Saved Again From the Jaws of Default

Saved Again From the Jaws of Default

All day long in drab Room 830 of New York City's Municipal Building, they gathered last week--the affluent and the needy, the young and the old. They had two things in common: all clutched yellow receipts, and all were frightfully worried that New York would not have the money to redeem the maturing city securities that they held. A Long Island couple needed their $5,000 to pay for a child's education. A messenger waited patiently to cash in $15 million in notes held by the Chemical Bank. An elderly married pair anxiously awaited payment of $25,000, half their life savings. A retired Brooklyn schoolteacher hoped to collect her $26,929. If she got it, she said, she would not reinvest it in New York's uncertain paper; she would put it into a lower-yielding but more secure savings bank. Finally, after a long line of people had waited for hours with increasing anxiety, Irving Gurfield of the city controller's office climbed on a chair at 2:57 p.m. and proclaimed: "It has turned out to be a wonderful day."

Two Forces. That signaled the city's hairbreadth escape from defaulting on its many loans, bonds, bills and other debts. Once again New York City had been fatally caught between two irreconcilable forces. On one side was Congress, which is not inclined to go to New York's rescue unless city officials dramatically demonstrate that they have stopped their high-spending ways. On the other side were the powerful city unions, some of which have threatened to shut down New York with a general strike if officials cut the budget too deeply. The squeeze pushed the city closer than ever before to a default that would shake money markets in the nation and world and left the city's leaders exhausted and dispirited. Pleading for help from Washington, Investment Banker Felix Rohatyn, chairman of the Municipal Assistance Corp. (Big Mac), plaintively said: "We just cannot go on like this much longer."

The latest crisis--the fourth and worst brush with default since last spring --occurred when city officials had to come up with $477 million to redeem short-term notes, pay sanitation workers and meet other expenses--but had only $34 million in the till. This near disaster was primarily caused by a flaw in the complex $2.3 billion rescue package that the state legislature had put together last month to carry the city into December. To guarantee that the state would have help in bailing out the city, the legislature had constructed a Rube Goldberg financing scheme that offered Big Mac $750 million in state loans--but only if the other parts fell into place first. They included $225 million from three state retirement funds and $500 million from five city employees' retirement funds. Among them was the teachers' retirement system, which pledged to provide $200 million and made an initial payment of $50 million.

Much Blood. As New Yorkers discovered last week, the package was only as strong as its individual elements, and one was controlled by tough, abrasive Albert Shanker, president of the United Federation of Teachers. Like other local union leaders, he believes that New York municipal workers are shedding too much blood from the city's cuts. Two weeks ago, he was outraged when the Emergency Financial Control Board, the fiscal overseer imposed by the state on the city in September, rejected an agreement that had ended a five-day teachers' strike last month. The board, which is controlled by Governor Hugh Carey, challenged the settlement as too costly, and may throw out many of its pay increases.

Shanker and the other union chiefs also have been angered by layoffs of city employees. Firings and attrition since January have reduced the city's full-time work force to 263,311, a drop of 32,211, including 7,077 teachers and other school employees. Further cutbacks must be made, but the union leaders will use their muscle to limit the losses.

Last week New York City Mayor Abraham Beame had to report to the Financial Control Board on how he planned to eliminate an $800 million deficit from New York's budget. To avoid further antagonizing the potent union chiefs, the beleaguered mayor at first gave only scanty details. Explained an aide: "We wanted to come in without the sledgehammer." But under intense pressure from the board and Carey, Beame bitterly proposed to pare $200.7 million from next year's budget. By one estimate, that would require trimming an additional 8,000 city employees, including 3,000 school workers, and freezing all pay until 1978. Moreover, Beame said, similar reductions of workers would have to be made in each of the following two years.

While other union captains merely fumed, Shanker mounted his power play, operating through the teachers' retirement board, whose trustees include three former teachers loyal to him. These men held the fate of New York in their hands. They simply told Big Mac that they would not buy the retirement board's remaining $150 million share of Big Mac bonds. Without that investment, the state would have to withhold a $250 million payment due last week, and the city would be forced to default.

Carey summoned the three trustees and Big Mac officials to a meeting in the conference room of his mid-Manhattan offices. All Thursday night and into Friday afternoon, the trustees waited for a signal from Al Shanker.

As the crisis deepened, Beame made an urgent, last-ditch attempt to persuade President Ford to end his adamant opposition to a federal loan guarantee or any other help for New York. Earlier in the week, city officials had been cheered by Vice President Nelson Rockefeller's plea for swift congressional action to "avoid catastrophe." Despite White House denials, New Yorkers interpreted the Vice President's statement as meaning that Ford was relenting. In fact, Rocky and Ford were sharply and openly split on the issue, and White House aides were furious at the Vice President. At 12:25 a.m. Friday, Beame phoned the White House to warn that a default might occur within twelve hours. But Presidential Adviser L. William Seidman decided that there was no need to wake Ford.

Cold Turkey. The President got the news when he awoke at 5:37 a.m., then summoned his economic advisers. They decided that there was still no reason to take any federal action; no one even suggested that Ford change his position. Reported Press Secretary Ron Nessen: "The President is not going to send money to New York." Nessen made a rather silly comparison between New York and a wayward daughter on drugs. Said he: "Would you help her? Are you going to give her $100 a day to support her habit? The answer is no. You tell her she's got to go cold turkey."

With the federal turndown, city officials struggled to gain precious minutes against the deadline for default--3 p.m., when the banks would close and bondholders would have to be paid the interest due on their maturing New York bonds. In an unusual concession, some banks agreed to stay open at least an hour later. Meanwhile, Carey pleaded with Shanker. Separately, Beame pleaded with Shanker. Then, at midafternoon, a worn and weary Shanker stepped before TV cameras to say that he would indeed "advise" the teachers' trustees to advance the necessary money. In Washington, Ford reacted cynically by asking his aides: "What did Shanker get in return?"

City officials and Shanker insisted that he had received only written assurances that Big Mac would never again seek to tap the teachers' retirement fund. Shanker claimed that he was acting only to save the city and in the face of official actions that "have been extremely destructive to our school system and to collective bargaining." He added: "The situation still stinks."

The crisis had only been temporarily averted. Officials expect the city to scrape through November--though not even that is sure. In December New York faces certain default unless it gets federal assistance. Thousands of city bondholders will be affected. Among them is Jacqueline Onassis. The forthcoming issue of MONEY reports that at her insistence a pre-nuptial trust established for her by Aristotle Onassis was invested entirely in New York City bonds and provides a tax-free $100,000 of her $341,000 annual income.

The city's best hope lies with Congress, which this week will hold hearings on rescue plans. The Senate Banking Committee is expected to settle on a bill by midweek, followed the next week by its counterpart in the House. Both chambers seemed likely to accept a plan that would guarantee state loans to keep New York afloat while it constricts its payroll and services to balance its budget by 1978. Congressmen are reluctant to help, but more and more of them feel that there is no alternative. Explained House Majority Leader Thomas ("Tip") O'Neill: "We can't let the financial capital of the world go down."

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