testimony, and a report upon such
special issues of fact, if the judge finds that the condition of his
docket is such that he cannot take such testimony without unduly de-
laying the dispatch of other business pending in his court, and if
it appears that such special issues are necessary to the determina-
tion of the case. Only under special circumstances shall reference
be made to a special master who is not a referee in bankruptcy or
a magistrate. A general reference of the case to a master shall
not be made, but the reference, if any, shall be only in the form
of requests for findings of specific facts.
AIBRARY
13
(b) The court may allow reasonable compensation for the
services performed by any such special master who is not a
salaried Federal employee, and the actual and necessary
expenses incurred in connection with the proceeding, including
compensation for services rendered and expenses incurred in
obtaining the deposit of securities and the preparation of
the plan, whether such work may have been done by the
petitioner or by committees or other representatives of
creditors, and may allow reasonable compensation for the
attorneys or agents of any of the foregoing: Provided, however,
That no fees, compensation, reimbursement, or other allowances
for attorneys, agents, committees, or other representatives
of creditors shall be assessed against the petitioner or paid
from any revenues, property, or funds of the petitioner except
in the manner and in such sums, if any, as may be provided for
in the plan of composition. An appeal may be taken from any
order making such determination or award to the United States
Court of Appeals for the circuit in which the proceeding under
this chapter is pending, independently of other appeals which
may be taken in the proceeding, and such appeal shall be heard
summarily.
GERALD R.FORD GERANT
14
HEARING ON CONFIRMATION OF PLAN
SEC. 815. (a) Within a reasonable time after the expiration of
the time within which a plan and any modifications thereof may be
accepted or rejected, the court shall set a hearing on the con-
firmation of the plan and modifications, and the clerk shall give
notice of the hearing and time allowed for filing objections as
provided in Subsection 807(c).
(b) Any creditor, or any other party in interest may file
a complaint objecting to the confirmation of the plan. The com-
plaint shall be served on the petitioner, and such other persons
as may be designated by the court, at any time prior to the date
of the hearing on confirmation or such earlier date as the court
may set.
(c) Before concluding the hearing on confirmation of the
plan the judge shall inquire whether any person promoting the
plan or doing anything of such a nature, has been or is to be
compensated, directly or indirectly, by both the petitioner
and any creditor, and shall take evidence under oath to make
certain whether or not any such practice obtains or might
obtain.
LIBRARY
15
(d) After such examination the judge shall make an adjudi-
cation of this issue, and if he finds that any such practice
obtains, he shall forthwith dismiss the proceeding and tax all
of the costs against such person, or against the petitioner,
unless such plan be modified within the time to be allowed by
the judge so as to eliminate the possibility of any such
practice.
(e) At the conclusion of the hearing, the judge shall
make written findings of fact and his conclusions of law
thereon, and shall enter a decree confirming the plan if he
finds and is satisfied that (1) it is fair, equitable, and
for the best interests of the creditors and does not discrimi-
nate unfairly in favor of any creditor or class of creditors;
(2) complies with the provisions of this chapter; (3) has been
accepted by creditors, holding two-thirds in amount of claims
of all classes materially and adversely affected by the plan
who have accepted or rejected the plan but exclusive of
claims provided for pursuant to Subsection 811(c) and of
GERALD P
16
claims owned, held, or controlled by the petitioner; (4) all amounts
to be paid by the petitioner for services or expenses incident to
the composition have been fully disclosed and are reasonable; (5) the
offer of the plan and its acceptance are in good faith; and (6) the
petitioner is authorized by law to take all action necessary to be
taken by it to carry out the plan. If not so satisfied, the judge
shall enter an order dismissing the proceeding. No case shall be
reversed or remanded for want of specific or detailed findings un-
less it is found that the evidence is insufficient to support one
or more of the general findings required in this section.
MODIFICATION OF PLAN
SEC. 816. Before a plan is confirmed, changes and modifications
may be made therein with the approval of the judge after hearing
upon such notice to creditors as the judge may direct, subject to
the right of any creditor who has previously accepted the plan to
withdraw his acceptance, within a period to be fixed by the judge
and after such notice as the judge may direct, if, in the opinion
of the judge, the change or modification will materially and ad-
versely affect such creditor, and if any creditor having such
right of withdrawal shall not withdraw within such period, he shall
be deemed to have accepted the plan as changed or modified:
Provided, however, That the plan as changed or modified shall
comply with all the provisions of this chapter and shall have been
accepted in writing by the petitioner.
