N.Y. city in hands of receiver

Press, Volume CXV, Issue 33978, 20 October 1975, Page 17

N.Y. city in hands of receiver

(From FRANK VOGL. of "The Times." through N.Z.P.A.)

WASHINGTON. October 18.

New York city is in the hands of a receiver. Its Democratic management has been suspended indefinitely. The “big apple,” as it is widely and affectionately known in the United States, is as colourful, dramatic, vivacious, and cosmopolitan as ever. It is also flat broke, unable to pay creditors and the 300.00€> city employees.

The bills are now being paid by the state of New York, with reluctant help from some banks and even some municipal employees’ pension funds. The Mayor (Mr Abraham Beame) has been deprived of all power and prestige, and the running of the citv is for the moment in the hands of the Governor of New York State (Mr Hugh Carey) and a team of businessmen.

A series of desperate attempts was made to stave off bankruptcy, but the city ran out of cash in early September, and only a last-minute rescue by New York state saved it then from defaulting on its debt repayments.

Some people ask why the Federal Government has refused aid to New York when it helped such companies as! Penn Central and Lockheed ' When a company runs out of i cash and cannot borrow, a 1 receiver is appointed to save what can be saved, liquidate; assets, and reorganise if pos-I sibfe. New York City is not a! company: it cannot sell Central Park or Staten Island, it ■ cannot dismiss its policemen, street cleaners. firemen, teachers and hospital workers. Bashing N.Y. But New York City is a more interesting political animal than Penn Central or any large corporation. Wherever President Ford travels he meets people who dislike New York, the centre of sophistication, the place that is almost always one step ahead of the nation, and , knows it. The President • meets people from Nebraska • and Kansas who. as the' Mayor of Syracuse, Mr Alex ■ ander. in upper New York state, noted the other day. would like to see "the great! old lady. New York City, rub its nose in the dirt.” i Bashing New York City! seemed like good politics to; Mr Ford, already running; hard to win next year’s • Presidential election. New York’s troubles are largely of its own making. Gracier Mansion, home of the city’s Mayor, has been controlled for deCades by the big trade unions. In return for electoral victories, mayors traditionally made city jobs available to friends of local borough bosses and union leaders. The municipal pav-roll grew and grew. Few attempted to streamline the administration. Mayor after mayor fell in with the demands of local bosses and unions, ensuring that the city’s employees were the highest paid of any municipality in the country, were granted the highest pensions — sometimes higher ’han those given in private industry — and enjoyed a lack of supervision. City employees account for 60 per cent of the municipal budget. Their wages vary, but are high by any standards — about SUSIB.OOO a vear for a street cleaner, > more than 5U519.500 for an ordinary policeman. Pensions* are determined by the final i vear of income, so workers I do masses of overtime in their last year of service. Gateway to U.S. Poor administration has been only one of the city s difficulties. For decades New York has been the gateway] to America for millions of immigrants, financing and sheltering many of them, who later became assets to the country. The Mayor of New Orleans (Mr Landrieu) maintains that the cost of, caring for these immigrants: most recently, thousands of Puerto Ricans — to New York city is more than SUSIOOO million a year. Also, New York has been a most compassionate city, providing welfare, housing and education at little or no cost, when other municipalities have been more hardhearted. It pioneered free university education. It pro-i sided the most expensive financial support schemes, which became magnets for the blacks of the South and; America’s rural poor. Lending a dime Yet the city’s 5U512.500; million a vear is a modest <um when compared to the i national United States Bud-; set of about 5U5.360,000 million. iust as New York’s; deficit’is about SUSB2O mil-; lion is small compared to. the likelv deficity of about SUS72,(XX) million. Such comparisons have led some New, Yorkers to comment firstly. | •‘surety Washington can lend] us a dime,' and secondly , ■ •‘Look who is fiscally irres-. ponsible. Our deficit is less than one-fifteenth of our budget, while the nations; deficit is now soaring bevond 20 per cent of the budWhile 'he city’s administration expanded and its costs rose, and as its policies swelled the expenditure side; of the balance sheet, so the; strength of the revenue side deteriorated. Business executives moved their homes tn even greater numbers to suburbs bevcnd the city limits, while maintaining

| city offices and taking full [advantage of many city services. A growing number of 'big companies moved to less expensive and less crowded cities. City taxes — the highest in the country, consisting of city income, sales land property taxes — were a prime cause of these moves, which served as a warning that further tax increases could lead to a still greater deterioration of the city’s revenues. This point did not seem to have regisI tered with those officials [around President Ford who 'called for higher city taxes. Erosion of jobs Erosion of jobs in the city (has been a big headache for the budget directors, with a decline of 250,000 jobs between 1963 and 1973 and a further decline of 115,000 jobs from mid-1974 to mid--1975. At the same time the payroll at City Hall actually rose by 136,000 between 1963 and 1973, so the numbers dependent on the taxpayers for their incomes were growing almost as rapidly as the number of private taxpayers was shrinking.

