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The original documents are located in Box 78, folder "New York City, May - October
1975 (7)" 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States of America his copyrights in all of his unpublished writings in National Archives collections.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
COUNCIL OF ECONOMIC ADVISERS
WASHINGTON
October 27, 1975
ALAN GREENSPAN, CHAIRMAN
PAUL W. MACAVOY
BURTON G. MALKIEL
MEMORANDUM FOR THE PRESIDENT
Subject: An Economic Analysis of the New York City
Financial Crisis
New York City, with approximately $1 billion of
expenditures each month, is now to the point that its
revenues fall short of current and capital expenditures
even without including the costs of service on its debt.
The City needs more income to pay policemen and firemen
and to continue capital improvement projects. This income
in recent months has been forthcoming from issuing new debt.
But unless additional financial resources are found the City
will default and stop debt service payments in December. At
that point the funds for current expenditures will also be
insufficient.
This memorandum provides an economic analysis of the
financial crisis in New York City. The question is how the
present financial problem evolved over the last ten years --- what
were the political and economic decisions that resulted in
deficit operations. Proposed solutions to the crisis are reviewed
and analyzed in the concluding section of the memorandum. The
analysis makes clear that it is unlikely that the various "plans"
now offered contain the solution to the crisis without Federal
legislation.
1. The Present Financial Condition of New York City
The City of New York expects to receive from tax sources,
welfare aid, and other State and Federal aid, approximately
$906 million per month for the last nine months of this fiscal year.
The expense budget calls for expendigures of approximately $903
million per month. Capital outlays, some of which are in reality
current expenses, exceed $100 million per month. Without including
debt service, the deficit in current and capital account should be
$98 million per month. This deficit will probably be exceeded,
however, because the expense budget may underestimate actual
outlays
if the new State plan is not enforced. The City
Comptroller testified before the Senate Banking Committee on
October 24th that revenues will fall short of expected expenses
REVOLUTION DEENTENNIAL
1776-1976
- 2 -
by $1.2 billion for the period December through March of 1976
alone.
Additional outlays are necessary to maintain the capital
budget. The amounts required in the rest of this fiscal year
are expected to exceed $50 million per month for repayment of
principal and interest and for maintenance of currently budgeted
capital improvement programs. Even if debt service is suspended,
the City will need as much as $500 million to $1 billion in the
next three to six months to meet expenses related to capital
projects.
Mayor Beame and the Emergency Financial Control Board have
adopted a three-year financial plan to attain a balanced budget
for the fiscal year commencing on Julyll, 1977. This plan is
designed to achieve an end to the deficits, by reducing the rate
of expenditures by $200 million in this fiscal year, $300 million
more in fiscal year 1976-1977, and $300 million more in fiscal
year 1977-1978. At the same time the capital budget is to be
cut from $1.7 billion to $1.1 billion, with operating expense
items in the capital budget reduced by $350 million per year.
This plan does not promise a solution to the problems created
by the debt service deficits in the next few months unless
investor confidence is restored immediately. The State of
New York plan to deal with debt service needs calls for the
State purchase $450 million of City notes this month. This
would seem to be achievable even if some outside sources of
money have to be obtained by the State to provide the needed
amount. But it is highly uncertain whether the State can
provide the funding necessary to complete debt service and meet
payrolls in the capital budget items after December. The most
likely course of events is for the City to default on debt service
in December even with the maximum possible assistance from the
State.
In the next year, and in the long term, the solution to the
financing problem is to balance City revenues and expenditures.
For this to be done certain critical political decisions of
the last decade have to be reversed. These decisions related
to the City's reasponses to demands for more and better services,
and to the City's methods of obtaining both tax revenues and
borrowed funds.
LIBRARY
- 3 -
Decisions on corporate taxation and rent controls were
equally important because they reduced incentives for
industry and housing to develop in the New York area.
2. Creation of the Fiscal Crisis
The current financial problems in New York City are
the result of a process which has been going on for a
decade or more. Recent economic conditions of course,
have played a role in default at this time. Inflation has
raised the costs of services, unemployment and recession
have increased the needs for services. The recent record
high interest rates have especially affected New York
by increasing debt service costs on the extraordinarily
large volume of short-term paper issued by this city.
The influence of the recession is shown in Table 1.
Although the CPI increased by 9.3 percent from June, 1974
through June, 1975, the sales tax base for New York increased
only 1.7 percent. This fact is important because New York
City obtains more of its revenues from non-property taxes
(57 percent as compared to 38 percent in 1972-1973) than
do other metropolitan areas and thus the tax receipts are
more income sensitive than those of most local governments. The
unemployment rate for New York City has been greater than
that of the nation as a whole, but the volatility of that
unemployment has not been more marked. The number of
welfare recipients has risen, but not markedly. The index
for welfare recipients in fact declined from the 1972 high
to levels 5 to 10 percent lower in 1974 and 1975. An
influx of welfare cases as a result of the recent recession
cannot be the cause of the financial poblems of the city.
Consequently, general economic conditions in 1974-1975
can
be said to have caused problems of New York City
but not significantly more than those of the rest of the
nation's cities. And the other cities did not experience
New York's financial crisis.
New York City has been losing population and jobs (as
shown in Table 2). The tax base has been disappearing as
well (as indicated by deflating the sales tax base by the
CPI for commodities).
The effect of these trends on the tax burden in New
York City is shown in Table 3. Through fiscal 1971, taxes
as a percent of personal income fluctuated within .4 percent
of 7.7 percent, but then rose a full percentage point
in 1971-1972. For fiscal 1975 taxes are 10.2 percent of
personal income.
FORD
-4-
TABLE 1 Measures of the Recession's Impact on New York City
Unemployment
Weifare*
Sales Tax*
1
Rate
Recipients
2
3
Year
Base
1970
4.8
101.5
78.1
1971
6.7
109.5
81.5
1972
7.0
112.9
NA
1973
6.0
106.4
91.9
1974
7.2
101.4
96.7
1974 June
6.9
100.0
100.0
July
7.3
100.2
100.4
Aug.
6.8
99.3
100.2
Sept.
7.3
100.5
99.1
Oct.
7.2
101.3
99.8
Nov.
7.4
101.3
99.6
Dec.
8.5
102.4
100.4
1975 Jan.
10.3
102.8
101.0
Feb.
10.2
102.5
101.0
Mar.
11.0
103.1
101.7
April
10.8
104.3
102.0
May
10.9
104.3
101.9
June
11.7
105.0
101.7
July
12.0
Aug.
11.0
Sources:
1.
New York State, Department of Labor
2.
New York State Department of Social Services
3.
Annual figures from New York State Department of
Taxation and Finance. Monthly figures from
Municipal Assistance Corporation
*Indexes use June 1974 as the base period (Sales Tax Base
100 = $1.6 billion; Welfare Recipients 100 = 949,000) Sales
Tax Base is equal to the total value of sales subject to taxa-
tion. Index is based on a twelve-month moving average to
eliminate seasonal effects.
The Welfare index includes recipients under the AFDC and home
relief programs.
-5-
Table 2 -- Employment, Population, Welfare Recipients and Sales Tax Base,
1970-1975 (first half)
Year
Total Jobs
Private Sector
Population
Welfare Recipients Sales Tax Sales
Index
Jobs Index
Index
Index
Base
Base
Index
Deflat
Inde
1960
94.5
98.4
98.6
NA
NA
1970
NA
100.0
100.0
100.0
100.0
100.0
100.0
1971
96.4
95.5
99.9
107.9
104.4
101.0
1972
95.1
94.2
99.4
111.2
NA
NA
1973
94.5
93.1
97.1
104.8
117.7
102.8
1974
92.4
90.4
95.8
99.9
123.8
96.6
1975
90.1
88.1
NA
102.2
129.9
94.8
1
Congressional Budget Office, "New York City's Fiscal Problem," calculated from Tables 3 ano
-6- -
Table 3
New York City Personal Income as Related to Taxes, Expenditures and Deficits
Municipal
Municipal
Municipal
Fiscal Year
Personal Income
Taxes
Taxes as Percent
Expenditures
Deficit
Debt as CP
$ B
Deflated by CPI
$ B
of Personal
% Personal
: Personal
Personal
Income
Income
Income
Income
1963-64
27
29
2.0
7.6
NA
NA
NA
1964-65
28
30
2.2
7.9
12**
NA
NA
1965-66
29
30
2.2
7.3
13**
NA
NA
1966-67
31
31
2.4
7.7
14**
NA
NA
1967-68
34
33
2.6
7.8
16**
NA
NA
1968-69
37
34
2.8
7.6
15
.2
16
1969-70
39
33
3.0
7.5
17
1.8
17
1970-71
41
34
3.2
7.7
18
3.5
16
1971-72
43
34
3.7
8.7
20
2.5
21
1972-73
45
34
4.0
8.9
21
.9
21
1973-74
48
33
4.5
9.4
22
3.4
23
1974-75
50
32
5.1
10.2
NA
NA
NA
Source: CBO Table 5, and calculated from data found in Annual Report of the Comptroller, The
City of New York, Fiscal Years 69-70 through 73-74, New York City: Economic Base and
Fiscal Capacity Summary, Maxwell Research Project on The Public Finances of New York
City.
*
Excludes fees and charges, stock transfer taxes and nonresident income taxes.
** Not strictly comparable with data for later years.
LIBRARY
- 7 -
At the same time municipal outlays increased more
rapidly than the tax burden. Table 3 indicates the change
which overtook city expenditures and debt in relation to
personal income. While for the four years 1964-65 through
1967-69 city expenditures rose as a percent of personal
income by three percentage points, for the 6 years ending
in 1973-74 they rose 7 percentage points. Cumulative
municipal debt relative to personal income rose as well.
The conclusion is that New York City experienced
demographic and economic changes which led to a stagnating
and then declining city economy. The changes eliminated
the possibility that today's problems could be solved by
tomorrow's growth. There was no longer an expanding economy
on which more debt could be placed in expectation that
future growth would make continuous funding of current
deficits feasible. As the deflated personal income figures
in Table 3 show, the City's economy was stationary in the
late 1960's and early 1970's. This condition put a limit
on revenues from tax sources. New Federal policy in the
early 1970's reduced the expansive growth of aid programs
at the same time. Thus income growth for the city was likely
to be much lower than in some of the newer large cities in
the South and West.
The pressures for expansion of expenditures did not
abate, however. The demand for social and educational
services for the poor were responded to by interest groups
across the political spectrum. The momentum built up on
the expenditure side was carried along by rising expecta-
tions for City services. In addition, the ability of the
City's powerful unions to extract wage settlements, coupled
with ineffective lower and middle management contributed
significantly to the situation in which the City finds
itself. The political process in New York City and the
way in which the municipal government chose to postpone
problems allowed the deficits to accumulate to crisis
dimensions. The gap between what the City paid out and
took in from tax and grant receipts exploded beyond levels
acceptable in other cities.
The budgetary process which relates expenditures
to revenues broke down in New York City and allowed the gap
to be created. Controls that normally would have forced
reconciliation between expenditures and receipts were
loosened by the use of questionable accounting practices.
The result of the slippage in management was to postpone
the day of reckoning. The postponement made the problem
worse because the deficit increased significantly. This
LIGRARY
- 8 -
made refunding not only a financial problem but also an
operations problem because of the necessity to raise money
to meet payrolls.
