Fighting the Unthinkable

It seemed an occasion for celebration. The TV lights and cameras were all assembled one night last week in a crowded 40th-floor suite in Manhattan's Waldorf Towers. Reporters scrambled for position as New York's stocky Governor Hugh Carey and New York City's diminutive Mayor Abraham Beame marched in and took seats at a small antique table and announced their triumph. After days of negotiation, said Carey, the two had finally worked out a new method to raise the $2 billion that New York City must have to stave off bankruptcy through November.

"We are in agreement on a plan," said Carey. "We can arrange state involvement with the city." The new master plan called for (1) a triumvirate consisting of Carey, Beame and State Controller Arthur Levitt to supervise the city's finances and set limits on its spending; (2) a new financial deputy to keep a watch on the city's books; and (3) a complex plan to have the state borrow the $2 billion via the Municipal Assistance Corporation (Big Mac), the major banks and other sources.

Amid all the talk of success, it sounded as though the nation's largest city had finally given up all efforts to govern itself and surrendered its key powers to the state. But Mayor Beame didn't see it that way. Said he: "We're not giving up home rule. There is absolutely nothing in the plan that doesn't exist today." After leaving the mystified reporters, the mayor returned to a basement conference room in his executive mansion to brief city officials on the new system. And what had he asked the city officials to do? a reporter inquired. One of the officials gave a brief answer: "Pray."

Familiar Figures. The very next day, while newspaper headlines bannered the deal that would save New York, it turned out that prayer would not suffice. The banks--notably Chase Manhattan, First National City and Morgan Guaranty Trust--which were being asked for new loans, took another look at the familiar figures in the budget and the familiar figures administering them and sadly shook their heads. With that, the solution so happily announced at the Waldorf collapsed.

"Do you--uh--do you have egg on your face?" an intrepid reporter asked Carey, who had hoped until last week to avoid a damaging involvement in New York City's prospective collapse.

"I am willing to have egg on my face, stones thrown at me," said Carey. "I'll walk on nails to avoid default."

But the figures that made the bankers shudder made default--once considered unthinkable--look more and more possible. Last week the city drew out the last $51 million remaining from the nearly $2 billion raised during July and August by Big Mac. Designed only two months ago to save the city, Big Mac had let it be known that it could not raise the additional $1 billion with which the city had hoped to get through September. On Sept. 12, the city will have to meet a $104 million payroll. Other expenses during the first two weeks of September come to $92 million. On Sept. 15, the city has to pay $441 million in short-term notes, plus $95 million in other expenses. And so on.

Already, the possibility that New York might default has caused financial tremors throughout the nation. Newark Mayor Kenneth Gibson says he has had difficulty selling municipal securities, and Houston Mayor Fred Hofheinz blames the New York City crisis for the fact that he had to pay a painful 7.2% for an issue of bonds. Says John Petersen, director of the Municipal Finance Officers Association: "Uncertainty over the New York City situation has contaminated the minds of investors throughout the Northeast."

Tidal Wave. If the mere possibility of a New York default arouses such anxieties, what would an actual default mean? For one thing, an end to the city's credit for years to come, and quite possibly the danger of a financial tidal wave. New York's banks have invested roughly 25% of their total municipal holdings in New York securities. To avert a series of crashes, Federal Reserve Board Chairman Arthur Burns stepped in last week with some reassurances. Even though he barred any use of the Federal Reserve to guarantee New York securities, he promised that the Fed would "act promptly" to save any bank endangered by the city's crisis.

Apart from the banks, however, how would default affect the city as a whole? A month ago, Mayor Beame defiantly declared that his administration was not even considering the question, but last week it turned out that the City Council had already prepared a study of what default would mean. Some city labor leaders have publicly come out in favor of a default or bankruptcy on the misguided ground that everyone would then suffer equally.

The simple fact is that nobody knows what bankruptcy would mean. One often cited precedent is the city of Fall River, Mass., which went into default in 1931 with a debt of more than $10 million. A state-appointed board took charge, chopped salaries 20%, drastically reduced most municipal activities and ran the city for ten years. New York City's disaster is on a far larger level. Its $11.9 billion budget for fiscal 1974-75 was second only to that of the Federal Government; so are its present deficit of $726 million and its overall debt of $3.3 billion.