17
EFFECT OF PLAN
SEC. 817. (a) The provisions of a confirmed plan shall be binding
on the petitioner and on all creditors, whether or not they are
affected by it, whether or not their claims have been listed, filed,
or allowed, and whether or not they have accepted the plan.
(b) The confirmation of a plan shall extinguish all claims
against the petitioner provided for by the plan other than those
excepted from discharge by the plan.
DUTY OF PETITIONER AND DISTRIBUTION UNDER PLAN
SEC. 818. (a) The petitioner shall comply with the provisions
of the plan and the orders of the court relative thereto and shall
take all actions necessary to carry out the plan.
(b) Subject to the provisions of Subsection (c), distribution
shall be made in accordance with the provisions of the plan to
creditors (1) whose proofs of claim have been filed and allowed or
(2) whose claims have been listed and are not disputed. Distribu-
tion to creditors holding securities of record shall be made to the
record holders as of the date the order confirming the plan becomes
final.
(c) When a plan requires presentment or surrender of securities
or the performance of any other act as a condition to participation
under the plan, such action must be taken not later than five years
after the entry of the order of confirmation. Persons who have not
within such time presented or surrendered their securities or taken
such other action shall not participate in the distribution under
the plan.
GENALD FORD
18
(d) The court may direct the petitioner and other necessary
parties to execute and deliver or to join in the execution and delivery
of any instruments required to effect a transfer of property pursu-
ant to the confirmed plan and to perform such other acts, including
the satisfaction of liens, as the court may determine to be necessary
for the consummation of the plan.
UNCLAIMED SECURITIES
SEC. 819. Any securities, monies, or other property remaining
unclaimed at the expiration of the time allowed for presentment or
surrender of securities or the performance of any other act as a
condition to participation in the distribution under a confirmed
plan shall become the property of the petitioner.
TERMINATION OF JURISDICTION
SEC. 820. The court shall retain jurisdiction of a proceeding
under this chapter until the proceeding is dismissed or until the
court is satisfied that the plan of composition or extension has been
operating satisfactorily for a reasonable length of time.
LIBRARY
SECOND DRAFT
October 24, 1975
NEW YORK CITY
Events are now rushing to an apparent climax in the
financial affairs of New York City.
days ago the
city tottered on the brink of a default and was saved from
PENSION FUND
that fate by an eleventh-hour decision of the teachers union,
The next day, Mayor Beame testified here in Washington
that the financial resources of the city and of the State of
New York were exhausted. Governor Carey agreed. It's now
up to Washington, they said, and unless the Federal Government
intervenes, New York City will no longer be able to pay its
WITHIN A. SHORT TIME
bills [a 9 of December +.]
Responsibility for New York City's financial problems
is being left on the front doorstep of the Federal Govern-
ment -- unwanted and abandoned by its real parents.
S your President, I believe the time has come to state
my position personally to the citizens of New York and to
GERALD
-2-
those across the land:
-- To sort out fact from fiction in this terribly complex
situation;
-- To say what solution will work and what should be
cast aside;
-- And to tell all Americans how the problems of New
York City relate to their own lives.
Many explanations have been offered about what led New
York City into this quagmire.
Some have said it was long-range economic factors such
as the flight to the suburbs of the city's more affluent
citizens, the migration to the city of poorer people, and
the departure of industry.
Others have said that the big metropolitan city has
become obsolescent, that decay and pollution have brought a
deterioration in the quality of life, and that a downfall
could not be prevented.
SURARY
(MORE)
3
Let's face the facts: many other cities in America have
faced these same challenges, and they are still financially healthy
today. They have not been luckier than New York; they have simply
been better managed.
There is an old saying: "The harder you try, the luckier you
are. "
During the last decade, the politicians of New York have
allowed the budget to triple. No city can expect to reamin solvent if
it allows its expenses to increase by an average of 12% every year,
while its tax revenues have been increasing by only 4 to 5% a year.
