How New York City Lurched to the Brink

It is hard to imagine that subways in New York City could be more congested, streets any bumpier, parks any scruffier, muggers in greater abundance, ambulances slower to respond or courts and prisons in more disarray. But all that and considerably more is likely to happen as New York comes to terms with its worst financial crisis since the Great Depression. After decades of living beyond its means, of spending as if there were no tomorrow, the city has accomplished what no one really thought possible: it has all but gone broke.

Between now and the end of the fiscal year, on June 30, it must raise $750 million to meet its expenses, pay its employees and refinance its massive debt. But the money may not be available. The banks have turned down any further short-term borrowing; they refused to enter bids on the city's latest notes. Tax revenues have lagged way behind expenditures; real estate taxes are in arrears by more than $200 million as landlords have been caught between soaring fuel bills and rent control. Hard-pressed for funds of their own, both the state and federal governments have rejected city pleas for the massive aid that city hall needs. In a narrow technical and legal sense, the city has not yet gone broke by missing a payroll or defaulting on a loan. At week's end state and city officials were haggling over the creation of a new state agency that would take the city into a partial receivership. The agency would temporarily bail out New York at the same time that it would assert some control over city finances--a humiliating but well-deserved intrusion on mismanaged home rule.

Civic leaders have responded to the crisis with their customary combativeness. "This is a street fight," Brooklyn Borough President Sebastian Leone told Mayor Abraham Beame at a budget strategy session. "You've got to put your opponents up against the wall." "You're right," responded the embattled mayor, pounding the table. Faced with a looming budget deficit of as much as $1 billion, as well as the immediate cash-flow pinch, Beame offered an $11.9 billion "crisis" budget for fiscal 1976 that would be balanced by laying off about 50,000 city employees, including police and firemen at a time when crime and arson are ominously rising. With inflammatory rhetoric that hardly squares with his image as a mild-mannered bookkeeper intent on keeping the peace in New York, Beame lashed out in his budget message at his chosen scapegoat: the city bankers, no longer willing to fund the city's debt, whom he accused of "poisoning our wells," of starting a "whispering campaign to denigrate our fiscal integrity."

The mayor's scare tactics were reinforced by the obdurate line taken by the city's powerful, militant public-service unions. Rejecting such job-saving solutions as a wage freeze or a shorter work week as unacceptable rollbacks of their hard-won contract gains, union leaders conjured up visions of an urban wasteland if large numbers of workers were laid off. "How many women are going to be raped?" asked Douglas Weaving, first vice president of the Patrolmen's Benevolent Association. "How many citizens are going to be held up?" Warned John DeLury, president of the Uniformed Sanitation Men's Association: "There will be 12,395,104 filled garbage cans in the streets--assuming that our unemployed youth will leave them there."

Said Albert Shanker, president of the United Federation of Teachers: "Our school system will be a kind of custodial institution with a few adults keeping a bunch of kids locked up and not preparing them for anything." Last week some 8,000 city workers gathered at a rally in front of the First National City Bank on Wall Street and cheered the announcement that police pension funds would be withdrawn from the "enemy" bank. A group of hospital workers shouted their encouragement: "Take it all! Don't leave 'em a penny!"

The question is: How did the city come to such a pass? An anatomy of how, over the years, the nation's Big Apple became so cankered:

PROLIFERATING SERVICES. The city got into its fix by overdoing what it does best: being generous. New York has always taken pride in its treatment of the poor and oppressed; it has welcomed wave after wave of immigrants, clothed, housed and schooled them for a better life--if not for themselves, then for their children. No other city in the U.S. has provided such a range of free services and diversions: schools and libraries, parks and playgrounds, museums, zoos and a host of programs aimed at improving mind, body and spirit. New York spends more per capita on services than any other city (see chart page 18). A staggering proportion are on welfare in New York: 1 out of every 8 citizens. They receive the highest benefits in the nation. A family of four is given $258 a month, along with $130 for rent--benefits that come on top of federally funded food stamps and medical care.

A service explosion occurred in the 1960s when the Great Society offered local governments a profusion of programs whose cost would be shared by Washington. Mayor John Lindsay, a lavish spender who presided over city hall from 1966 to 1974, took all that he could get for the city. Somewhat oblivious to the needs of most ethnic groups, he was sensitive to the possibility of blacks rioting in New York, as they had in other cities. Even before a federal Office of Economic Opportunity arm was set up in New York, he put $20 million in city funds into the antipoverty program. Day-care centers proliferated. So did drug treatment programs, bilingual teaching, job training and youth services. Once these programs were started and attracted constituencies, there was no stopping them--not even when federal money for some of them tapered off under the Nixon Administration. Rather than cut back the programs, the city assumed the costs that had been borne by the Federal Government.

