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.