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The original documents are located in Box 5, folder "New York City, November 20, 1975 -
February 2, 1976" of the White House Special Files Unit Files at the Gerald R. Ford
Presidential Library.
Copyright Notice
The copyright law of the United States (Title 17, United States Code) governs the making of
photocopies or other reproductions of copyrighted material. Gerald Ford donated to the United
States of America his copyrights in all of his unpublished writings in National Archives collections.
Works prepared by U.S. Government employees as part of their official duties are in the public
domain. The copyrights to materials written by other individuals or organizations are presumed to
remain with them. If you think any of the information displayed in the PDF is subject to a valid
copyright claim, please contact the Gerald R. Ford Presidential Library.
Digitized from Box 5 of the White House Special Files Unit Files at the Gerald R. Ford Presidential Library
THE PRESIDENT HAS SEEN
THE WHITE HOUSE
WASHINGTON
NOVEMBER 25, 1975
MEMORANDUM FOR THE PRESIDENT
FROM:
L. WILLIAM SEIDMAN fws
SUBJECT:
New York City Speech
An agreement involving actions by New York State, City, union
and financial community leaders is expected to be consumated
today at 3:00 p.m. A discussion at the EPB Executive Committee
and with Ron Nessen, Bob Hartmann and others has produced the
following options for consideration regarding the announcement
of your position on New York which you indicated last week you
would make after reviewing the actions taken by New York offi-
cials.
Draft legislation, the New York Seasonal Financing Assistance
Act of 1975, has been prepared and cleared by the Departments
of Treasury, Justice, the White House Counsel's Office, and
OMB. A fact sheet for release following any statement or
speech is being prepared and should be completed by the end of
the day.
Options
Option 1: Deliver a medium length (10-15 minute) address from
the Oval Office at noon tomorrow.
Advantages:
O A noon announcement would likely be carried live by
the major networks and would also receive maximum
coverage in the network evening broadcasts.
o A noon announcement has two advantages over an even-
ing announcement when large numbers of people could
be expected to be travelling on Thanksgiving Eve and
when it would not receive coverage in the nightly
network news programs.
2
Option 2: Deliver a medium length (10-15 minute) address from
the Oval Office at 7:30 p.m. tomorrow.
Advantages:
It is expected that the major networks would provide
time for live coverage.
Option 3: Request network television time for coverage of an
announcement of your position at a meeting with
designated New York officals (Governor Carey, Mayor
Beame and a few others) in the Cabinet Room.
Advantages:
This would provide a new setting and permit you to
commend the New York officials personally on the
measures that they have taken. New York officials
who have been quietly approached on their reaction
to such a meeting have indicated that they would be
receptive to the idea and that they would respond
positively during such a meeting.
Option 4: Announce your position on New York in a prepared
statement at the beginning of a press conference
tomorrow.
Advantages:
An announcement of your position in the context of
a press conference maintains the visibility of such
an announcement while permitting attention on other
issues at the same time (i.e. the China trip) and
thereby reducing the perception that your announce-
ment represents a major change in your position.
Jim
GERALD FORD LIBRARY
net
Max Friedersdorf's office would
like the President to see this immediately
after the conference.
Trudy
THE PRESIDENT HAS SEEN
THE WHITE HOUSE
WASHINGTON
November 26, 1975
MEMORANDUM FOR THE PRESIDENT
FROM:
MAX L. FRIEDERSDORF
m.
SUBJECT:
New York City Reaction
Congressional reaction to the President's New York City
statement tonight included the following:
Senator John Tower - Strongly endorsed the Presidential
message, indicated he would issue supportive comments.
Particularly pleased that the assistance will be loans.
Senator Bob Griffin - Not enthusiastic but indicated he
would not be critical and realizes the President had no
choice. I am taking a fact sheet by his house tonight.
Senator Garn - "As you know, I've been very opposed, but I
do prefer loans to loan guarantees. If you guaranteed that
would make New York's paper more valuable than Salt Lake
City's AAA. " Was very pleased to have been called.
Senator Young - "It won't be popular out here, but I guess
he had to do it. I doubt if I could vote for it unless my
vote was the deciding one. He has forced New York to make
some basic changes.
Representative Barber Conable - Excellent statement and will
lend all possible support. Believes that the President's firm-
ness has resulted in the best possible solution.
Representative Bill Stanton - Supports the President all the way.
Will issue statement and "Dear Colleague" letter to Republicans
urging support. Will personally contact the Minority Members of
House Banking & Currency Committee.
Representative Lud Ashley - Get the bill up right away. Will
consider substituting the President's bill for the Committee
bill now scheduled for House Floor action on Tuesday, December 2.
-2-
Senator Bellmon - "Let them default. They got into the mess.
The President must make a case of having forced New York City
to put its house in order. Hopefully, it is not a long-term
commitment into perpetuity. What will he (the President) do
on common situs and energy?"
Representative Lou Frey - Oscar Juarez, Frey's AA, called from
Orlando and asked for a reading. He was very pleased and felt
it would be acceptable to Frey and Floridians generally. Oscar
felt the emphasis on essential services and monthly granting
of the loan money was good.
Senator Hruska - "Will he ask for bankruptcy legislation? It
should be part of the package. They may still try to postpone
and bring on default so they can get larger federal help. I
am pleased that Simon is the Federal official who will administer
the program. I will listen carefully and try to say something
helpful. We should really stress the bankruptcy legislation.
I am pleased about the monthly provision."
Representative Caldwell Butler - Believes the President's
announcement is a graceful retreat from his earlier position.
Supports the legislative proposal as the most satisfactory,
available solution to the New York City problem. Foresees
this proposal as precluding further Congressional action on
pending bankruptcy legislation. Will support the President's
new position.
Representative Jim Cleveland - "I know Bill Loeb, the Governor
and Reagan will call it a bailout. I plan to duck calls on it
tonight. I will cogitate tomorrow and plan a press conference
on Friday. I have been traveling the state for three days and
it's not good at all. I'm not saying we will get licked, but
it is a lot of things like that crazy Nessen remark about skiing
in New Hampshire." (I read Cleveland the good reports we are
getting, particularly from Frey's AA in Florida, and urged him
to take a positive attitude, but Cleveland remained skeptical.)
