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The original documents are located in Box 79, folder "New York City, November 1975
- July 1976 (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States of America his copyrights in all of his unpublished writings in National Archives collections.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 79 of the L. William Seidman Files at the Gerald R. Ford Presidential Library
OF
THE
THE 1789 TREASURY
THE SECRETARY OF THE TREASURY
WASHINGTON 20220
MAR 1 1976
MEMORANDUM FOR THE PRESIDENT
SUBJECT: Update on New York City
On Thursday, April 1, I will be testifying before
Senate Banking at oversight hearings on the New York City
loan program. Particuarly in view of the release last week
of Mayor Beame's plan to cut $862 million from the budget in
fiscal years 1977 and 1978, my testimony will be extremely
complimentary and optimistic. I will, however, discuss
other possible actions, including further cuts, needed to
restore New York City's long term economic viability.
The Beame Plan
In earlier reports to you, I indicated that while
New York City was on schedule for this fiscal year, we were
quite concerned about their failure to announce a specific
budget reduction program for the following two years. I
also noted my belief that no program appeared feasible
unless it directly addressed one or more of the following
four major areas: welfare, fringe benefits, the City University
or the courts and corrections system.
The Beame plan meets both concerns. First, it outlines
a comprehensive series of cuts which, if fully implemented,
will result in a budget surplus of $76 million in fiscal 1978.
Second, it calls for the elimination of all city funding for
the University and the courts and corrections system by
fiscal 1978. A good indication of the careful and conservative
nature of the plan is that it also proposes alternative cuts
which can be accomplished by unilateral City action in the
event that New York State refuses to take on the expense of
running the university or the courts and corrections program.
New York State
Progress continues to be made in completing the New York
State $4 billion seasonal financing. On Thursday, April 1,
the New York City financial institutions which are leading
the effort will begin their attempt to raise $700 million
from the 100 largest commercial banks outside of New York
State. If this effort is successful, and I believe it will
be, the $4 billion financing package should be complete.
LIBRARY
- 2 -
Transit Negotiations
The New York City subway workers' contract expires at
midnight on March 31. The union continues to demand a
substantial wage increase and voted last weekend to strike
on April 1 if agreement on an increase was not reached by
then. In view of the hard line being taken by New York City
and New York State regarding such an increase, there would
appear to be a real possibility of a strike on April 1.
Welf- William E. Efen Simon
LIBRARY
OF
The Department of the TREASURY
NEWS
DIPARTMENT
THE
WASHINGTON, D.C. 20220
TELEPHONE 964-2041
THE
TREASURY
1789
FOR RELEASE ON DELIVERY
Statement of the Honorable William E. Simon
Secretary of the Treasury
Before The Senate Committee On
Banking, Housing and Urban Affairs
Thursday, April 1, 1976 at 10:00 AM
NEW YORK CITY'S FINANCIAL SITUATION AND OUTLOOK
Mr. Chairman and Members of this distinguished Committee,
I am pleased to provide you with the first formal report to
Congress on the administration of the New York City Seasonal
Financing Act of 1975. Much has occurred since the New York
City financial situation was last before this Committee and
later in my remarks today I shall summarize the key events.
But at the outset, let me provide you with an overview of
the situation as we see it today.
We presently have $1.26 billion of loans outstanding,
and we expect repayment of the first $270 million on April 20.
Repayment is in part dependent upon successful completion
of the New York State financing in April and I am pleased to
report that it now appears that the financing will be
completed. Accordingly, I am satisfied that there exists a
reasonable prospect that the entire $1.26 billion will be
repaid by June 30.
Looking at the balance of the three year period, there
is now basis for a degree of cautious optimism. Last week,
Mayor Beame responded forcefully to increased estimates of
the budget deficit by announcing a comprehensive and detailed
program of expenditure cuts designed to achieve a budget
surplus by fiscal 1978.
Carrying out this plan will not be easy for New York
City. Undoubtedly there will be those who will urge that it
is impossible, those who will claim that it can only be
accomplished over a longer period of time and those who will
urge that the price of achievement is severe human hardship.
In my experience in government, too often have I
witnessed an unfortunate tendency to allow the naysayers,
the purveyors of gloom and doom, to stifle sound and meaningful
WS-757
- 2 -
reform. Clearly it would be wrong to adopt a pollyanna
attitude and blithely assume that all the problems are
solved. But it would be even more wrong to deny New York
City, by our words and by our actions, the chance it so
clearly has earned by its progress in the past few months.
I believe the job can be done and done within the
allotted time frame. I believe the job can be done without
disrupting essential services. And most importantly, I
believe the rewards of doing the job well and properly are
potentially enormous.
Throughout this entire period, there has been much talk
about the question whether New York City will be in a position
to reenter the capital markets in 1978. I think it's fair
to say that it has become fashionable in some circles to
assume that there exists no chance of reentry for many
years. But I would submit that such predictions are based
upon an incorrect factual perspective: an assumption that
New York City will not achieve the reforms it is on its way
to achieving.
I look at the situation quite differently. I ask
myself whether I, as a private lender, would be willing to
lend money to an entity which has
-- successfully weathered a severe financial crisis;
-- taken, within a 30 month period, firm actions to
correct more than a decade's worth of extreme fiscal and
financial neglect, including the permanent elimination of an
operating budget deficit of $1 billion;
- - established a sound and credible accounting and
financial reporting mechanism; and
-- developed a first rate financially oriented management
team.
Today these are still objectives. But if they become
reality, I believe New York City will be perceived entirely
differently by the credit markets in 1978. This is our
goal, and it now appears to be the City's goal as well. As
I said a moment ago, let's give them the chance to achieve
it.
I. Background
Before outlining New York City's current progress
toward fiscal reform, let me take a few moments recalling
- 3 -
certain key events that brought us to this point.
At the time I first testified before Congress on New
York City's financial situation in June 1975, it was on a
hopeful note, immediately following the creation by New York
State of the Municipal Assistance Corporation. MAC was
authorized to borrow $3 billion on New York City's behalf,
intercepting City sales and stock transfer tax revenues to
fund what it borrowed. Passage of the MAC legislation
prevented default in June, and provided, we then believed,
ample time through the summer to make the necessary corrections.
Our optimism was unwarranted. As June turned into July
without meaningful action on the fiscal front, the market
began to close to MAC as well. Its July issue sold sluggishly,
despite an "A" rating and a 9½ interest rate. Exploratory
efforts regarding an August sale indicated that investors
would not purchase MAC securities without solid evidence
that the City was making meaningful progress toward fiscal
and financial reform. On July 17, underwriters informed MAC
that its planned August issue could not be marketed unless
the City announced meaningful fiscal reform and spending
cuts.
In late July, the City and MAC announced plans to
reduce spending. Wage freezes, pay cuts for higher salaried
employees and layoffs were openly discussed. The announcements
were accompanied, however, by a public dispute about MAC's
authority to intervene in the City's financial affairs. In
addition, the City's labor unions denounced all talk of wage
freezes and layoffs of municipal employees.
It soon became clear that MAC could not raise the
$840 million needed to cover New York City's August cash
needs by public sales of its securities. Less than $300 million
was raised from the public despite a tax-exempt interest
rate of 11 percent. The remainder was sold to banks and
state employee pension funds. Perhaps more importantly, the
August sale marked, as a practical matter, the end of MAC's
utility as a viable and independent financing vehicle.
In September, New York State took the major step of
committing its own credit and resources to the problem.
This action was accompanied by a substantial restructuring
of the governmental relationship between City and State:
The Emergency Financial Control Board was established and
given virtually unlimited powers over the fiscal and financial
- 4 -
affairs of New York City. Moreover, the law mandated achievement
of a balanced budget in the fiscal year ending June 30, 1978,
and a showing of substantial progress toward a balanced
budget in fiscal years 1976 and 1977.
Under the legislation, New York City was required to
submit for Control Board approval a financial plan designed
to eliminate the budget deficit by fiscal 1978. The plan as
submitted on October 15 predicted a budget deficit of approximately
$700 million in fiscal 1978 and proposed to eliminate it in
three stages: $200 million in annual expenditure reductions
in fiscal 1976 and $262 million per year in both fiscal 1977
and fiscal 1978, thus achieving a small surplus in 1978. As I
shall discuss later in my testimony, this deficit estimate
proved too low. Much more in the way of expenditure cuts
was required.
As required by law, the plan also addressed the capital
budget. Total capital spending was cut from the approximately
$2 billion originally proposed for fiscal 1976 to $1.6 billion
in that year, $1.1 billion in fiscal 1977, and $900 million
in fiscal 1978. Operating items in the capital budget --
nearly $700 million in fiscal 1976 -- were to be reduced at
a rate of $50 million per year. As I shall discuss later,
according to current projections, this target has already
been exceeded.
Two issues remained open. First, there was the question
of financing the deficits accumulated over the previous
decade that resulted in a multibillion dollar overhang of
short term debt. And second, in view of the fact that the
public credit markets were closed, New York City needed a
source of funds to finance operations and the capital
program during the 1976-1978 period.
In numerous appearances before this Committee and else-
where, New York City and New York State officials insisted
that they had done all they could and demanded that Federal
taxpayers provide the funds to eliminate the overhang of
short term debt and meet all of the City's financial needs
during the 1976-1978 period. But these demands were seriously
questioned in Congress and flatly rejected by the Administration.
We believed that such deficit financing had to be provided
at the State and local level.
Finally, in late November, we were presented with a
financing plan that met the City's requirements. The package
consisted of the following elements:
- 5 -
-- New and increased taxes designed to yield $500
million during the period December 1, 1975 through June 30,
1978. Included were higher taxes on personal income, increased
bank, estate and cigarette taxes, an increase in the minimum
corporate income tax and extension of the sales tax to cover
personal services.
-- Increased real estate taxes designed to yield $400
million.
-- Investment of $2.5 billion by the City's pension and
sinking funds.
-- Refunding of $1 billion of maturing City notes into
6 percent City bonds by the City's sinking funds, pension
funds and major banks.
-- Legislation imposing a moratorium on retirement of
the $1.6 billion of New York City notes which were held
privately and reducing the interest rate on such notes
to 6 percent. In lieu of the moratorium, holders of these
notes were given the option of exchanging the notes at
face value for ten year MAC bonds, bearing an 8 percent
interest rate. Despite the favorable exchange terms, only
$500 million of the notes -- less than a third -- were so
exchanged.
-- A commitment by New York State to continue to advance
$800 million in welfare and education aid in the spring
quarter.
These steps were designed to result in a balanced cash flow
over the course of each fiscal year, eliminating the need
for deficit financing. However, because revenue collections
are not uniform throughout the year, seasonal loans remained
necessary to assure that payrolls were met, vendors paid and
essential services performed in the months in which the
City's revenues fell short of its regular monthly expenditures.
Accordingly, to assure the continuity of essential services,
we asked the Congress for authority to make short-term
seasonal cash-flow loans. In early December, Congress
passed the New York City Seasonal Financing Act of 1975,
providing for up to $2.3 billion in seasonal loans.
II. The Seasonal Loan Program
The Federal Seasonal Loan Program began almost immediately
after passage and approval of PL 94-143. On December 18, 1975,
- 6 -
the Federal Government loaned New York City $130 million
at an interest rate of 6.92%. As required by the statute,
the rate reflected the average rate on Treasury debt of
comparable maturity, plus a one percent premium. The loan
was secured by a pledge of $180 million in State aid to
education, and is scheduled to be repaid on April 20.
Credit Agreement
On December 30, 1975, after two weeks of extensive
negotiations, we entered into a Credit Agreement with New
York City, New York State, the Municipal Assistance Corporation
and the Emergency Financial Control Board. The Agreement, a
copy of which I shall submit for the record, provides a
number of specific protections to the Federal Government.
The principal requirements are as follows:
-- Certification by the Emergency Financial Control
Board that loans requested are consistent with the City
Financial Plan.
-- Agreement by the Mayor, City Comptroller, and Control
Board to take all actions necessary to insure that revenues
securing repayments are paid into a special repayment account,
controlled by the Secretary of the Treasury.
-- Power to require the Governor and State Comptroller
to prevent disbursement of State-funded repayment revenues,
except to the Secretary of the Treasury.