The fiscal practices which contributed to the City's
ability to spend more than income are as follows:
(a) Borrowing on accounts receivable. In a number
of instances, the City borrowed on accounts receivable that
had little if any likelihood of being collected.
(b) Capitalization of operating expenses. Operating
expenses have been put in the City's capital budget so as to
reduce the need for tax levy monies in a given fiscal year.
This practice grew to the point where it eroded the City's
ability to finance capital improvements to its own physical
plant. Further, this practice, while legal, inevitably
cost the taxpayer 15 to 20 percent more each year because
of the interest payments on the borrowed funds. In the
1973-74 budget, for example, the entire cost of the voca-
tional education program (estimated at $148 million) was
transferred from the operating budget to the capital budget
through a technical loophole in the law.
(c) Underfunding pension costs. The City underfunded
the entire pension program by holding to acturarial assump-
tions made in 1917 that imply short lifetimes for retired
employees. In addition, the Fire Department Pension fund
has been $200 million in arrears because of an impasse among
members of the fund's Board of Trustees as to the respective
responsibilities which the employees and the City should
assume in making payments to liquidate the deficit. Despite
these factors, the City took advantage of some questionable
fiscal practices to use $125 million of "excess" income in
the Employees Retirement System to balance the 1974-75 budget.
(d) Underfunding collective bargaining settlements.
In each of the last two fiscal years the City has under-
funded the cost of collective bargaining settlements by
about $100 to $150 million annually. Essentially, the City
assumed that contracts negotiated in one fiscal year, e.g.,
1973-74, would not be settled until the following year,
e.g., 1974-75. This allowed the 1973-74 costs of such
contracts to be paid retroactively through bonds issued
under the "judgements and claims" provision of the City
Charter and the State Finance Law. The effect on relative
expenditure levels in the following year, e.g., 1974-75,
was to double count the cost of the collective bargaining
increase as the amount allocated doubles to meet the base
GERALD FORD LIBRARY
- 9 -
year (1973-74) salaries plus the second year (1974-75) cost
increases. This practice has permitted the City to grant
salary ncreases in excess of what they might normally
provide since there is little effect on the City tax levy
funds in the base year.
Decisions on budgetary practices were important, but
not the only determinant of deficit operations. A number
of key political decisions were made, including the following:
(a) Mayor Wagner in 1958 granted city employees
the right to bargain collectively. This
created what one of Wagner's advisers called
"a powerful special interest group" able to
influence elections and bargain effectively for
salary and benefit increases beyond those in
effect in other cities.
(b) Successive Mayors in the decade from 1965 to
1975 developed the practice of borrowing on
short terms so as to cover budget deficits.
On June 30, 1965 the city's short term debt
was $526 million. By February, 1975 it had
grown to $5.7 billion.
(c) Mayor Lindsay postponed decisions to balance
budgets in both 1973 and 1974. More than $270
million of expense items were moved to the
capital budget, contingency accounts were drained,
and one year notes were "rolled over" a second
year. As a result, between June 1973 and March
1975 short term debt increased from $2.5 billion
to close to $6 billion.
(d) At a number of points each Mayor considered
and rejected proposals to remove rent controls.
These controls in the last few years have kept
rents below operating costs for many owners,
thus reducing property values for tax purposes effective-
ly to zero. About 25 percent of city apartment
buildings are in arrears on taxes. Of the 125
subsidized Mitchell-Lama projects for middle
income residents, 9.0 are var ious stages of default
Outright abandonment runs to 90,000 housing units
per year. The incumbant Mayors depreciated the
tax base for the sake of voter approval in the
next election.
With these actions the New York City municipal govern-
ment ceased to practice levels of fiscal restraint found in
other city governments. The results are shown in Table 4.
BERALD FORD VIBRARY
- 10 -
Table 4
Revenues and Expenditures of New York City
(Millions of dollars)
Fiscal Year
Fiscal Year
Fiscal Year
Revenues
1969-1970
1971-1972
1973-1974
Real estate taxes
$1,831
$2,100
$2,489
General fund
2,012
2,752
3,379
State and Federal aid
2,433
3,370
4,123
Other
251
377
84
Total Receipts
6,527
8,589
10,075
Expenses
Current (excl. debt)
6,420
8,088
9,997
Current and capital
(excl. debt)
7,139
9,207
11,579
Net Surplus Before
Debt Service
-612
-618
-1,504
Debt Service
221
325
474
Net Surplus after
Debt Service
-833
-943
-1,978
Source: Annual Report of the Comptroller of the City of New York
- 11 -
Although significant gaps did not occur between current
revenues and current expenses, this was in part due to
large expansions in the capital budget and in debt service.
Funding problems were postponed by shifting from current
account into the capital account. The day of reckoning was
postponed.
These practices allowed New York City to extend
itself beyond other large cities in the magnitude of its
expenditures. As indicated in Table 5, the per capita
expenditures of New York City exceeded those of every other
except Washington, D.C. (a special case because of its
national capital status). After taking account of the
fact that New York City provides its own school services
while many other cities do not, New York is still operating
beyond the levels of expenditure provided elsewhere. State
of New York studies indicated that New York City expenditures
in the early 1970's for all categories of city services ex-
ceeded or matched those in the other of the 10 largest cities
on a per capita basis. Cities having higher per capita
incomes did less, and took a smaller proportion of per
capita incomes in local taxes. The New York style of public
service was lavish and expensive.
3. Proposed Solutions to the Financial Crisis
After New York's financial difficulties became apparent,
the State set up the Municipal Assistance Corporation (MAC)
to do the City's borrowing and the Emergency Financial Control
Board (EFCB) to oversee the City's spending. To avoid default
in September, the State legislature approved a complex fin-
ancial plan to use the State's credit to help the City raise
$2.3 billion to meet cash needs until December. The merging
of State and City credit has caused investors to lose confi-
dence in both governments. Prices for both State and MAC
securities have dropped, raising the real possibility that the
marketability of State securities may decline to the point
where new debt issues will not meet both the City's and
State's needs. Were this to occur, the State would be dragged
to default along with the City. At the present time seven
State agencies are in danger of defaulting unless they can
raise a total of $1.5 billion by June 30. Beginning in
March, the State government has to find ways to borrow approxi
mately $4 billion in short-term funds primarily to supply
State aid to local governments for welfare, school costs and
other services.
To restore investor confidence and thereby prevent
default by both the City and the State governments the City
and EFCB have attempted to put together a plan to balance
the municipal budget within three years. It is widely
FORD is LIBRARY
Table 5
Comparison of Per Capita General Revenues for the
Ten Largest U.S. Cities, 1966, 1970, and 1974
Cities with
*
Per Capita Total General
Per Capita General Revenues
Dependent
Revenues
Raised from Own Sources
School Population
Aver. annual
Aver. annual
Percent of Total General Reve
% increase
% increase
Raised from Own Sources
1966
1970
1974
1966-1974
1966
1970
1974
1966-1974
1966
1970
1974
New York City
$509
$838
$1378
13.2
$348
$454
$714
9.4
68.4%
54.2%
51.8%
Baltimore
35
618
945
13.8
184
285
373
9.2
55.2
46.1
39.5
Washington, D.C.
526
908
1520
14.2
385
581
840
10.2
73.4
64.0
55.3
Cities without
Dependent
School Population
Chicago
132
183
319
11.7
105
139
218
9.6
80.1
75.8
63.3
Los Angeles
130
188
311
11.5
110
156
253
11.0
84.8
82.8
81.4
Philadelphia
266
276
457
13.5
142
241
321
10.7
76.1
87.1
70.2
Detroit
1285
272
486
12.8
131
197
300
10.9
70.7
72.6
61.7
Houston
84
112
185
10.4
76
108
154
9.2
91.2
96.3
83.2
Dallas
89
142
260
14.3
87
137
220
12.3
98.5
96.0
84.6
Cleveland
127
194
370
14.3
100
170
253
12.3
76.5
87.4
68.4
Averages
$2.28
$373
N.A.
N.A.
$167
$247
N.A.
N.A.
73.4%
76.2%
N.A.
Source: U.S. Department of Commerce, Bureau of the Census, City Government Finances.
* Cities that operate school districts within the municipal budget.
GERALD
FORD
LIBRARY
- 13 -
acknowledged that the City's public payroll has to be re-
duced significantly, that City services have to be cut,
particularly in the municipal welfare, hospital, and
education systems, and some City agencies have to be abolish-
ed. It is also acknowledged that means must be found to in-
crease City revenues, including raising sales tax rates.
But encouragement must be given to business and industry to
develop within the City so as to add to municipal tax
receipts within existing corporate rates.
The plan is possible only if a significant initial
expenditure reduction is made in the 1975-76 fiscal year.
Mayor Beame and EFCB have proposed that the City government
reduce expenditures from tax levy funds by $200 million
over this fiscal year. This requires a redu ction of total
outlays for services of $342 million (the difference being
reductions in those services paid for by Federal and State
funds). The proposed redu ctions occur primarily in
welfare and other social services, and secondarily in education,
hospital and police services. The important categories
are shown in Table 6. Social services are cut the most,
because $4 of reduction are required in Federal and State
aid to achieve a $1 reduction in the City's own outlays.
These cutbacks require a reversal of City expenditure
growth trends not likely to be achieved. Moreover, past
patterns of decision making in New York imply that cutbacks,
if achieved, may not be made in the most effective manner
from the long run viewpoint.
--- The reductions in the educational and
police serices are expected to come out of
operating programs -- from the high school
and community school districts, or from crime
control -- rather than from support services
where excess employment is the greatest.
-- The reduction in social services is attained
primarily by cutting back on personnel which
if across the board could have the effect of
increasing overall welfare expenditures (as
more people enter the welfare roles without
being checked)
Health and hospital services are: reduced by
curtailments in hospital care in all the
hospitals without actually closing down the most
outmoded and inefficient hospitals.
These cuts will be objected to by the municipal unions
and local community interest groups concerned with their
GERALD FORD LIBRARY
- 14 -
Table 6: Major Proposed Reductions in New York City Expenditures
in 1975-1976
Reductions in
Expenditures
from the City's
Agency
Total Reductions
Own Tax Receipts
($ million)
($ million)
Education
39
38
Police
20
20
Social Services
128
37
Environmental Protection
14
13
Health and Hospitals
39
12
Human Resources
10
10
All others
92
71
Total
342
201
LIBRARY
- 15 -
own police, education and hospital services. They have
not been achieved voluntarily by the City in the past, and
they are not likely to be achieved by a City government
in the future. The question is whether EFCB or succeeding
agencies will be able to make these redu ctions and follow
through in the face of strong union and local community
pressure.
Long term cost reductions. There is no plan at this time
that specifies the additional $600 million of reductions
to be achieved in the next two fiscal years. Budget saving
proposals have to be much more drastic than those outlined
for the rest of this fiscal year. But any feasible plan
would reduce further the police, fire and sanitation depart-
ment employees that are still on the job. These would include
sizable reductions in 3,500 supervisory jobs at the rank of
sergeant or above in the police department, and in fire
inspection positions. They would call for eliminating up to
one-third of the employees of the sanitation department by
means of a long-term capital enhancement program. The reduc-
tions would be the most difficult to obtain in the fire
department and somewhat less difficult in the sanitation
department, although significant capital expenditures would
have to be made in new garbage collecting equipment. The
changes required in thee sanitation department would be
most likely achieved by contracting out garbage collection to
private corporations able to borrow at lower rates in the
capital markets and to operate at lower costs in collection.
