The Anguished City Gears for D-Day

Work will stop on $1 billion in city construction projects, endangering even the renovation of fabled Yankee Stadium. Holders of maturing city securities will be turned away emptyhanded. Some of the city's 18 public hospitals will be closed. Subsidies to the Metropolitan Museum, to plays in Central Park and other cultural activities will be cut off. Vendors of "nonessential" city supplies ranging from playground baseball bats to power turbines will not be paid on time. Thousands more--perhaps tens of thousands--city employees will be fired.

These dire events became more and more likely when President Ford vowed emphatically last week "to veto any bill that has as its purpose a federal bailout of New York City to prevent a default." That left city officials with virtually no hope of gaining a federal guarantee of securities that would enable New York to raise some $4 billion by June 30, the end of the fiscal year. Default is almost assured, either in mid-November if the city cannot raise $150 million to help meet payrolls and payoffs of securities due then, or during the week of Dec. 8, when the city must redeem $437.8 million in short-term notes.

In some secrecy, the city is preparing for what anguished officials call Dday. Since early October, a twelve-member team of bankers, businessmen and city officials has been plotting how New York could operate after a default. TIME'sNew York Bureau Chief Laurence Barrett reports that the committee set six priorities for expenditures. They are, in descending order: 1) police and fire protection and garbage collection, 2) food and shelter for welfare recipients, 3) hospital and emergency medical care for the poor, 4) payment to suppliers of essential goods and services, 5) public schools, and 6) interest on city debt. In short, cops, firemen, garbage collectors and welfare recipients will get paid first, though perhaps less than usual; teachers and bondholders will be the last on the list to be paid.

According to Presidential Assistant L. William Seidman, Ford decided to speak out because "the possibility of default was becoming a greater threat, and no one wanted to talk about what would follow." In his tough speech Ford blamed New York's plight on "bad financial management" over the past decade, during which the city's expense budget tripled to more than $12 billion. He warned that a loan guarantee would set "a terrible precedent." Moreover, he said that the primary beneficiaries of a bailout would be "officials who would thus escape responsibility for their past follies [and] the large investors and financial institutions who purchased these securities anticipating a high rate of tax-free return."

Ford's Plan. Instead of federal aid to prevent default, Ford urged Congress to make it easier for the city to go bankrupt. Default would mean that the city could not promptly pay its many loans, bonds, bills and other debts; bankruptcy would mean that a federal court would hold off the city's creditors to give it time to cook up a reasonable schedule for paying them. The President proposed exempting New York from a provision in the federal law that now requires it to win the consent of 51% of its creditors --estimated by bond dealers at 160,000 individuals and institutions--before going bankrupt. Under Ford's plan, after defaulting on loans, city officials would petition the U.S. District Court for the Southern District of New York for a stay of suits by creditors to keep what Ford called the city's "essential" functions from being disrupted.

Then, under supervision of one of the court's 30 judges, the city would work out a plan for either partial payment or stretching out of its debt. The city would also have to give the court a program for raising taxes or cutting spending to balance its expense budget, which is more than $600 million in the red this year. When necessary, the court could authorize the issuing of "debt certificates" covering new loans to the city; buyers would be paid off before the holders of the notes and bonds on which the city had defaulted, including Municipal Assistance Corp. (Big Mac) paper, which had been touted as so "secure" and now is down anywhere from 91/2 to 29 points in price. When somebody questioned Mayor Abraham Beanie about the debt certificates, he asked, "Did you say death certificates?"

Ford was deliberately vague on many details. He did not explain why investors would find the debt certificates any more attractive than the city's existing paper, which has been unsalable on the regular bond market for months. Indeed, 27 states prohibit banks, insurance companies and certain other institutions from buying a defaulted municipality's notes and bonds for periods ranging from three to 20 years. The President promised that the Government would cooperate with the court "to assure that police, fire and other essential services for the protection of life and property in New York are maintained." He did not spell out what form that help would take. According to Seidman, Ford believes that keeping these services going will not require a federal guarantee of any court-approved debt or direct federal grants. But many congressional critics argue that a New York bankruptcy may wind up costing the Government millions of dollars to maintain essential services, thus providing the "blank check" that Ford said he opposes.

Ford also hoped to exploit his anti-New York stand as a favorable political issue--an issue he sorely needs because Ronald Reagan is challenging him on the right and his own election campaign is mired in ineptitude and internal bickering.* By attacking both Democratic big spenders in the bad old city and big bankers of the elitist East, he figured to woo voters in other areas. At the same time, he used New York as a symbol for a countrywide need to make fewer demands of the Government and balance budgets in order to avoid a day of reckoning in Washington like that in New York. He asked, "Who will bail out the United States of America?" Said Assistant Senate Minority Leader Robert Griffin of Michigan: "This will do more for [Ford] than his proposed tax cut and federal spending limitation." Added one high Democrat: "The President hasn't hit the jackpot so well since the May ague z incident."

Forcing Cuts. Outside New York, most voters adamantly opposed helping the city. Pollster Albert Sindlinger found sentiment running more than 4 to 1 against a federal bailout. On a two-day political trip after his speech, Ford drew laughter, cheers and standing ovations when he derided New York before Republican audiences in Milwaukee and San Francisco.