"Default," said Big Mac Finance Chairman Felix Rohatyn last week, "is like stepping into a tepid bath and slashing your wrists." It would start, presumably, on the day Mayor Beame announced that notes or bills due on a specific date could not be paid. Creditors would then start filing suits in an effort to assert their claims. According to Chapter IX of the Bankruptcy Act, a city can go into bankruptcy with 51% of its creditors agreeing on the procedure for partial payment, but nobody knows exactly who or where many of New York's creditors are--not just the big banks, but shopkeepers, contractors, widows. Legal experts say that the 51% requirement could be waived by congressional action, and then it would probably be up to the courts to decide which creditors should get what.

Conventionally, the creditors are those who have a piece of paper representing a debt, but Teachers Union President Albert Shanker, who is currently leading his union to the brink of a strike in the hope of getting a substantial wage increase, is among those who claim that a union contract is just as binding as any five-year bond. Says he: "Why should the bankers be repaid and not the workers?"

That argument can be extended to include the 1 million welfare recipients who take some $852 million of the city's budget. In fact, it can be extended to include any and all New Yorkers whose needs for services are driving the city to ruin in the first place. A bankruptcy judge might well reject such arguments, but City Corporation Counsel W. Bernard Richland said last week, "City services would certainly take precedence over noteholders' demands."

Doomsday Scenario. Even now, New York is not penniless, of course. But once a day of default established the principle that not all bills could be paid, the fighting would begin. One lurid doomsday scenario predicts an army of welfare dependents marching to get their checks and an army of policemen marching to get their pay, and both colliding somewhere on the approaches to Madison Square Garden (which last week won the debatable honor of housing the 1976 Democratic Convention). But there is little likelihood that such a violent doomsday will occur; as in Rohatyn's metaphor of the man in the bathtub, blood can flow quietly.

Whatever managerial authorities the state or the courts might eventually assign to assume de facto control, the city will have to take steps that should have been taken several years ago. Basically, city services will have to be cut. According to one official estimate last week, it will take a reduction of about 46,000 of the 320,000 municipal workers to balance the budget. New York will not be able to spend, as it now does, far more than any other American city on good works ranging from the City Opera to the City University to 17 city hospitals and a special police guard for the diplomatic corps. It will not be able to pay garbage collectors $15,000 a year--or twice that to public relations consultants. These are all decisions that could have been made by Beame or his high-flying predecessor, John V. Lindsay, but each of them would have been met by fierce resistance from the victims. Even last month, it took a major crisis for Beame and the increasingly powerful leaders of Big Mac to persuade most of the municipal unions to accept not a pay cut, but simply a three-year freeze on further raises. Last week it turned out that the announced freeze still had not been fed into the city's payroll computers and therefore had not taken effect; it also turned out that the measure would not have been enough to stop the slide toward ruin.

The needed action was political as much as financial, and Beame had already proved himself a likable but inadequate representative of the old clubhouse politics. A former city controller, he juggled figures with such dexterity that almost nobody could ascertain exactly what was available to pay what deficits. When the banks demanded specific cost-cutting measures as the price of further investments, Beame waffled and wavered and cried that the city was being degraded. His own board of estimate held at least two strategy meetings without even telling Beame, and when he heard about them, he could only protest, "What are you guys trying to do to me?"

At week's end meetings were continuing, and various officials mulled over various fund-raising schemes to meet at least the first of the September deadlines. Among the possibilities: prepayment of real estate taxes by major property owners; purchase of MAC bonds by city and state pension funds; the sale, probably at a loss, of mortgages that the city holds on middle-income housing projects. But none of these measures seemed a solution for more than a fairly brief interim. And after September, another $711 million comes due in October. When asked what the situation looked like, MAC Chairman William Ellinghaus, former president of the New York Telephone Co. said with grim understatement, "It looks mighty tough."

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