The budget this fiscal year compares to one of about SUS32OOm in 1963, and despite the financial strains of 'the last year — the need for prudence — the city’s budget this year is about ;3U51250m greater than it 'was in fiscal year 1974-75. All these developments moved the city inevitably toi wards financial disaster. The lever-growing deficits beIcame a game of piling bad debt upon bad debt, and the [interest costs of these debts : added all the more to the I deficits. A day of reckoning had to come, and it came with a vengeance on April Fool's Day this year, when the credit rating agencies, who determine the creditworthiness of market borrowers, decided that New York city was not credit worthy.

At first it looked as if the city only needed short-term financing to get out of deep water. But the decision by the rating agencies sent shock-waves through the financial community, which immediately raised borrowing costs to ail municipalities. It also smashed investors’ confidence in New York and even in some state agencies, forcing one into default. Yet the crisis seemed containable, especially when a leading Wall Street banker was appointed to clean up the mess. Desperate crisis Mr Felix Rohatyn, a partner of Lazard Freres, which engineered many of the most; dramatic mergers in United, States corporate history, set I up the Municipal Assistance! Corporation, swiftly raised some cash, scoured the city’s balance sheets and discovered the simple truth that New York city had been managed so badly for so long that, in the midst of i a national economic recesIsion when unemployment 'was at its highest rate in 30 years and businesses were generating less tax revenue than ever, the city faced a desperate crisis.

It was mainly Mr Rohatyn who persuaded Governor Carey to involve the New York state in the city’s problems, establish an emergency financial control board; as a receiver, and strip Mr Beame of all effective power. That was in early September and today, with businessmen making most of the decisions, a plan is finally being put together that could reform New York; city. The architects of this plan! are not subject to the samel [trade union pressures as the! 'city officials, nor do they! [have an electorate to race.: They can take the tough; decisions that most politi-■ cians would shy away from.! New York city needs tol raise about 5245.3800 m, be-; tween now and next June,; [just to meet current debts, •and its payroll. Big redundancies Mr Rohatyn and his colleagues are planning big redundancies, trimtning expenditures and a programme to cut about sl7om of this Ivear’s deficit and achieve a balanced budget within three vears. But the city needs time. The aid programme [worked out by the New I York state for about 5220 million will keep New York ; city’s creditors at bay until I earlv December. After early December the [city will need Federal money |to' provide the breathing space for the new budgetI cutting plans to be put into [operation. All the New York [experts agree that the best (solution is for the Federal ! Government to provide about SUS3OOOm to about |ssooom of Government guar-

antees for new special New York city bonds. The Government has every reason to support New York.

It is the real capital of America, its business and cultural centre. The city is a supreme national asset, generating imaginative and constructive ideas to fuel the industrial heartland, engineering the means and mechanisms to finance the budgets of local, state and federal governments and domestic and foreign corporations sucking in from around the globe masses of invisible earnings and pouring out social, political and cultural ideas of a sort unrivalled by any other American centre and of immeasurable value. International crisis Chancellor Helmut Schmidt of West Germany has said that a dangerous international financial crisis would result if New York defaulted on its debts. Mr Brenton Harries, president of the agency that withdrew the credit rating last April, said that there would be violence on the city streets if the Federal Government did not come to the rescue. The Mayor of Dallas (Mayor Wise) said that a default would ripple across the country, forcing every municipality to pay much more for its; monev.

Leading New York bank-; |ers said there could be a great undermining of confidence in the nation's banks if the city defaulted because the banks held a great proportion of the city’s debt and the losses could be vast. Philadelphia. Detroit and Newark, all cities with grave problems, could follow New York into default. New York state could be bankrupt by the spring. Economic recovery According to Dr Arthur Bums, chairman of the Federal Reserve Board, foreign investors might lose confidence in America’s chances of economic recovery — and the recovery itself could be threatened. Mr Peter Klotndz, a leading Frankfurt broker who was in New York last week, said that the only reason why the dollar had not fallen sharply and foreign investments had not been withdrawn on a grand scale from New York, was that foreigners simply could not believe that the city would default.