The city helps support a highly ambitious and costly university system. With 266,000 students, City University of New York is now larger than 43 state universities. Yet most students receive a free education as compared with the several hundred dollars in tuition charged by almost all state universities. In 1970 the Lindsay Administration began a program of open enrollment, which permits any city high school graduate, whatever his grades, to enter the university. Of the 19,000 students who have been added, some 15% receive an average $30-a-week stipend as well as a free education. The cost of remedial studies for unprepared students has boosted the higher-education budget by $30 million, to $585.2 million.

SOARING SALARIES AND BENEFITS. The city has been equally generous with the public employees who provide these services. Although the population of New York has declined slightly over the past ten years, to 7.8 million, the city work force had grown by 37% to 338,000. The figures are approximate, since a symptom of the city's difficulties is that its various bureaucracies cannot agree on whom to count on the payroll. The work force, moreover, has increased unevenly. The line agencies--police, firemen, sanitation men--declined slightly in the past decade. The agencies involved in helping the poor were enlarged by about a third.

As the number of civil servants has shot up, so have their pay and their benefits, which now equal nearly a third of their salaries. It is increasingly hard to say no to their demands, since by striking they can cripple the city--as the sanitation men proved when they walked out in 1968, leaving mountains of refuse on the streets. No matter that striking is illegal: the law is basically unenforceable. First given the right to bargain collectively in the 1950s during the friendly administration of Mayor Robert Wagner, the unions made their biggest gains under Lindsay. On entering office in 1966, he was confronted with a strike of transit workers that brought public transportation to a virtual standstill for twelve days. He mishandled the event with a combination of political naivete and personal arrogance; the mayor--and the city--never really recovered.

From then on, the unions got more or less what they wanted from Lindsay, even though they never learned to like him. By the time he left office in 1974, the unions had won wages and benefits that largely outstripped any others in public employment in the country. After three years on the job, a New York City cop is scheduled to earn $17,458 a year and a sanitation man $15,731. A full professor in the city university makes from $24,000 to $38,000 a year; a teacher in the secondary-school system receives an annual salary ranging from $9,700 to $20,350. Teachers earn more pay, in fact, for less work. Fifteen years ago, a junior high school teacher had a work load of 30 45-min. periods a week, and was required to do a variety of other chores. Today the same teacher is responsible for 25 periods a week and cannot be asked to perform any extra functions. As they rise in the ranks, many teachers give up the classroom for administrative positions. More than a third of the 107,450 people who work for the Board of Education are classified as "nonpedagogical."

Final Raise. The most egregious and, many argue, outrageous employee expense is pensions. The city is currently paying $1 billion a year to retirement funds. By 1985, pensions will cost New York $3 billion a year. Since policemen can retire at half their final pay after 20 years, more and more of them are understandably choosing to leave when they qualify. A cop can wait for his final raise, then put in his retirement papers the next day. It is estimated that if a policeman who retired lives for 30 more years, he will collect more money from the city than he earned on the force. While receiving his handsome pension, he is free to take another job. All in all, a promising prospect for a man in his late 30s or early 40s.

The hidden costs of these extravagant pensions have not begun to be computed. The agencies lose some of their most skilled and experienced personnel just when they have the most to contribute to the city. After winning a whopping pension increase in 1970, thousands of transit workers retired to take jobs with private industry. Within a year, the Transit Authority lost 70% of its car-maintenance supervisors. Those who remained on the job had to work overtime at premium pay. "By 1970," says a T.A. officer, "the subway had nearly fallen apart. Equipment deteriorated and on-time performance fell below 80%. It has taken us the last five years to recover from that settlement, and no one can tell what it has really cost."

NARROWING TAX BASE. As costs have mounted, the tax base that supports all these services has steadily eroded. In a pattern typical of other U.S. cities, the poor have moved in while the affluent have moved out. Since 1950 there has been a great migration of blacks from the South and Hispanics from Puerto Rico and other Caribbean islands. In two decades the white, non-Hispanic percentage of the city population has declined from 87% to just below 65%, the black has climbed from 10% to 21%, and the Puerto Rican from 3% to a shade over 10%.

A cycle of deterioration is under way. As the poor arrive, the demand for services increases. This entails higher taxes, which impels more taxpayers to leave the city. Taxes must then be raised once again for those who remain. Taxes are higher per capita in New York City than anywhere else in the U.S. Besides paying an 8% sales tax and a hefty state income tax, a family of four earning $15,000 a year must cough up $179 in city income taxes.