-- Submission of detailed analyses on a regular basis
to provide the flow of information needed to track and
monitor the City's performance and adherence to the Financial
Plan and Credit Agreement.
-- Right to audit and inspect the books and records of
New York City and New York State.
Subsequent to the signing of the Credit Agreement, we
loaned New York City $240 million on December 31, 1975, $140
million in January, $430 million in February, $250 million
on March 1, and $70 million on March 15. All loans are
scheduled to be repaid in full during the spring quarter.
Two hundred and seventy million dollars mature on April 20,
$240 million on May 20, $250 million on June 20, and $500
million on June 30.
Let me focus on the security. As I have indicated,
each loan is directly secured by a specific revenue due New
- 7 -
York City on or before the maturity date of the loan. These
encumbrances total $1,944 million and consist of $50 million
in City tax levy funds, $382 million in State revenue sharing
funds, $602 million in State aid to education and higher
education, $110 million in State welfare payments and $800
million of advances of fiscal year 1977 State welfare and
education aid. The Agreement provides that these funds cannot
be used for any other purposes until our loans are repaid.
Arthur Andersen Report
Prior to signing the Credit Agreement, I retained Arthur
Andersen and Company to report to me on the Three-Year Financial
Plan and to evaluate New York City's financial reporting and
accounting systems. In addition, we asked them to help in the
preparation of a financial reporting package.
The Report provoked numerous concerns. I wrote to
Mayor Beame on January 20 and asked for his comments on six
specific questions raised by the Andersen Report. Chairman
Proxmire and Senator Stevenson wrote to me on January 23, asking,
in light of the Report, to be "apprised of the factors which
led (me) to conclude that there is nevertheless a reasonable
prospect of repayment by June 30, 1976," and, in addition,
for my answers to eight related questions. I am submitting
this correspondence for the record.
While we must be aware of the warnings in the Andersen
Report, it is equally important to understand its limits.
It did not comment specifically on the Federal loan program
or address the question of whether there was "a reasonable
prospect" of timely repayment by New York City of the Federal
loans which have been made to date.
It is not inconsistent to regard as tenuous the assumptions
and forecasts of the City's Three-Year Financial Plan, while
at the same time concluding that the City will repay the Federal
loans on time. The critical issue involves the aid and advances
that New York State is committed to provide New York City in
the spring quarter. If it receives the State aid and advances
that it is scheduled to receive, New York City's cash flow
will be sufficient to repay the Federal loans maturing
between now and June 30.
As suggested in the Andersen Report, some of the original
assumptions and forecasts in the Plan have already been
discarded. As predicted by the Andersen report, the estimated
deficit today is substantially higher than the October
- 8 -
forecast. But, as Mayor Beame's recent proposal makes
clear, this does not mean the plan cannot work. If revenues
fall short of projected levels, or if expenditures are
higher, other revenues will have to be found, or expenditures
cut further. In the final analysis, targeted budget balances
can be hit and debts repaid on schedule, if there is a will
to cut spending.
In this regard, it is important to note that New York
City has little in the way of alternatives. Congress did
not contemplate and PL 94-143 does not allow the seasonal
loan program to become a vehicle for financing New York
City's deficits. And New York City can no longer finance
elsewhere the level and diversity of programs and activities
they would like to provide but cannot afford. Accordingly,
without the prospect of either more Federal loans or funds
from other sources, revenues and expenditures must balance
by fiscal year 1978. As Mayor Beame recognized last week,
quoting Governor Carey's State of the State message,
the days of wine and roses are over."
The Mayor's budget reduction proposal is clearly
the most significant indication that this important message
appears to be getting through. City officials now recognize
that major changes in the way the City conducts its affairs
have to be made. But before turning to the specifics of
Mayor Beame's new budget proposal, let me first outline the
progress in other areas.
Management
There is a new top financial management team on the
job. Mayor Beame has two new Deputy Mayors: Kenneth Axelson,
on leave from his positions as Senior Vice President of
Finance and Administration and Director of the J.C. Penney
Company; and John Zuccotti, formerly Chairman of the City
Planning Commission. The Mayor also has appointed Donald
Kummerfeld, formerly Vice President for Public Finance of
the First Boston Corporation, to be the City's Budget Director.
Comptroller Goldin has hired Martin Ives, formerly Deputy
State Comptroller, to be his Deputy. These are first-
rate people.
Reporting and Record-Keeping
As I observed earlier, the Andersen Report concluded
that the City's present financial reporting, record-keeping
and controls systems are inadequate. We have been advised
- 9 -
by Mayor Beame that "a major effort is underway to correct
deficiencies in these systems." In that connection, Touche-
Ross and Company and American Management Systems are designing
a new accounting and controls system to be in place by
July 1, 1977. By July 1 of this year, an interim obligation
encumbrance reporting system for all agencies will be in
operation. This step will help tremendously in controlling
unbudgeted spending, which until now has been a serious
concern.
Monthly Reports
The Credit Agreement requires detailed monthly financial
reports to allow us to oversee the City's progress toward
budgetary balance. These reports also will enable City and
Control Board officials and staff to monitor progress, and
to spot any variances from the forecasts before they get out
of hand. The reporting package will be refined and improved
as time passes and we gain experience. Andersen personnel
are assisting us in this area, and we also are working
closely with City, Control Board and GAO staff to perfect
the monitoring formats.
Expenses
Expenditures are very close to target for fiscal
year 1976. Expenses through January were $12 million
higher than planned. Spending for social services and
education was $28 and $21 million above targeted levels.
Debt service, including MAC, was $34 million above forecast.
On the other hand, spending on health and hospitals was
$38 million below forecast and spending on police protection
and higher education was $9 and $10 million below targeted
levels.
Employment
Significant progress has been made in reducing
New York City's large payroll. In the first seven months
of fiscal year 1976 -- July 1, 1975 to January 31, 1976 --
the payroll was reduced by the equivalent of nearly
35,000 full time employees. And when these gains are
added to progress made earlier in calendar 1975, the
total payroll reduction exceeds 40,000. In my view,
trimming a massive public payroll by 15 percent in one
year is a truly laudable accomplishment.
Capital Budget
New York City's most recent monthly forecast shows
total capital budget expenditures for fiscal 1976 at
- 10 -
$1.597 billion, $3 million below the financial plan.
More importantly, the forecast shows a significant acceleration
of the removal of operating expenses from the capital
budget.
The original October plan included $697 million of
operating items in the fiscal 1976 capital budget and
forecast a $50 million annual reduction in both fiscal
1977 and 1978, reducing the total amount included in the
capital budget to $597 million in 1978.
The current forecast shows a further reduction of
$22 million to $675 million for this fiscal year. For
fiscal 1977, the amount eliminated will be almost double that
originally planned: a $95 million cut reducing the balance
to $580 million. Another $60 million will be cut in 1978,
leaving a balance of $520 million, $77 million better than
the original projection.
The Budget, the Financial Plan and Mayor Beame's New Proposals
Let me turn now to the highly complex, but critically
important, subject of New York City's budget deficit and how
it will be eliminated. In evaluating the current status,
let's begin with the forecasts of the October financial
plan.
The October plan forecast operating deficits of $1.19 billion
in fiscal year 1976, $932 million in fiscal year 1977 and
$693 million in fiscal 1978, before taking into account the
effect of the expenditure reduction program. In other
words, New York City predicted that its annual operating
deficit would decrease by some $500 million in the normal
course of events and thus premised its expenditure reduction
plan on the projected 1978 deficit of $693 million. According
to the plan, this amount was to be cut from the budget in
three steps: $200 million in fiscal 1976, $262 million in
fiscal 1977 and $262 million in fiscal 1978. Since the
program reductions imposed in 1976 and 1977 would of course
also result in savings in 1978, the gross savings in 1978
would be $724 million, generating a $31 million operating
surplus.
The $500 million "natural" decrease in the deficit was
suspect from the start, and data released by New York City
in February confirmed the error. The February forecast showed
that the deficit to be eliminated in fiscal 1978 -- again
before the effect of any spending cuts -- is $986 million,
$293 million more than had been projected in October.
- 11 -
For clarity, let me emphasize one point. Program
cuts imposed in 1976 and 1977 obviously have the effect of
reducing the operating deficits in those years. But in
evaluating the financial plan, we must keep in mind that
the target is a balanced budget in fiscal 1978. Accordingly,
all cuts -- irrespective of the year in which they are
implemented -- should be viewed as reducing the $986 million
1978 deficit.
Until Mayor Beame's recent announcement, New York
City had not announced the details of any expenditure
reductions other than the $200 million announced and imposed
in the current fiscal year. Accordingly, the Beame Plan
must and does address the remaining 1978 deficit of
$786 million.
The Beame plan calls for deficit reductions of $379 million
in fiscal 1977 and $483 million in fiscal 1978. When added
to the $200 million savings anticipated this year, the total
savings are $1.062 billion, eliminating the projected fiscal
1978 deficit of $986 million and generating a $76 million
surplus.
The Beame proposals are incorporated in a detailed
document that was submitted to the Control Board on March 26.
I am submitting a copy for the Record.
FISCAL YEAR 1977
The Beame plan proposes reducing expenditures
by $379 million during the fiscal year ending
June 30, 1977. Fifty-four million dollars of this
reduction would result from proposed increases in Federal
and State funding. The remainder would be achieved through
the City's own efforts -- nearly all through reduction
in the scope and cost of services and programs currently
provided.
The City would cut $250 million by reducing existing
programs. Cuts in current programs and residual savings would
reduce the City's expenditures for education and higher
education by $84 million. Police expenditures would be cut
by $40 million, primarily through personnel reductions and
management improvements. Previously identified proposals
would reduce payments to the Health and Hospital Corporation
by $27 million. These proposals, and other means for reducing
the City program expenditures by nearly $250 million, are
spelled out in the Mayor's Plan.
GERALD
LIBRARY
- 12 -
The Plan provides considerable detail about how the
City plans to save an additional $75 million: reducing non-
mandated welfare costs ($30 million), reducing fringe
benefits ($24 million), and an anticipated reduction in
power costs ($16 million) are the key measures.
Finally, the City plans to receive approximately an
additional $54 million in Federal and State revenues during
FY 1977. State assumption of court and probation costs on
April 1, 1977 would save the City $24 million. Increased
Federal subsidies for public housing and senior citizens
under existing programs is estimated to provide the remaining
$30 million.
FISCAL YEAR 1978
The largest saving in 1978 ($113 million) would result
from phasing out City support for the City University. In
addition, the City would expect to achieve $100 million in
savings through further program reductions, increased
productivity, greater management efficiency, and other
measures.
The remaining savings would be achieved through several
measures: withdrawal from the Social Security system ($43 million);
increased use of community development funds for tax levy
purposes ($50 million); and further reductions in non-
mandated welfare costs ($30 million). Additional savings
would result from further reductions in power costs, and
other measures.
Finally, the Plan calls for an additional $128 million
in deficit reductions during fiscal year 1978 through increased
State and Federal funding. Most of this is attributable to
proposed assumptions by the State of additional court and
correction costs ($103 million). The remaining $25 million
would arise through proposed Federal assumptions of certain
costs for public housing and senior citizen rent increase
exemptions. It should be noted, however, that the plan
also includes contingency reductions in City programs
to be used in the event the State does not agree to
participate.
The Mayor submitted his Plan to the Control Board on
March 26 with a letter stressing the need for immediate
action. The proposal was generally well received and is
being intensively reviewed. A full Control Board appraisal
is expected by May 1.
- 13 -
Mayor Beame's plan plainly dispels two myths which have
permeated the year-long debate on New York City. How often
have we heard it said in some quarters that it was simply
impossible for New York City to balance its budget within
three years? And how often have we heard from others that
New York City officials simply were incapable of facing up to
the hard decisions and developing sound and credible
solutions?
Mayor Beame's plan shows that New York City's budget
can be balanced -- soundly and credibly -- within the alloted
time frame. And in so doing, it reflects a recognition
that hard measures must be taken and that detail
is required now. It does not attempt to avoid cuts in 1977
by unduly backloading them into 1978. It recognizes that some
assumptions are questionable and identifies contingency
measures in the event they prove too optimistic. All in
all, it reflects an unambiguous desire to deal with, not
evade, the problems New York City faces.