Representative Norman Lent - "That's great. It will be a big
help to New York City. I will embargo the information, but I
heard essentially that on the radio a few moments ago.
Representative John Rhodes - Fine statement. Will issue supportive
statement indicating he recommended these steps recently and pleased
that the President forced New York City to take responsible financial
steps.
Representative Bob Michel - Non-commital. Just returned from the
District and wonders about pollsters who report public turning
around on New York City. His people still strongly opposed to any
assistance. People told him the President shouldn't give in on
New York City. "I'm glad Reagan waffled and seemed soft on this
issue because I'm afraid he could hurt us."
CONGRESSIONAL REACTION TO PRESIDENT'S NEW YORK
CITY ANNOUNCEMENT
FORD
LIBRARY
The Speaker
Enroute to North Carolina. Gave message to Mike
Reed. He was non-committal, but seemed satisfied.
Chairman George Mahon
Enroute to Dallas. Nancy Langston will relay message.
Was enthusiastic. Believes the Chairman will approve
of this approach.
Chairman Henry Reuss
In Africa. Gave message to James Galbraith, Banking
and Currency Committee Counsel. He seemed to buy
the approach and felt the Chairman would want to
convene the Committee speedily to report out the
legislation as a committee amendment which could be
offered to the pending bill under the open rule.
Rep. Jack Wydler
Very supportive. Urged that the President's
statement expresses sympathy for the people of
New York City who have been the victims of their
elected leaders.
Rep. John Anderson
Enroute back to Washington. Gave message to
Mike Masterson, who felt the Congressman would
support this approach and issue a statement.
Rep. Stewart McKinney
Could not be reached at his home in Connecticut.
Left message with Mrs. McKinney and with Jerry
McKiernan, his Press Aid here. McKiernan was
enthusiastic.
Rep. J. William Stanton
Already had essence of the plan from Max.
- 2 -
Rep. Joe Waggonner, Jr.
Initially reacted with the following questions:
-- Will New York City retirement plans be made
contributory?
-- Will New York City impose salary freezes for
City employees?
-- Are Federal audits planned for New York and
New York City in order that we may be assured
of their financial positions?
-- Will New York City's previous abuses of welfare
programs, higher education and retirement plans
be corrected?
-- Will the Federal government be assured that
"essential services" will not be allowed to go
on strike while being Federally financed?
-- In the event of default on seasonal loans, does
the Federal government have a means to retrieve
loaned monies -- i.e. withholding of commensurate
amounts of revenue sharing monies, etc. ?
The Congressman indicated he did not feel the
President's announcement would be warmly accepted
throughout the country. However, he stated that he
would do everything he could to lend public support
to the President on this matter and all others.
Rep. Ed Hutchinson
As a result of the President's announced loan
program, believes Congress will forego action on
pending bankruptcy legislation.
In travelling through his district, the Congressman
has found that his constituents will only support
amendments to the Bankruptcy Law. They do not
believe Federal assistance of any sort should be
made available to New York City. Therefore, the
Congressman stated he would not be able to
publicly support the President's announcement.
Thomas P. O'Neill, Jr. (D-Mass.)
Will this require legislation? Yes. I'm delighted at the
President's action. I won't be critical. "I'm in Cape Cod
and don't expect any calls but if he does he'll say that the
President has done the right thing and thank God for the
nation."
Peter W. Rodino, Jr. (D-N.J.)
Spoke with Francis O'Brien, A/A - Rodino will probably have
a reaction but don't know what that reaction will be until he
sees the fact sheet on the President's statement.
Thomas L. Ashley (D-Ohio)
He talked to Seidman and wants fact sheet this afternoon and
hopes that's understood so he can coordinate the necessary
legislative action. Ashley bill put onto the Senate calendar to
avoid filibuster. If he has to start with new language or bill
then something has to be done to keep the number of the bill,
understand the legislative situation and act accordingly. He
talked to Burns and says Ford exposing himself a little on
direct loan -- politically he's exposed himself on direct loans
and budget implications. There also may be problem because
this doesn't discourage other cities as the Ashley bill does by
setting conditions so onerous that they wouldn't consider it.
This smacks of direct bail out and people will shake their
heads. He'll make no commitment until he sees the fact sheet
and language of the bill. Bill Seidman told him that Ed Schmultz
of the Counsel's office is to meet with him on Friday, November
28.
John J. McFall, (D-Calif.)
Is this going to require going back to Committee with new
legislation? Hope not, we should be able to work something
out legislatively. Glad its worked out this way and hope we
can work out the legislative situation next week.
Norman F. Lent (R-N.Y.)
Could not be reached.
SENATOR
PLACE
TIME
REACTION
Scott, H.
D.C.
4:15 *
His reaction is favorable.
The action to continue the
viability of New York City
is desirable. Will support it.
Buckley
New York
4:20
Spoke to A.A. He will
transmit message and advise
us of reaction.
Brooke
D.C.
4:20
Senator and A.A. unreachable.
Spoke with Secretary, Sheila
Crowley, but did not read
the message to her.
Mansfield
Florida
5:15
Fine! The President played
this just right. The situation
could have been chaotic.
N.Y. now has a chance to work
out of a situation on a firm bas-
is.
Javits
New York
5:30
The President has done well.
I will issue a statement in
support.
Proxmire
Milwaukee
5:40
Sounds alright to me. Will
the loans be direct treasury
loans? If so, they will require
authorization and appropria-
1040
tion. The figures sound a
LIGRARY
little low.
* all times P.M.
THE
PRESIDENT HAS SHEN
THE WHITE HOUSE
WASHINGTON
November 28, 1975
MEMORANDUM FOR THE PRESIDENT
FROM:
MAX L. FRIEDERSDORF m.b.
HR7.
SUBJECT:
New York City/Senator Proxmire
Bill Kendall personally delivered the New York City
legislation to Senator Proxmire today and received
a favorable reaction.
I am attaching Kendall's brief report on the Proxmire
meeting.
FORD LIBRARY
THE WHITE HOUSE
WASHINGTON
November 28, 1975
MEMORANDUM FOR: MAX L. FRIEDERSDORF
FROM:
WILLIAM T. KENDALI
SUBJECT:
Senator Proxmire's reaction to the
New York City legislation
I was able to deliver the New York City legislation to Senator Proxmire
personally this morning before he left for Wisconsin. He approves of
the legislation and hopes that it can be passed by the House by the middle
of next week. His chief staff man was also in on the conference. The
staff man suggested two minor changes: (1) that GAO audit city finances- - -
but not necessarily before the loans are made-- - (2) and that a quarterly
report be submitted to the Congress from the President on the New Yo rk
City situation.