The cutbacks require reductions in real income for
those employed by the City. There is some doubt that sub-
stantial savings could be made from reducing real wage
rates for both political and economic reasons. The municipal
unions have threatened general strikes to protest extended
wage freezes. Comparisons between salaries in New York and
other cities indicate that New York's salaries are somewhat
"out of line" with those elsewhere or in the private sector
given that, although wages are comparable, fringe benefits
are paid for entirely by the City so that wages net of health
and pension payments are at least 10 percent greater.
Fringe benefits and pension payments in New York City are
well beyond those offered elsewhere. In addition to wages
totalling $4.5 billion this year, the City will spend another
$2.8 billion on fringe benefits and pensions. This con-
stitutes 55 percent of the payroll, while in private industry
the fringe pension package averages 20 percent of the
payroll. City workers receive four weeks vacation their
first year on the job, and most have unlimited sick leave,
personal leave days and a variety of other time-off provisions.
The City pays the full health insurance costs of its employees
and supports annunity funds for policemen, firemen and
FORD
GERALD
LIBRARY
- 16 -
sanitation men (with total health and annunity expenditures
of $100 million per year). Although it will be extremely
difficult to curtail these fringe benefits, bringing
expenditures under control will require that to be done.
Most proposals stress that employees should pay a significant
part of their own health insurance premiums, vacation periods
should be reduced, and there should be an elimination of
annuity payments. But these in effect constitute salary
reductions which the unions say they will not accept.
In the longer period, the services extended to the City
resident have to be reduced as well. Cutbacks in education,
health, and welfare services would be a prime consideration.
Particularly important is a cutback in the municipal hospital
system -- an 18-hospital complex and related health care
facilities that provides medical services for more than
2 million patients per year. The system costs close to $1
billion a year and has chronic deficits as a result of in-
efficient operations, low capacity utilization and expensive
treatment in relation to charges. Last year the City
experienced a deficit close to $334 million in that portion
of the budget.
Proposals have been widely made to phase out or severely
reduce the number of municipal hospitals. These plans have
been opposed not only because the facilities provide health
care particularly to the poor, but also because they are an
important source of jobs to members of minority groups.
Suggestions to close a hospital have provoked bitter pro-
tests among neighborhood residents fearing the loss of this
resource and have touched off sensitive racial issues.
Nevertheless, cost savings must be made and the most effective
way is to reduce the number of small inefficient facilities.
Eliminating hospitals has been a tentative municipal goal
for years, but has been abandoned each time the issue is
raised because of strong local community reaction.
Other City agencies will have to undergo drastic prun-
ing. The City University system, by attempting to carry
out policies of open admissions at the undergraduate level
and full doctoral programs at the graduate level, has
extended itself beyond its resources. Its annual expenditures
of up to $600 million be reduced by imina ting graduat
training and by shifting the open-admissions program back
to the high schools as a remedial education program. Tuition
should be equivalent to that now being paid by State University
students. In the long run the City University should be a
division of the State University of New York, for cost
reductions obtained by consolidation could be beneficial to
both governments.
BERALD FORD LIBRARY
- 17 -
Plans for reducing welfare costs call for either
shifting the costs to other governments or for eliminating
the outmoded system now in operation. Most likely neither
policy could be put into effect, and reductions in expenditures
will be achieved only by more diligent surveillance of the
caseload. This city's caseload is now close to 1 million,
with slight increases likely in the next few years. State
audits indicate that the proportion of ineligible people
receiving welfare in New York City is close to 11 percent
for the first half of this year. This is an increase from a
preliminary report of 9 percent for the first four months,
but is less than the 18 percent reported last year. Improved
operations have to come from simplifying the error-creating
regulations in the system.
The fact is that a solution to New York City's problems
that relies on expenditure reduction is doomed to failure
unless there is a restructuring in the way the City responds
to the pressures of interest groups. Unless this is achiev-
ed the budget gap will not be closed. The gap that exists
is not transitory because those with the power to make
changes benefit from the status quo. "Business as usual,"
however fervent and well intentioned the efforts at expendi-
ture reform, cannot suffice to put the City ona sound
financial basis.
Increased City tax revenues. One of the means for balanc-
ing expenditures and revenues in the past has been to raise
taxes. Yet as business taxes have been increased, companies
have been driven from New York City. Further extensive
increases in City corporate taxes will in the long run
probably reduce revenues paid into the municipal govern-
ment. Important policies for long-term stability
include measures to add to the tax base rather than to
reduce it.
First, corporate taxes should not be raised unduly.
Recent studies indicate that the City is once again cost
competitive in attracting corporations in certain industries.
Because of large scale building of office space, rents on
space for banking, communications, publishing, and other
important industries are at levels competitive with those
in other important metropolitan centers. If efforts are
made to hold corporate tax rates down, the long term gains
for the City itself may be substantial.
Second, an important step in encouraging additions to
the tax base is to remove the City's archaic rent control
law. Because landlords have not been able to raise rents
FORD
GERALD
LIBRARY
- 18 - -
to levels that cover costs, much housing has been abandoned.
Tax delinquencies on real estate have been rising and reached
$200 million in fiscal year 1975. Rent controls must be phased.
out and incentives provided to re-establish building programs
and home-ownership in the City.
Additional income and sales taxes have to be levied
on residents if they are going to continue to demand such
extensive services. In addition to an 8 percent sales
tax, a city income tax is levied on residents and to a lesser
extent on commuters. City and State taxes for a New York
family of four earning $15,000 a year now come to more than
$650. While these amounts are large, they may not be out
of line with the extensive services provided by the municipal
government.
Summary
At the present time it does not seem likely that
significant cost reductions and income increases are about
to be realized. Budgetary balancing is still quite specula-
tive.
The plan for a $200 million reduction this year is not
more likely to be more successful than plans to achieve the
same reductions in earlier years. Voluntarism by City or
State officials in cutting back programs deemed important
by local community groups or municipal unions had no
previous success. Although the crisis atmosphere may gen-
erate some reforms, it is not possible to foresee immediate
results from the Beame-EFCB plan. The interest groups
still have considerable power. Although questionable fin-
ancial practices have been eliminated, the results will be
first the long-delayed bankruptcy.
The use of Federal funds to prevent bankruptcy would
be no more successful in solving long run problems. A
Federal bailout to prevent default would require more than
$4 billion this fiscal year for refinancing debt and the
capital program, and would require an additional $2 million
to finance the operating deficits on current and capital
accounts during the year WI thout reduction in expen-
ditures, the Federal outlays would have to increase by
$1 'to $2 billion a year in the next few fiscal years.
These amounts would be excessively large and inequitable
in a period of Federal program reductions designed to obtain
a more balanced Federal budget. The problem of expenditure
and receipts control would remain.
Paul W. MacAvoy
Member
Alan Greenspan
Chairman
GEBALD FORD LIBRARY
THE WHITE HOUSE
WASHINGTON
October 25, 1975
MEMORANDUM FOR THE PRESIDENT
FROM:
SUBJECT:
New JIM York CANNON June
I asked Dick Dunham to come over this morning to
discuss a possible resolution of the New York City
problem.
Dick and I felt it would be appropriate for him to
summarize his views for you, and a copy of his
memorandum is attached.
CC: The Vice President
Mr. Rumsfeld
Mr. Hartmann
Mr. Seidman
Mr. Greenspan
GEBALO
THE WHITE HOUSE
WASHINGTON
October 25, 1975
MEMORANDUM FOR:
JIM CANNON
FROM:
DICK DUNHAM
SUBJECT:
New York City
It is my recommendation that the Administration propose
a new statute which would govern the situation in New York
City. This statute should not use the words bankruptcy or
default but would be called something like, "A statute
providing for the reconstitution of municipalities' debts."
The main features of this statute would be:
1. It would parallel the existing Chapter 11 of the
Federal bankruptcy laws.
2. It would reference the existing Chapter 11 in such
a way that the existing state law which gave New
York City permission to petition the Federal court
under Chapter 11 could be used.
3. The essential feature would be that it would by-pass
the existing provision of Chapter 11 which requires
that permission of 51% of the creditors is required
in order to effectuate a voluntary reorganization of
debt. This feature would avoid the present problem
of trying to find the note and bond holders and the
fact that so much of the paper is in the form of
bearer certificates.
4. On petition of the city, the Federal judge would
authorize the reconstitution or conversion of the
existing three billion dollars of short-term notes
into the three billion dollars of long-term Big
Mac bonds. The Big Mac authorization is now for a
total of five billion dollars of bonds, of which
two billion have been sold.
GERALD
2
5. The court would designate the state Emergency
Financial Control Board to act as trustee and/or
enforcer of the three-year financial plan already
adopted by that board this week and hold them
accountable for accomplishing the balancing of
the budget over a three-year period. You will
recall that the three-year financial plan adopted
by that board includes in its plan the assignment
of sufficient revenues to finance the debt service
on the five billion dollars of Big Mac bonds.
6. The purpose, therefore, of this statute would
merely be to effectuate and legitimize the state
plan which has already been adopted. This plan
cannot be accomplished at the present time because
of the inadequacy of existing Federal statues
governing "bankruptcy of municipal corporations"
and the failure of the financial community or
investors to accept that board's plan and reopen
the market.
7. There are two elements of the New York City debt
situation that this plan would not solve:
The first of these is the financing of the
legitimate short-term cash flow needs of the city
other than the accumulated three billion dollars
of deficit mentioned above.
There are two possibilities: First, if the Big
Mac plan is in effect legitimized by this Federal
statute and action of the appropriate Federal court,
it is quite possible that the financial markets
would be reopened to the city for legitimate short-
term financing on a tax-anticipation basis of the
city's short-term cash flow needs.
Second, if this reopening does not occur, the statute
could provide for the issuance of trustee certificates
under the authority of the Federal court to get over
the one, two or three-year period while the city
budget is being balanced and the accumulated deficits
paid off.
3
The Federal court would not have and, in my opinion,
should not have, any direct enforcement powers
over the management decisions required to accomplish
the three-year financial plan and the budget actions
necessary to accomplish that plan. The Federal
court could, by statement or by its order, designate
the Emergency Financial Control Board as its trustee
or representative.
If, however, the trustee certificates mentioned above
were used to finance the legitimate short-term cash
flow needs of the city which, in normal course, turn
over every 30, 60 or 90 days, it would get direct
enforcement powers by refusing to permit the issuance
of new certificates during the course of the period
that they were needed.
8. The second problem that is not covered, as I under-
stand it in either the three-year plan adopted by
the Emergency Board or in this scenario, is the
financing of the cash requirements of the capital
budget. The capital budget has always been financed
by 40-year bonds with the property tax as the basic
and underlying guarantee. By virtue of the fact that
the markets have been closed to all issues of the
city of New York, the expenditures generated under
former capital budgets are not now being financed
on a long-term basis and therefore constitute a
working drain on the current revenues of the city.