Consider what this has meant in specific terms:
4
-- New York City's payroll costs are the highest in the United
States. A sanitation worker with three years experience now receives
a base salary of nearly $15,000 a year. Fringe benefits and retirement
costs average more than 50% of base pay. Four-week paid vacations
and unlimited sick leave after only one year on the job. Where else?
-- In most cities, city employees are required to pay 50% or
more of the cost of their pension. New York City is the only major city
in the country that picks up the entire burden.
-- And when retirement for municipal employees does come,
it often comes much earlier than in most cities, and the system has been
rigged so that most can retire at pensions considerably higher than any
sound retirement plan would permit.
-- New York City has 18 municipal hospitals; yet, on an average
day, 25% of the hospital beds are empty. Meanwhile, the city spends
millions more to pay the hospital expenses of those who use private
hospitals.
FORD i LIBRARY GERALD
5
-- New York City also operates one of the largest universities
in the world, free of tuition for any high school graduate, rich or poor,
who wants to attend.
-- As for the much discussed welfare burden, more than one
current welfare recipient in ten is legally ineligible for welfare assist-
ance.
I do not blame all the people of New York City for their
generous motives or for their present plight. I do blame those who have
misled the people of New York City about the inevitable consequences
of what they have allowed to happen over the last 10 years.
The consequences are incontrovertible:
-- A steady stream of unbalanced budgets;
-- Massive growth in the city's debt;
-- Extraordinary increases in public employee contracts;
GERALD
- -6-
-- And total disregard of [their independent experts
who warned again and again that the city was courting disaster.
There can be no doubt where real responsibility lies.
And when New York City now asks the rest of the country to GUARANTEE
[pay] its bills, it should be no surprise to its leaders that
many Americans ask why. Why should they SUPPORT advantages
in New York that they have not been able to afford for their
own communities? Why should all the working people of this
country be forced to rescue those who bankrolled New York
LARGE INVESTORS AND BANKS ?
City's policies for so long -- the big banks [and creditors?]
In my judgment, no one has yet given these questions a satis-
factory answer.
Nor can I.
Instead, Americans are told that unless the rest of
the country bails out New York, there will be certain catastrophe
for the United States and perhaps for the world. There is no
objective evidence to support that conclusion. It would be
6a
To be sure there are risks that default could temporarily unsettle
financial markets. But these markets have already made a substantial
adjustment in anticipation of a possible default by New York City.
Moreover, claims have been made that because of New York City's
troubles, other municipalities will have grave difficulties in selling
their bonds.
But, the New York City fiasco is unique among municipalities.
Other communities have a solid reputation for living within their means.
In recent days and weeks, other local governments have gone to investors
with clean records of fiscal responsibility and have had no difficulty
raising funds.
The more important risk is that any attempt to provide a blank
check for the politicians of New York City could insure that no long-run
solution to the city's problems would occur.
-7- -
more accurate to say that no one really knows precisely what
To be sure there are risks that default could unsettle financial markets
and at least temporarily these create financing difficulties for weaker
municipalities. But financial markets have already made a substantial
adjustment in anticipation of a possible default by New York City. And
the more important risk is that any attempt to provide a blank check
for the politicians of New York City would insure that no long-run
solution to the city's problems would be possible.
of the whole Nation would not be ceriously set back.
I can understand why some people disagree with this
conclusion and would speak out about their reservations.
They believe other prophets the ones whese carlier prophecies
brought New York City to its present state.
What I cannot understand - and what nobody should
condone -- is the blatant attempt in some quarters to frighten
the American people and their Representatives in Congress into
panicky support of patently bad policy. E eay] the people of
FORD is LIBRARY GERALD
-8-
this country will not be stampeded; they will not panic when
a few desperate New York politicians and bankers try to scare
the mortgage payments out of them.
What we need now is a calm, rational decision as to what
the right solution is -- the solution that is best for the
people of New York and best for all Americans.