New York State's Prospects
To conclude my status report, let me briefly review the
financial situation in New York State. Our analysis indicates
that the state's financial condition is fundamentally sound,
and that its cash flow later this year will be adequate to
repay its borrowings this spring. These factors should
enable the State to raise the funds it needs. If it does,
New York City will receive the State aid and advances required
to repay the Federal loans.
In recent months, the State's leaders have directed
their efforts toward financing the state agencies, producing
a credibly balanced budget and obtaining financing for
seasonal needs. The first two jobs now have been done.
Substantial progress has been made toward completing the
third.
With the help of the State's retirement systems, a
$2.5 billion financing package was put together, allowing
the state agencies to refund short-term notes into bonds and
to finance completion of projects now in progress. No
further projects will be undertaken. And, most significantly,
moral obligation bonds are now prohibited by law.
Second, the State legislature adopted what appears to
be a credibly balanced budget. Significantly, expenditures
in the new budget are only $123 million higher than in the
GERALD
- 14 -
fiscal year that ended yesterday. Investors are certain to
be reassured by this move to hold down spending.
As a result, the State now should be able to place the
$4 billion of securities it must sell before mid-June. As
of now, all but $1.7 billion has been tentatively placed
with various State funds and New York City's commercial
banks.
III. Long-Term Prospects
While the recent actions by New York City are clearly a
major step toward a solution to New York City's immediate
financial crisis, prior to June 1978 unforeseen events will
undoubtedly require more in the way of actions and responses.
However, while we should not be complacent in dealing with
the immediate situation, I believe the time has come to
address the longer term outlook as well. Accordingly, I would
like to devote the remainder of my time this morning to setting
the framework for what I hope will be a comprehensive review
of New York City's economic condition and outlook.
Let's begin by identifying the objectives. First,
and foremost, New York City must recreate an environment
in which economic activity can flourish. That in turn
requires a rational approach to business taxation and a
stable and satisfied labor force. As Mayor Beame and
Governor Carey have squarely recognized in recent weeks,
New York City's economic future depends upon its ability
to attract and retain business investment.
My remarks today are only a beginning. In the months
and years ahead New York City's leadership must mobilize
all elements of society -- the business and financial
community, organized labor and the citizenry at large --
toward achieving this common goal. Without it, the
herculean efforts of the past months will be viewed by
future generations as an empty gesture.
To put this portion of the discussion into context,
let's first explore on a fundamental plane the problems
which led New York City into a unique dependency relationship
with the Federal Government.
New York City is bound by local and State Laws to
balance its operating expenses and revenues. Accordingly,
the first response to spending pressures was more and
higher taxes. Ultimately, the tax base was pushed beyond
- 15 -
its ability to generate more in the way of revenues and
deficit spending, hidden by accounting gimmicks, was the
inevitable option. As a consequence, New York City has run
operating deficits each year since fiscal year 1961. By
fiscal year 1975, these deficits totalled over $4 billion.
In addition, more in the way of past deficit spending is
forever buried in the capital program.
As a first step in a program of long-term economic
reform, the spending pressures which precipitated the problem
in the first place must be evaluated. If these pressures can
be moderated, then we will have made major progress in
creating an environment where business can invest and citizens
can settle.
I.
Spending Pressures
Unique Services
New York City simply provides services that other
cities do not provide. The 1975-1976 fiscal year budget, as
originally submitted, provides, apart from pension costs,
$477 million for higher education, $890 million for City
hospitals, $586 for charitable institutions, most of which
consist of payments to private hospitals, $90 million for
activities of the Health Department, including mobile health
units and labs, $71 million for addiction services, $5 million
to administer mental health programs, $137 million for
various housing activities and $180 million in subsidies for
the transit system. State and Federal matching programs
account for a major share, but the City's taxpayers must
provide $1 billion to fund these activities.
Health and Hospitals
It must be determined whether New York City residents
could receive a satisfactory level of health care if public
outlays for this purpose were reduced. The operating
expense budget for New York City's Health and Hospitals
Corporation in fiscal year 1975-1976 called for total
expenditures of $1 billion, including pension costs; $390 million
of this amount comes from city taxes. Of the City tax
funds, approximately $165 million is spent for medicaid and
other necessary programs. The remaining $225 million reflects
administrative costs and delivery of health care services
over and above those paid for by third party programs such
as medicaid, medicare, workmen's compensation, and private
GERALD
LIBRARY
- 16 -
insurance. Such extra services may be desirable, but it
must be asked whether they are affordable under present
conditions.
Progress clearly has been made in the health area. The
Beame plan provides for large cuts by the Health and Hospitals
Corporation. However, the possibility of similar cuts by the
Health Department and Addiction Services Agency, in the
budget for Charitable Institutions, and in mental health
programs must also be studied. Particular attention ought
to be paid to the possibility of eliminating unnecessary
administrative expenses.
Transit
Re-evaluation of the system of financing mass transit
is needed. Transit subsidies now cost New York City's
taxpayers $183 million per year. As we look into the future,
alternative approaches must be evaluated. An across the
board fare increase might hurt the poor; but if that is the
concern, why not explore the feasibility of a direct method
of helping the poor, while more affluent riders pay their
fair share.
Another area to explore is the fare structure. Many
cities have sucessfully experimented with a fare based on
distance travelled, and with off-peak discounts and rush-
hour premiums. The possibility of these innovations should
not be ruled out in advance.
Fringe Benefits
Everyone would agree that no long range study of New
York City's economy can ignore the question of public employee
fringe and retirement benefits. In the current fiscal year,
employee fringe benefits -- pensions, health insurance,
vacations and the like -- will cost New York City's taxpayers
more than $2 billion. Based on the 232,000 person full time
equivalent payroll at the end of January, this cost averages
more than $8,600 per employee. In other words, New York
City's taxpayers spend more per employee on fringe benefits
than the annual income of the average American.
Clearly, ample fringe benefits are essential to an
efficient, productive and contented labor force. But given
the large costs, and the significant disparity between New
York City and other employers, a careful study is certainly
warranted.
Before turning to particular benefits, let's review the
overall level of benefits for certain key employee groups.
The cost of vacations and sick leave are excluded from these
- 17 -
examples because of the difficulties in making precise
calculations. But these costs are well above average and
would add considerably to the level of disparity.
The base pay of a New York City patrolman first grade,
including the latest cost-of-living adjustment, now is
$16,800. Fringe and retirement benefits, excluding vacations,
equal $8,500 or 51% of the base. For a sanitationman,
benefits are 39% of the base. For a fireman first grade
they are 49%. For a teacher with a masters degree and eight
years of service they are 37%. For senior clerks, using
their median salary, benefits equal 34% of the base. All of
these percentages dwarf the national average of less than
20 percent.
Specific Benefits
The current costs of certain key fringe benefits are:
- Pensions
$1,165 million
- Social Security
214 million
- Health and Hospitalization Insurance
170 million
- Union Welfare Funds
107 million
- Union Annuity Funds
36 million
- Uniform Allowances
19 million
- Training Funds
1 million
$1.712 billion
Social Security
New York City has announced that it is withdrawing from
the Social Security System as of March 1978. Given my
concern for the financial condition of the Social Security
System, I cannot be entirely sanguine about this development.
However, it may have been inevitable under the circumstances.
Ideally, Social Security benefits should be integrated
with pension benefits to provide a reasonable level of
retirement income. However, accomplishing such integration
in New York City is complicated by two factors. First, the
New York State Constitution has been interpreted to prohibit
reduction in levels of pension benefits already vested.
Second, a New York State law enacted at the time state and
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local governments were made eligible for Social Security,
prohibits taking Social Security benefits into account in
collective bargaining regarding pensions. In light of these
factors, and given the anticipated savings of nearly $200 million
a year, New York City may have had little choice but to
withdraw.
Annuity Funds
New York City now pays $36 million per year into Union
Annuity Funds. These funds involve per diem contributions
toward the provisions of still more retirement benefits in
the form of annuities for certain employee groups. The
continuation of these payments should be assessed in light
of the overall level of retirement benefits employees now
receive.
Union Welfare Funds
The 1976 fiscal year budget provides for direct payments
of $107 million to municipal unions. These funds enable the
unions to provide both active and retired workers with still
more in the way of fringe benefits: free dental care,
eyeglasses, counseling and legal services. Certainly these
benefits are desirable for the employees. But their value
must be weighed against the burden imposed on New York
City's taxpayers.
Uniforms
Uniform allowances and training funds now are budgeted
at $19 million per year. Uniform subsidies can, of course,
be justified in the cases of policemen and firemen. But the
allowances also are given to marine engineers, aqueduct
captains, speech and hearing therapists, public health
nurses, nurses aides, ambulance technicians, food service
supervisors, bridge operators, deckhands, water plant operators,
and swimming pool operators. Uniform allowances should be
carefully studied to determine whether certain allowances
could be eliminated and whether cost savings could be
achieved by direct City purchases of essential uniforms.
Health Insurance
Like many private employers, and certain other cities,
New York City pays 100% of the cost of employee health
insurance programs. But most cities, and the Federal Govern-
ment as well, require the employee to pay a fair share of
- 19 -
the cost of providing health care protection for the employee
and his family. In light of the current fiscal and financial
realities, division of this expense between the City and its
employees warrants study.
Working Time
Additional areas of study include night shift pay
provisions, vacation benefits and working hours. The night
shift pay differential is normal -- 10%. But night is
defined to cover 16 of every 24 hours. Cutting it down to
8 hours, or even 12 hours, would produce annual savings of
approximately $10 and $20 million.
Vacation and sick leave costs are quite high. For
example, such costs are estimated to exceed $4,000 per year
for patrolmen and $3,000 for sanitationmen. These high
costs are attributable to the fact that every employee is
entitled to 20 vacation days in the first year on the job
and most have unlimited sick leave privileges. By comparison,
new Federal employees receive only 13 days vacation and do
not reach 20 days until their fourth year of service.
In the case of patrolmen, consideration should be given
to reducing the current work day from 8 and 1/2 hours to 8,
while increasing the work year by the equivalent number of
days -- 18, from 243 to 261. Little is gained by the 8 and
1/2 hour day, while the cost of the 243 day year (versus
261) is nearly 7 and 1/2% of total compensation, or $57 million
per year under the current contract.
Many other New York City employees now work only
35 hours per week. Others work 37½. In addition, under the
"summer hours" program, an even shorter work week is the
norm in some cases. The possibility of moving to a 40 hour
week -- thus achieving substantial reductions in costs
without a loss in services -- should be examined.
Pensions
Quite appropriately, many aspects of the pension
situation are under careful review at present. I have
already noted one step New York City has taken: its planned
withdrawal from Social Security. In view of the substantial
disparity in net pension benefits between New York City and
other large cities, further actions might be considered.
- 20 -
For example, a married New York City employee who
retires at age 65, with 25 years of service, receives in net
after tax retirement income an amount equal to 125 percent
of his disposable income in his last year on the job. In
Atlanta the same worker receives 43 percent, Chicago 47 percent,
Dallas 52 percent, Los Angeles and Memphis 54 percent. Only
Denver and Detroit -- at 91 and 104 percent -- are even
close.
*
*
*
Let me reiterate the spirit in which these areas for
discussion have been identified. I mean absolutely no
criticism of the creative plan Mayor Beame announced last
week. I do not mean to suggest that the plan as currently
proposed will not accomplish its intended objective. I
simply want to make clear that if New York City is to recapture
its proper leadership role the plan can not be viewed as
defining the outer limits of possible fiscal and financial
reform.
The Real Estate Tax Base
The heart of any great city is its real estate. Not
only does it provide the physical facilities for housing and
economic activity, but it is also an important financial
asset, since real estate taxation is the core of any city's
revenue stream. Accordingly, in providing for New York
City's future, we cannot avoid a careful look at the impact
on the tax base of the long and costly experiment with rent
controls and stabilization.
Like many of the programs we have discussed today, rent
control is a subsidy program and must be evaluated as such.