Even his harshest critics could scarcely deny the accuracy of Ford's attack on New York's mismanagement, featherbedding, political chicanery and long unwillingness to face facts. A bond guarantee coupled with stringent requirements that the city balance its budget might have been a safer and less expensive course of federal action. The Administration made a strong case, however, that default was the only way to force the city's politicians to order the unpopular cuts that are needed.

But Ford was denounced by liberals who especially resented his tone, somewhere between John Calvin and Marie Antoinette. He also wrongly implied that all of New York's more than $12.2 billion in bonds and notes was held by banks or other fat cats. Estimates vary, but perhaps as many as half of those securities are owned by tens of thousands of Americans from Long Island to Hawaii, including what Chairman Walter Wriston of First National City Bank calls "little old ladies in Sun City," which is normally Ford country.

The President left unspoken the fact that much of the crisis was caused by factors outside the city's control. For example, New York's welfare budget grew enormously (to $2.4 billion this year) in part because of migration to the city by Puerto Ricans and poor Southern blacks. The size of these welfare payments, larger than elsewhere in the country, is set by the state and federal governments, not by the city. The recession, which was induced by the Government's anti-inflation policies, cut the city's tax revenues and vastly increased its bill for welfare and other services. Nor did Ford mention the budget cuts already made by the city; firings and attrition since January have reduced New York's full-time work force to 263,311, a drop of 32,211.

Bankers had mixed reactions.

California's Bank of America, criticizing Ford, called default "an unacceptable alternative" that would weaken the economy's recovery and further inflate the federal deficit by forcing the Government to make emergency loans and increase welfare payments. But Wriston called Ford's program "highly responsible" and predicted that "the effects of default are containable" and would have "minimal" impact on major New York banks, which hold a total of $2 billion in city and Big Mac debt. According to an estimate by Wall Street analysts, Chairman David Rockefeller's Chase Manhattan is worst off, holding $400 million in city and Big Mac paper because of its commitment to helping New York. Wriston's Citibank reportedly has $340 million worth, the Chemical Bank $280 million, Manufacturers Hanover Trust $240 million, Morgan Guaranty Trust $210 million, and Bankers Trust Co. $160 million.

These banks are big enough to surmount the shock of default, but some banks outside the city--most of them small--could be in bad trouble. A federal survey found that 53 of the nation's 4,700 national banks hold New York City bonds equal to 40% or more of their capital. Nine of them would probably become insolvent and have to merge with other banks, and 44 could get by with long-term loans from the Federal Deposit Insurance Corp. or the Federal Reserve System. Other Government studies found that 62 of the 9,964 state-chartered banks surveyed hold New York City obligations equal to 50% or more of their capital and would be kept afloat in the same manner as the national banks.

Because of the state's support of the city and the fact that investors have lost confidence in all securities bearing the

New York name, the market for securities issued by New York State and its quasi-independent agencies has collapsed. If the city defaults, the state is expected to follow suit in March or April, when it must raise $4 billion in short-term borrowing to supply municipalities and counties with aid for schools, welfare and other services. The city's troubles have also made it difficult to impossible for other hard-pressed states and municipalities to sell their notes and bonds. Such is already the case for New Jersey, Massachusetts and Connecticut, and some cities, among them Yonkers, N. Y., and Buffalo.

Gallows Humor. Though Ford's promised veto probably means that Congress will not pass legislation to avoid default, some liberals insisted on trying anyway. The Senate Banking Committee voted 8 to 5 in favor of a bill that would guarantee $4 billion in loans to New York and put the city, until it balances its budget, under the control of a three-member federal board headed by conservative Treasury Secretary William Simon. More to the point, the House and Senate are expected to act quickly to amend federal bankruptcy laws along the lines suggested by Ford.

Desperately, New York officials considered last-ditch, long-shot proposals to escape default. They debated radical reductions in spending even to the point of cutting all salaries by as much as 25%. They weighed asking the city's 14,000 suppliers to accept 800 on the dollar for unpaid bills. Among them: $7.5 million for electricity in October and $604,000 for meat served at the city's prisons, hospitals and other institutions. The officials even opened negotiations with trustees of the five city employee pension funds to use their $8.5 billion in assets as collateral for $4 billion in loans to the city. The plan was tentatively and reluctantly approved by some union leaders, among them Albert Shanker, the teachers' boss.

But news of the talks outraged many members of Congress because city and state officials had testified that without federal help, default was inevitable. Fumed Republican Senator Bob Packwood of Oregon: "Those guys sat here and lied to us. I don't think we should bail those liars out." Governor Hugh Carey told congressional leaders that the plan had virtually no hope of succeeding because of legal snarls; indeed, Big Mac Chairman Felix Rohatyn called it a "20-to-l shot." Even so, the dustup further damaged New York's already bankrupt credibility.

Combative to the last, Carey tried to mobilize New Yorkers to continue fighting Ford. He urged city residents to rally soon, perhaps in Times Square or Central Park, in an "Operation Alive and Kicking." Said he: "We're going to be seen and heard. That's the way New York normally responds when it gets kicked in the groin." But the time for shouting and demonstrating was long past. Rohatyn summed up the situation more accurately with gallows humor: "I feel like somebody who tries to check into a hospital and keeps getting referred to the cemetery." Facing tougher times ahead, New York has only one hope: that its long overdue cutbacks will create a base for its eventual recovery.

* Last week the financial chairman, David Packard, resigned, perhaps partly because of criticism of his failure to organize a direct-mail fund-raising drive. He was the second high official to quit the Ford campaign in recent weeks.

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