(EPB to check Lockheed and Penn Central casss)
To be effective, the right solution must meet three
basic tests:
-- It must maintain essential services for the people
of New York City. It must protect the innocent victims of
this struggle. [These citizens must be assured that their
governments, city, state and Federal, will not punish them
for the fiscal sins of others ]
ASSURE
-- Second, the solution must make absolutely certain]
that New York City can and will achieve and maintain a balanced
FORD i LIBRARY GERALD
- -9-
budget in the years ahead.
-- And third, the right solution must guarantee that
neither New York City nor any other American city ever becomes
a [permanent dependent ward of the Federal Government.
GEBALO VORD
10
There are at least eight different proposals under con-
INTENDED
sideration by the Congress to prevent default. They are all
variations of one basic theme: that the Federal Government
THE AVAILABILITY of FUNDS TO
would guarantee [the future bonds of New York City that it
could borrow additional money in the financial markets. The
sponsors of these bills say that the guarantee would be short-
term because New York City could be forced by Federal law to
balance its books within three years.
I am fundamentally opposed to this purported solution,
and I will tell you why.
Basically, it is a mirage. By giving a Federal guarantee we would
be reducing rather than increasing the prospect that the city's budget
will ever be balanced. New York City's politicians have proved in the
past that they will not face up to the city's massive network of pressure
groups as long as any alternative is available. If they can scare us into
providing that alternative now, why should they not be confident of scaring
us into providing it three years from now? In short, it encourages the
continuation of "politics as usual" in New York -- which is precisely not
FORD i LIBRARY GERALD
the way to solve the problem.
-11-
As long as "politics as usual continues in New York -- as
long as the present power coalition remains undisturbed -- there
can be no serious hope that hard, tough decisions will be taken
"
for long-term reform. Federal guarantees would change nothing
in New York's power structure. Instead, they would inevitably
lead to long-term Federal control over the city's affairs of
the city -- New York would become a colony of Washington --- or
vice versa
Such a step would violate the spirit of our Federal
SUCH A STEP
Constitution
It
would set a terrible precedent for the rest
of the Nation. It would promise immediate rewards and eventual
rescue to every other city that followed the example of our
largest city. What restraint would be left on the spending
of other local and state governments once it became clear to
them that there is a Federal rescue squad that will always
arrive in the nick of time?
(MORE)
[to replace pages 12 and 13]
Finally, we must all recognize who the primary beneficiaries
of a Federal guarantee program would be. The immediate beneficiaries
would not be the recipients of the services provided to New York City
residents because the really essential public services must and will
continue to be provided.
The prime beneficiaries would just be the New York politicians
who would thus be excused from bearing the responsibilities of the
profligacy of their past decisions and further excused from now making
the hard decisions required to restore the fiscal integrity of the city.
The second beneficiaries would be the investors
and financial institutions who purchased these securities anticipating
a high rate of tax-free return.
Does this mean there is no solution? Not at all. There is a
fair and sensible way to resolve this issue, and this is the way to do it.
GERALD
LIBRARY
-13-
as gains in risk-taking. And when the risks do, turn out to
be bad, as in New York City, I do not believe that the Federal
Government and all the taxpayers / of this country should then
A
make them good. To me, it is clear that those who made the
free choice to invest their money in New York City should now
bear the risk, not the 200,000,000 Americans who never made
such a choice.
Does this mean there is no solution? Not at all. There
is a fair and senisble way to resolve this issue, and this is
the way to do it:
NERALD
-13a
First, I propose that the leaders of New York face
up to reality. Either they must take firm steps to avoid
default, or they should prepare to accept the inevitable.
They argue that they have run out of resources to help
the city. I disagree. What they have run out of are
alterńatives that are politically easy. They can still
take the tough but decisive step of raising their taxes.
And if they do, they can save themselves from default.
ADVANT
[p. 13 (b) lead in]
GERALD
I am well aware that New York has had increasing difficulty
raising money to pay its bills.
If, at some point, the city is unable to pay all of its bills, legal
confusion could result. In order to prevent this confusion - - and to
insure that the city can continue to provide for essential public services
-- Federal bankruptcy law must be changed,
law is inadequate to deal with this problem Therefore, I
will tomorrow submit to the Congress special legislation pro-
viding the Federal Courts with sufficient authority to[earry PRESIDE
OVER an orderly reorganization of the City's financial affairs
SHOULD THAT BECOME NECESSARY.