Proxmire cautioned his staff man that he wanted to accept whatever
the House sent over and that any such changes should be made on the
House side. He feels that it will be necessary to lay down a cloture
petition on Thursday for a possible Monday, December 8 vote. He thinks
that there are a good 45 Democratic votes for the bill.
THE WHITE HOUSE
WASHINGTON
President said on 12/9/75 that he
wanted to hold on this statement - -
Bill was sent forward.
per Jim Connor
THE WHITE HOUSE
WASHINGTON
December 9, 1975
MR PRESIDENT:
The attached signing statement on New York
Seasonal Financing Act of 1975 was prepared
by EPB and approved by Bob Hartmann. Your
approval is requested.
Approve
Disapproved
Jim Connor
December 9, 1975
SIGNING STATEMENT ON NEW YORK SEASONAL FINANCING ACT OF 1975
I am signing into law today H.R. 10481, a bill authorizing the
Federal Government to assist the City of New York in meeting its
temporary financing needs over the next two and one half years.
Under this legislation, the Federal Government is authorized
to provide loans of up to $2. 3 billion a year to the State of New York.
State authorities will in turn channel the funds to the City of New York
to enable the city to continue providing essential services to its residents.
By the end of each fiscal year the loans are to be repaid to the Federal
Government in full and with interest. It is anticipated that there will be
no cost to the taxpayers in the rest of the United States.
This measure climaxes a long, arduous but ultimately
successful effort to ensure that New York assumes primary responsibility
for solving its own financial problems. They have begun this process
through a self-help program. This includes:
2
One, meaningful spending cuts have been approved to reduce the
cost of running the City; Two, more than $200 million in new taxes have
been voted; Three, payments to the City's noteholders will be postponed
and interest payments will be reduced through passage of legislation by
New York State; Four, banks and other large institutions have agreed
to wait to collect on their loans and to accept lower interest rates;
Five, municipal employees will be required to bear part of the cost of
their pension contributions and other reforms will be made in the pension
funds; Six, the City pension system is to provide additional loans of up
to $2. 5 billion to the City. All of these steps -- adding up to $4 billion
-- are part of an effort to provide financing and to bring the City's budget
into balance by the fiscal year starting July 1, 1977.
I am gratified that these constructive efforts are
continuing. I also want to take this opportunity today to commend the
Congress for its rapid action in securing passage of this authorizing
3
bill; I look forward to a companion appropriations bill within
the next few days.
While this occasion represents a significant milestone in
resolving New York's financial difficulties, none of us should be lulled
into complacency about what still needs to be done. In many ways, this
still represents only the beginning for New York. As I have said before,
the provision of seasonal loans by the Federal Government is contingent
upon the continued good faith efforts by the leaders of New York to carry
out their own self-help program.
Looking beyond the current self-help plan, let us recognize that
in New York -- as in Washington and elsewhere around the country -- all
of us still have a great responsibility to take the hard, tough steps that
will actually bring public spending into line with public revenues.
A fundamental lesson to be learned from New York's experience
is that sound fiscal management is an imperative of self-government.
4
No individual, no family, no business, no city, no State, and no Nation
can go on indefinitely spending more money than it takes in.
OF
DEPARTMENT THE THE TREASURY
PRESIDENT HAS
SEEN
THE SECRETARY OF THE TREASURY
WASHINGTON 20220
1789
RBC has SEHEN
February 2, 1976
MEMORANDUM TO THE PRESIDENT
Subject: Update on New York City and New York State
The New York City Loan Program
To date we have loaned $510 million under the New York
City Seasonal Financing Act of 1975. It is anticipated
that additional loans of $350 million will be made in
February and $400 million in March, bringing the total
outstanding at the end of March to $1,260 million.
The loans are scheduled to be repaid in full during
the spring quarter. Each loan is directly secured by a
specific revenue source expected to flow to New York City
during the spring quarter. These sources total more than
$2 billion and consist of City tax levy funds, State
revenue sharing funds, State aid to education, and prepay-
ments of aid to education and higher education. The State
will have to borrow to meet this and its other commitments.
Thus, timely repayments of the Federal loans to the City
depend upon the State's ability to borrow this spring.
New York State
New York State and its agencies face immense financing
needs in FY 1977. We are monitoring the situation very
closely, as is the Federal Reserve. Treasury and New York
Federal Reserve personnel were in Albany last week to review
New York State's fiscal and borrowing situation. On the
fiscal side, we believe New York State will be in sound
shape if a reasonable FY 1977 budget is produced by the
Legislature.
The key concern is New York State's needs this spring.
The State must raise $3.7 billion -- largely seasonal
financing -- during the spring quarter.
- 2 -
Ordinarily, the seasonal needs would be funded by open
market sales of tax anticipation notes. However, given the
overall concerns regarding New York securities, there is
at least some question whether a public sale of the entire
$3.7 billion will be possible.
Accordingly, I have asked Ed Yeo quietly to explore
the possibilities of establishing a nationwide back-up
bank line of credit for New York State. To date, he has
had preliminary discussions with a limited group of bankers
in New York City and on the West Coast. With the help of
the information we developed in Albany, this approach will
be pursued further.
New York City's Progress
Attached are copies of recent correspondence I have
had with Mayor Beame (Tab A) and with Senators Proxmire
and Stevenson (Tab B). These letters, along with information
obtained from monitoring meetings of the Emergency Financial
Control Board, indicate that New York City has made some
progress towards living within its revenue constraints.
However, much remains to be done, especially in light of
the fact that revenues will fall below the estimates in
the current Financial Plan. That Plan is now being revised
to reflect these shortfalls and other changes. The revised
Plan will be ready by mid-February.
Congressional Oversight
As reflected in the attached correspondence with
Senators Proxmire and Stevenson, Congressional interest
remains strong. Our liaison work with the staffs of the
relevant Committees is continuing. We understand informally
that Senate Banking and House Appropriations are planning
oversight hearings in April.