Simply stated, rent control provides a subsidy to a small,
largely middle class group, the members of which have occupied
apartments for a substantial period of time and are paying
rentals which bear no resemblance to current costs. Few
poor people benefit: typically, they have arrived too
recently or moved too frequently to qualify under the program.
But all poor people, indeed all citizens, pay for the subsidy
in the form of higher taxes, deterioration of the housing
stock and a general decline in the economic well-being of
the city.
Let's look at some specific costs. Since 1960, 300,000
rental units have been abandoned, and abandonments are now
running at an annual rate of 30,000 per year.
- 21 -
From 1965 to 1975, New York City's housing stock
increased only 2%, and the number of rental units declined
3.8%. The City's supply of rental units is old. Nearly
half were built before 1929. More than half are "walk-ups."
The aging, decay and decline of New York's housing
stock should come as no surprise. Rents have not been
allowed to increase as fast as operating costs. Landlords
have been compelled to absorb the larger part of the sharp
increases in fuel costs. Small wonder that maintenance has
been postponed and tax delinquencies and abandonments have
increased. Landlords cannot suffer losses endlessly.
But landlords are not the only ones to suffer. All New
Yorkers suffer in their capacities as taxpayers and users of
City services. Everyone suffers because property values
and, as a corollary, property taxes, decline. In this
regard, total arrears of real estate taxes are estimated to
be over $700 million, not including arrears in water rents
and sewer rents.
Because of the erosion of its real estate tax base, New
York City has had to resort to more taxation of business and
personal incomes. Such taxes tend to drive employers and
higher income workers out of town.
The ability to own one's own home -- one of the fundamental
goals of our society -- is another frequent victim of the
rent control system. Applications to restore subdivided
brownstones to the original one or two family status can
take over a year to process through the rent control bureaucracy
and often are turned down, despite the neighborhood improvement
which would result. Clearly, the administrators of the
complex rent control laws do not recognize the direct relation-
ship between the spread of urban blight and the flight of
middle-class families from New York City.
In short, rent control is inequitable as well as
uneconomic. If it were phased out, the following benefits
would accrue:
-- the existing housing stock would be better utilized,
reducing both over-crowding and under-occupancy;
-- new construction starts and rehabilitation work
would create thousands of jobs and provide New York City's
underemployed youth with a chance to learn a skill;
- 22 -
-- the real estate tax base would stop eroding and
start growing;
-- the need for public housing projects, which have
been a tremendous drain on the City's financial resources,
would decline;
-- business and personal taxes could be reduced and, as
a result, investment, jobs and income earners would return
to New York.
Welfare and Federal Aid
Before concluding, let me turn briefly to the role of
the Federal Government, particularly in the welfare area.
Mayor Beame's statement of last week reiterated a commonly
heard contention: New York City would not have a financial
problem if the Federal Government took over welfare. In
light of such contentions, it may be useful to outline the
large and growing Federal role in financing state and local
governments generally. But before I do, let me address
specifically the welfare question.
First, let me reiterate my conviction that we need a
comprehensive re-examination of Federal, State and local
relationships in the area of assistance to the disadvantaged.
I personally favor the simple, non-bureaucratic approach of
income maintenance. But whatever the outcome, we plainly
must assure ourselves that current policies are consistent
with the needs of the last quarter of the twentieth century.
As is clear from my remarks to this point, however, I
do not believe a change in welfare policy is itself a solution
to New York City's financial problems. To be sure, it is
factually correct to say that if the Federal Government
assumed all of New York City's welfare obligations, the
budget deficit would be substantially reduced since City
expenditures would fall by approximately $800 million. But
it is equally correct to say that the same effect would be
realized if the Federal Government took over responsibilty
for schools, for operating the police and fire departments,
or by paying for any of the other services which New York
City now provides. Accordingly, if the arguments regarding
welfare have any validity, they must be accompanied by a
credible showing that New York City's welfare problem is
somehow unique. And the facts simply don't bear that out.
- 23 -
The percentage of New York City's population which is
on welfare is 10.9%, a lower percentage than in Philadelphia,
Washington, D.C., St. Louis, Newark, or Baltimore. Median
minority family income is $8,108, almost $2000 more than the
national average. The proportion of families below the
poverty level fell by more than a third in the 1960's and is
well below the national average. These facts plainly belie
the allegation that New York City is a haven for the poor
and, as such, performs a service which Federal taxpayers
must pay for.
The real financial problem presented by welfare in New
York City is a problem which has its roots at the State
level: specifically the division of responsibility between
the State Government and local governments for the non-
Federal portion of the welfare payment. This Committee is
well aware of the burden New York State has traditionally
imposed on its local governments: 25 percent of total
welfare costs, as opposed to 1 percent in Illinois and 12
percent in California. But this Committee is also aware of
the fact that New York State is hardly in a financial position
to change this formula now.
Let me turn now more generally to the subject of Federal
aid. Federal aid to State and local governments has risen
steadily during the post-war period, and very rapidly since
the late 1960's.
In 1950, direct Federal aid to state and local government
was $2.3 billion. Two decades later, in 1970, aid had
increased tenfold, reaching $24.4 billion. And this fiscal
year the figure will more than double again to $60 billion.
These are only direct grants. If other Federal expenditures --
in the form of housing subsidies, transfer payments, Federal
employment and the like -- are included, the total benefit is
more than $100 billion higher.
Moreover, the growth in Federal aid to New York City
has outpaced even these rapid increases. In fiscal year 1965,
direct Federal aid to New York City was $228 million and
equalled 6% of the City's general revenues. By the current
fiscal year, direct Federal aid had grown to $2.437 billion:
22% of scheduled general revenues. This eleven fold increase
in aid is precisely double the nationwide growth rate over
the same period.
Federal aid has hurt New York City -- and every other
city -- in one respect. The bulk of Federal aid is in the
form of categorical grants. Of the total $2.437 billion
- 24 -
being provided to New York City in the year ending June 30,
1976, $2.174 billion, or nearly 90%, consists of categorical
grants. These grants are nearly always tied to matching
funds being provided from State and local sources. Matching
programs provide a clear and dangerous path to over-commitment
of local financial resources.
There is nothing more important that the Congress can
do to help New York City (and other municipalities as well)
than to enact the President's proposal to extend revenue
sharing, and to embrace the Administration's proposal to
substitute functional or block grants for large elements of
the present categorical matching grant system. We need to
let states and municipalities decide by and for themselves
the kinds of activities they want to support, and how much
of their own financial resources they want to put into these
activities.
Conclusion
I began my testimony today by suggesting that the
situation is much as we expected it to be. The financing
package and the Federal seasonal loan program have served
the purpose they were designed to serve: they have provided
New York City with ample time and ample opportunity to solve
its fiscal and financial problems.
At this time, no one can predict with complete confidence
whether the job will be done. Clearly the challenges are
great. But the potential rewards are even greater. New
York City has been given the opportunity to restore itself
to pre-eminence among our urban centers. And in so doing,
its accomplishments can serve as a model for all the cities
of the nation -- and for the Federal Government as well.
The question is very straightforward: what do the
people want from their Government and what are they willing
to pay for? Most political units must answer this question
every day. Congress has given New York City two more years
to find the answer. It must use this time wisely.
000
OF
THE TREASURY THE
aye [1-76]
THE UNDER SECRETARY OF THE TREASURY
FOR MONETARY AFFAIRS
1789
WASHINGTON. D.C. 20220
MEMORANDUM FOR EXECUTIVE COMMITTEE, ECONOMIC POLICY BOARD
SUBJECT: Update on New York
1. Loans to Date
Loans in the amount of $130 million at an interest
rate of 6.92% and $240 million at 6.68% were made on
12/15 and 12/31. A further loan of $140 million is
scheduled for 1/15.
2. Credit Agreement
The master credit agreement was signed 12/30 (copy
attached). It provides the following protections to the
Government.
Certification by the Emergency Financial Control
Board that loans requested are consistent with the
City Financial Plan.
Submission to the Secretary of a Borrowing and
Repayment Schedule, approved by the Control Board,
showing expected receipts and expenditures for the
current and next fiscal years, amounts and dates of
anticipated borrowings and specification of repayment
sources.
Agreement by the Mayor, City Comptroller and Control
Board that they will take all actions necessary to insure
that revenues specified as repayment revenues are paid
into a specified repayment account. In the event that
there is any doubt about the availability or sufficiency
of the repayment revenues, the Mayor, Comptroller and
Board agree to specify alternative sources of repayment.
Power to require the Governor and State Comptroller
to prevent disbursement of State funded repayment revenues
except as provided by the Loan Agreement.
LISBARY
Agreement by the City and Board to use "best efforts"
to see that the Financial Plan is carried out and its
assumptions fulfilled.
- 2 -
Submission of detailed reports on a regular basis
to provide the flow of information needed to track and
monitor the City's performance and adherence to the
Financial Plan and Loan Agreement.
Submission of economic condition analyses semi-
annually, commencing July 31, 1976.
Audit power.
Agreement that the City will put in place a new
accounting system by July 1, 1977.
3. Arthur Andersen Report
Treasury has retained Arthur Andersen to evaluate the
City Financial Plan and the City's accounting systems and
to devise a reporting and monitoring package. This
engagement is expected to terminate by February 1.
A. Financial Plan
The report (copies of which should be available
by the 1/14 Executive Committee meeting) pinpoints
key problem areas in the City Financial Plan.
The spending cuts called for by the City's
Three Year Financial Plan are running behind
projections.
Pension plans are underfunded.
There may be substantial reduction of revenues
below levels projected in the Plan, up to $571 million
because of reduced State aid, revision of the real
estate tax equalization rate and repeal of the bond
transfer tax.
The Plan assumes that real estate tax collections
will be 90% of taxes levied in this and the succeeding
fiscal years, despite prepayment in FY 1975 of $192
million. This assumption may be optimistic.
The Plan assumes that revenues will grow at
5, 7, and 7 percents in FY 1976, 1977 and 1978,
apart from recently adopted new taxes. This
assumption may be unrealistic.
The Plan assumes welfare costs will not rise.
- 3 -
B. Future Problems
The Andersen Report also points out that even
if the plan is met, the City will face major problems
in FY 1979. There will be demands for large wage
increases, pressure to catch-up on deferred and
terminated capital projects and the moratorium will
be over.
C. Inadequate Reporting System
The Andersen Report is extremely critical
of the City's current financial system and controls.
4. Reporting Package
A reporting package has been designed to provide the
flow of information needed to track and monitor the
City's performance (the package is an Exhibit to the credit
agreement). The State Comptroller's office also is
designing a reporting package, and the two will be
coordinated as much as possible.
5. Congressional Liaison
A liaison group has been established with key staff
members of the Senate and House Banking and Appropriations
Committees. This group was briefed on December 18 and
will be briefed again on January 14. At least one
briefing per month is expected. This group has received
the Credit Agreement and will receive the Andersen Report.
Edwin H. Yeo III
LIBRARY
NYC
THE WHITE HOUSE
WASHINGTON
January 7, 1976
MEMORANDUM FOR MAX FRIEDERSDORF
THROUGH
BOB WOLTHUIS
FROM
TOD HULLIN
SUBJECT
JOINT ECONOMIC COMMITTEE HEARINGS ON
MUNICIPAL FINANCING CRISES
Sol Mosher, Assistant Secretary of HUD for Legislative
Affairs, has been requested by Ralph Scholsstein, Staff
Director of the Joint Economic Committee (Sen. Hubert
Humphrey, Chairman), to provide a witness for a hearing on
the subject of "New York City: Will It Happen Elsewhere?"
to be held on Friday, January 23.
The Committee plans to have a panel of government witnesses,
including Paul O'Neill of OMB and Ed Yeo of Treasury in
addition to the HUD witness. Mosher feels that the Committee
does not expect the agency heads to appear, but rather to
designate a witness.
The Committee would like testimony discussing the steps, if
any, that HUD is taking to forecast future municipal
financing crises like that of New York City, and plans HUD
has for dealing with such events.
I have alerted Paul O'Neill and Roger Porter about this
request. I suggest that your office coordinate the response
to this request.
If I can help, please give me a call.