How would this work? The City, with State approval,
would file a petition with the Federal District Court in
New York under a proposed new Chapter XVI of the Bankruptcy
Aqt. The petition would state that the City is unable to pay
its debts as they mature and that the City desires to work out
an adjustment of its debts with its creditors.
[p. 13 (b) lead in]
GERALD
LIBRARY
I am well aware that New York has had increasing difficulty
raising money to pay its bills.
If, at some point, the city is unable to pay all of its bills, legal
confusion could result. In order to prevent this confusion -- and to
insure that the city can continue to provide for essential public services
-- Federal bankruptcy law must be changed,
law is inadequate to deal with this problem Therefore, I
will tomorrow submit to the Congress special legislation pro-
viding the Federal Courts with sufficient authority to PRESIDE
PRESIDE
OVER
OVER an orderly reorganization of the City's financial affairsA
SHOULD THAT BECOME NECESSARY.
How would this work? The City, with State approval,
would file a petition with the Federal District Court in
New York under a proposed new Chapter XVI of the Bankruptcy
Act. The petition would state that the City is unable to pay
its debts as they mature and that the City desires to work out
an adjustment of its debts with its creditors.
The Court will accept jurisdiction of the case and pro-
vide for an automatic stay of suits by creditors so that the
essential functions of the City will not be disrupted. This
stay, essentially an injunction, would continue until the pro-
ceeding is terminated. This will enable an orderly plan to be
AN ARRANGEMENT
developed whereby the City can work out [a composition with its
creditors. [This might take the form of payment in full but
over a longer period of time, or it might involve payment for
less than the full amount due the craditors.]
While the City is working out a compromise with its
creditors the essential governmental functions of the City
CURRENT LAN
would continue. under the financial direction of the Court and
the State financial control Board.]
FORD & LIBRARY GERALD
I
The proposed legislation will include provision that as
a condition of the City petitioning the Court, [that] the City
NOT ONLY
must file a good faith plan [which will not only provid] for
[partia]] payment n East its creditors but [which] also [establish]
-14-
PRESENT A PROSRAM FOR PLACINT
the fiscal affairs of the City on a sound basis ithin a reason-
able period of time ]
In order to meet the short term needs of the City the
Court will be empowered to issue debt certificates covering new
loans to the City which would be paid out of future tax revenues
ahead of other creditors.
Thus, the legislation I am proposing will do three essential
things. First, it will prevent, in the event of a default, all
City funds from being tied up by lawsuits. Secondly, it will
enable an orderly plan to be developed for [partia]] payment n To
New York's creditors over the long term. Thirdly, it will
enable some new borrowing secured on a priority basis by future
tax revenues.
Let us not dilude ourselves that this proposed legisla-
tion will in and of itself put the affairs of New York City
in order without the need for some hard measures to be taken
by the officials of New York City and State. This must include
FORD is LIBRARY GERALD
-15-
either increased revenues or expenditure cuts or some combina-
tion of both that will bring them to a sound financial position.
Our careful examination has indicated, however, that those
measures are neither beyond the realm of possibility nor be-
yong the demands of reason. If they are taken, New York City
will, with the assistance of the legislation I am proposing,
be able to restore itself as a fully solvent operation, within
a
reasonable period of time.]
To summarize, the plan I am recommending tonight is
this: if New York fails to act in its own behalf, there
PROCEEDING
should be an orderly [default] supervised by a Federal Court.
This plan will work. It will work because it is fair ]
The ones who will be hurt by this plan will be those
who are now fighting so hard to protect their power and
their profits: New York politicians and the city's creditors.
NEED
The creditors [will] not be wiped out; how much they will be
GERALD
-16-
hurt will depend upon the future conduct of the City's
politicians.
For the people of New York, this plan will mean that
essential services will continue. There may be some temporary
inconveniences, but that will be true of any solution that is
adopted. For the financial community, the défault may bring
some temporary disorder but the repercussions NEED not be
large or long-lasting. In fact, there is solid reason to
believe that once the uncertainty of New York is ended,
n
vesters will begin returning to the markets and thos markets
will be sturdier. Finally, for the people of the United
States, this plan means that they will not be
(MORE)
- 17 -
asked to assume a burden that is not of their own making and
should not become their responsibility. This is a fair and
honorable way to proceed.