William E. Simon
Attachments
OF
THE
THE 1789 TREASURY
THE SECRETARY OF THE TREASURY
FORD
WASHINGTON 20220
JAN 20 1976
Dear Mayor Beame:
I am sure that by now you have seen the Arthur
Andersen & Co. report regarding New York City's
financing requirements under PL 94-143, and have had
time to digest its substance. The report calls
attention to a number of reasons for concern about the
ultimate success of the seasonal financing loan program
under PL 94-143. I would appreciate your prompt
responses to the concerns raised by the Andersen report.
(1) Changes in programs planned for this fiscal
year call for expenditure cuts of $200 million in the
expense budget on an annual basis. As of December 29,
1975, savings having an annual effect of only $50 million
had been identified and only $12 million actually achieved.
I understand, however, that further substantial progress
has been made since December 29, 1975, and has been
reported to the Emergency Financial Control Board. Please
provide me with the details of these savings. In addition,
I would appreciate your arranging to have future progress
reports on the identification and achievenent of scheduled
expenditure cuts transmitted to me when they are submitted
to the Control Board.
(2) Staff of the City Comptroller have called
attention to the possible loss of $571 million in revenues
in this and the next two fiscal years. How do you evaluate
this possibility? More generally, what revisions in the
Financial Plan are contemplated to cover any revenue
shortfall? Are there alternative revenue sources? The
Treasury Department must be immediately informed about
all revenue developments which might affect the size or
timing of the City's loan requests and the availability
of revenues for repayment.
- 2 -
(3) The Financial Plan, drawn-up in October, assumes
that salaries will be maintained at the 1975-1976 level
through FY 1978, that savings will offset the effects of
inflation on other than personal service costs, and that
the public assistance caseload will remain stable. How
do you now evaluate these assumptions? Please keep me
informed about developments which affect them.
(4) Recognition of unfunded pension liabilities
will raise future pension costs substantially. How will
this change the Financial Plan?
(5) The Andersen report indicates a shortfall of
$408 million in current cash sources to cover this year's
needs. Prepayment of $192 million of real estate taxes
last year accounts for nearly half of this amount. Will
prepayments approach $192 million this year? What cash
sources are available to cover the $408 million shortfall?
(6) The Andersen report expresses serious doubts
about the City's current ability to generate reliable
financial data. What steps have been taken to assure
that reliable data, as agreed upon in the Credit Agreement,
are supplied to the Treasury on a timely basis?
I look forward to your reply by January 31. It is
absolutely essential that the Treasury be kept informed
of all developments pertaining to the implementation of
the Financial Plan, any revisions in it, and to be supplied
reliable up-to-date financial data on a timely basis.
Without such information and data, we cannot make the
judgments we are required under the enabling legislation.
Sincerely yours,
(Signed) William Et. Simon
William E. Simon
The Honorable
Abraham Beame
Mayor of the City of New York
City Hall
New York, New York 10007
CC: Governor Carey
EFFECTY
1664
THE CITY OF NEW YORK
OFFICE OF THE MAYOR
NEW YORK, N.Y. 10007
January 29, 1976
Mr. William E. Simon
Secretary of the Treasury
Washington, D.C. 20220
Dear Mr. Secretary:
This is in response to your letter of January 20, 1976 in which you pose
several specific questions.
1. With reference to expenditure cuts of $ 200 million in the expense
budget, substantial progress has been made since the December 29, 1975 report
of Arthur Andersen & Co. As reflected in the enclosed Status Report to the
Emergency Financial Control Board, as of January 23, 1976 action has been com-
pleted on 60% of the programs to be cut or in which revenues are to be increased
in this fiscal year. Timely progress is being made on an additional 30%.
These reductions amount to $95.2 29 million in annualized savings out of
$116. 2 million in anticipated savings.
Ten percent of the planned reductions are behind schedule. This repre-
sents 16 reduction actions amounting to $20.9 million in annualized savings.
The principle item involved is $17.5 million in reduced Medicaid costs. At the
time the Financial Plan was prepared, it was expected that this saving could
be achieved by administrative action. However, it has since been determined
that State legislative action may also be necessary. This action is contemplated
in the State budget recently submitted to the Legislature.
I have directed that future progress reports on these matters be trans -
mitted to the Treasury at the time of transmittal to the Control Board. It is
anticipated these reports will be monthly.
-2-
2. With reference to the reported possible loss of $571 million in
revenues over this and the next two fiscal years, the Financial Plan is cur-
rently being revised. This revision is scheduled to be completed by February 15,
1976 and should answer fully the revenue shortfall questions you raise.
In the present year, the Financial Plan is being adjusted to reflect a
$35 million shortfall in General Fund revenues as well as changes in other
revenues, expenditures and debt service. The revised Plan will include pro-
vision for the impact of all required changes during the three years covered by
the Plan.
3. The maintenance of salaries at the 1975-1976 level through FY 1978
remains in collective bargaining. The Financial Plan provides that salaries
be maintained at said levels. To the extent that increases occur, they must be
offset in savings in the same manner that inflation is offset in other areas covered
by the Plan.
The public assistance case load level is not stable. The current rate of
increase in the case load is slightly less than anticipated. However, indications
are that there may be an increase next year that had not been previously anti-
cipated. This matter is being considered in connection with the current revision
to the Financial Plan.
It is significant to note that despite the smaller case load increase this
year, the cost of public assistance is larger than estimated. This is due directly
to rent increases which increase the welfare grants.
4. As you are aware, the Mayor's Management Advisory Board (the
"Shinn Committee") is investigating the matter of unfunded pension liabilities
and their effect on future pension costs. The Committee is scheduled to report
about March 1, 1976. A determination as to the effect of these liabilities on the
Financial Plan will be made after this report is received.
5. With regard to cash sources available to cover cash shortfalls, I
attach a memorandum from the Hon. Harrison J. Goldin, Comptroller of the
City of New York, addressed to the Emergency Financial Control Board which
discusses this question in detail.
A significant aspect of the cash sources question concerns the ability of
the five New York City employee pension funds to meet their commitment to
-3-
purchase New York City serial bonds. The next purchase is to be on or about
February 20, 1976. This purchase cannot be assured without legislation con-
cerning certain provisions of the Internal Revenue Code. I am pleased that
Treasury has communicated to me and the Joint Committee on Internal Revenue
Taxation its support in principle of this proposed legislation. If this objective
cannot be achieved in time for the pension investment to be made as scheduled,
the City will seek to advance the next intended loan from the Treasury.
