On the Brink of Bankruptcy

For New York Mayor John Lindsay, the timing was too painful to be coincidental. Within hours of Senate action shelving welfare reform legislation, the omnibus agency that administers the city's welfare programs submitted budget requests that, under existing payment formulas, will cost the city $100 million more for welfare this year than last. New York already foresees a $300 million deficit. Without federal and state help, said Lindsay, the city "risks bankruptcy and elimination of basic essential services" as a result of the welfare increase. Lindsay turned down the request and initiated an ad hoc reform program of his own, ordering officials to look for federal and state funds to absorb future increased costs, review welfare eligibility requirements and find legal means of refusing to pay for increased costs.

New York's dilemma is symbolic of cities across the U.S. Caught in an unprecedented scissors of soaring costs and limited incomes, many of the nation's cities face deficits that border on bankruptcy. The emblems of austerity are going up in city halls like so much black crape. In recent months, at least ten major cities have either declared a total job freeze or laid off workers. Municipal services have been slashed; the cuts range from the elimination of archery and synchronized swimming in Rochester's recreation program to Cleveland Mayor Carl Stokes' decision to close down the police academy, at least temporarily, beginning Feb. 1.

The worst of the crisis is yet to come. Despite the cutbacks, municipal authorities face an unremitting increase in costs, many of them outside their power to control. This year Boston will be forced to ante up $25 million to pay its share of the operating deficit of the Massachusetts Bay Transit Authority--a responsibility that state law requires the city to shoulder although it has no hand on the throttle governing the M.B.T.A.'s expenses. Increasingly militant municipal employees are demanding huge pay hikes in New York, Baltimore, Philadelphia and other cities--and some are threatening strikes or job slowdowns if they do not get them. Recession-based job layoffs have sent welfare costs soaring. Inflation has made services vastly more expensive than only five years ago.

As a result, Chicagoans next year face a staggering 17.5% increase in real estate taxes. Buffalo and Syracuse recently declared the largest property tax hikes in their histories, and Newark got permission to collect a 1% levy on payrolls. San Francisco will begin taxing payrolls .5% if its law clears the courts. These cities are relatively fortunate; other cities are virtually desperate. Under state laws, both Omaha and Detroit are already taxing to the limit of their authority and could not pass tax increases even if they wanted to. Sooner or later, says former Pittsburgh City Councilman J. Craig Kuhn, "all cities face bankruptcy, unless some new patterns of municipal financing evolve."

No More Rabbits. The cities' plight is part of a larger problem. Though not yet in the anguished stages of the long overburdened cities, state and county governments are also increasingly strapped for funds. Says New York's Nelson Rockefeller, who forecasts a $400 million deficit for the 1971-72 fiscal year: "We pulled a rabbit out of the hat each year, but it's not possible any more."

Financial pressures on mayors and governors reflect a drastic change in the makeup of the overall U.S. tax dollar. "The Federal Government is good at some things and bad at others," says Daniel Patrick Moynihan, who has departed from his job as President Nixon's urban affairs adviser. "It is perhaps best at collecting taxes." Increasingly, the collection of public moneys depends on personal and corporate income tax, a form of levying largely reserved for the Federal Government. Meanwhile the traditional base for municipal taxation--real estate--has stagnated, largely because of the move of businesses and middle-class families to the suburbs and the concomitant growth of inner city slums. Revenue from real estate taxes is further reduced by the tax-exempt status of government and other institutional holdings. In Detroit, 30% of developed land is lost to federal and state office buildings, schools and hospitals. Pittsburgh took 85 acres off its tax rolls with the construction of Three Rivers Stadium.

Yet the burden of building new schools, hospitals and other shrines to the nation's prosperity falls most heavily on the states and cities. Increasingly, Washington has chipped in on these projects: the Federal Government now budgets $28 billion annually in grants-in-aid to states and cities v. $13 billion in 1966. Even that help is not enough to offset the increases in local needs. From the early '40s to the late '60s, state and city spending increased twice as much as federal spending. Moreover, the federal programs, most notably welfare, often added to local burdens, imposing substantial and sometimes capricious drains on city treasuries.

The imbalance in public finance was foreseen as long ago as 1960 by Walter Heller, President Johnson's principal economic adviser, and by Joseph Pechman of the Brookings Institution, who chaired a presidential task force that looked into tax problems. Their recommendation: a direct "skimming" of federal tax moneys, perhaps an amount of 1% to 2% of the U.S. budget, for the use of the states as their officials see fit. The idea was shelved by L.B.J. in favor of sharply increasing New Deal-style federal grants-in-aid that were limited for use in education, manpower training or some other specific program whose goals were set in Washington. Unfortunately, Great Society giveaways often compounded federal red tape and were not worth the effort.

New Federalism. The idea of sharing revenue directly with lower levels of government appealed to President Nixon as a basis for the "new Federalism" that he hoped to see established in his Administration. In the 1970-71 budget, he called for $275 million to be handed over to state and local governments. This amount would increase gradually to $5 billion in 1975. The idea, if not the amount, has won applause from city halls across the country. But the President's legislation died in committee, after House Ways and Means Chairman Wilbur Mills and John

Byrnes, the committee's ranking Republican, decided that it was not their brand of federalism because it took too much power away from Congress.

The Administration, well aware of the deepening crisis of the cities, has indicated that it will put up a much tougher fight for the plan this year. It is working on a new draft that could increase the first-year ante to $2 billion, perhaps as much as $5 billion, and has lined up bipartisan support for the idea. Moreover, there were strong indications that one of the duties of newly appointed Treasury Secretary John Connally would be to induce fellow Southerner Mills to back the program.

By all rights, a second and far more rapid infusion of help should be coming from closer to home: the ever-widening belt of prosperous suburbs that surrounds every major U.S. city. Unfortunately, such help has rarely been extended either through consolidation of governmental services or revenue. Says City Councilman Henry L. Valentine of Richmond: "Our neighboring localities do not seem to want to assist us in facing the problems of the core city. But if the core rots, the whole apple will rot." Or as John Lindsay puts it: "If we cannot move forward in the cities, we will move backward in America. If we fail now, the cost will far outweigh today's financial deficits. They will be measured in despair, in hatred, in bitterness and in strife."

It is a bleak picture indeed, and nothing short of restructuring the distribution of the tax dollar is likely to alleviate it. So grim is the prospect facing the cities that when the Superior Tea and Coffee Co. as a promotion stunt recently presented the City of Boston with $100 in reparation for the harbor pollution occasioned by the Boston Tea Party in 1773, Mayor Kevin White could only note with a trace of bitterness that, after nearly 200 years, Boston was still faced with taxation without representation.

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