In conclusion, let us pause for a moment to consider
what the New York City experience means for the United
States.
Two weeks ago, I spoke to you about the choice I believe
we face as a nation: the choice between continuing down a
path of higher government spending, higher government deficits,
and more inflation or taking a new direction by cutting our
taxes and cutting the growth in government spending. Down
one fork, I said, lies the wreckage of many great nations of
the past. Down the other lies the opportunity for greater
prosperity and greater freedom.
Tonight I think it is clear what path New York City
chose. None of us can take any pleasure from this moment,
- 18 -
because the leaders of New York were in a very basic sense
SPENDING
following the same practices they saw in Washington. The
difference is that Washington owns printing presses and can
always print more money to pay its bills. But ultimately
the practice of living beyond your means catches up with a
nation just as it catches up with a family or city. And for
the citizens of that nation, the bill comes due either in
the form of higher taxes or the harshest and most regressive
tax of all, inflation.
All of us tonight care especially about the people of
New York City: they have worked hard over the years to
create one of the greatest centers of civilization. But as
we work with them now to overcome their difficulties, let us
never forget what led that city to the brink. And let us
resolve that these United States will never reach the same
crisis,
Thank you and good evening.
GERALD
10/25/75
NEW YORK CITY
Events are now rushing to an apparent climax in the financial
affairs of New York City.
days ago the city tottered on the
brink of a default and was saved from that fate by an eleventh-hour
decision of the Teachers Union Pension Fund.
The next day, Mayor Beame testified here in Washington that
the financial resources of the city and of the State of New York were
exhausted. Governor Carey agreed. It's now up to Washington, they
said, and unless the Federal Government intervenes, New York City will
no longer be able to pay its bills within a short time.
Responsibility for New York City's financial problems is being
left on the front doorstep of the Federal Government -- unwanted and
abandoned by its real parents.
GERALD
As your President, I believe the time has come to state my
position personally to the citizens of New York and to those across the land:
2
-- To sort out fact from fiction in this terribly complex
situation;
-- To say what solution will work and what should be cast aside;
-- And to tell all Americans how the problems of New York City
relate to their own lives.
Many explanations have been offered about what led New York
City into this quagmire.
Some have said it was long-range economic factors such as the
flight to the suburbs of the city's more affluent citizens, the migration
to the city. of poorer people, and the departure of industry.
Others have said that the big metropolitan city has become
obsolescent, that decay and pollution have brought a deterioration in
the quality of life, and that a downfall could not be prevented.
GERRATE FORD LIBRARY
3
Let's face the facts: many other cities in America have faced
these same challenges, and they are still financially healthy today.
They have not been luckier than New York; they have simply been better
managed.
There is an old saying: "The harder you try, the luckier you are. "
During the last decade, the politicians of New York have allowed
the budget to triple. No city can expect to remain solvent if it allows
its expenses to increase by an average of 12 percent every year, while
its tax revenues have been increasing by only 4 to 5 percent a year.
Consider what this has meant in specific terms:
-- New York City's payroll costs are the highest in the United
States. A sanitation worker with three years experience now receives
a base salary of nearly $15,000 a year. Fringe benefits and retirement
GERAED
LIGRARY
4
costs average more than 50 percent of base pay. Four-week paid
vacations and unlimited sick leave after only one year on the job.
Where else?
-- In most cities, city employees are required to pay 50 percent
or more of the cost of their pension. New York City is the only major
city in the country that picks up the entire burden.
-- And when retirement for municipal employees does come, it
often comes much earlier than in most cities, and the system has been
rigged so that most can retire at pensions considerably higher than any
sound retirement plan would permit.
-- New. York City has 18 municipal hospitals; yet, on an average
day, 25 percent of the hospital beds are empty. Meanwhile, the city
spends millions more to pay the hospital expenses of those who use
private hospitals.
5
-- New York City also operates one of the largest universities
in the world, free of tuition for any high school graduate, rich or poor,
who wants to attend.