6. The City has taken substantial steps to improve its financial systems
reporting. I attach a memorandum to the Control Board which addresses this
issue specifically.
The City is eager to maintain close communication with Treasury and
will make every effort to keep your office timely and fully advised of the pro-
gress of the implementation of the Financial Plan.
Sincerely,
Abraham D. Beame
MAYOR
THE CITY OF NEW YORK
OFFICE OF THE COMPTROLLER
HARRISON J. GOLDIN
COMPIPOLLT#
January 21, 1976
TO:
Emergency Financial Control Board
FROM:
Harrison J. Goldin
SUBJECT: Arthur Andersen Report -
Cash Shortfall
The attached memorandum should explain
the confusion surrounding Arthur Andersen's
assertion of a $400 million cash shortfall.
THE CITY OF NEW YORK
OFFICE OF THE COMPTROLLER
MUNICIPAL BUILDING.
NEW YORK. N. Y. 10007
HARRISON J. GOLDIN
STEVE CLIF FORD
COMPTROLLER
SPECIAL DEPUTY COMPTROLLER
January 21, 1976
TO:
Harrison J. Goldin
FROM:
Steve Clifford
SUBJECT: Arthur Andersen Report - Cash Shortfall
Arthur Andersen stated that "to meet the cash requirements
for fiscal 1976 the city must find additional sources of
over $400 million. " The Comptroller's Office made available
to Arthur Andersen detailed computerized cash projections
for the remainder of the fiscal year demonstrating that all
cash shortages can be covered by seasonal loans plus long
term financing already arranged with the City's pension
funds. We do not know whether these projections were reviewed
in depth by Arthur Andersen; however, they were not included
in the discussion of cash needs in their report.
Instead, they based their assertion of a $408 million cash
shortfall on their analysis of aggregated annual financial
plan totals displayed on page 52 of the report. This analysis
failed to adjust for a number of distinctions between cash
flow on one hand and accrual-based financial plan data on
the other hand. Specifically, the following items should
have been included in Arthur Andersen's analysis:
1. State Advance - $162 million
Of the funds advanced by the State to the City
in the fourth quarter of fiscal 1974-75, only
$628 million was included as financial plan
revenue for 1975-76, the remainder being credited
to 1974-75. Were the State to discontinue this
advance, cash receipts in 1975-76 would then be
$628 million less than accrued revenue under the
plan. However, since the State will advance
$800 million this fiscal year, cash receipts
will exceed accrued revenue by $162 million.
2. Reserve -for Disallowances - $223 million
The City included in its financial plan an
expense of $315 million for reserve for aid
disallowances. As we informed Arther Andersen,
we do not expect to experience the full cash
impact of this accrued expense in this fiscal
year. Our cash forecast assumes that
$223 million of this reserve will remain
a non-cash charge in FY 76-77.
3. Expenses to be Paid Subsequent to June 30, 1976 -
Approximately $83 million
The City's financial plan includes accrued expenses
of $383 million to be paid after June 30, 1976.
Expenses paid in fiscal 1975-76 to be charged to
prior years is estimated at $300 million of which
$280 million had been paid through 11/30/75. Cash
needs for the current fiscal year should be decreased
by the difference, $83 million.
4. Decrease in Expense Aid Receivables - $136 million
As of June 30, 1975, valid, collectible expense
budget receivables of State and Federal aid were
estimated by the Office of Management and Budget
to be $604 million. Through November 30, 1975
we had collected $538 million of these receivables
and we expect to collect an additional $66 million
in this fiscal year. According to the City's
financial plan, receivables as of June 30, 1976
will be $468 million. The difference, $136 million,
should appear as a source of funds.
5. Decrease in Capital Aid Receivable - $78 million
As of June 30, 1975, capital aid receivables were
$148 million. They have decreased by $78 million
to $70 million as of December 31, 1975. We expect
the year end receivables to be approximately the
same as December 31st.
6. Other, Including Non-Plan and Non-Budget Cash
Flows - $10 million negative
The above six adjustments decrease cash needs or increase
cash sources by a total of $672 million. Accordingly, rather
than a cash deficit of $408 million for 1975-76, Arthur
Andersen's analysis should indicate a surplus of $264 million.
As stated in the documents supplied to Arthur Andersen by the
Harrison J. Goldin
-3-
January 21, 1976
Comptroller's Office, we are currently forecasting a surplus
of $191 million before adjusting for possible future State
legislative actions, not reflected in the financial plan,
which may impact this year's cash flow. This document also
noted that our projected cash outflows are $73 million higher
than the financial plan. By adding this $73 million to the
$191 million, our detailed cash forecast can be reconciled to
the $264 million indicated by the aggregate annual flow approach
employed by Arthur Andersen.
In light of the above, we have asked Arthur Andersen to issue
a clarifying amendment to their report.
20
TO: Members of the EFCB
FROM: Steven A. Clifford, Office of the Comptroller
David G. Woodbridge, Office of the Mayor
SUBJECT: Arthur Andersen & Co. 's Comments on Current and Proposed City
Financial Management Systems
The Arthur Andersen & Co. report states that
a systems change of the magnitude
envisioned might take substantially longer to implement than the present schedule
of 18 months. This is an appropriate observation as the systems changes mandated
on the City are immense. However, these changes are required by law. Accordingly,
we are organizing our efforts with a view to complying with the statutory mandate.
Recognizing the critical shortage of City personnel available for this task, we have
laid out the program SO that three consulting firms will be involved, two of which
have already been selected and have been at work on the project for a number of
weeks. While this project will be difficult to accomplish within the time frame avail-
able, we believe, nevertheless, that it is not an impossible goal.
With respect to the present accounting activities, Arthur Andersen & Co. stated
that
it is our conclusion that the present circumstances demand immediate
improvement. " In view of the City's limited personnel resources, we are devoting
primary attention to accomplishing the major systems project. However, steps are
being taken on an interim basis that will improve the City's recordkeeping and re-
porting. For example, the City is revising its procedures so that monthly statements
can be issued of the type called for in the credit agreement with the Treasury Depart-
ment. As we have advised the U.S. Treasury, initially these statements will be
partially incomplete and no doubt deficient with respect to some of the information
reported. However, continuing efforts will be made to improve the completeness
and reliability of these reports. In the months ahead other steps will be under way
to speed up the processing of data in City agencies and improve the monitoring of
State and Federal aid collections.
