Last-Minute Bailout Of a City on the Brink

Both sides claimed a victory, and both had a point. Finally offering a federal loan to New York City, President Ford denied that he had bailed out the municipality he had so often reprimanded for profligacy. "New York has bailed itself out," he declared. And he added with self-congratulation: "If we had shown any give, I think they wouldn't have made the hard decisions they have made."

New York officials took a different view. They thought they had finally convinced the country -- and through the country the President -- that New York had to be rescued. Governor Hugh Carey considered the loan a "vindication of New York's case." He thanked the American public for its "support and solidarity," but he voiced no gratitude to the man in the White House who had kept him waiting so long.

The loan, as the President emphasized, is no handout. If Congress approves it, as expected, the Federal Government will advance the city up to $2.3 billion each year through June 30, 1978. The loan must be repaid within the year it is made, and it will carry 1% higher interest than the U.S. Treasury borrowing rate, currently about 7%. Thus, the Government will turn a small profit.

To wangle the loan, which was necessary to prevent default, city and state officials were forced to take drastic actions that went against many a past promise. For the most highly taxed city in the country, the state legislature passed a $200 million increase that includes a 25% raise in the city income tax as well as higher levies on corporations, banks, barber shops, beauty and massage parlors and inheritances. Also approved was a three-year moratorium on the redemption of $1.6 billion in city short-term debt held by individuals.

Banks Agree. The municipal workers' unions were persuaded to contribute to the rescue from their pension funds. They agreed to invest $2.5 billion in city securities and to refinance $700 million in bonds issued by the Municipal Assistance Corp. and $450 million in city notes. The New York banks, too, were persuaded to cough up still more in assistance. By promising to balance the state budget, now in deficit by an amount estimated anywhere from $300 million to $700 million, Carey won agreement from the banks to refinance $550 million in city notes and $1.1 billion in MAC bonds.

The road to compromise was filled with political pitfalls. The first meeting of Ford with Carey and Mayor Abraham Beame last May was more confrontation than give-and-take. They came on so strong -- warning of dire consequences unless New York 'got federal aid, claiming that the city could do no more to help itself -- that they turned the President off. Both sides began to mobilize public opinion to pressure the other. The President made stern public appeals for frugality and forebearance; New Yorkers argued that a default would have a domino effect around the nation and even abroad.

Eventually, cracks appeared in the Administration's monolithic resistance. Federal Reserve Chairman Arthur Burns expressed growing anxiety; Vice President Nelson Rockefeller broke with the President and urged aid to the city. Even hard-line Treasury Secretary William Simon quietly began to ponder a plan for assistance. Some give was also apparent on the other side. Carey and his financial advisers, who gained great power over the city, ordered deeper cuts in the city budget and girded for an epic battle over a tax increase. The Governor had to overcome the opposition of upstate Republicans in the legislature as well as the Democratic minority caucus -- blacks and Puerto Ricans -- who protested reductions in social services and demanded a larger voice in city management. When he finally won his tax package, Carey took full responsibility for the unpopular action. Ford praised his "very courageous stand."

Even with the long-sought federal aid, New York has not completely shed its troubles. Scarcely is one insolvent agency rescued than another pops up. Largely because it has lent so much to the city, New York State has a tough time borrowing money. Four state agencies, financed by the dubious "moral obligation" bonds, are in danger of default. If they cannot repay the $1.5 billion they owe over the next three months, they will become another financial drain on the hard-pressed state. To avert default, David Rockefeller, chairman of Chase Manhattan Bank, said federal aid might have to be given to the agencies.

In many ways, New York City's long-term prospects remain bleak. More austerity lies ahead for a city whose services and safety have been declining alarmingly for the past few years. Schools and libraries, parks and tennis courts, hospitals and day care centers will be more crowded and less well maintained. Last week the city halted 46 construction projects.

The city's largely free universities are about to restrict their costly open admissions program, which admits every high school graduate. Now it is probable that students who have less than a C average or who rank in the lower third of their class will have to take a test to show that they have an eighth-grade level in reading and math.

Job Stampede. Last week all 338,000 welfare check recipients were mailed new eligibility forms; they must return satisfactory answers within ten days or face elimination from the rolls. Similarly, a state report last week urged that welfare benefits be reduced because an average family of four on relief gets -- in cash, rent subsidies, Medicaid, food stamps and other benefits -- nearly as much as an average working family of four. As programs and benefits are reduced, the underprivileged -- largely blacks and Hispanic Americans -- may choose to move to areas where it costs less to live. Thus, while minorities will continue to grow in proportion to the rest of the population, the trend eventually could taper off.

More immediately, higher taxes will drive middle-class people and businesses out of New York. "This migration has been going on a long time," says George Sternlieb, an urbanologist at Rutgers University. "Now the flow is a stampede." In the first nine months of 1975, the city has lost 193,000 jobs.

How can New York come back? In an interview with TIME Correspondent John Tompkins, Deputy Mayor-designate John Zuccotti insisted that "economic development should be one of the city's high-priority items." He wants to move ahead with expansion and modernization of port facilities and a projected convention center that will attract more business.

Austerity may have its positive side. Cutbacks can lead to improved productivity in municipal services, argues E.S. Savas, professor of public systems management at Columbia University. "The budget can be cut," he says, "but it doesn't follow that services must be diminished relative to that cut." Carter Bales, a partner of McKinsey & Co., a management consultant firm, urges the creation of an independent agency to assess the productivity of city departments. "That would scare the living hell out of the managerial bureaucrats," says Bales. If an agency fails to measure up, its work can be contracted out to a more efficient private organization. Beyond that, the city must stop trying to be all things to all people. As Zuccotti puts it: "We have to decide whether to do a lot of things poorly -- or a few things well."

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