This sum amounts to, on the average, about 1.5 billion
dollars for each of the next three years.
If these actions discussed in this memorandum are
successful and the market is reopened to New York
City securities, the problem, of course, disappears.
It should be pointed out that the cash requirements
of the capital budgets decrease quite rapidly over
the next two and three and four-year periods and that
capital expenditures discussed in this section were
generated by authorizations of the last decade. The
city and the state board have cut the capital budget
extensively and, as I understand it, have not
authorized any new starts.
4
Jim, this is not a completely staffed-out proposal and
I do not know all the legal issues on either the Federal
or the State side.
In addition, I would want to have some more understanding
of the State's three-year financial plan for the city that
I now have before it was finalized.
Therefore, please consider it an outline of a method which
provides for an orderly bankruptcy proceeding without
calling it that and thus may avoid more radical and
undesirable Congressional actions such as guarantees.
LIBRARY
[10-75]
QUESTION:
What impact is the New York City financial
crisis having on other large cities? If
New York City defaults, will it precipitate
defaults by other cities?
ANSWER:
In the third quarter of this year, state
and local governments raised a record
$13.5 billion in municipal bonds and notes.
And in the last three weeks alone, average
municipal borrowing costs, as measured by
the Daily Bond Buyer index have dropped a
full one-half percentage point.
With respect to defaults by other cities,
such a risk would be presented only if such
cities needed to borrow to pay off maturing
debts. Very few cities finance in this way.
And for those that do, the market will judge
them according to their ability to pay.
Amidst all the scare talk about the impact
on cities in New York State, just last
week Syracuse, New York sold nearly $10
million in bonds. And the previous week
Philadelphia, often cited as a city impacted
by New York City's problems, borrowed $75
million.
In short, those cities which are able
to pay their bills will be able to borrow.
Gerald GLPorRA
Assistant Secretary
Optional paragraph re seasonal cash flow financing for New York City:
This court authority will assure the funds necessary to meet
seasonal cash flow needs for essential services. If New York State
and City take appropriate actions, these borrowings should be saleable.
The Secretary of the Treasury will be authorized to assure such market-
ability by providing Federal assistance if, in his opinion, short-term
market conditions require such assistance. His authority will include
the right to set such conditions as appear appropriate prior to such
assistance.
I want to make it absolutely clear that I do not believe the Federal
Government can or should be involved in providing financial assistance
in the form of a bail-out to avoid default. To provide assistance in
advance of default would merely protect the bond holders and remove
any incentive the city's political leaders may have to restore fiscal
integrity.
After default, it may be necessary, if state and local officials
continue to refuse to accept responsibility for managing the affairs
IN CONJUNCTION WITH THE
of the city, to provide sufficient assistance, through justice,
courrs
for maintairies essential services for the citizens of New York City.
I believe we have to make a distinction between bailing out. the bond
GERALD LIQUARY
-2- -
holders and politicians on the one hand, and on the other, protecting
the people of New York City from the consequences of the lack of
courage which may be exhibited by their office holders.
LIBRARY
Optional paragraphs concerning New York City to be inserted after
first paragraph on Page 15 of the draft speech.
This court authority should assure the funds necessary to meet
seasonal cash flow needs for essential services. If New York State
and City take appropriate actions, these borrowings should be salable.
I want to make it absolutely clear that I do not eheve the
Federal Government can or should be involved in providing
out
financial assistance in the form of a bail-out to avoid default.
To provide assistance in advance of default would merely protect
the interest of the bond holders and remove any incentive the
City's political leaders may have to restore financial integrity.
In the event of defalut, state and local officials would be
required to accept responsibility for managing the affairs of the
City, and to maintain essential services for the citizens of New York.
If, however, the federal court finds that the borrowings are not
salable because of a failure on the part of state and local officials
to take appropriate action to bring revenues and expenditures into
balance, the Secretary of the Treasury would be authorized at his
discretion to assist the court by assuring the marketability of these
short term notes. He would do this by purchasing the court approved
short term notes, if in his opinion market conditions require such
purchases, and after he has established stringent requirements for
state and local government officials to insure the closing of the gap
between revenues and expenditures.
-2-
In short, in the event of default, essential services of New York
City will continue, if action is taken by state and local officials to
balance the New York City budget. This will occur either as a
result of action taken at their own initiative or, in the event they
fail to act, [it will occur at the direction of the Federal Government)
APPROVED
as a condition which must be met before the Secretary of the
COURT
COMMIT FEDERAL FUNDS FOR THE PURCHASE of SHORT
Treasury would move to maintain essential services in New York
NOTES
[by purchasing court approved short term notes.] Finally, these
APPROVED
notes issued at the direction of the federal court responsible
for supervising the default procedure would have first call on
all revenues
flowing to New York City and New York State,
either in the form of state and local taxes or in the form of
financial assistance currently provided to the city by
the Federal Government, such as revenue sharing payments.
BRARY
How do we ensure essential services
will he maintained.
as default a foregove
who controls city after default
Loan
How down tidether aver ?
do we expect other cities?
what is the debt
How much do they need?
10/28/75
Option A
After default, it may be necessary, if State and local officials
continue to refuse to accept responsibility for managing the
affairs of the City, to work with the courts to maintain the
protection of life and property for the citizens of New York
City. I believe we have to make a distinction between bailing
out the bond holders and politicians on the one hand, and on
the other, protecting the people of New York City from the
consequences of the lack of courage which may be exhibited
by their office holders.
Option B
After default, we will work with all of the appropriate
agencies of government to insure the protection of life and
property for the citizens of New York City.
Option C
The real victims of the default caused by mismanagement of the
affairs of the City by its leaders, are the eight million
citizens of New York City who have paid their taxes but have
been hurt by this fiscal tragedy. I wish to assure them that
I will work with the appropriate governmental agencies to
insure the protection of life and property.
Option D
In the event of default, the Federal Government will work
with the Court to assure that police, fire and other essential
services for the protection of citizens are maintained.
GERALD LISEARY
10/28/75
Option A
After default, it may be necessary, if State and local officials
continue to refuse to accept responsibility for managing the
affairs of the City, to work with the courts to maintain the
protection of life and property for the citizens of New York
City. I believe we have to make a distinction between bailing
out the bond holders and politicians on the one hand, and on
the other, protecting the people of New York City from the
consequences of the lack of courage which may be exhibited
by their office holders.
Option B
After default, we will work with all of the appropriate
agencies of government to insure the protection of life and
property for the citizens of New York City.
Option C
The real victims of the default caused by mismanagement of the
affairs of the City by its leaders, are the eight million
citizens of New York City who have paid their taxes but have
been hurt by this fiscal tragedy. I wish to assure them that
I will work with the appropriate governmental agencies to
insure the protection of life and property.
Option D
In the event of default, the Federal Government will work
with the Court to assure that police, fire and other essential
services for the protection of citizens are maintained.
FUNDS FOR ESSENTIAL SERVICES
Sour
Q. Under your proposal, how would New You City get the funds
to meet essential services?
A. According to New York City's figures, the City's cash needs for
operations and capital projects (not including any payments of
principal and interest on outstanding debt) will exceed revenues
by approximately $700 million during the period December 1, 1975
- June 30, 1976. There are at least three ways this gap could be
made up.
First, New York State could impose a temporary and emergency
tax -- perhaps a package involving the income gasolin 6 and sales
taxes -- to generate the necessary cash.
Second, the assets of the pension funds could be used to collateralize
borrowing by MAC or the City. State and City pensions hold well in
this purpose.
excess of $10 billion of unencumbered assets which (c would be used for
Third, in the context of an orderly debt restructuring proceeding,
the court could authorize the City to issue certificates of indebtedness,
to be payable, on a prior claim basis, out of revenues in years after
the budget balancing process is complete.
Fourth, the gap could also be reduced by immediate expenditure
cuts in the City budget.
Background
There are really two problems: the net cash flow shortfall referred to
in the answer and the so-called seasonal problem. The remaining
seven months of the fiscal year can be broken down into two periods:
December-March in which the City runs a $1. 3 billion cash deficit
(net of debt service) and April-June in which it runs a $600 million
surplus. On a direct revenue anticipation basis, the City should be
able to borrow $600 million during December-March, but it needs
one of the mechanisms described in the answer to borrow the remainder.
GP/10-28-75
FORD is LIBRARY GERALD
3
FUNOS FOR ESSENTIAL SERVICES
Q.
OUESTION.
Under your proposal, how would New York City
get the funds to meet essential services?
ANSWER:
A. According to New York City's figures, the City's
cash needs for operations and capital projects
(not including any payments of principal and
interest on outstanding debt) will exceed
revenues by approximately $700 million during the
period December 1, 1975 - June 30, 1976. There
are at least three ways this gap could be made
up.
First, New York State could impose a tempo-
rary and emergency tax -- perhaps a package
involving the income, gasoline and sales taxes --
to generate the necessary cash.
Second, the assets of the pension funds
could be used to collateralize borrowing by
MAC or the City. State and City pensions hold
well in excess of $10 billion of unencumbered
assets which would be used for this purpose.
Get insert #3
Third, in the context of an orderly debt
restructuring proceeding, the court could
authorize the City to issue certificates of
indebtedness, to be payable, on a prior claim
basis, out of revenues in years after the budget
balancing process is complete.
BACK-
GROUND:
There are really two problems: the net cash
flow shortfall referred to in the answer and
the so-called seasonal problem. The remaining
seven months of the fiscal year can be broken
down into two periods: December-March in which
the City runs a $1.3 billion cash deficit (net
of debt service) and April-June in which it
runs a $600 million surplus. On a direct
revenue anticipation basis, the City should be
able to borrow $600 million during December-
March, but it needs one of the mechanisms
described in the answer to borrow the remainder.
Parsky
Assistant Secretary of
FORD i LIBRARY GERALD
GP/10-28-75
ESSENTIAL Services?
Q.
e
If that New York does defaul how do you propose to ensure
essentro services will be maintained?
(NSERT # 3
use three points of Mr. Gerard and add this 4th:
Four,
ALSO
The gap could, A be reduced by immediate expenditure cuts in
the City budget.
RP/10-28-75
FORD LIBRARY &
4
WHO WILL BE IN CONTROL?
Q.
If New York City goes into default, under your proposed
amendment to the federal bankruptcy act, who will be in
control of the City?
provided
The type of bankruptc proposed by this new legislation is one in
which the debtor remains in contr ol of its assets. -In other words,
STET
this City will re ain under the city form of government would remain
unchanged from its present state.
A, Under the legislation the federal government (neither the Administration
not the If ederal Court) would control the City's affairs + would
remain under (with the Mayor.
not
My
could
control
Under the proposal the Court would have authority to authorize the
City to issue new debt. The Court could condition the issuance of
such debt by specific actions by the City.
to be taken
This
on
However,
cand the State Francial Board.
no Such conditions
would more be onerous Han are Hose Hat
a required y
mudert investor.
FORD LIBRARY is GERALD
RP/10-28-75
1
IS DEFAULT DEFINITE?