Encouraging the exodus from New York is the decay of schools and neighborhoods, the rise in crime and "antisocial behavior." Among the first to flee are major businesses, which depend on a secure environment to attract talent and customers. In 1966, 198 of the top 1,000 industrial companies were headquartered in Manhattan. Today only 120 remain. Between 1969 and this March, the city lost 419,000 jobs in the private sector. Unlike other cities, New York never recovered from the 1970 recession. It has been downhill ever since.

FISCAL GIMMICKRY. Approaching the limits of taxation, unwilling to cut expenditures, the city has in recent years resorted to a variety of fiscal gimmicks to balance the budget, as required by the state constitution. A favorite ploy is to put current expense items involving salaries and supplies into the capital budget, which is supposed to cover construction projects. Ten years ago, $200 million was all that had been diverted from one account to the other. In the current budget, the figure has swelled to $800 million. Another tactic is to raid the "Rainy Day fund," which is supposed to be maintained for an emergency. Instead of contributing to the fund as required by law, New York has obtained waivers from the city council permitting it to skip payments for the past seven years. As a result, the fund is almost drained. Still another stratagem is to push certain expenses into next year's budget and pull next year's revenues into the current budget--all by a stroke of a dexterous pen. To help balance the 1974 budget, for example, the city moved up water billings by six months. In the following year, of course, it had to borrow to make up the deficit.

Some Remedies. Despite all this ledgerdemain, the budget becomes more unbalanced each year as the debt is papered over but never paid off. Interest costs inexorably mount as the credit-risky city has to pay more for the money it needs. Today debt service amounts to a staggering $1.9 billion a year, or 17% of the budget. With less than 4% of the U.S. population, New York has been selling 18% of all municipal bonds on the U.S. market and 39% of all short-term tax-exempt notes. Says Jackson Phillips, senior vice president of Moody's Investors Service, Inc.: "A lot of cities are just not coming to market. They're postponing things. But New York keeps coming."

Even if the city manages to escape from the present short-term dollar crunch, in the long run New York City is obviously going to have to start cutting back. The question is how--and where. First of all, there has to be some kind of rollback of pensions. It is doubtless too late to do anything about pension contracts for people already retired or serving in the city government. But it is essential that pensions be renegotiated for new workers coming into the employ of the city. Rather than brutally lopping jobs, it would be more equitable to put a freeze on the 5%-6% wage hike scheduled this year for all city employees. Such a move would save an estimated $400 million, or the equivalent of almost 25,000 jobs. Reducing the work week from five days to 4 1/2 would save $700 million even if the pay increase takes place. A shorter week, of course, would mean some reduction in services.

Other possibilities for savings, none without human costs and services lost:

o Impose a $400-a-year tuition on students attending the city university and ask faculty members to add an extra hour to the average 8.5 hours they teach a week.

o Increase the average class size in the secondary-school system from 25 to 32. This can be done fairly painlessly since only about 70% of the enrolled students show up on the average day.

o Make a strenuous effort to weed out the ineligible people receiving welfare; city auditors estimate that they account for 13% of the total.

o Close enough of the city's 19 municipal hospitals to reduce the current 23% vacancy rate to 13%. No other city runs so many hospitals; Chicago, for example, operates one.

o Contract out the collection of refuse to private companies. It is estimated that it costs the city $45 a ton to pick up garbage, while private collectors perform the same job for $22 a ton in San Francisco, $19 a ton in Boston, $18 a ton in Minneapolis.

o Replace retiring park laborers, who earn from $14,000 to $17,000 a year, with unemployed youths who will work at the minimum wage of $2.10 an hour.

o Shut down city activities that duplicate or closely parallel other agencies. Among the candidates for elimination: the Municipal Broadcasting System, the Mayor's Office for Veteran Action, the Commission on Human Rights, the Office of Collective Bargaining.

At the end of the week, New York's immediate financial fate was still in doubt. State and city officials were bitterly wrangling over the powers to be given to the proposed Municipal Assistance Corporation (dubbed "Big Mac"), which would attempt to convert the city's short-term debt into long-term bonds. The banking community insisted that Big Mac should exercise tight control over the city's short-term borrowing and receive all city sales tax revenue so as to make sure that the bonds it issued would be repaid. City officials balked at such a surrender of their fiscal authority. The question is whether Big Mac will be established in time to prevent the city from defaulting on $792 million in notes that fall due this week. True to the politics of bluff and brinkmanship that characterize New York, the solution was not likely to come until five minutes before midnight on D-day--or even five minutes after.

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