CC:
Jim Cavanaugh
Paul O'Neill
Roger Porter
GERALE FORD FIBRARY
Royer.
the
12/29
as
mshda
yes
Michigan State Housing Development Authority
State of Michigan
David L. Froh, Executive Director
William G. Milliken, Governor
300 South Capitol Avenue
Lansing, Michigan 48926
(517) 373-1385
December 17, 1975
Mr. L. William Seidman
Assistant to the President
for Economic Affairs
The White House
Washington, D.C.
20500
Dear Mr. Seidman:
This comes to you as an update to conversations held
over the past two weeks with you and members of your staff.
Following our discussions, meetings with a HUD task force on
co-insurance headed by Morton Baruch of Assistant Secretary
David Cook's staff resulted in what we believe to be a workable
co-insurance method that shows great promise. Members of the board
of the National Council of State Housing Agencies have endorsed
this scheme in principle. Our understanding is that it is
presently being refined and put into workable form by HUD. We
have submitted the plan to counsel and firms who underwrite
bonds to determine its legality and potential effectiveness
in improving the acceptability of our financings.
This system is a variation on mortgage co-insurance
which was the subject of our discussions. It would not go
into effect until the State Housing Finance Agency had come
to the point of technical default on its bond payments and
the State had failed to honor its moral obligation. Significant
to the method is a system proposed by the state housing group
to HUD that would enable an objective evaluation of the effectiveness
of state agencies to determine their eligibility for co-insurance.
Of overriding significance are some minor amendments
to Section 244 of the 1974 Housing Act that would allow
co-insurance to operate in the manner proposed. It is my under-
standing that these amendments have been approved by the Committee
on Banking, Housing and Urban Affairs of the U. S. Senate.
Mr. L. William Seidman
December 17, 1975
Page 2
Your assistance and support in the above matters is
urgently needed. If we are to resume marketing notes and
bonds and undertaking subsidized housing production in 1976,
action will be needed no later than the month of February.
Respectfully yours,
John John T. Dempsey
Chairman
Asic LEE
David L. Froh
Executive Director
CC: Birge Watkins
Staff Assistant to L. William Seidman
Douglas Metz
Assistant Director-Operations
LIBRARY
aye
THE WHITE HOUSE
WASHINGTON
January 13, 1976
MEMORANDUM FOR SECRETARY CARLA A. HILLS
FROM:
L. WILLIAM SEIDMAN gess
The Economic Policy Board Executive Committee will review the
New York City financial situation at the regular Executive
Committee meeting tomorrow morning at 8:30 a.m. in the Roose-
velt Room. I understand that the Department of Housing and
Urban Development has been requested to testify at hearings
on "New York: Can it happen again?" scheduled by the Joint
Economic Committee for January 23. In light of that upcoming
testimony you may wish to attend or send a representative to
the Executive Committee meeting tomorrow.
The papers relating to the New York agenda item for tomorrow's
discussion are attached.
LIBRARY 071839
THE WHITE HOUSE
WASHINGTON
January 14, 1976
MEMORANDUM FOR THE PRESIDENT
FROM:
L. WILLIAM SEIDMAN gws
SUBJECT:
New York City Seasonal Financing Program
At this morning's EPB Executive Committee meeting Treasury re-
ported on New York City's financial situation and reviewed the
report from Arthur Anderson & Co. relating to the City's finan-
cial condition and its accounting procedures.
The EPB Executive Committee unanimously agreed that a statement
from the Secretary of the Treasury to you reporting on the New
York City situation and the Anderson report should be prepared
and submitted today. This report has been prepared and is
attached at Tab A.
In view of the publicity that the Anderson Report is likely to
receive in the press, the EPB Executive Committee also unanimous-
ly recommended that the statement from Secretary Simon to you
be released to the press.
Treasury officials are briefing congressional staff members and
New York State congressmen on the New York City financial situ-
ation this afternoon.
LIBRARY
OF
THE TREASURY THE DEPARTMENT
THE SECRETARY OF THE TREASURY
WASHINGTON 20220
1789
January 14, 1976
MEMORANDUM FOR THE PRESIDENT
SUBJECT: New York City Seasonal Financing Program
I received today a report from the public accounting firm
of Arthur Andersen & Co. concerning matters relating to
New York City's financial condition and its accounting and
reporting systems. Pursuant to the authority conferred on me
by Public Law 94-143, I retained Arthur Andersen & Co. on a
limited and short term basis to provide me with an independent
and professional review of the above matters. Based on
Arthur Andersen's findings, as well as my own independent review,
I have been able to conclude at present that there is a
"reasonable prospect of repayment" within the meaning of
Public Law 94-143.
Credit Agreement
On behalf of the Department, I have executed a Credit
Agreement with the State of New York, the City of New York
and the Emergency Financial Control Board. The Credit
Agreement authorizes the Treasury to make demand loans if
numerous terms and conditions are met. These terms and
conditions include strict compliance with New York City's
three-year financial plan (and regular certification to that
fact by the Emergency Financial Control Board), extensive
financial reporting requirements and identification of specified
revenues as a source of repayment for Federal loans.
Pursuant to the Credit Agreement, Treasury has advanced
$370 million to date and we expect to advance an additional
$140 million tomorrow. These advances are consistent with
our expectations as to cash needs.
Summary of Andersen Report
The Andersen Report is in three parts. Part I evaluates
New York City's three-year financial plan and the assumptions
which underlie it. Part II reviews New York City's current
system of financial controls and reporting. Part III comments
on certain critical issues relating to New York City's opera-
tions.
- 2 -
In substance, the report's findings confirm the factors
you considered in connection with your decision to propose
and support the seasonal financing concept. Andersen's
findings show that spending cuts in the financial plan are
running behind projections, that many of the underlying
assumptions as to levels of revenues and expenditures are
optimistic and that additional expenditure cuts will be
required if revenue growth does not meet current projections.
In addition, the report indicates that New York City's
accounting and reporting systems require substantial and
immediate improvement.
These concerns reflect the tremendous challenges
New York City and New York State face in the next two and
one-half years. Virtually every page of the report
identifies an important target which must be met if New York
City is to be returned to a totally sound fiscal and financial
basis. I can assure you that I will take all steps within
my power to insure that these targets are met.
Congressional Liaison
A liaison group has been established with key staff
members of the Senate and House Banking and Appropriations
Committees. This group was briefed on December 18 and
will be briefed again today. At least one briefing per
month is expected. This group has received the Credit
Agreement and will receive the Andersen Report at today's
briefing.
Weif William E. Simon
LIBRARY
Department
to: Mr. Roger Porter of the Treasury
Office of the
Assistant Secretary
(Trade, Energy, and
Financial Resources
room.
date, 1- 22-76 Policy Coordination)
Office of
Capital Markets Policy
Forwarded per Mr. Harper's request.
Helen C. Jackeor
Helen C. Jackson
Secretary to
Robert A. Gerard
Room 3208
LIBRARY
RARY
Ext. 2103
THE SECRETARY OF THE TREASURY
WASHINGTON 20220
1169
January 14, 1976
MEMORANDUM FOR THE PRESIDENT
SUBJECT: New York City Seasonal Financing Program
I received today a report from the public accounting firm
of Arthur Andersen & Co. concerning matters relating to
New York City's financial condition and its accounting and
reporting systems. Pursuant to the authority conferred on me
by Public Law 94-143, I retained Arthur Andersen & Co. on a
limited and short term basis to provide me with an independent
and professional review of the above matters. Based on
Arthur Andersen's findings, as well as my own independent review,
I have been able to conclude at present that there is a
"reasonable prospect of repayment" within the meaning of
Public Law 94-143.
Credit Agreement
On behalf of the Department, I have executed a Credit
Agreement with the State of New York, the City of New York
and the Emergency Financial Control Board. The Credit
Agreement authorizes the Treasury to make demand loans if
numerous terms and conditions are met. These terms and
conditions include strict compliance with New York City's
three-year financial plan (and regular certification to that
fact by the Emergency Financial Control Board), extensive
financial reporting requirements and identification of specified
revenues as a source of repayment for Federal loans.
Pursuant to the Credit Agreement, Treasury has advanced
$370 million to date and we expect to advance an additional
$140 million tomorrow. These advances are consistent with
our expectations as to cash needs.
Summary of Andersen Report
The Andersen Report is in three parts. Part I evaluates
New York City's three-year financial plan and the assumptions
which underlic it. Part II reviews New York City's current
system of financial controls and reporting. Part III comments
on certain critical issues relating to New York City's opera-
tions.
FORD is LIBRARY GERALD
- 2 -
In substance, the report's findings confirm the factors
you considered in connection with your decision to propose
and support the seasonal financing concept. Andersen's
findings show that spending cuts in the financial plan are
running behind projections, that many of the underlying
assumptions as to levels of revenues and expenditures are
optimistic and that additional expenditure cuts will be
required if revenue growth does not meet current projections.
In addition, the report indicates that New York City's
accounting and reporting systems require substantial and
immediate improvement.
These concerns reflect the tremendous challenges
New York City and New York State face in the next two and
one-half years. Virtually every page of the report
identifies an important target which must be met if New York
City is to be returned to a totally sound fiscal and financial
basis. I can assure you that I will take all steps within
my power to insure that these targets are met.
Congressional Liaison
A liaison group has been established with key staff
members of the Senate and House Banking and Appropriations
Committees. This group was briefed on December 18 and
will be briefed again today. At least one briefing per
month is expected. This group has received the Credit
Agreement and will receive the Andersen Report at today's
briefing.
Weif William E. Simon
FORD & LIBRARY GERALD
TMENT
OF
THE
myc
DEPAR TREASURY THE
THE SECRETARY OF THE TREASURY
WASHINGTON 20220
1789
FEB 24 1976
MEMORANDUM FOR THE PRESIDENT
SUBJECT: Update on New York City
On Tuesday, February 17, I received the first formal
financial report from New York City, submitted pursuant to
the Credit Agreement we entered into with New York City,
New York State and the Emergency Financial Control Board.
Two key points stand out in the report:
1. New York City is close to target with
respect to the current fiscal year (ending
June 30) and should be able to repay our
loans without disrupting services and without
tapping other sources of funds (i.e., the
pension funds) for substantial amounts.
2. The budget deficit which must be
eliminated over the three fiscal years is
substantially larger than was previously forecast:
$1.021 billion versus $724 million.
This memorandum is in two parts. The first part
addresses the outlook for New York City, both immediately
and over the longer term. Part two deals with the current
New York State situation, which is significant not only in
its own right, but also because of its direct impact on
New York City's finances.
Outlook for New York City
As noted above, New York City appears close to
schedule for the current fiscal year. For the six months
ending December 31, 1975, expenses were $3 million higher
than planned. For the fiscal year as a whole, expenses
are forecast at $218 million above the plan, due primarily
to a $118 million increase in welfare and social services
costs and a $90 million increase in debt service. This
expenditure increase, however, will be largely offset by
a $151 million increase in forecasted revenues.
- 2 -
While we cannot be certain that New York City will not
incur at least a slight cash flow deficit this fiscal year,
the Federal Government's immediate financial interest is
protected by the fact that approximately $2.2 billion
of the pension funds' $2.53 billion three year commitment
remains available. Any shortages can be made up from
this source.
The longer term outlook is considerably less clear.
Given the enormity of the further budget cuts required - -
over $400 million in FY 77 and an additional $400-500 million
in FY 78 - - I doubt whether the job can be done with the
piecemeal approach employed to date. In other words, unless
New York City and New York State are willing to address
head-on one or more of the following key problem areas, a
permanent solution is unlikely:
- - employee compensation and fringe
benefits;
-- welfare and social services;
- - courts and correction system;
-- City University.
Compensation. Employee compensation, particularly fringe
benefits, is the root of the overall problem. Nationwide,
fringe benefit costs average less than 20 percent of direct
salary costs. In New York City, the average cost of fringe
benefits exceeds 50 percent of direct salary. To quantify
this burden: if New York City reduced its fringe benefit
costs to the national average, the annual savings would be
in the $1.5 - 2 billion range, creating an annual surplus
well in excess of $500 million without any other expenditure
cuts.
There is, at least theoretically, the opportunity in
the months ahead to make significant progress in this area.