Q. In your estimation is the New York City default a foregone conclusion?
in recent testimony
Mayor Beame and the Governor have adicted/there will be a
default
that the City has exhaused its financial resources
and that defaultis in the hands.of the state and federal government.
and State will
A. City and State officials in recent testimony stated that the financial
CONGRESSIONAL
resources of the City have been exhausted and that the stated plan by
for maintaining solvency through December has very limited
chances of success beyond December.
II,
inancial analysists and economists generally agree with this
De simistic catlock.
(agree that the cash flow position of the City will not liekly allow
the City to meet debt service obligations or to meet current
payments for essential services.
Accordingly, un State and
If the City and State continue to be unwilling to take the measures
necessary to avoid a default, it (seems is likely that a default will occur.
NEW YORK CITY
FORD is LIBRARY GENALD
RP/10.28-75
z
CURRENT DEBT SITUATION
Q. What is the current debt situation in New York and how much
additional financing de the need in order to avoid a default?
does the city
1975
A. According to the City's financial plan, the City will requires $4.055 billion
1976
between December land June 30 to retire maturing shortêterm debt,
to meet debt service obligations on long-term bonds, and to pay
operating AND capital expenses. Edditional amounts egating approximately
$2 billion W ould be required to meet these obligations in the fiscal
years 1977 1978.]
(net cach need)
(maturing in December of $400 million and operating capital shortfall
of $600 million in December
[can supply figures]
)
Disnply to get through the month of december
X the City will need clase to $ / billion the
seasting personal
Patters
Due to peasonal cash flaw the
to meet its obligations in December
FORD in LIBRARY GERALD
RP/10.28-75
11
COURT AUTHORIZED DEBT CERTIFICATES 10/28/75
COURT AUTHORIZED DEBT
Q: Will the trustee, certificates be marketable?
STatute
A: If New York City submits, as the statute (or proposal Doe
requires, a budget which places its financial affairs
upon a sound footing , and proceedures
there is every reason to believe that the certificates
ought to be marketable.
GERAL FORD LIBRARY
10
10/28/75
SAFETY of INVESTMENTS
Q: Are the creditors going to loose their investments?
hAccordingly,
b
A:
n New York City acts responsively there is likelihood
n
should
that eventually all creditors 1 be paid. In working
out the arrangements major states and cities have
defaulted before for example Arkansas and Detroit
and in all these cases the creditors have received
100 dollar cents on their dollar.
FORD & LIBRARY GERALD
9
RIPPLE EFFECT
9.
What ripple effect do you expect on the financial community
from a New York City default?
There are two risks in any major financial reversal : financial the
and psychological.
We ^ Carefully have assessing ed the financial in equires risk the impact on the markets and
impact on the banking system and we believe these risks are
events
AFangent manageable. Markets tend to discount future affects (offorma)?
and to some significant degree possible default by New York City
has been discounted.
la potential
The
^
Psychological risks cannot be measured. However, it is clear that
the dire predictions and vigorous rhetoric employed by those who seek
to force a federal bail-out for New York City ha ve enhanced the
psychological risks. It remains of utmost importance that all who
concern themselves with the affairs of New York City view the
situation objectively.
These conclusions confirmed by many disinterested observers
of the market.
have been
m short, a ssiming responsible
conduct from now on, we
do not anticipate a
serious ripple effect.
FORD & LIBRARY GERALD
8
REUSS PROPOSAL
Q.
What is your view of Henry Reuss's proposal to extend loan
guarantees to the State of New York for the benefit of the
City subject to the City's bringing its budget into balance,
the GAO being empowered to audit the City to ensure a
balanced budget, securing any federal exposure by a first lien
on all payments which the federal government may in the
future owe the City or State, and acceptance by the large
creditors of New York City of a stretch-out of their debt.
We think these things are the most appropra tely resolved in the
Judicial system.
deficit
A.
I
However clothed, the proposal basically involves the
taxpayers of America financing the cumulative default of New York City.
don't bail out the creditors keep the essential rvices direct going
Moreover, the proposal
two concerns w/Reuss. involves tremendous expansion of federal
control over lesal (fiscal) and financial affa rs
a/1? federal
taxpayers of America bail out
default( legislation) is a good idea for the time -- will provide
these positive benefits. in favor. judicial system.
they propose to help the creditors; cannot do this at this time.
of state local and
government
GERALD LIBRARY ? FORD
RP/10-28-75
5
OTHER CITIES USE THE LEGISLATION?
Do youexpect cities other than New York to utilize the legislation
you are proposing?
has
A
Absolutely not. No other major citie in the Unite D States have
engaged in consistent deficit spending and, therefore, no city
has a cumulative deficit of any size much less the size of New York's.
Note: #7 follows
RP/10-28-75
FORD s LIBRARY GERALD
7
LOAN GUARANTEES ?
Vould you consider a form ofloan guarantees to assist New York
in financing its short-term financial needs?
would you -consider pruchasing debt certificat -
rephrase the question to read:
Would you consider any form of financial assistance?
would not/until the City and the State have done absolutely
everything/in their powerto restore the City to a sound footing
which
they are so far from having done every thing that is necessary
that is not a realistic
A. under one proposal,
finance short tem needs
One of the ways in which the City can raise money after default under
ur proposal is by the issuance of certificate authorized by the Court.
We expect that these certificates will be marketable. It must be
remembered that in order to begin the judicial process, the City
must submit a plan for balancing its budget. If that is done they
should be no difficulty raisin necessary funds.
Lable to
RP/10-28-75
FORD & LIBRARY GERALD
STATE DEFAULT 10/28/75
Q:
Will the State of New York default in the wake of the
New York City default?
A:
There is no reason for New York State to default because
they are in sound financial position. Once appropriate
action has been taken with respect to New York City,
New York State should have no problem wi if the officials
act
in a responsible way.
FORD & LIBRARY GERALD
delete earlier answer
13
SPECIFIC CUTS
10/28/75
Q:
What specific cuts do you propose?
A:
None It Is up to the City of New YORK.
appear
As I mentioned, New York City expenditures seem out of
by compartson to ex pendi twice of other d this,
line with respect to these in the rest of the country.
It is up to the appropriate New York State and City
authorities to make the decisions of which they have
specific regarding cuts.
choosen. That is the difficulty that New York City
NOW has in waiting too long
FORD is LIBRARY GERALD
12
FRAUD PROSECUTION 10/28/75
Q:
Fraud in New York City?
A:
No information on fraud is available at this time.
There has not been/uncovered anything beyond any other
city's doing.
The matter should be investigated and handled by the
appropriate authorities.
I am confident the appropriate Authorities will
that bes prasite agencies
take action if information turns up on fraud.
whatwer
may he bucessary.
appropriate
In Er P (prom or - 20 ra.
L. 12-nye
FORD & GERALD LIBRARY
14
IMPACT ON BANKS
event
How many banks will be placed in difficulty in the effelcks of a
New York City default? What are the names of the banks?
review of holdings of New York City securities inpur banking system. and the
The federal bank regulatory agencies have conducted an exhaustive
Potential impact on that system of default by New York City.
They have concluded that no major bank would be materially
affected, As a direct consequence of a deficit by New York City.
While the impact on of a very small number of smaller banks could be
handful Edefault
more serious, the Federal Reserve and the FDIC have adequate
mechanisms to protect bank. depositors in the banking system.
In view of the protections which do exist, it would not be appropriate
to create unnecessary concern by (and identifying individual banks.
GERALO FORD LIBRARY
RIPPLE EFFECT
Q:
What ripple effect do you expect on the financial
community from a New York City default?
A:
There are two risks in any major financial reversal:
the financial and psychological.
We have carefully assessed the financial risk--the
impact on the markets, and the impact on the banking
system--and we believe these risks are manageable.
Markets tend to discount future events and to some
significant degree a potential default by New York
City has been discounted. These conclusions have been
confirmed by many disinterested observers of the
market.
The psychological risks cannot be measured. However,
it is clear that the dire predictions and vigorous
rhetoric employed by those who seek to force a Federal
bail out for New York City have enhanced the psychological
risks. It remains of utmost importance that all who
concern themselves with the affairs of New York City
view the situation objectively.
m short, if all those
concerned act responsibly
in the future, the rippee
effect would be minimal.
10/28/75
GERAED LIBRARY
FUNDS FOR ESSENTIAL SERVICES
Q. Under your proposal, how would New York City get the funds
to meet essential services?
insert
A. According to New York City's figures, the City's cash needs for
operations and capital projects (not including any payments of
principal and interest on outstanding debt) will exceed revenues
by approximately $700 million during the period December 1, 1975
- June 30, 1976. There are at least four ways this gap could be
made up.
First, New York State could impose a temporary and emergency
tax -- perhaps a package involving the income and sales
taxes -- to generate the necessary cash.
funds
Second, the assets of the pension funds could be used to collateralize
borrowing by MAC or the City. State and City pension) hold well in
excess of $10 billion of assets which could be used for
this purpose.
later
Third, in the context of an orderly debt restructuring proceeding,
the court could authorize the City to issue certificates of indebtedness,
to be payable, on a prior claim basis, out of revenues in years after
the budget balancing process is complete.
Fourth, the gap could also be reduced by immediate expenditure
cuts in the City budget.
Background
There are really two problems: the net cash flow shortfall referred to
in the answer and the so-called seasonal problem. The remaining
seven months of the fiscal year can be broken down into two periods:
December-March in which the City runs a $1. 3 billion cash deficit
(net of debt service) and April-June in which it runs a $600 million
surplus. On a direct revenue anticipation basis, the City should be
able to borrow $600 million during December-March, but it needs
one of the mechanisms described in the answer to borrow the remainder.
GP/10-28-75
PROVISION OF ESSENTIAL SERVICES
Q:
How does the proposal assure for the provision of
essential services?
A:
First, the proposals provides an orderly mechanism
for the restructuring of New York City's debt,
allowing deferral of the massive debt service burden
while the budget is being balanced.
Second, we have provided a procedure for borrowing
to meet cash shortages in the interim period
10/28/75
BANY
FUNDS FOR ESSENTIAL SERVICES
Q:
Under your proposal, how would New York City get the
funds to meet essential services?
A:
The proposal provides an orderly mechanism for the
restructuring of New York City's debt, allowing defer-
ral of the massive debt service burden while the budget
is being balanced.
According to New York City's figures, the City's cash
needs for operations and capital projects (not including
any payments of principal and interest on outstanding
debt) will exceed revenues by approximately $700 mil-
lion during the period December 1, 1975 through June 30,
1976. There are at least four ways this gap could be
made up.
First, New York State could impose a temporary and emer-
gency tax--perhaps a package involving the income and
sales taxes to generate the necessary cash.
Second, the assets of the pension funds could be used
to collateralize borrowing by MAC or the City. State
and City pension funds hold well in excess of $10 bil-
lion of assets which could be used for this purpose.
Third, in the context of an orderly debt restructuring
proceeding, the court could authorize the City to issue
certificates of indebtedness, to be payable, on a prior
claim basis, out of revenues, in later years, after
the budget balancing process is complete.
Fourth, the gap could also be reduced by immediate expendi-
ture cuts in the City budget.
Background
There are really two problems: the net cash flow shortfall
referred to in the answer and the so-called seasonal
problem. The remaining seven months of the fiscal year
can be broken down into two periods: December-March in
which the City runs a $1.3 billion cash deficit (net
of debt service) and April-June in which it runs a $600
million surplus. On a direct revenue anticipation basis,
the City should be able to borrow $600 million during
December-March, but it needs one of the mechanisms de-
scribed in the answer to borrow the remainder.