B
WILLIAM PROXMIRE, WIS., CHAIRMAN -
JOHN SPARKMAN, ALA.
JOHN TOWER, Trx.
MARRISON A. WILLIAMS, JR., N.).
EDWARD W. BROOKE, MASS,
THOMAS J. MC INTYRE. N.H.
BOB PACKWOOD, ONEG.
ALAN CRANSTON, CALIF
JESSE HELMS. N.C.
ADLAI E. STEVENSON, ILL.
JAKE GARN, UTAH
JOSEPH R. BIDEN, JR., DEL.
ROBERT MORGAN, N.C.
United States Senate
KENNETH A. MC LEAN, STAFF DIRECTOR
COMMITTEE ON BANKING. HOUSING AND URBAN AFFAIRS
ANTHONY T. CLUFF. MINORITY STAFF DIRECTOR
MARY FRANCES DE LA PAVA, CHIEF CLERK
WASHINGTON, D.C. 20510
January 23, 1976
The Honorable William E. Simon
Secretary of the Treasury
Fifteenth Street and Pennsylvania, N.W.
Washington, D.C. 20220
Dear Secretary Simon:
On January 14, 1976, you announced the commitment
of an additional $140 million in loans to New York City
beyond the $370 million previously advanced pursuant to
the New York City Seasonal Financing Act of 1975. In
doing so, we understand that you concluded, as required
by law, that there is a "reasonable prospect of repayment. "
However, on the same day you announced receipt of an Arthur
Andersen & Co. report on the financial condition of New
York City which generally concluded that the City does not
yet have adequate financial accounting and reporting systems
and that spending reductions are running behind schedule.
The Arthur Andersen report points out that there are many
questionable assumptions and deficiencies in the City's
three-year financial plan, including unrealistic pro-
jections of anticipated revenue and prospects for holding
down expenditures through fiscal year 1978.
In light of that report, we would appreciate being
apprised of the factors which led you to conclude that
there is nevertheless a reasonable prospect of repayment
by June 30, 1976. In addition, we would appreciate your
response to the following questions which are suggested by
the report:
1.
What action is anticipated by New York City and the
Treasury if the short-term debt moratorium is declared
invalid by the courts?
2.
Has New York State made a firm commitment to prepay
$800 million in State aid in the spring of each year during
the life of New York City's three year financial plan? What
is the source of such funds? Has the City accounted for
these funds properly to date, or have there been instances
of double-counting, e.g. as both cash on hand and revenues
coming due. What steps have been taken to remedy any pro-
blems rising from erroneous accounting for these funds?
The Honorable William E. Simon
January 23, 1976
Page Two
3. Has the City specifically identified the reductions in
budgeted expenditures needed to fulfill the plan (total
of $1.5 billion during the three-year period) ? If so,
would you specify such reductions?
4. Does New York City or New York State have a contingency
plan for raising additional revenues or making additional
expenditure reductions in the event the assumptions of the
financial plan are not met? If so, would you describe that
plan?
5. Has the City entered into negotiations to reduce the
cost of City pension plans? If not, why not, and what are
the prospects?
6. The Arthur Andersen report states that the City's financial
plan continues to include operating expenditures in the
capital budget ($677 million in Fiscal 1976, $607 million
in Fiscal 1977, $557 million in Fiscal 1978) and that this
practice will continue over a ten year period before being
ended. The report views this as a "major departure from
sound accounting and public reporting" and implies that it
could hinder access by New York City to the capital markets
after Fiscal 1978. Why is the practice being allowed to
continue for so long? What efforts have you made to eliminate
this practice?
7. The Andersen & Co. report suggests that the City's
implementation of the State Comptroller's Uniform System of
Accounts may not be possible by July 1, 1977. If not, why
not and what must be done to achieve that goal.
8. In your judgment, has the City achieved an adequate
interim system of budget control? If not, why not?
Your cooperation is appreciated.
Sincerely,
William E. Proxmire
Adlai E. Stevenson
OF
THE
THE SERVICES
THE SECRETARY OF THE TREASURY
WASHINGTON 20220
12A9
Dear Mr. Chairman:
I am pleased to respond to your request for additional
information concerning our conclusion that there is a
reasonable prospect that New York City will repay the loans
made to date under the New York City Seasonal Financing
Act of 1975. Your concern, as I understand it, is based on
the observation, contained in the report to me prepared by
Arthur Andersen & Co., that there are many questionable
assumptions and deficiencies in New York City's current
three-year financial plan.
Many of the concerns provoked by the Andersen report
and reinforced in recent days by the prospect of reduced
aid under recently announced State and Federal budgets
appear to be based on the erroneous assumption that the
three-year plan is immutable. It is not. Revenue short-
falls or expenditure overruns, arising from unforeseen
circumstances or from miscalculations by the City or the
Emergency Financial Control Board last October, can and
must be offset by modifying the plan to compensate for such
shortfalls or overruns. I expect that timely compensating
actions will be taken as warranted by the emerging facts.
Even now the City and Control Board are amending the plan
to compensate for actual and newly projected revenue short-
falls and expenditure overruns that have been recognized
or acknowledged since October. These revisions are scheduled
to be completed by mid-February.
We expect the modified plan to take account of many
of the concerns identified in the Andersen report in a
manner designed to insure that New York City will complete
the current fiscal year with its cash flows in balance. Under
such circumstances, New York City will have ample cash to meet
all of its obligations, including the Federal loans. It is
this conclusion which has served as the primary basis for my
finding that a reasonable prospect of repayment currently
exists.
- 2 *
In addition, however, there are several other specific
protections designed to insure repayment of the Federal
loans. First, pursuant to the Credit Agreement dated
December 30, 1975, between the Treasury, New York State,
New York City, and the Emergency Financial Control Board,
each Federal loan is directly secured by a specific and
specified State aid payment flowing to New York City.
These payments will CO into a special account from which
disbursements cannot be made, except with my permission.