-- As for the much discussed welfare burden, more than one
current welfare recipient in ten is legally ineligible for welfare assist-
ance.
I do not blame all the people of New York City for their generous
motives or for their present plight. I do blame those who have misled
the people of New York City about the inevitable consequences of what
they have allowed to happen over the last 10 years.
The consequences are incontrovertible:
-- A steady stream of unbalanced budgets;
-- Massive growth in the city's debt;
-- Extraordinary increases in public employée contracts;
6
-- And total disregard of independent experts who warned again
and again that the city was courting disaster.
There can be no doubt where real responsibility lies. And when
New York City now asks the rest of the country to guarantee its bills,
it should be no surprise to its leaders that many Americans ask why.
Why should they support advantages in New York that they have not been
able to afford for their own communities? Why should all the working
people of this country be forced to rescue those who bankrolled New
York City's policies for so long -- the large investors and banks? In
my judgment, no one has yet given these questions a satisfactory answer.
Nor can I.
Instead, Americans are told that unless the rest of the country
bails out New York, there will be certain catastrophe for the United
States and perhaps for the world. To be sure, there are risks that
LIBRARY
7
default could temporarily unsettle financial markets. But these markets
have already made a substantial adjustment in anticipation of a possible
default by New York City. Moreover, claims have been made that
because of New York City's troubles, other municipalities will have
grave difficulties in selling their bonds.
But, the New York City fiasco is unique among municipalities.
Other communities have a solid reputation for living within their means.
In recent days and weeks, other local governments have gone to investors
with clean records of fiscal responsibility and have had no difficulty
raising funds.
The more important risk is that any attempt to provide a blank
check for the politicians of New York City could insure that no long-run
solution to the city's problems would occur.
LIBRARY
8
What I cannot understand -- and what nobody should condone --
is the blatant attempt in some quarters to frighten the American people
and their representatives in Congress into panicky support of patently
bad policy. The people of this country will not be stampeded; they will
not panic when a few desperate New York politicians and bankers try to
scare the mortgage payments out of them.
What we need now is a calm, rational decision as to what the
right solution is -- the solution that is best for the people of New York
and best for all Americans.
To be effective, the right solution must meet three basic tests:
-- It must maintain essential services for the people of New York
City. It must protect the innocent victims of this struggle.
-- Second, the solution must assure that New York City can and
will achieve and maintain a balanced budget in the years ahead.
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-- And third, the right solution must guarantee that neither
New York City nor any other American city ever becomes a ward of
the Federal Government.
There are at least eight different proposals under consideration
by the Congress intended to prevent default. They are all variations of
one basic theme: that the Federal Government would guarantee the
availability of funds to New York City. The sponsors of these bills say
that the guarantee would be short-term because New York City could be
forced by Federal law to balance its books within three years.
I am fundamentally opposed to this purported solution, and I will
tell you why.
Basically, it is a mirage. By giving a Federal guarantee we would
be reducing rather than increasing the prospect that the city's budget will
ever be balanced. New York City's politicians have proved in the past
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that they will not face up to the city's massive network of pressure groups
as long as any alternative is available. If they can scare us into providing
that alternative now, why should they not be confident of scaring us into
providing it three years from now? In short, it encourages the continu-
ation of "politics as usual" in New York -- which is precisely not the
way to solve the problem.
Such a step would set a terrible precedent for the rest of the
Nation. It would promise immediate rewards and eventual rescue to
every other city that followed the example of our largest city. What
restraint would be left on the spending of other local and state governments
once it became clear to them that there is a Federal rescue squad that
will always arrive in the nick of time?
Finally, we must all recognize who the primary beneficiaries of
a Federal guarantee program would be. The immediate beneficiaries
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would not be the recipients of the services provided to New York City
residents because the really essential public services must and will
continue to be provided.
The prime beneficiaries would just be the New York politicians
who would thus be excused from bearing the responsibilities of the
profligacy of their past decisions and further excused from now making
the hard decisions required to restore the fiscal integrity of the city.
The second beneficiaries would be the large investors and
financial institutions who purchased these securities anticipating a
high rate of tax-free return.