10/28/75
GERALD
LIBRARY
WHO WILL BE IN CONTROL?
Q. If New York City goes into default, under your proposed
amendment to the federal bankruptcy act, who will be in
control of the City?
A. Under the legislation the federal government would not control
the City's affairs -- control would remain with the Mayor and
the State Emergency Financial Control Board.
However, under the proposal the Court could authorize the
City to issue new debt. The Court could condition the
issuance of such debt on specific actions to be taken by the
City. Such conditions are no more onerous than those that
would be required by a prudent investor.
RP/10-28-75
GENALD
COURT AUTHORIZED DEBT CERTIFICATES
Q:
Will the court authorized debt certificates be
marketable?
A:
If New York City submits, as the proposed statute
requires, a budget which places its financial affairs
upon a sound footing, the certificates ought to be
marketable.
10/28/75
FRAUD PROSECUTION
Q:
Do you expect there to be prosecutions for fraud
resulting from a default of New York City?
A:
I am confident that the responsible agencies will take
whatever action may be appropriate.
10/28/75
FEDERAL FINANCIAL ASSISTANCE
Q:
Would you consider any form of financial assistance
to New York for financing its short term needs?
A:
Under our proposal, one of the ways in which the
City can finance short term needs is by the
issuance of certificates authorized by the Court.
It must be remembered that in order to begin the
judicial process, the City must submit a plan for
balancing its budget. If that is done they should
be able to raise necessary funds.
10/28/75
STATE DEFAULT
Q:
Will the State of New York default in the wake of
the New York City default?
A:
There is no reason for New York State to default
because they are in sound financial condition. Once
appropriate action has been taken with respect to
New York City, New York State should not have financial
problems if officials act in a fiscally responsible way.
10/28/75
REUSS PROPOSAL
Q:
What is your view of Henry Reuss' proposal to extend
loan guarantees to the State of New York for the
benefit of the City subject to the City's bringing
its budget into balance, the GAO being empowered to
audit the City to ensure a balanced budget, securing
any Federal exposure by a first lien on all payments
which the Federal Government may in the future owe
the City or State, and acceptance by the large creditors
of New York City of a stretch-out of their debt.
A:
However clothed, the proposal basically involves the
taxpayers of American financing the cumulative deficit
of New York City. Moreover, the proposal involves
a tremendous expansion of direct Federal control over
fiscal and financial affairs of State and local govern-
ment.
10/28/75
GERALD
LIBRARY
FUNDS FOR SERVICES
Q:
What happens if New York City does not have funds
to pay for police, etc.
A:
There are vast financial resources availabe in New
York State. However, if the State of New York fails
to provide the funds, we will work with the appro-
priate authorities to see that services essential
for the protection of life and property are provided.
10/28/75
GERALA RIFURD JOHNAT
IMPACT ON BANKS
Q:
How many banks will be placed in difficulty in the
event of a New York City default? What are the names
of the banks?
A:
The federal bank regulatory agencies have conducted
an exhaustive review of holdings of New York City
securities in our banking system and the potential
impact on that system of a default by New York City.
They have concluded that no major bank would be
materially affected, as a direct consequence of a
default by New York City.
While the impact on a handful of smaller banks could
be more serious, the Federal Reserve and the FDIC
have adequate mechanisms to protect bank depositors
and the banking system. In view of the protections
which do exist, it would not be appropriate to
create unnecessary concern by identifying individual
banks.
10/28/75
OTHER CITIES USE THE LEGISLATION?
Q:
Do you expect cities other than New York to utilize
the legislation you are proposing?
A:
Absolutely not. No other major city in the United
States has engaged in consistent deficit spending
and, therefore, no city has a cumulative deficit
of any size, much less the size of New York's.
10/28/75
GERALO FORD
IS DEFAULT DEFINITE?
Q. In your estimation is the New York City default a foregone conclusion?
A.
City and State officials in recent Congressional testimony stated
that the financial resources of the Ctiy and State will have been
exhausted by December.
Accordingly, if the City and State continue to be unwilling to take
the measures necessary to avoid a default, it seems likely that a
New York City default will occur.
AUGUST GERALD
RP/10-28-75
CURRENT DEBT SITUATION
Q. What is the current debt situation in New York and how much
additional financing does the City need in order to avoid a default?
A. According to the City's financial plan, the City will require $4.055
billion between December 1, 1975 and June 30, 1976 to retire
maturing short-term debt, to meet debt service obligations on long-
term bonds, and to pay operating and capital expenses.
Due to seasonal cash flow patterns, the City wi 11 need close to
$1 billion to meet its obligations in December.
RP/10-28-75
GERAL R.FORD
SAFETY OF INVESTMENTS
Q: Are the creditors going to lose their investments?
A:
Major states and cities have defaulted before--
for example Arkansas and Detroit--and in all these
cases the creditors have received 100 cents
on their dollar. Accordingly, if New York City acts
responsibly, eventually all creditors should be
paid.
10/28/75
GERALD R.70RD LIBRARY
RIPPLE EFFECT
Q:
What ripple effect do you expect on the financial
community from a New York City default?
A:
There are two risks in any major financial reversal:
the financial and psychological.
We have carefully assessed the financial risk--the
impact on the markets, and the impact on the banking
system--and we believe these risks are manageable.
Markets tend to discount future events and to some
significant degree a potential default by New York
City has been discounted. These conclusions have been
confirmed by many disinterested observers of the
market.
The psychological risks cannot be measured. However,
it is clear that the dire predictions and vigorous
rhetoric employed by those who seek to force a Federal
bail out for New York City have enhanced the psychological
risks. It remains of utmost importance that all who
concern themselves with the affairs of New York City
view the situation objectively.
In short, if all those concerned act responsibly in
the future, the ripple effect would be minimal.
GERALD
LIBRARY
10/28/75
SPECIFIC CUTS
Q:
What specific cuts do you propose?
A:
As I mentioned, New York City expenditures appear out
of line by comparision to expenditures of other cities.
It is up to the appropriate New York State and City
authorities to make specific decisions regarding cuts.
10/28/75
GERALD 115AARY
SAFETY OF INVESTMENTS
Q:
Are the creditors going to lose their investments?
A:
Major states and cities have defaulted before-
for example Arkansas and Detroit - and in all these
cases the creditors have received 100 cents
on their dollar. Accordingly, if New York City acts
responsibly, eventually all creditors should be
paid.
10/28/75
OK
SPECIFIC CUTS
Q:
What specific cuts do you propose?
A:
As I mentioned, New York City expenditures appear out
of line by comparision to expenditures of other cities.
It is up to the appropriate New York State and City
authorities to make specific decisions regarding cuts.
10/28/75
ok
CURRENT DEBT SITUATION
Q. What is the current debt situation in New York and how much
additional financing does the City need in order to avoid a default?
A. According to the City's financial plan, the City will require $4.055
billion between December 1, 1975 and June 30, 1976 to retire
maturing short-term debt, to meet debt service obligations on long-
term bonds, and to pay operating and capital expenses.
Due to seasonal cash flow patterns, the City wi 11 need close to
$1 billion to meet its obligations in December.
RP/10-28-75
LIBRARY
IS DEFAULT DEFINITE?
Q. In your estimation is the New York City default a foregone conclusion?
A.
City and State officials in recent Congressional testimony stated
that the financial resources of the Ctiy and State will have been
exhausted by December.
Accordingly, if the City and State continue to be unwilling to take
the measures necessary to avoid a default, it seems likely that a
New York City default will occur.
RP/10-28-75
OTHER CITIES USE THE LEGISLATION?
Q:
Do you expect cities other than New York to utilize
the legislation you are proposing?
A:
Absolutely not. No other major city in the United
States has engaged in consistent deficit spending
and, therefore, no city has a cumulative deficit
of any size, much less the size of New York's.
10/28/75
LIGRARY
RIPPLE EFFECT
Q:
What ripple effect do you expect on the financial
community from a New York City default?
A:
There are two risks in any major financial reversal:
the financial and psychological.
We have carefully assessed the financial risk--the
impact on the markets, and the impact on the banking
system--and we believe these risks are manageable.
Markets tend to discount future events and to some
significant degree a potential default by New York
City has been discounted. These conclusions have been
confirmed by many disinterested observers of the
market.
The psychological risks cannot be measured. However,
it is clear that the dire predictions and vigorous
rhetoric employed by those who seek to force a Federal
bail out for New York City have enhanced the psychological
risks. It remains of utmost importance that all who
concern themselves with the affairs of New York City
view the situation objectively.
In short, if all those concerned act responsibly in
the future, the ripple effect would be minimal.
GERALD
LIBRARY
10/28/75
IMPACT ON BANKS
Q:
How many banks will be placed in difficulty in the
event of a New York City default? What are the names
of the banks?
A:
The federal bank regulatory agencies have conducted
an exhaustive review of holdings of New York City
securities in our banking system and the potential
impact on that system of a default by New York City.
They have concluded that no major bank would be
materially affected, as a direct consequence of a
default by New York City.
While the impact on a handful of smaller banks could
be more serious, the Federal Reserve and the FDIC
have adequate mechanisms to protect bank depositors
and the banking system. In view of the protections
which do exist, it would not be appropriate to
create unnecessary concern by identifying individual
banks.
10/28/75
GERALD
REUSS PROPOSAL
Q:
What is your view of Henry Reuss' proposal to extend
loan guarantees to the State of New York for the
benefit of the City subject to the City's bringing
its budget into balance, the GAO being empowered to
audit the City to ensure a balanced budget, securing
any Federal exposure by a first lien on all payments
which the Federal Government may in the future owe
the City or State, and acceptance by the large creditors
of New York City of a stretch-out of their debt.
A:
However clothed, the proposal basically involves the
taxpayers of American financing the cumulative deficit
of New York City. Moreover, the proposal involves
a tremendous expansion of direct Federal control over
fiscal and financial affairs of State and local govern-
ment.
10/28/75
GERALD
LIBRARY
STATE DEFAULT
Q.
Will the State of New York default if New York City defaults?
A.
There is no reason for New York State to default because they
are in sound financial position. Once appropriate action has been
taken with respect to New York City, New York State should have
n O problems if officials act in a responsible way.
10/29/75
LIBRARY
SPECIFIC CUTS
Q.
What specific expenditure cuts do you propose that New York
City make?
A.
As I mentioned, New York City expenditures appear out of
line by comparison to expenditures of other cities. It is up
to the appropriate New York State and City authorities to make
specific decisions regarding cuts.
10/29/75
GERAL
IMPACT ON BANKS
Q: How many banks will be placed in difficulty in the event
of a New York City default? What are the names of the
banks?
A: The federal bank regulatory agencies have conducted an
exhaustive review of holdings of New York City securities
in our banking system and the potential impact on that
system of a default by New York City. They have concluded
that no major bank would be materially affected, as a
direct consequence of a default by New York City.
While the impact on a handful of smaller banks could be
more serious, the Federal Reserve and the FDIC have
adequate mechanisms to protect bank depositors and
the banking system.
10/29/75
GERAL
PRARY
RIPPLE EFFECT
Q.