These "trasped" funds will be applied first to the repay-
ment of outstanding Federal loans. Moreover, New York
City will need seasonal financing next year. City officials
recognizo that this year's seasonal loans must be repaid in
order to obtain future seasonal financing. This statutory
requirement serves as a powerful incentive to do what is
necessary to repay the Federal Loans on time.
In short, I an satisfied that a number of considerations
provide an adequate basis for my finding that there currently
exists a reasonable prospect of repayment.
Your letter also identified a number of specific
concerns regarding the financial situation In New York City.
Many of these concerns mirror questions I recently addressed
to ayor Soame. Accordingly, I an attaching to this lottor
a copy of my letter to Mayor Beame and his response thereto.
My responses to your specific questions are set forth below.
1. Given the judicial decisions to date, we do not
expect the moratorium to be overturned. In the event teat
it is, our actions will denend cn the actions of other parts
of the financing component of the three-year plan.
Specifically, we would want to know whether the pension funils,
the banks and the State adhere to their commitments. The
notes in moratorium would, of course, be in default. Hew York
City and the Control Board would then have to decide whether
to pay interest on these notes while the courts adjudicated
claims of notcholders.
2. Governor Carey has agreed to take the actions
necessary for the prepayment of $300 million in State aid
to New York City during the period covered by the financial
plan. In addition, at the time the Credit Agreement was
executed, I received from the leaders of the New York State
Senate and Assembly written commitments to support the pay-
ment of such advances.
- 3 -
To make these advances to New York City and to other
jurisdictions, New York State will be required to issue
short term debt during the months of April, May and June.
Specifically, in connection with this spring's advances,
the State's cash flow projections for its next fiscal year
indicate the funds will be advanced in three parts: $400
million April 1, $200 million May 1 and $200 million June 1.
I do not believe the aid advances are materially double
counted in New York City's revenue and cash projections.
City officials recognize that the extra cash provided by
advancing aid payments to the spring quarter was largely
used last year.
3. New York City has identified the specific reductions
in expenditures for this fiscal year. According to Mayor
Beame, itemization of specific reductions for fiscal years
1977 and 1978 is now in progress and will be available
shortly.
4. In his attached response to me (see paragraph 2)
Mayor Beame indicates that contingency plans will be reflected
in further revisions to the financial plan on February 15.
I shall have a further response to you on this matter after
we have evaluated those revisions.
5. The Mayor's Management Advisory Board on pensions
is scheduled to report on March 1, 1976. We expect the
report to include recommendations on reducing the cost to
the City of its pension plans. Public Law 94-143 does
not provide me with legal authority to direct New York City
to reduce specific expenditure items or otherwise control
the City's management or operations. I will, of course, be
monitoring all aspects of New York City's costs structure
in connection with my statutory responsibility.
6. Under State law, New York City must eliminate
operating expenses from its capital budget over a ten year
period and the financial plan under which Congress and the
President acted and under which New York- City is now operating
contemplates such a reduction period. While it obviously
would be most desirable to accelerate the process, it is not
within my statutory authority to direct New York City to do so.
7. City officials contend that while implementation
of a uniform accounting system by July 1, 1977 will be difficult,
they will be able to meet the target date.
- 4 -
8. Mayor Beame assures me that "the City has taken
substantial steps to improve its financial systems reporting. "
However, there is not yet in place an obligation encumbrance
agency reporting system. Such a system, even in manual form,
would be extremely helpful in preventing expenditure overruns.
New York City and Control Board officials also recognize
this pressing need and efforts are underway to implement a
workable interim system within a matter of months.
I am pleased and heartened by your interest. As you
know, we have established a staff level liaison group with
the Senate Banking Committee and the other Congressional
committees directly concerned with the implementation of
the seasonal loan program to review relevant matters on an
ongoing basis. Please let me know if I can be of further
assistance.
Sincerely yours,
William E. Simon
The Honorable
William E. Proxmire, Chairman
Committee on Banking, Housing
and Urban Affairs
United States Senate
Washington, D.C. 20510
THE OF
THE SECRETARY OF THE TREASURY
THE
WASHINGTON 20220
1739
Dear Adlai:
I am pleased to respond to your request for additional
information concerning our conclusion that there is a
reasonable prospect that New York City will repay the loans
made to date under the New York City Seasonal Financing
Act of 1975. Your concern, as I understand it, is based on
the observation, contained in the report to me prepared by
Arthur Andersen & Co., that there are many questionable
assumptions and deficiencies in New York City's current
three-year financial plan.
Many of the concerns provoked by the Andersen report
and reinforced in recent days by the prospect of reduced
aid under recently announced State and Federal budgets
appear to be based on the erroneous assumption that the
three-year plan is immutable. It is not. Revenue short-
falls or expenditure overruns, arising from unforeseen
circumstances or from miscalculations by the City or the
Emergency Financial Control Board last October, can and
must be offset by modifying the plan to compensate for such
shortfalls or overruns. I expect that timely compensating
actions will be taken as warranted by the emerging facts.
Even now the City and Control Board are amending the plan
to compensate for actual and newly projected revenue short-
falls and expenditure overruns that have been recognized
or acknowledged since October. These revisions are scheduled
to be completed by mid-February.
We expect the modified plan to take account of many
of the concerns identified in the Andersen report in a
manner designed to insure that New York City will complete
the current fiscal year with its cash flows in balance. Under
such circumstances, New York City will have ample cash to meet
all of its obligations, including the Federal loans. It is
this conclusion which has served as the primary basis for my
finding that a reasonable prospect of repayment currently
exists.
- 2 -
In addition, however, there are several other specific
protections designed to insure repayment of the Federal
loans. First, pussuant to the Credit Agreement dated
December 30, 1975, between the Treasury, New York State,
New York City, and the Emergency Financial Control Board
GERALD R. FORD LIBRARY
each Federal loan is difectly secured by a specific and
specified State aid payment flowing to New York City.
These payments will go into a special account from which
disbursements cannot be made, except with my permission.
These "trapped" funds will be applied first to the repay-
ment of outstanding Federal loans. Moreover, New York
City will need seasonal financing next year. City officials
recognize that this year's seasonal loans must be repaid in
order to obtain future seasonal financing. This statutory
requirement serves as a powerful incentive to do what is
necessary to repay the Federal loans on time.
In short, I am satisfied that a number of considerations
provide an adequate basis for my finding that there currently
exists a reasonable prospect of repayment.