Negotiations are beginning on the transit workers contract
which expires March 31. The Teachers' contract, negotiated
last fall but rejected by the Emergency Financial Control
Board, has not been finalized. And most other major labor
contracts will be up for negotiation this summer and fall.
GERALD FORD LIBRARY
- 3 -
The current transit negotiations will, in effect,
serve as the bellweather on this front. If a cut in
overall costs, either through a pay cut or a reduction in
fringe benefits, is achieved, it will be a highly
favorable sign. If, on the other hand, the new contract
provides for higher compensation, it would be a cause
for serious concern.
Firm action in this area could well precipitate one
or more major strikes. More importantly, given
Governor Carey's political ambitions, it is unlikely that
he would be willing to take a strong position, which
would be viewed as anti-labor. Accordingly, I do not
believe we can be confident of meaningful progress in this
area.
Other Areas. Progress in the other three areas - -
welfare, courts and corrections, City University - - in
effect requires a shifting of the financial burden to
New York State. In light of New York State's own fiscal
condition, it is unrealistic to expect a meaningful step
in the welfare area, especially because any change in
the relative state/local shares would have to be applied
statewide. Such a statewide shift would substantially
increase the billion dollar cost of taking over New York
City's share.
The courts and the university are different matters.
New York City is the only jurisdiction in the state that
pays for its own portion of the state courts and corrections
system. Integrating the system with the overall state
system would result in a savings to New York City of
$200 - 250 million. Given the efficiencies of integration,
the additional cost to the state would be considerably
less.
This is even more true in the case of the university.
Transferring the university to New York State would save
New York City more than $300 million, yet a rough estimate
of the cost to the state is $100 - 150 million. The possi-
bility of such a transfer is being given serious con-
sideration by both Beame and Carey. We know of no
concrete steps, however, towards implementing it.
GERALS VORD
- 4 -
In short, of the four key areas, the larger two - -
compensation and welfare -- must be viewed as unlikely.
However, the smaller two are quite feasible. I am con-
fident that if New York City were relieved of the
$500 - 600 million courts/university burden, that action,
coupled with the existing cost reduction program, would
result in achievement of a balanced budget by fiscal
1978.
Proposals for Delay. In the past week, both
Governor Carey and Felix Rohatyn have expressed the view
that New York City's problems may be too great to solve
in 3 years and that an extension of the plan to 5 or
even 10 years could be required. In addition, Rohatyn
has taken the position that some new type of Federal aid
will be necessary: either some permanent deficit
financing for New York City or an RFC-type program for
all cities.
Mayor Beame has publicly disassociated himself from
this position. He was asked at a press conference about
the Carey suggestion of a stretch-out and replied: "the
law says three years and I intend to obey the law."
The problem can be resolved within the three years
only if all interested parties -- New York City, New York
State and the Emergency Control Board - - exert the maximum,
good faith, effort. Given this necessity, it is especially
disturbing that Governor Carey, as Chief Executive of two
<
of the parties, shows signs of taking a different tack.
We suspect that the Carey/Rohatyn remarks could be
the forerunner of a new bail-out type initiative in
Congress. We will be watching closely for signs of this.
New York State
The outlook for New York State is considerably better,
but there are bases for concern. New York State must
find a way to meet its own seasonal financing needs of
nearly $4 billion in April, May and June. Failure to
raise these funds will render the State unable to make aid
payments to New York City and every other local jurisdiction
in the State. Since our loans were made in anticipation of
GERALD FORD LIBRARY
- 5 -
these payments and since many other jurisdictions have
borrowed in anticipation of such payments, a failure to
make the aid payments would result in numerous defaults.
There are two threshold requirements to a successful
spring financing by the State. First is prompt adoption
of a balanced budget for the State's 1977 fiscal year
(April 1). Second, there must be a solution to the
financing problems of the State's agencies, particularly
the New York State Housing Finance Agency.
Budget. At present, there appears to be bi-partisan
recognition in the New York State Legislature of the
importance of adopting a balanced budget quickly. While
it is too early in the budget process to predict with
any confidence whether this objective will be met, recent
statements by leaders of both parties suggest a con-
siderable change in attitude from that which prevailed. .
last year. Accordingly, we are cautiously optimistic
in this area.
Agencies. The agencies of New York State require
approximately $2.5 billion in permanent financing. The
bulk of this amount is to refund short-term notes which
mature at a rate of $80 - 100 million per month over the
next 18 months; the remainder is to finance completion of
construction projects now in progress. It is clear that
the market will not continue to supply any portion of the
financing on a month by month basis. Accordingly, sources
for the entire $2.5 billion must be committed at the
outset.
The agency financing is itself contingent upon the
adoption of a balanced budget. If a balanced state budget
is adopted, a complex, but credible and workable, package
has been developed to finance the entire amount.
New York State. The State picture is as follows.
Approximately $1.6 billion of the $4 billion seasonal
financing need can be handled through various state funds,
GERALD FORD LIBRARY
- 6 -
leaving $2.4 billion to be done by the private sector.
According to current plans, the private portion will be
done in three ways:
-- bank credit;
- - public sale of securities;
- - pre-payment of taxes by major corporate
taxpayers (in effect, tax anticipation
financing).
In recent days, we have detected a new sense of
determination and optimism among the leaders of the
New York City financial community. Previously, key
institutions were negative, hoping they could assume
that more Federal help would be forthcoming. We made
it clear that financial assistance would not be
available.
The cooperative attitude of State Comptroller Levitt
is also partially responsible. Much credit must be given
to a newly created advisory board consisting of Bill Morton
(former President of American Express and a municipal bond
expert), Bill Martin (former Chairman of the Federal
Reserve) and Gene Black (former Chairman of the World Bank).
Given the fundamental soundness of the State and the
adequacy of its cash flow, the current problems are largely
psychological. Accordingly, the entry of new, but experienced,
faces has given the entire effort an important lift.
The next 2 - 3 weeks will be critical in finalizing the
financing arrangements for both the Agencies and the State.
An essential element will be substantial participation by
major banks located outside New York State. In that regard,
Arthur Burns and I may well be called upon to help with the
process of persuading such banks. I have quietly indicated
that under appropriate circumstances -- a balanced budget
and a sound overall financing package -- I would play such
a role.
LIBRARY
- 7 -
Congressional Activity
Senate Banking and House Appropriations have scheduled
oversight hearings on April 1 and April 6 respectively. In
addition, our liaison group with Senate and House Banking and
Appropriations staffs will have its fourth meeting on
February 26.
On February 20, a Senate/House conference reached
agreement on new municipal bankruptcy legislation. We were
successful in persuading the conferees to include language
addressing the concern expressed by some state and government
groups that the legislation would harm the bond market by
making it too easy to go into bankruptcy.
William E Simon
GERALE HONG
Nyc
OF THE PERASURY
DEPARTMENT OF THE TREASURY
THE
WASHINGTON, D.C. 20220
1789
DEPUTY ASSISTANT SECRETARY
March 17, 1976
MEMORANDUM FOR THE EXECUTIVE COMMITTEE
ECONOMIC POLICY BOARD
SUBJECT:
Up-Date on New York City
I.
March 15 Monthly Report
The March 15 monthly report, covering the period
ending January 31, shows continued steady budget
reductions roughly in accordance with the financial
plan for fiscal 1976. It should be noted that the
plan still calls for annualized expenditure reductions
of only $200 million in fiscal 1976, notwithstanding
the $300 million increase in the deficit estimates.
What remains of most concern is the fact that no
concrete plans have yet been announced to cover the
$400-$500 million reductions required in each of the
next two fiscal years.
II. Other New York City Matters
The transit workers' contract expires on March 31
and negotiations are currently underway. The Union is
demanding a substantial wage and benefit increase and
is taking the position that since the Transit Authority
is technically a State agency, its employees are not
covered by the city employee wage freeze. Needless to
say, whether or not this position is factually correct,
as a practical matter a substantial wage and/or benefit
increase will make it extremely difficult to hold the
line on other city contracts which will be negotiated
this spring.
Last week, Governor Carey announced the removal
of Herbert Elish as Executive Director of the Emergency
Financial Control Board, and appointed Stephen Berger,
currently State Welfare Commissioner, to the position.
Berger is extremely familiar with the finances of
New York City since he served as Executive Director of
the Rockefeller-created Scott Commission which raised
some key warning signals in 1973 and 1974. Berger has
a reputation as an honest and tough, if somewhat
abrasive, administrator. If, notwithstanding the
Governor's public pronouncements regarding stretching
-2-
out the financial plan and similar comments by
Felix Rohatyn, the Control Board is committed to
carrying out the plan, Berger can be an effective
force.
In April, New York City will return to the
front burner in Congress. Proxmire will hold
oversight hearings beginning on April 1. Secretary
Simon will be the lead-off witness; Mayor Beame,
other City and State officials, and GAO representa-
tives will also testify. On April 6, both the
Senate and House Appropriations Subcommittees will
hold hearings on the issue in connection with our
fiscal 1977 administrative expenses appropriation.
Congressman Ashley's Subcommittee of House Banking
is expected to hold oversight hearings on or about
April 20 (the date the first loan repayment is due).
III. New York State
There is room for optimism with respect to the
financing requirements of New York State. The
$2.6 billion State Agency financing package appears
to be firmly in place.
With respect to the State's own financing
requirements, considerable progress has been made.
The legislature is expected to adopt a conservatively
balanced FY-77 budget sometime this week. The
New York clearing house banks have agreed to provide
approximately $1 billion of the $2.75 billion to be
raised from the private sector. The principal question
mark is the $700 million scheduled to be provided by
commercial banks outside of New York State. No formal
approaches have been made to these institutions,
pending adoption of the budget and the issuance of a
State prospectus regarding the offering. An informal
contact with the institution expected to take the
largest share provides basis for hope, but it is still
too early to tell.
PAR
Robert A. Gerard
Deputy Assistant Secretary
Financial Resources Policy Coordination
To:Lub
will
Is Anyone Serious?
W.S. Journal
Senator Proxmire's Banking
Secretary Simon has given no
Committee has urged. Treasury Sec-
public indication he is considering
retary Simon to cut off federal loans
to New York City if there are se-
decertifying the loans, and the tim-
rious deviations from its three-
ing will make any such action an
year. financial plan, as seems likely
immensely difficult decision for Mr
Simon and President Ford. The me-
to be the case But we find reason to
wonder whether even the Senator is
chanics of the city's cash flow and
fiscal year mean that the decision
serious about taking such a step,
however justified it may be
on certifying the next year S loans
Secretary Simon is charged with
will probably have to be made in
the first week in July, The Demo-
certifying that the loans have a
cratic National Convention is
reasonable prospect of repayment
Any such certification would have
booked into Madison Square Garden
to be based on a finding that the
during the second week in July.
city: is living up to its three year
Unimaginable chaos is entirely
plan, contemplating a belanced bud-
predictable if the Democrats meet
get in its third year. (At its best, the
in a city that has just skipped its
plan makes no provision: for repay-
payroll, perhaps in a city besieged
ing debt now in various types of de-
by a strike of all public employes.
fault, but its underlying assumption
Since such an event would display
is that in the fourth year the city
before a national television audi-
will be able to sell short-term notes
ence the bankruptcy cf policies ad-
to private buyers in order to deal
vocated by the typical Democrat,
with seasonal cash-flow problems.)
their embarrassment would be
In any event, there are plenty of
acute Their obvious response would
reasons to doubt: that the plan will
be to attack the decertification deci-
be met. The Banking Committee
sion as politically motivated, an at-
cited failure to change the destruc-
tempt by Mr. Ford and Mr. Simon
tive rent-control law, and failure to
to ruin the convention
scale back lavish fringe benefits for
Now, Senator Proxmire is loyal
city employes. It pointed out that
if not entirely regular Democrat. If
the three-year plan is partly based
he were serious about supporting
on the assumption that the state and
decertification, it seems to us he
federal government will take over
would certainly go to the Demo-
certain services, in particular a
cratic National Committee to warn,
gimmicky plan for federal take-over
"Say fellas, we may have a prob-
of certain housing subsidies. And of
lem. Some way around the timing
course the plan calls for a wage
dilemma might even be found. But
freeze, which is breached by the
Democratic Party officials met in
settlement with the transit union.