What ripple effect do you expect on the financial community
from a New York City default?
A.
There are two risks in any major financial reversal: financial
and psychological.
We have carefully assessed the financial risk--the impact on
the markets, and the impact on the banking system--and we
believe these risks are manageable. Markets tend to discount
future events and to some significant degree a potential default
by New York City has already been discounted. These conclusions
have been confirmed by many disinterested observers.
The psychological risks cannot be measured. However, it is
clear that the dire predictions and alarmist rhetoric employed
by those who seek to force a Federal bail out for New York
City have enhanced the psychological risks. It remains of utmost
importance that all who concern themselves with the affairs of
New York City view the situation objectively.
In short, if all those concerned act responsibly, the ripple
effect would be minimal.
GERALD LIS8684
10/29/75
LOAN GUARANTEES?
Q: Would you consider any form of financial assistance to assist
New York in financing its short term financial needs?
A: Under our proposal, one of the ways in which the City can
finance short term needs is by the issuance of certificates
authorized by the Court. It must be remembered that in order to
begin the judicial process, the City must submit a plan for
balancing its budget. If that is done they should be able to
raise necessary funds.
10/29/75
GERAL SORD LIDHARY
FRAUD PROSECUTION
Q.
Do you expect there to be prosecutions in fraud resulting from
a default of New York City?
A.
I am confident that the respon sible agencies will take whatever
action may be appropriate.
10/29/75
IF NEW YORK CITY CAN'T SELL SECURITIES?
Q: Supposing they cannot sell securities or otherwise raise
funds to pay for essential services?
A: We have said we will work with the Court to assure essential
police, fire and other services are maintained -- whatever it
takes to provide these will be done.
10/29/75
OTHER CITIES USE THE LEGISLATION?
Q.
Do you expect cities other than New York to utilize the legis-
lation you are proposing?
A.
Absolutely not. No other major city in the United States has
engaged in consistent deficit spending and, therefore, no city
has a cumulative deficit of any size, much less the size of
New York's.
However, the statute applies to all cities over 1, 000, 000
population not just to New York.
10/29/75
GERALD
IS DEFAULT DEFINITE?
Q.
In your estimation is the New York City default a foregone
conclusion?
A.
City and State officials in recent Congressional testimony
stated that the financial resources of the City and State will
have been exhausted by December.
Accordingly, if the City and State continue to be unwilling
to take the measures necessary to avoid a default, it seems
likely that a New York City default will occur.
10/29/75
REUSS PROPOSAL
Q.
What is your view of Henry Reuss' proposal to extend loan
guarantees to the State of New York for the benefit of the City
subject to the City's bringing its budget into balance, the GAO
being empowered to audit the City to ensure a balanced budget,
securing any Federal exposure by a first lien on all payments
which the Federal Government may in the future owe the City
or State, and acceptance by the large creditors of New York
City of a stretch-out of their debt.
A.
However clothed, the proposal basically involves the taxpayers
of American financing the cumulative deficit of New York City
which I oppose. Moreover, the proposal involves a tremendous
expansion of direct Federal control over the fiscal and financial
affairs of State and local government.
Further, the practicality of handling the situation in this way is
doubtful. Particularly, in dealing with small creditors, union
contracts, and other obligations.
10/29/75
GERALD FORD
TIMING OF SPEECH
Q: Why did you give this speech now?
A: It was becoming increasingly likely that New York City
might default because actions to prevent default were
not forthcoming. Thus, I think it was important to provide
for an orderly system for handling the situation should this
occur.
10/29/75
GERALD
CURRENT DEBT SITUATION
Q: What is the current debt situation in New York and how
much additional financing does the City need in order to avoid a
default?
A: According to the City's financial plan, the City will require
$4.055 billion between December 1, 1975 and June 30, 1976
to retire maturing short-term debt, to meet debt service
obligations on long-term bonds, and to pay operating and
capital expenses.
Due to seasonal cash flow patterns, the City will need close to
$1 billion to meet its obligations in December.
10/29/75
GERALD
CREDIT INVESTMENTS
Q: Are the creditors going to lose their investments?
A: Major states and cities have defaulted before -- for example
Arkansas and Detroit -- and in all these cases the creditors
have received 100 cents on their dollar. Accordingly, if
New York City acts responsibly, eventaully all creditors
could be paid if New York City officials act responsibly in
handling the city's fiscal affairs.
10/29/75
\ RIGHT PATMAN
COMMITTEES:
FIRST DISTRICT
BANKING, CURRENCY AND HOUSING
STATE OF TEXAS
JOINT ECONOMIC COMMITTEE
JOINT COMMITTEE ON DEFENSE PRODUCTION
WASHINGTON ADDRESS:
2328 RAYBURN HOUSE OFFICE BUILDING
Congress of the United States
20515
house of Representatibes
HOME ADDRESS:
P.O. BOX 1868, TEXARKANA. TEXAS
Washington, D.C. 20515
75501
October 29, 1975
The President
The White House
Washington, D. C.
My Dear Mr. President:
As I understand your speech before the National Press Club
concerning the financial problems of New York City, you are suggesting
that there be no assistance until the city enters default and goes
through bankruptcy proceedings in the Federal courts. You indicated
that there would be two major beneficiaries of any pre-default
assistance -- the present officials of New York City and the commercial
banks or other large investors who purchased the city's securities.
You made it clear that you opposed a "bail out" of either group.
It is well-known that the Federal banking agencies, particularly
the Federal Reserve, have often provided direct and indirect bail-out
mechanisms for commercial banks when they have been caught with bad
investments. As you know, there has been Congressional testimony
and news reports about such assistance in relationship to the
troubled Real Estate Investment Trusts, to feed lot operators, and
of course, it is a matter of public record that the now-defunct
Franklin National Bank was provided about $1.7 billion in bail-out
assistance from the Federal Reserve.
Judging from the tone of your speech, which is clearly
"anti bail-out", I assume that such mechanisms would not be employed
in this instance and that the commercial banks and other investors
would, like the city, be required to seek relief in the courts. I
assume that you have discussed this with Federal Reserve Board Chairman
Arthur Burns and other bank regulatory officials and that you have
instructed them that there will be no behind-the-scenes bail-outs
employed by these agencies.
The President
-2-
October 29, 1975
In conclusion, Mr. President, your speech very clearly indicated
to the American public and the Congress that it is your policy that
the municipality and those who have invested in its securities are to
be treated alike and that their basic remedies lie in bankruptcy
proceedings. This would represent a significant change in policy
toward the commercial banking industry and other investors who make
bad judgments. I am most interested in learning how you plan to
implement this policy at the Federal Reserve and the other regulatory
agencies and what steps will be taken to monitor their continuing
relationships with the institutions which hold the New York City
paper in question.
Mian Respectfully, Patman
Wright
FORD LIBRARY
MAC NEGOTIATING PLAN WITH LENDERS
TO PROVIDE NYC WITH 8 BILLION
R Y (DJ) -- A PLAN TO PROVIDE SOME
8 BILLION TO PULL NEW YORK CITY OUT
OF ITS FISCAL CRISIS IS BEING NEGOTIATED
BETWEEN MUNICIPAL ASSISTANCE CORP AND ?
POTENTIAL LENDERS.
A MAC SPOKESMAN SAID COMMITMENTS
HAVENT BEEN OBTAINED THUS FAR FROM BANKS
PENSION SYSTEMS AND INVESTORS. BY NEXT
MONDAY OR TUESDAY WELL HAVE 8 SENSE OF
WHETHER WE CAN DO IT HE SAID. 8 MAC
BOARD MEETING ON THE FINANCING PLAN
ENDED AT THE GOVERNORS NEW YORK OFFICE
BEFORE NID-DAY,
ELEMENTS OF THE PLAN ARE-
-EXTENSION OF 1.1 BILLION OF MAC
BONDS HELD BY BANKS TO 10-YEARS AT A 6
PC INTEREST RATE FROM THREE TO FIVE-
YEAR MATURITIES.
-EXTENSION OF 1.3 BILLION OF MAC
BONDS HELD BY PENSION FUNDS SAVINGS
BANKS AND OTHER STATE FUNDS FOR THE SAME
PERIOD AND RATE.
-A BANK ROLLOVER OF 550 MILLION
OF NEW YORK CITY NOTES PREVIOUSLY AGREED
TO.
-VOLUNTARY EXCHANGE BY INDIVIDUAL HOL-
DERS OF 1.6 BILLION OF CITY NOTES FOR 9
PC MAC BONDS DUE IN 15-YEARS.
-THE PURCHASE OF 1.87 BILLION OF
THREE-YEAR NEW YORK CITY SECURITIES BY
CITY PENSION FUNDS:
THE CITY ALSO WILL NEED 1.5 BILLION
OF SEASONAL THREE-MONTH LOANS FROM BANKS
TO MEET ITS NEEDS THROUGH APRIL.
THE LARGEST PROBLEM WILL BE GETTING
COOPERATION OF INDIVIDUALS WHO ARENT
EVEN ON RECORD AS HOLDERS OF THE CITYS
FORD
BEARER SECURITIES THE MAC SPOKESMAN
SAID.
PERALD
KIBRARY
-0--
18170 06 NOV 75
hite House
NS,
IHD030
WAE167(1434) (1-020431C308)PD 11/04/75 1422
ILX CONEDMAIL NYK
PM 3 1!
ICZC 1-PD NEW YORK N Y NOVEMBER 4 1975
PMS PRESIDENT GERALD R FORD
THE WHITE HOUSE
IASHINGTON D C
+ 1975 NOV 4 PM 4 51
MAIL ROOM
38008 31,HG
)EAR MR. PRESIDENT
IE RESPECTFULLY BUT URGENTLY ASK YOU TO RECONSIDER
YOUR ANNOUNCED INTENTION TO ALLOW NEW YORK CITY TO GO
FORM 0000 PRINTED BY THE STANDAND RECISTER COMPANY
INTO BANKRUPTCY. WE AGREE WITH YOU THAT THE LAWS
GOVERNING MUNICIPAL BANKRUPTCY SHOULD BE MADE MORE
JORKABLE BUT WE URGE THAT, AT THE SAME TIME, FEDERAL
INANCIAL ASSISTANCE SUCH AS LOAN GUARANTEES BE MADE
AVAILABLE TO MAKE IT POSSIBLE FOR NEW YORK CITY TO
WORK ITSELF OUT OF ITS FINANCIAL CRISIS. SUCH ASSIST-
ANCE COULD AND SHOULD BE SO CONDITIONED AS TO ASSURE
NOT ONLY THE FEDERAL TREASURY IS PROTECTED, BUT THAT
AID TO STAVE OFF BANKRUPTCY
25 17 Hd 7 AON
3500h 31:24
IN THE FUTURE NO MUNICIPALITY WILLINGLY SEEKS FEDERAL
WE URGE TWO MAIN ARGUMENTS AGAINST BANKRUPTCY FOR NEW
YORK: FIRST. GOVERNOR CAREY AND MAYOR BEAME ALREADY
HAVE PLACED MANAGEMENT OF THE CITY'S FINANCES IN THE
HANDS OF SOME OF THE ABLEST BUSINESS EXECUTIVES IN THE
COUNTRY. IN COOPERATION WITH LEADERS OF ORGANIZED LABOR
THEY CAN DO A FAR BETTER JOB OF PLANNING AND EXECUTING
A WORK-OUT PROGRAM THAN COULD ANY FEDERAL REFEREE IN
GERALD LIBRATA FORD
BANKRUPTCY. SECOND. WE BELIEVE THE DOMINO EFFECT OF
NEW YORK CITY'S GOING BANKRUPT. IS FAR GREATER THAN SOME
OF YOUR ADVISERS HAVE PREDICTED. HERE IN NEW YORK THERE
WILL BE A PREDICTABLE LARGE FALL-OFF IN MUNICIPAL TAX
REVENUES, AND MANY HOSPITALS BOTH PUBLIC AND VOLUNTARY,
AS WELL AS OTHER CITY-SUPPORTED VITAL SERVICES, WILL BE
DRIVEN INTO BANKRUPTCY. WE PREDICT THAT INEVITABLY A
FEDERAL REFEREE IN BANXRUPTCY: WILL HAVE TO ASK THE
FEDERAL GOVERNMENT FOR EVEN MORE FINANCIAL AID THAN IS
PRESENTLY BEING REQUESTED, AND THAT THE WORK-OUT PERIOD
WILL BE MUCH LONGER. OUTSIDE OF NEW YORK CITY AND NEW
YORK STATE, MANY INNOCENT PERSONS WILL SUFFER. THE
DOMINO EFFECT ON NATIONAL AND INTERNATIONAL CREDIT
MARKETS WILL IMPOSE ENORMOUS-BURDENS ON THE ECONOMY
AND THE PEOPLE IN THE FORM OF HIGHER INTEREST RATES,
CANCELLED AND POSTPONED CONSTRUCTION PROJECTS,
REDUCED GNP, AND ACCELERATED INFLATION.