Does this mean there is no solution? Not at all. There is a fair
and sensible way to resolve this issue, and this is the way to do it:
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If the city is unable to act to provide a means of meeting its
obligations, a new law is required to assure an orderly and fair means
of handling the situation. Therefore, I will tomorrow submit to the
Congress special legislation providing the Federal Courts with sufficient
authority to preside over an orderly reorganization of the city's financial
affairs, should that become necessary.
How would this work? The city, with State approval, would file
a petition with the Federal District Court in New York. The petition
would state that the city is unable to pay its debts as they mature and
that the city desires to work out an adjustment of its debts with its
creditors.
The Court will accept jurisdiction of the case and provide for an
automatic stay of suits by creditors so that the essential functions of the
city will not be disrupted. This stay, essentially an injunction, would
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continue until the proceeding is terminated. This will enable an orderly
plan to be developed whereby the city can work out an arrangement with
its creditors.
While the city is working out a compromise with its creditors,
the essential governmental functions of the city would continue under
current law.
The proposed legislation will include provision that as a condition
of the city petitioning the Court, the city must not only file a good faith
plan for payments to its creditors but must also present a program for
placing the fiscal affairs of the city on a sound basis.
In order to meet the short-term needs of the city, the Court will
be empowered to authorize debt certificates covering new loans to the
city which would be paid out of future tax revenues ahead of other
creditors.
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Thus, the legislation I am proposing will do three essential
things. First, it will prevent, in the event of a default, all city funds
from being tied up by lawsuits. Secondly, it will enable an orderly plan
to be developed for payments to New York's creditors over the long
term. Thirdly, it will enable some new borrowing secured on a priority
basis by future tax revenues.
Let us not delude ourselves that this proposed legislation will in
and of itself put the affairs of New York City in order without the need
for some hard measures to be taken by the officials of New York City
and State. This must include either increased revenues or expenditure
cuts or some combination of both that will bring them to a sound financial
position. Our careful examination has indicated, however, that those
measures are neither beyond the realm of possibility nor beyond the
demands of reason. If they are taken, New York City will, with the
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assistance of the legislation I am proposing, be able to restore itself as
a fully solvent operation.
To summarize, the plan I am recommending tonight is this:
If New York fails to act in its own behalf, there should be an orderly
proceeding supervised by a Federal Court.
The ones who will be hurt by this plan will be those who are now
fighting so hard to protect their power and their profits: New York
politicians and the city's creditors. The creditors need not be wiped
out; how much they will be hurt will depend upon the future conduct of
the city's politicians.
For the people of New York, this plan will mean that essential
services will continue. There may be some temporary inconveniences,
but that will be true of any solution that is adopted. For the financial
community, the default may bring some temporary disorder, but the
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repercussions need not be large or long lasting. In fact, there is solid
reason to believe that once the uncertainty of New York is ended, markets
will be sturdier. Finally, for the people of the United States, this plan
means that they will not be asked to assume a burden that is not of their
own making and should not become their responsibility. This is a fair
and honorable way to proceed.
In conclusion, let us pause for a moment to consider what the
New York City experience means for the United States.
Two weeks ago, I spoke to you about the choice I believe we face
as a nation: the choice between continuing down a path of higher govern-
ment spending, higher government deficits, and more inflation or taking
a new direction by cutting our taxes and cutting the growth in government
spending. Down one fork, I said, lies the wreckage of many great nations
of the past. Down the other lies the opportunity for greater prosperity
and greater freedom.
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Tonight I think it is clear what path New York City chose. None
of us can take any pleasure from this moment because the leaders of
New York were in a very basic sense following the same spending
practices they saw in Washington. The difference is that Washington
owns printing presses and can always print more money to pay its bills.
But ultimately the practice of living beyond your means catches up with
a nation just as it catches up with a family or city. And for the citizens
of that nation, the bill comes due either in the form of higher taxes or
the harshest and most regressive tax of all, inflation.
All of us tonight care especially about the people of New York
City: they have worked hard over the years to create one of the greatest
centers of civilization. But as we work with them now to overcome their
difficulties, let us never forget what led that city to the brink. And let
us resolve that these United States will never reach the same crisis.
Thank you and good evening.
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