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March 23, 2007

In our remarkable nation, state and city, fiscal responsibility can only be expressed in relative terms.  The Federal government for years has been the least responsible level of government, breeding a national debt that as of today has been computed by the National Debt Clock as approaching nine trillion dollars ($8,834,493,471,371.31).  The debt is rising at $1.87 billion a day.

Such a large sum is almost unbelievable, at least to us.  The United States is a debtor, not a creditor nation, and its balance of payments deficit is increasing.  The principal reason the world financial system is unlikely to collapse is that China, among other countries, has bought so much of our paper, thus lending us a mountain of money. If they and other nations pulled the plug and denied us additional credit, much less repayment of our current debt, that would cause an international fiscal crisis of unprecedented magnitude.
 
 As a practical matter, many nations become part of the conspiracy to protect debtors and creditors when they consent or acquiesce to excessive borrowing by other nations. To protect their loans, they must get in further and deeper.  This happened with regard to American banks which had loaned billions of dollars to Latin America in the 1970's and 80’s.

Although the State of New York is sounder financially than the Federal government, in part because it lacks the authority to print money and to borrow endlessly, it is still close to being a financial basket case, compared to similar jurisdiction.  New York State has circumvented Constitutional limitations on state borrowing by setting up over 700 public authorities many of which are authorized to sell bonds to the public. Only California has a higher public debt than New York Stat, and the Golden State has almost twice as many residents as the Empire State..

The City of New York, now fettered by state and federal legislation and accounting rules,
is better off, but only be comparison with the other two levels of government.  The city went through a near-death fiscal scare in which bankruptcy papers had been prepared by counsel Ira Millstein, signed by Mayor Beame, and were to be submitted to a Federal court in the morning of October 17, 1975.  A mayoral statement had been typed, but not yet issued: “I have been advised by the Comptroller (Jay Goldin) that the City of New York has insufficient cash on hand to meet debt obligations due today.  This constitutes default that we have struggled to avoid.”  The Times reported that the statement was ready to be released on October 17 if the teachers’ union (UFT) did not invest $150 million from its pension funds in city securities.  It was that close.
  
In the early 70’s, the banks' refusal to extend further credit was the immediate cause of  New York City's fiscal crisis, yet the banks were not being irresponsible..  They had been buying short-term debt instruments called  BANs, RANs and TANs.  The initials stood for bond, revenue and tax anticipation notes. The city had been living beyond its means since the last two years of the Wagner administration and all eight years of the Lindsay administration, with the consent of Governor Rockefeller. Its short term debt exceeded six billion dollars.

The roof fell in during the Beame administration, ironically when the man who knows the buck was mayor.  A certified public accountant, Beame had entered city service on January 1, 1946, as assistant director of the budget, at a salary of $9,100.  He was a product of the Brooklyn Democratic organization,  He was elected Comptroller in 1961 on the Wagner ticket, turned against Wagner by opposing and defeating Paul Screvane in the Democratic mayoral primary, then losing to Lindsay in 1965 (William F. Buckley, Jr. was a strong third; five years later his brother James would be elected United States Senator from New York on the Conservative Party line).  Beame, taking one step backward, ran and was elected to a second term as Comptroller in 1969.  Four years later, he was elected Mayor in 1973, just before the house of cards began to teeter.

The city’s inability to control its own spending had left it increasingly unable to pay its operating expenses out of revenues, so it resorted increasingly to short-term borrowing, not only for capital projects, which was traditional, but for the routine expenses, primarily labor costs, of providing city services.  That was legal at the time; it has since been prohibited.  Economically insupportable, excessive borrowing was the road to ruin. The workforce had to shrink drastically, and it did with the layoffs of over 50,000 employees in June 1975.  After that, the headcount resumed its upward crawl.
 
The last several years have been enormously prosperous for the city, reflecting the boom on Wall Street and in real estate. Income and property taxes have brought in more money than anticipated. Mayor Bloomberg has been conservative in handling the surplus, setting aside two billion dollars for health benefits to be paid, and buttressing some reserve funds. At the twelfth hour the state city the unions and the banks reached an agreement on a rescue package. State laws were passed to create an Emergency Financial Control Board (EFCB) with power to approve or reject city budgets.   A  Municipal Assistance Corporation (MAC) was set up to borrow money because the city had no credit. Originally MAC paid 9.75% on fifteen-year bonds backed by specific city taxes revenues.  The bonds were later redeemed before their term expired.. 
 
The Independent Budget Office, which is a highly-respected corner of city government, notes the city's surplus but predicts a decline in growth in future years as the business cycle turns downward.  They are rightly concerned about revenue gaps in the out years.  By way of definition, the out years are those years which follow the next fiscal year, FT 2007-2008, which starts for the city on July 1, 2007, for the state on April 1, for the federal government on October 1, and of course on the calendar at January 1.  The academic year and the Jewish new year begin in September, and the Lunar New Year(Tet) comes at the end of January or early February. 
 
This month the Mayor asked his agencies to make plans for a 1.5% reduction this year and 4% next year.   Although these cuts are not likely to be implemented across the board, it is a good idea to have commissioners and their key staffs prioritize their operations and decide what, if necessary, can most easily be cut.  Historically, agency reductions never occur without outside pressure of some sort.
 
My most vivid recollection of the budget trimming process came from a morning meeting in the Blue Room, in the second year of the Giuliani administration.   First Deputy Mayor Peter Powers presided, explaining that there were some budget cuts that had to be made in all agencies.  He said he understood that some commissioners might feel that these cuts would impair the functioning of their agencies, result in substantial lessening of services to the public, or make it difficult to carry out their programs effectively.  His tone was sympathetic and understanding of the plight commissioners faced.  He said “you may believe in good conscience that you cannot carry out these reductions. If you feel that way, I completely understand.  Let's part friends."
 
The room was silent.  We all looked around.  No one rose to head for the door.  The deputy mayor's last three words so impressed me that they became Rule 15. Peter Powers' rule.  Later he contributed two other rules, which will be sent to you if you ask for them by e-mail..
 
We have learned that the city budget can be trimmed moderately without substantial loss of services.  It requires effort and intelligence to find the right places to cut.  It is human nature to protect those who are nearest and dearest to you, and to make sacrifices as far away as possible. In my experience, the Office of Management and Budget generally knows less about the details of  management than good commissioners do, so I would not readily substitute their staff’s judgment for that of operations people who know their agencies from the inside.  That appears to be the mayor’s view as well.  A persistent difficulty is that, in the further reaches of city government, few people know exactly what is going on, much less how to do it better and cheaper.  That would require a level of attention to detail which has not yet been attained.
Hopefully, the new alignment of Deputy Mayors will increase oversight without intolerable
 Interference with agency authority.

Alexander Pope summed up the issue concisely in Moral Essays (1731-35), where he wrote:
“For forms of government, let fools contest;
Whate’er is best administered, is best.”



 
#361  3.23.07   1462wds