IF THE FEDERAL GOVERNMENT NEVERTHELESS DOES PERMIT
NEW YORK CITY TO SINK INTO DEFAULT, AND MERELY AMENDS
THE MUNICIPAL BANXRUPTCY LAWS, IT IS IMPERATIVE SUCH
AMENDMENTS INCLUDE ELECTRIC, GAS, AND STEAM ENERGY
7
SUPPLY IN ANY PRIORITY LIST OF "ESSENTIAL SERVICES".
19
IF THEY DO NOT THE RESULTS COULD BE DEVASTATING BOTH
20
11
TO OUR COMPANY AND TO THE CITY AS A WHOLE.
22
23
THE CITY PAYS US DIRECTLY ABOUT $120 MILLION A YEAR FOR
GERALD ABVURIT FORD.
24
25
ELECTRICITY, GAS, AND STEAM -- MOST OF WHICH IS USED
26
FOR SUCH ESSENTIAL SERVICES AS POLICE, HOSPITAL, FIRE
DEPARTMENT, SANITATION, SEWAGE, AND STREET-LIGHTING
FACILITIES. OUR BILLINGS TO RELATED PUBLIC AGENCIES --
SUCH AS THE HOUSING AUTHORITY AND THE TRANSIT AUTHORITY--
ARE ABOUT $150 MILLION A YEAR FOR SUCH ADDITIONAL ESSEN-
TIAL SERVICES AS THE SUBWAY SYSTEM AND THE ENERGY NEEDS
OF ABOUT 600,000 RESIDENTS OF PUBLIC HOUSING.
THE STATE, WHICH COULD BE CAUGHT UP IN THE DOMINO EFFECT
OF A DEFAULT SITUATION, PAYS US ANOTHER $12 MILLION
A YEAR. AND JUST TWO INDEPENDENT STATE AGENCIES--THE
METROPOLITAN TRANSPORTATION AUTHORITY AND THE PORT
AUTHORITY--PAY US IN TOTAL NEARLY $60 MILLION A YEAR.
THUS WE RECEIVE NEARLY $350 MILLION A YEAR FROM CITY
AND STATE AGENCIES THAT COULD BE AFFECTED BY DEFAULT.
WE SHOULD NOT BE PLACED IN A POSITION WHERE OUR CHOICES
ARE EITHER TO DISCONNECT ESSENTIAL UTILITY SERVICE TO
THE CITY OR STATE, OR TO WITHHOLD PAYING A LARGE PART
OF THE TAXES WE NOW ANNUALLY PAY THE CITY AND STATE
(MORE THAN $400 MILLION) OR TO OURSELVES SLIP INTO
INSOLVENCY.
IT IS CLEAR CON EDISON COULD NOT SURVIVE FOR LONG IF
IT CONTINUED TO SERVE A BANXRUPT CITY, AND CONTINUED
TO PAY TAXES, BUT WAS NOT ITSELF PAID BY THE CITY OR
THE REFEREE IN BANKRUPTCY. WE OURSELVES WOULD SOON
BE
BE INSOLVENT, AND SERVICE RELIABILITY WOULD DETERIORATE.
GERALD FORD LIBRARY
IN A CITY THAT IS BOTH VERTICAL AND UNDERGROUND (WITH
BOTH ELEVATORS AND SUBWAYS A PART OF EVERYDAY LIFE),
SUCH SERVICE DETERIORATION WOULD BE THE FINAL BLOW
TO OUR ONCE PROUD CITY. IT CANNOT SURVIVE WITHOUT
ADEQUATE AND RELIABLE UTILITY SERVICES.
WE THEREFORE EARNESTLY REQUEST THAT ELECTRICITY, GAS,
AND STEAM SERVICE BE INCLUDED ON ANY LIST OF "ESSENTIAL
SERVICES" THAT WOULD BE MAINTAINED IN THE EVENT OF DEFAULT.
SINCERELY.
CHARLES F.o LUCE
CHAIRMAN OF THE BOARD
CON EDISON
NNNN
GERALD FORD LIBRARY
STATE OF NEW YORK
EXECUTIVE CHAMBER
ALBANY 12224
HUGH L. CAREY
GOVERNOR
November 4, 1975
Dear Mr. President:
I have today sent the attached letter and supporting
materials to the President of the Federal Reserve Bank of
New York. On behalf of the people of the State of New York,
I am requesting that the Federal Reserve consider emergency
I
credit assistance for four agencies of the state that face
imminent default on their obligations. I wish to stress to
you that these agencies have nothing to do with the fiscal
crisis facing New York City. Each of them has an enviable
record of financial soundness and prudent management. Each
of them for years have been relied upon by the citizens of
New York to provide housing, health and environmental
facilities essential to the state's well being. Yet these
agencies, the models for similar agencies in over 30 other
states, now find themselves precluded from the investment
market ---- a condition that has only been severely aggravated
since your recent speech calling for the bankruptcy of New
York City.
Should these agencies default, which certainly will occur
in the absence of Federal assistance, hundreds of projects
involving $2.5 billion in construction funds will be stopped
prior to completion and thousands of workers will be thrown
into the unemployment rolls. These projects include hospitals
and other health facilities, schools, and housing.
The general credit of the State will not only be placed
in jeopardy but, in my opinion, could be critically impaired
for many years to come.
Again, all of this does not have to occur While these
agencies have no direct relationship with the New York City
problem, unfortunately the investment community views the
problem as one and the same. This will continue as long as
the Administration remains passive in the face of the New
York City crisis.
FORD & LIBRARY GERALD
- 2 ⑉
In effect, the contagion of New York City has now
spread to agencies of New York State.
In addition, your many statements on this subject
continue to assert that the State of New York has
sufficient resources to meet the collapse of the city.
I would only remind you once more of what your own
financial experts know -- the State of New York has its
own budget deficit of $700 million, and is in no position
to sustain the city's needs or meet the borrowing needs of
these state agencies.
I sense, Mr. President, as do many others across the
country that we are at an economic crossroads unparallelled
since those final moments in the darkest Depression. Whatever
points you thought necessary to make about the past mistakes
of New York City have been made. For our part, we have labored
long and hard over the past ten months of my administration to
right those wrongs. Now, despite all those efforts, we see the
rapid spread of financial confusion and distrust from the city
to the State, and potentially to other states as well.
It is not inappropriate, indeed it is in the tradition
of our nation for us now to look for and expect positive
leadership from a President and his administration.
Sincerely,
they Hugh L. Carey P. Carez
Governor
The Honorable Gerald R. Ford
President of the United States
The White House
Washington, D.C.
GERALDO FORD LIBRARY
STATE OF NEW YORK
EXECUTIVE CHAMBER
ALBANY 12224
HUGH L. CAREY
GOVERNOR
November 4, 1975
Dear Mr. Volcker:
Pursuant to my responsibilities as Governor of the State
of New York, I herewith submit a preliminary application and
request for consideration of a 90-day extension of credit,
with the option of renewal for an additional 90 days, in the
amount of $576 million pursuant to Section 13 of the Federal
Reserve Act (12USC 343). The proceeds of this loan would be
applied to meet the immediate needs of the following public
benefit corporations which are authorized by statute to
operate within New York State:
--- Housing Finance Agency
-- Medical Care Facilities Financing Agency
-- Dormitory Authority
-- Environmental Facilities Corporation
Events in recent months and weeks have disrupted the
capital markets, closing them to the issues of several agencies
which have traditionally enjoyed high ratings and a reputation
for prudent and conservative management. New York State and
the Federal government, to the extent of their capacity, have
an obligation to help contain this crisis and to insure that
agencies with sound credit are not destroyed
The President indicated in his address to the nation last
Wednesday that discerning investors would distinguish between
sound credits and weak ones, and that the market had already
largely discounted the potential insolvency of New York City,
Yet, as of this moment, the capital markets are closed to four
New York State authorities. Indeed, the prospects of securing
financing for these seasoned agencies are considerably dimmer,
not brighter, following the President's speech.
FORD is LIBRARY 938870
- 2 -
Now more than at any other time, I believe, since creation
of the Federal Reserve System, the essentials of one of its
crucial national purposes are sharply defined by the demands of
the current crisis: to provide credit on an emergency basis to
sound agencies which find traditional sources of investment
temporarily closed to them.
In support of this application, enclosed is a series of
analyses prepared by my office which explain the circumstances
giving rise to this preliminary application.
I have discussed this request with the Lieutenant Governor,
the State Comptroller, the Speaker and Minority Leader of the
State Assembly, and the Majority and Minority Leaders of the
State Senate, and can report they endorse the course of action
proposed in this letter.
I have asked the legislative leaders to stand in readiness
to convene a legislative session the week of November 10th. As
you know, staff representatives of my office and the legislative
leaders have been meeting with financial institutions to discuss
steps that have been proposed to strengthen the viability of the
State agencies; the legislative session would provide a timely
opportunity for State action in support of the State agencies in
connection with any definitive action regarding an extension of
credit. It is my hope that this letter can lead to early dis-
cussion with you of the alternatives open to us and agreement on
a common framework for action.
For a complete analysis and explanation of the public
purpose to be financed under the proposed loan, and to supply
further information, State Budget Director Peter C. Goldmark, Jr.
and the directors of the four public authorities involved are
prepared to answer any request you may have.
Sincerely,
/s/ Hugh L. Carey
Mr. Paul Volcker
President, Federal Reserve
Bank of New York
33 Liberty Street
New York, New York
R.FORD
Enclosure
GERALD
LIBRARY