Your letter also identified a number of specific
concerns regarding the financial situation in New York City.
Many of these concerns mirror questions I recently addressed
to Mayor Beame. Accordingly, I an attaching to this letter
a copy of my letter to Mayor Beame and his response thereto.
My responses to your specific questions are set forth below.
1. Given the judicial decisions to date, we do not
expect the moratorium to be overturned. In the event that
it is, our actions will depend on the actions of other parts
of the financing component of the three-year plan.
Specifically, we would want to know whether the ponsion funds,
the banks and the State adhere to their commitments. The
notes in moratorium would, of course, be in default. New York
City and the Control Board would then have to decide whether
to pay interest on these notes while the courts adjudicated
claims of noteholders.
2. Governor Carey has agreed to take the actions
necessary for the prepayment of $800 million in State aid
to New York City during the period covered by the financial
plan. In addition, at the time the Credit Agreement was
executed, I received from the leaders of the New York State
Senate and Assembly written commitments 00 support the pay-
ment of such advances.
- 3 -
To make these advances to New York City and to other
jurisdictions, New York State will be required to issue
short term debt during the months of April, May and June.
Specifically, in connection with this spring's advances,
the State's cash flow projections for its next fiscal year
indicate the funds will be advanced in three parts: $400
million April 1, $200 million May 1 and $200 million June 1.
I do not believe the aid advances are materially double
counted in New York City's revenue and cash projections.
City officials recognize that the extra cash provided by
advancing aid payments to the spring quarter was largely
used last year.
3. New York City has identified the specific reductions
in expenditures for this fiscal year. According to Mayor
Beame, itemization of specific reductions for fiscal years
1977 and 1978 is now in progress and will be available
shortly.
4. In his attached response to me (see paragraph 2)
Mayor Beame indicates that contingency plans will be reflected
in further revisions to the financial plan on February 15.
I shall have a further response to you on this matter after
we have evaluated those revisions.
5. The Mayor's Management Advisory Board on pensions
is scheduled to report on March 1, 1976. We expect the
report to include recommendations on reducing the cost to
the City of its pension plans. Public Law 94-143 does
not provide me with legal authority to direct New York City
to reduce specific expenditure items or otherwise control
the City's management or operations. I will, of course, be
monitoring all aspects of New York City's costs structure
in connection with my statutory responsibility.
6. Under State law, New York City must eliminate
operating expenses from its capital budget over a ten year
period and the financial plan under which Congress and the
President acted and under which New York City is now operating
contemplates such a reduction period. While it obviously
would be most desirable to accelerate the process, it is not
within my statutory authority to direct New York City to do so.
7. City officials contend that while implementation
of a uniform accounting system by July 1, 1977 will be difficult,
they will be able to meet the target date.
- 4 -
8. Mayor Beane assures me that "the Cityhas taken
substantial steps to impoove its financial systems reporting."
However, there is not yet in place an obligatonn encumbrance
agency reporting system. Such at system, even in manual form.
would be extremely helpful in preventing expenditure overruns.
New York City and Control Board officials also recognize
this pressing need and efforts are underway to implement a
workable interim system within a matter of months.
I am pleased and heartened by your interest. As you
know, we have established a staff level liaison group with
the Senate Banking Committee and the other Congressional
committees directly concerned with the implementation of
the seasonal leen program to review relevant matters on an
ongoing basis. Please let me know if I can be of further
assistance.
With best regards,
Sincerely yours,
William E. Simon
The Honozable
Adlai E. Stevenson
United States Senate
Washington, D.C. 20510
OF
REPARTMENT THE TREASURY
THE
THE SECRETARY OF THE TREASURY
WASHINGTON 20220
1789
2/2/76
MEMORANDUM TO THE PRESIDENT
Subject: Update on New York City and New York State
The New York City Loan Program
To date we have loaned $510 million under the New York
City Seasonal Financing Act of 1975. It is anticipated
that additional loans of $350 million will be made in
February and $400 million in March, bwinging the total
outstanding at the end of March to $1,260 million.
The loans are scheduled to be repaid in full during
the spring quarter. Each loan is directly secured by a
specific revenue source expected to flow to New York City
during the spring quarter. These sources total more than
$2 billion and consist of City tax levy funds, State
revenue sharing funds, State aid to education, and prepay-
ments of aid to education and higher education. The State
will have to borrow to meet this and its other commitments.
Thus, timely repayments of the Federal loans to the City
depend upon the State's ability to borrow this spring.
New York State
New York State and its agencies face immense financing
needs in FY 1977. We are monitoring the situation very
closely, as is the Federal Reserve. Treasury and New York
Federal Reserve personnel were in Albany last week to review
New York State's fiscal and borrowing situation. On the
fiscal side, we believe New York State will be in sound
shape if a reasonable FY 1977 budget is produced by the
Legislature.
The key concern is New York State's needs this spring.
The State must raise $3.7 billion -- largely seasonal
financing -- during the spring quarter.
- 2 -
Ordinarily, the seasonal needs would be funded by open
market sales of tax anticipation notes. However, given the
overall concerns regarding New York securities, there is
at least some question whether a public sale of the entire
$3.7 billion will be possible.
Accordingly, I have asked Ed Yeo quietly to explore
the possibilities of establishing a nationwide back-up
bank line of credit for New York State. To date, he has
had preliminary discussions with a limited group of bankers
in New York City and on the West Coast. With the help of
the information we developed in Albany, this approach will
be pursued further.
New York City's Progress
Attached are copies of recent correspondence I have
had with Mayor Beame (Tab A) and with Senators Proxmire
and Stevenson (Tab B). These letters, along with information
obtained from monitoring meetings of the Emergency Financial
Control Board, indicate that New York City has made some
progress towards living within its revenue constraints.
However, much remains to be done, especially in light of.
the fact that revenues will fall below the estimates in
the current Financial Plan. That Plan is now being revised
to reflect these shortfalls and other changes. The revised
Plan will be ready by mid-February.
Congressional Oversight
As reflected in the attached correspondence with
Senators Proxmire and Stevenson, Congressional interest
remains strong. Our liaison work with the staffs of the
relevant Committees is continuing. We understand informally
that Senate Banking and House Appropriations are planning
oversight hearings in April.
William E. Simon
Attachments