Last Chance for the Big Apple

"Do we want people 50 or 100 years from now to look back and say that we here, today, sat back and allowed this city to die?" That question was posed last week by Investment Banker Felix Rohatyn as he and other defenders of New York's fiscal integrity fought their most desperate battle so far to keep the city from defaulting. Such a default could have potentially grave consequences for many other city governments. Against the odds, Rohatyn & Co. appeared to be prevailing -temporarily. A plan patched together by Governor Hugh Carey and the Municipal Assistance Corporation (Big Mac) to raise some $2 billion over the next three months seemed to gain grudging acceptance among New York legislators, who will vote on the proposal this week.

Even if the legislators approve and all the pieces of the complex package hold together, the nation's biggest and most debt-ridden city will get merely another brief breather. The $2 billion will tide it over until December. Between then and the end of the fiscal year, next June, New York must beg or borrow yet another $3 billion or so. It can accomplish this only if it can market bonds to the nation's investors, who have lately viewed New York's paper as a pox. To regain their confidence and start putting its finances in order, the city has had to surrender a sizable chunk of home rule to the state.

Lesser Evil. Under Carey's proposal, an Emergency Financial Control Board will be set up to supervise the city finances and try to make outgo match income. The board will consist of Carey, Mayor Abraham Beame, the state and city controllers, and a fifth member appointed by the Governor. Obviously, Carey will take command. The board will stay in existence until the city's accumulated deficit is wiped out, a date that nobody can predict.

Carey's legislation also includes a contingency plan in case everything fails and the city defaults. Basically, the city would be given 90 days after a default to arrange a schedule for deferred payment of all its debts. If the schedule is accepted by the state supreme court and followed in good faith, creditors' suits would be rejected. Carey's proposal to raise $2 billion or so seemed to be the lesser evil. Said Rohatyn, who played a key role in selling the package to Albany's legislators: "I told them I was bringing them essentially a rotten choice. They were being asked to choose between a default -a known, unquestionable, terrible catastrophe right now -and a complicated long shot carrying its own high level of risk. The state's credit is involved either way."

According to the plan, the state will try to borrow $750 million and invest it in Big Mac bonds. State and city pension funds will buy another $750 million of the bonds, the State Insurance Fund will take $100 million and the city sinking funds $180 million. In addition, New York banks have agreed to provide $406 million by rolling over short-term city notes that they hold and buying or underwriting Big Mac bonds. Finally, big property owners have pledged to prepay $150 million in real estate taxes.

Upstate Republicans were wary of laying out so much state money, but they were not overtly hostile. Senate Majority Leader Warren Anderson was impressed by the consensus behind the plan. "Beame is completely on board," he said. "He should have been there three months ago. It would have saved us a lot of time and trouble."

Until late in the week, Abe Beame was struggling to prevent the loss of the power that he had exercised so inadequately during the months of mounting crisis. In the bunker atmosphere of city hall, one die-hard loyalist muttered that Carey and his aides were out to "destroy" the mayor. But the Board of Estimate, the city's principal governing body, decided reluctantly to support the Carey plan as the only alternative to default. In the end, after winning some token concessions from Carey, Beame gave in.

The mayor's belated conversion did not end all opposition to the plan, especially from liberal Democrats. Said Seymour Posner, a state assemblyman from The Bronx: "I got a call at 3:30 today telling me what the party line is. By 4 o'clock, I was already being threatened." Democratic liberals in the assembly, particularly blacks and Puerto Ricans, harbored populist fears that the bankers, who advise Carey and demand austerities, were about to take over the city. "They have no feeling for the poor," said Buffalo Assemblyman Arthur Eve. City Councilman Theodore Weiss echoed a familiar hyperbole: "This may be the last day for democracy in New York."

Voluntary Bankruptcy. At the other extreme, some experts argued that a default was not only inevitable but might be therapeutic. In a lead editorial, The Wall Street Journal urged the city to declare voluntary bankruptcy. That, said the Journal, would enable New York to make orderly payments to creditors and rewrite its laws and contracts to reduce its chokingly generous payments for municipal wages, pensions, welfare and other services.

In Washington, President Ford met for 45 minutes with Carey and again turned down pleas for any form of federal bailout. Said Treasury Secretary William Simon: We "will do nothing to help the city avoid default or lead it out of bankruptcy." Chairman Arthur Burns reiterated that the Federal Reserve Board would not guarantee the city's bonds and notes to make them marketable. The Fed argues that even if New York City defaults on all its paper, no large bank will fail.

But many influential Congressmen from outside New York were beginning to worry about the impact a default would have on their home districts. A number of them -Senate Majority Leader Mike Mansfield, House Speaker Carl Albert, House Banking Committee Chairman Henry Reuss -began calling for some additional long-term federal help for all cities. A main reason was that New York's agony has made it costlier and tougher for many other cities to raise money from investors.

Jumping Turnstiles. For New York, says Rohatyn, default would probably mean "a business exodus and, more generally, a draining away of vitality." Businessmen who own New York bonds and use them as collateral for loans would have a hard time renewing their loans. Bankers who have underwritten the city's bonds and notes might be hit by lawsuits from investors, claiming that the underwriters should have known and disclosed the true financial condition of New York. Worried about the city's future, more and more corporations might abandon the nation's biggest headquarters town.

Despite these prospects, some New Yorkers are not prepared for even initial austerities. The teachers' union was threatening a strike last week over city attempts to increase their duties and class size and eliminate some jobs (see EDUCATION). Congressman Herman Badillo and Congresswoman Bella Abzug urged New Yorkers to refuse to pay the new transit fare, raised last week from 35-c- to 50-c-. In parts of the city, protesters jumped subway turnstiles. At least in one case, they provoked a bloody confrontation with police.

Yet if New York is ever to be made whole, there will have to be many more cuts in subsidies, services, payrolls and pensions. To avoid default, the city needs to reduce spending for its huge and underused hospital system, its university, its welfare services and its bloated and underworked bureaucracy.

The question of default now rests heavily on the performance of the Emergency Financial Control Board, the surrogate mayor of New York City. Assuming that the $2 billion financial package holds up, the board will have three months in which to devise a program that can start to put the city on a sound financial basis. If the board succeeds, Rohatyn is hopeful the Federal Government at last may lend some land of support to Big Mac bonds -a guarantee if the paper is subject to federal taxation. New York, in effect, has a new government with a more decisive politician, Hugh Carey, at its head. It is probably the city's last chance for a financial turnabout.

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