New York the week before last to
This- pact has been sent back for
firm up convention plans, and as
renegotiation, but the transit work-
the meeting wound up no one had
ers are threatening to strike if they-
told them about the decision Mr. Si-
do not receive. the promised raise mon faces the week before they con-
July I
vene.
GERALD R. FORD << LIBRARY
NYC
THE WHITE HOUSE
WASHINGTON
May 26, 1976
MEMORANDUM FOR THE ECONOMIC POLICY BOARD
EXECUTIVE COMMITTEE
FROM:
L. WILLIAM SEIDMAN SWS
SUBJECT:
New York Emergency Financial Control
Board May 18, 1976 Resolutions
Two resolutions adopted by the Emergency Financial Control
Board at its meeting on May 18, 1976 are attached for your
information. The resolutions concern: (1) general wage and
salary policies applicable to collective bargaining agree-
ments of the City and covered organizations during the emer-
gency period; (2) the conditions and limitations of the Board's
approval of the collective bargaining agreement between the
New York City Transit Authority and the Transport Workers
Union of America and the Amalgamated Transit Union.
Attachment
GERALE FORD
MAY
REC'D
MAY 2 REC'U
State of New York
Emergency Financial Control Board
For the City of New York
Chairman
270 Broadway
Hugh L. Carey, Governor
New York, New York 10007
Board Members
212-488-4294
Arthur Levitt,
Comptroller
Abraham D. Beame,
Mayor, City of New York
May 20, 1976
Harrison J. Goldin
Comptroller, City of New York
Albert V. Casey
William M. Ellinghaus
David I. Margolis
Mr. L. William Seidman
Assistant to the President
for Economic Affairs
The White House
Washington, D.C. 20500
Dear Mr Seidman:
Enclosed herewith for your information are
copies of the following Resolutions adopted by the
Emergency Financial Control Board at its meeting on
May 18, 1976: one, a Resolution setting forth general
wage and salary policies applicable to collective bar-
gaining agreements of the City and covered organizations
during the emergency period; and, two, a Resolution
setting forth the conditions and limitations of the
Board's approval of the collective bargaining agreement
between the New York City Transit Authority and the
Transport Workers Union of America and the Amalgamated
Transit Union.
Very truly yours,
Stephen Berger
Enclosures
GERALD FORD VIBRARY
RESOLVED, that the Board adopts the following general wage
and salary policies which shall be applicable, during the
emergency period or until such earlier time as the Board shall
determine, to collective bargaining agreements of the City or
covered organizations:
1.) No agreement shall provide for general wage or salary
increases or increases in fringe benefits.
2.) No agreement shall provide for increases or adjustments
to salaries or wages, including those based upon
increases in the cost of living, unless such increases
or adjustments are funded by independently measured
savings realized, without reduction in services,
through gains in productivity, reductions of fringe
benefits or through other savings or other revenues
approved by the Board, all of which savings shall be
in addition to those provided for in the financial plan.
3.) Each agreement shall provide for a mechanism to
permit savings in pension costs or other fringe
benefits during the term of agreement.
FURTHER RESOLVED, that to the extent that the collective
bargaining agreement recently negotiated by the Transit Authority
does not give effect to the general wage and salary policies
herein adopted, the Board will establish such conditions and
limitations on the performance of such agreement as shall be
necessary to insure that such agreement does give effect to
the wage and salary policies herein adopted.
GERALD LISRARY
WHEREAS, the Emergency Financial Control Board on April 30, 1976
received and took under consideration proposed collective bargaining
agreements (hereinafter the "contracts") between the New York City
Transit Authority as employer and the Transport Workers Union of
America and the Amalgamated Transit Union representing the hourly
rated employees of the Transit Authority and the hourly rated and
clerical employees of the Manhattan and Bronx Surface Operating
Authority; and
WHEREAS, after due consideration the Board decided that it could not
approve the contracts as submitted, requested the Authority to submit
revised contracts that would guarantee the City no adverse impact
on its financial plan and no new cost to the State, and assigned
Stephen Berger, Executive Director of the Board and John Zuccotti,
First Deputy Mayor of the City of New York to observe and report on
the Authority's meetings with the Unions; and
WHEREAS, the observers report that no contract revisions have been
made, the Unions contending that joint good faith implementation of
the productivity provisions of the contracts will generate savings
in operating costs at least sufficient to meet any reasonably fore-
seeable increase in the cost of living allowances provided by
the contracts and that the contracts as submitted satisfy the
requirements fixed by this Board in its April 30 resolution; and
BRARY
WHEREAS this Board, without reflection on the good faith of the Transit
Authority and Unions, may not under its statutory responsibilities and
in view of the serious financial crisis faced by the City and
the Transit Authority, approve collective bargaining agreements
which will increase the take home pay and the cost of fringe
benefits of the employees, without ensuring that the payment of
such increases has no adverse impact on the City's financial
plan or on the financial plan submitted by the Authority; it
is therefore
RESOLVED, that the proposed contracts are hereby approved and
returned to the parties for execution and performance subject to
the following conditions and limitations:
1. The cost-of-living adjustments ("COLA") provided
by the proposed contracts shall be calculated and paid at a
rate of one cent per pay hour for each full four-tenths (0.4) of
a point increase in the consumer price index, rather than at
GERALS
LIBRARY
the rate specified in the proposed contracts. The difference
between the rate so approved and the rate specified in the contracts
is deferred.
2. Payments of COLA made under the proposed contracts and
these conditions and limitations, shall not be deemed part of wages or
compensation for the purpose of computing pension contributions of
either an employee or the Transit Authority or in fixing any
rights, benefits or allowances of an employee or his beneficiaries
under the retirement systems or plan to which he belongs, but
shall be included for all other purposes covered by the contracts.
3. No COLA shall be paid for increases in the cost-of-
living index during the 1976 calendar year which exceed 6 per cent
of the CPI for December 1975 (i.e. a maximum increase of 25c per
hour over the 22c paid as of March 31, 1976), or for increases during
the 1977 calendar year which exceed 6 per cent of the index for
November 1976. Any difference between the COLA paid pursuant
to this paragraph and the COLA calculated pursuant to the
provisions of the contracts is deferred.
4. Payments of COLA during any period specified in
the proposed contracts may be made only from funds available
from actual accrued productivity savings, exclusive of reductions
in service. However, payment of the COLA due July 1976 may
be made upon certification by the Transit Authority that the
Steering Committee and the Joint Productivity Working Committees
designated in the contracts are cooperating constructively in
developing more effective, more efficient and more economical
utilization of the Authority's employees and facilities, and that
productivity savings are definitively scheduled to provide
sufficient funds to pay said COLA.
GERALD
For each subsequent period designated for COLA
payments in the contracts, the Transit Authority shall determine
prior to the beginning of each month whether or not the productivity
savings are sufficient to make the COLA payments during such
month, and if the Transit Authority 50 finds, it shall certify this
fact to the Board and make the required COLA payments. If the Transit
Authority determines that the savings are not sufficient, the
Unions may contest this determination before the Impartial Arbitrator
provided for in the contract. If the Impartial Arbitrator deter-
mines that productivity savings are sufficient, the Authority
shall make the required COLA payments.
The Transit Authority may, in its discretion, subject
to review by the Impartial Arbitrator, make COLA payments subject
to productivity savings in the various represented entities,
namely, in the Manhattan and Bronx Surface Transit Operating Authority,
in the TWU represented unit in the Transit Authority, in the ATU
unit in Staten Island, and in the ATU unit in Queens.
However, the Board reserves to itself the right to
make the final determination as to whether or not the savings
pursuant to the productivity provisions of the contracts are
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adequate to warrant COLA payments. The Board shall monitor the
productivity agreements through its duly designated representative,
the Special Deputy Comptroller for the City of New York. The
Board may, at any time, suspend all or part of the payment of the
COLA if it has reason to believe that the productivity savings
cannot sustain the payments.
5. The retroactive and prospective payment by the Transit
Authority of annual and semi-annual wage increments as provided
in the proposed contracts is hereby approved. Payment by the
Transit Authority of the COLA under its prior contracts with the
unions is hereby approved and continued payment of the COLA, under
- 5-
the conditions of its prior contracts, in an amount equal to 22
cents per pay hour, during the term of the proposed contract is
hereby approved.
6. As to the deferred items, the Board provides that if
on March 31, 1977, the monies accumulated by productivity savings
are in excess of the amounts needed to defray the cost of the
0.4 cost-of-living adjustment, the TA may, consistent with its
then existing overall financial condition, recommend to this
Board the use of a portion of these surplus productivity savings
(a) to pay the difference between the rate of the COLA as herein
limited and the rate provided in the proposed contracts (either
retroactively or prospectively or both) and or (b) any COLA
deferred by reason of the 6% limitation imposed in #2 above. For
the contract period subsequent to March 31, 1977, a similar
review may be made on or after January 1, 1978. The Board reserves
the right to determine whether the portion of the surplus recom-
mended to be allocated to these payments is consistent with the
Transit Authority's overall financial condition as well as what
payments may be made.
GERALD
- 6 -
7. The Transit Authority, under the productivity agreement,
will seek to maximize those savings which will eliminate as far
as possible, the inclusion in pension costs of other than the basic
wage rate of retiring employees. To this end the Transit Authority
shall exercise close administrative control as to overtime and
overtime distribution; sick leave, sick leave pay and related
costs and the distribution of vacation periods over a calendar year.
8. The Transit Authority is directed to insure that
payments for salaries and wages, including payments of cost-of-
living adjustments as hereby limited, do not exceed the amount
budgeted for such purpose in the financial plan submitted to
this Board.
RESOLVED FURTHER, that the suspension of salary or wage increases
and other payments imposed by Section 10 of the Financial
Emergency Act and extended by action of this Board is hereby
terminated to the extent necessary to permit the Transit Authority
to make payments under the proposed contracts in accordance with
the conditions and limitations specified above.
SERALD
THE CITY OF NEW YORK OFFICE OF THE MAYOR ABRAHAM D. BEAME
FFLEYED to WASH.
Tel: 566-5090
205-76 & MIBANY
6-9-76
For Release:
Wednesday, June 8, 1976, 10:00 A.H.
STATEMENT BY MAYOR ABRAHAM D. BEAME
In recent weeks you may have read or heard reports
from State agencies which, in varying degrees, criticized the
budget and the financial plan of the City of New York because
it is, to quote the most recent EFCB Staff report, "unrealistic"
in anticipating that the State of New York would assume some of
burden which the City has had to bear in areas that legitimately
are State functions.
I want to take the next few minutes to talk to you
about the responsibility of the State of New York to this
City, and let you decide for yourself whether the State is meeting
that responsibility.
The City of New York, battered by more than a year
of worsening financial crises and economic erosion, accompanied
by continuing cuts in manpower and services to our people,
was offered the promise of a strong partnership with the State
to see it through these difficult times.
The report also fails to point out that when Congress
was debating the question of Federal help to the City, the
House Banking Committee said that it was only right for the
State to absorb up to 33 per cent of the city deficit, while
the Senate committee said the State's share of the deficit
should rightly be 50 per cent. Secretary of the Treasury
TORARY
(more)
Simon, in testimony before the Senate Banking Committee,
also urged that the State pick up half of our operating
deficit.
Yet, despite the intent of the Federal government,
the City-State "Partnership" didn't work out that way.
It may come as a shock to some of you, but the
State of New York has not given the City of New York one cent
in additional aid over existing formulas to meet the City's
fiscal crisis. The burden of the most crushing financial
cataclysm in our City's history is being borne solely on the
backs of New York City taxpayers.
Even more shocking is the fact that the Federal
Government and the State Government have both made substantial
monetary gains out of this City's miseries. These windfalls
came when we were forced to curtail programs and separate
tens of thousands of City employees from the payrolls, some
of whom were paid for in part by federal and state programs.
During the 1976 and 1977 fiscal years, the City of
New York is producing $271 million in State budget windfalls
as a result of our economies.
In return, the State of New York has not given the
City one extra penny. Indeed, the State -- either
administratively or legislatively -- has imposed upon our City
still greater costs. These costs, including the City's new tax
burden granted it by the State, total $888 million.
This City cannot survive the continuing trauma of relent-
less cutting of staff and services without some recognition of
the role that must be played by the State.
(more)
Accordingly,in developing the revised financial plan,
we prepared a rational and legitimate program which transfers
to the State government on a gradual basis the financing of several
programs which legally, logically and in the name of equity
fall under State jurisdicition.
The financial plan calls for phaseout of City funds
for the City University's senior colleges.
It also calls for the phased assumption by the State
of the costs of courts, probation and correction.
The case for the State financing higher education
has been made and accepted time and again. All other public
senior colleges in our State are financed by the State;
CUNY is the sole exception.
We have taken every step required for the State to
assume its proper and legitimate role. The State should
accept its responsibility now and provide CUNY with the same
level of funding as SUNY. Correcting that inequity would
provide CUNY with an additional $200 million. We are not
asking for that. We are only asking that the State pass legislation
confirming the appropriation level already in its adopted budget
for next year for CUNY, and that it provide the needed emergency
money to re-open this great institution and schedule future
allocations to achieve parity with SUNY.
If that is unrealistic, then so are the hopes of the
young people of this City for the opportunity provided by
higher education. If we fail to fulfill that promise, then
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no financial plan, no matter how artfully drawn, will redeem
this City or this State.
(more)
-4-
We are also asking the State to gradually assume the costs
of courts, probation and correction institutions. The takeover
of the City's share involves a cost to the State of $24 million
in fiscal 1977 and $127 million in fiscal 1978.
The fragmentation and duplication inherent in a dual
criminal justice system invites administrative overlap and
inefficiency. It costs more for less. Every major report that
has analysed the situation has concluded that equity and
justice demand the State assumption of these responsibilities.
I will only cite a few: the report of the U.S. Advisory
Commission on Intergovernmental Relations, issued in 1971; the
report on criminal justice of the State Temporary Commission
on the State Court System, issued in January of 1973; the State
Charter Revision Commission report on criminal justice issued
in May of 1975; as well as the City Temporary Commission on
City Finances report on court probation and correction services
in New York, issued in January of 1976.
A unified State system could dispense even-handed
justice, minimizing disparities of services and resources that
currently exist. It is right and rational. It is legally
desirable and more efficient. It is more humane. It has been
achieved elsewhere. Why is it unrealistic here. And when did
it become unrealistic?
I have long advocated that these functions are
properly the responsibility of the State. This was articulated
in the initial financial plan document issued in October of
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(more)
4
last year. The most recent revision to the financial plan issued in
March further detailed these actions. According to press reports,
the Governor praised the document then and called it commendable.
Why is it unrealistic now?
I will make the cuts that are reasonable and possible against
a background of keeping this city alive by effectively delivering vital
services 50 as to keep our people and our businesses in our city.
But I am equally determined to resist pressure from the State to make
further cuts merely to permit the State to avoid its responsibilities.
Cooperation and a true partnership are the only course.
We have worked together in the past and we must work
together now, if the City--and the State--are to recover and thrive.
LIBRARY
assess WAMNU an
(In Millions of Dollars FY 76 & FY 77)
State Burden
City Burden
ADMINISTRATION AND INTEREST
Funds given to City by State to
help in fiscal crisis
$ 0
-
Overhead Costs of MAC
0
$ 11
Interest on State advances
0
50
MAJOR ADJUSTMENTS TO FINANCIAL PLAN
Repeal of Estate Tax
0
17
Repeal of Bond Transfer Tax
0
40
CITY TAXES TO MEET FISCAL CRISIS (Enacted by State)
-
770
TOTAL . .
...
0
$888
0803
WINDFALL SAVINGS TO STATE FROM CITY BUDGET CUTS
(In Millions of Dollars)
Fiscal '76
Fiscal '77
Total
Savings to State
$ 149
$ 122
$ 271
Less Proposed Takeover
of CUNY, Courts, Probation
and Corrections
-
74
74
Wind 11 Savings after
Proposed Takeovers
149
48
197
Amer
BERALD
FORD
UNEQUAL "PARTNERS"
+$271 X
State Windfall
-$888
City Burden
3.
GERALD
FORD
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(In Millions of Dollars)
THE WHITE HOUSE
INFORMATION
WASHINGTON
June 30, 1976
MEMORANDUM FOR THE PRESIDENT
FROM:
L. WILLIAM SEIDMAN
LWS
SUBJECT:
New York City Financial Situation
The EPB Executive Committee this morning reviewed the current
financial condition of New York City. Treasury reported that
New York City has requested a loan of $500 million on Thursday,
July 1, primarily to meet debt service and payroll obligations.
Treasury is satisfied that the loan is for seasonal financing
and that the financial plan under which New York City will
operate during FY 1977 (July 1-June 30) is reasonable. While
Treasury believes that the plan, as submitted, is probably at
least $100 million short of the target originally outlined in
the original plan, the Emergency Financial Control Board has
directed the City to identify an additional $135 million in
standby reductions by July 31 and to implement at least $50
million of those cuts no later than August 15.
In addition, the Municipal Assistance Corporation (MAC) has
proposed to the major New York banks and pension funds, which
purchased MAC debt as part of last fall's financing package,
that the debt be restructured in a way that would reduce the
immediate debt service requirements by $170 million per year.
While there is some resistance at this point, Treasury believes
it likely that the restructuring will ultimately be agreed to,
reducing expenditures at an annual rate of $170 million.
The only remaining question is the settlement of the City's
labor contracts. The negotiations involve five major unions
representing 96 percent of the City's employees whose contracts
expire today. The only major union not directly involved is
the teacher's union. Bargaining is intense with especially
strong resistance to cuts in benefits. It is not clear at this
time as to when and if a settlement will be reached.
The Secretary of the Treasury must make a decision on whether
to meet New York's request for seasonal financing by tomorrow.
I will keep you advised of any further developments.
LIDRARY
OF
DEPARTMENT THE 1789 TREASURY
THE
DEPARTMENT OF THE TREASURY
WASHINGTON, D.C. 20220
ASSISTANT SECRETARY
July 7, 1976
MEMORANDUM FOR ROGER B. PORTER
SUBJECT: New York City Aid
Yesterday you requested the monthly disbursement and
repayment schedules for the loans made by Treasury under
the New York City Seasonal Financing Act during the
City's last fiscal year, the period ending June 30, 1976.
You also requested anticipated disbursements and repayments
(principal and interest) for the City's current fiscal year,
July 1976 through June 1977. The schedules you requested
are attached.
You will note that we have presented the precise amount of
interest and principal for the period ending June 30, 1976
as well as for the $500 million loan made on July 1. There-
after, we can provide the City's projected borrowing each
month, but we are unable to provide a precise interest
rate because the rate is not fixed until the date of each
loan. At that time, the interest is fixed at one percent
above the rate paid by Treasury for loans of comparable
maturity.
If the average interest rate during the period July 1, 1976
through June 30, 1977 were equal to the amount paid on the
$500 million loan made July 1, 1976 (7.37 percent) then
total interest paid during this period by New York City
would equal approximately $100 million. It is quite possible
however, that short-term loan rates will increase and that
the average interest rate on loans to the City next year
will therefore exceed the 7.37 percent paid on the July 1 loan.
By contrast, the City paid approximately $27 million in
interest during the period December 1975 through June 1976.
This differential arises from several factors: the City
expects to borrow more during fiscal 1977 ($2.175 billion
versus $1.26 billion during fiscal 1976) ; the average maturity
will be substantially longer; and the interest rate, at the
assumed 7.37 percent level, would be approximately one per-
cent higher than last year.
BaB
Robert A. Gerard
Attachments
New York City Borrowing
Fiscal Year 1976
1. Borrowing
December
$370,000,000
January
$140,000,000
February
$430,000,000
March
$320,000,000
TOTAL
$1.26 Billion
2. Repayments
Principal
Interest
Total
April
$270,000,000
$ 5,120,723.29
$275,120,723.29
May
240,000,000
6,105,336.99
246,105,336.99
June
750,000,000
15,897,901.38
765,897,901.38
TOTAL $1,260,000,000 $27,123,961.66 $1,287,123,961.66
LIBRARY
New York City Borrowing
Fiscal Year 1977
1. Borrowing
July 1976
$850,000,000
August 1976
$225,000,000
October 1976
$125,000,000
November 1976
$175,000,000
December 1976
$475,000,000
January 1977
$150,000,000
March 1977
$175,000,000
TOTAL
$2.175 Billion
2.
Repayments
Principal
Interest
Total
April 1977
$650,000,000
$37,000,000 (est.)
$687,000,000 (est.)
May 1977
450,000,000
26,000,000 (est.)
476,000,000 (est.)
June 1977 1,075,000,000
38,000,000 (est.)
1,113,000,000 (est.)
TOTAL
$2,175,000,000
$101,000,000 (est.)
2,276,000,000 (est.)
THE WHITE HOUSE
WASHINGTON
July 8, 1976
MEMORANDUM FOR THE PRESIDENT
FROM:
L. WILLIAM SEIDMAN
fews
SUBJECT:
Federal Seasonal Assistance Loans to
New York City
In response to your request Treasury has prepared the attached
charts showing disbursements and repayments (principal and
interest) both for Fiscal Year 1976 and for Fiscal Year 1977
for Federal seasonal assistance loans to New York City.
I suspect that there are many taxpayers who do not realize
that the Federal Government earned approximately $27 million
in interest payments from New York during the period December
1975 through June 1976.
Attachment
New York City Borrowing
Fiscal Year 1976
1. Borrowing
December
$370,000,000
January
$140,000,000
February
$430,000,000
March
$320,000,000
TOTAL
$1.26 Billion
2. Repayments
Principal
Interest
Total
April
$270,000,000
$ 5,120,723.29
$275,120,723.29
May
240,000,000
6,105,336.99
246,105,336.99
June
750,000,000
15,897,901.38
765,897,901.38
TOTAL $1,260,000,000 $27,123,961.66 $1,287,123,961.66
New York City Borrowing
Fiscal Year 1977
1. Borrowing
July 1976
$850,000,000
August 1976
$225,000,000
October 1976
$125,000,000
November 1976
$175,000,000
December 1976
$475,000,000
January 1977
$150,000,000
March 1977
$175,000,000
TOTAL
$2.175 Billion
2.
Repayments
Principal
Interest
Total
April 1977
$650,000,000
$37,000,000 (est.)
$687,000,000 (est.)
May 1977
450,000,000
26,000,000 (est.)
476,000,000 (est.)
June 1977 1,075,000,000
38,000,000 (est.)
1,113,000,000
(est.)
TOTAL
$2,175,000,000
$101,000,000 (est.)
2,276,000,000 (est.)
GERALD LIBRARY FORD
THE WHITE HOUSE
WASHINGTON
July 8, 1976
MEMORANDUM FOR L. WILLIAM SEIDMAN
FROM:
ROGER B. PORTER
SUBJECT:
Battery Park
I spoke with Dick McGraw, at HUD, on the telephone this morn-
ing. I was returning his call. He indicated that he was
aware that you were interested in the Battery Park question
and were under some pressure to call Bob Georgine on the mat-
ter.
He then explained that he had met with Georgine two or three
times and that Secretary Hills had talked with Georgine twice
on the telephone, the latest time on Tuesday. He said that
he had also spent a good deal of time with several of Georgine's
people and had taken a trip to New York to look into the situ-
ation.
The project involves approximately 2,000 construction jobs
and would entail HUD taking a $65 million mortgage. In HUD's
view the most serious problem is the marketability of the
mortgage, but there are also some environmental clearance and
other unspecified problems. McGraw assures me that Georgine
is aware of all of these and that they have been in close touch
on the matter.
McGraw is presently in the process of trying to put together
a definitive package for Secretary Hills that lays out all of
the problems that the HUD bureaucracy has with the project.
He is currently waiting for inputs from the HUD New York Area
Office and from Georgine's people and expects to have them by
next Monday. He will be glad to talk with us about it after
that and to provide us with a copy of the report he sends, to
Secretary Hills.
You may also be interested in knowing that the Vice President
has talked with Secretary Hills about the issues on at least
two occasions.
GERALD FORD LIBRARY