--:-- Keith Romer: Welcome to Planet Money. I'm Keith Romer.
--:-- Nick Fountain: And I'm Nick Fountain.
--:-- Keith Romer: Every Tuesday morning, this very easy to overlook, but incredibly important thing happens on the street where I live in Brooklyn. Three employees of the city of New York roll up in a giant truck and take away all the garbage for the people in my apartment building.
--:-- Nick Fountain: Those guys in their stained Diglo green t-shirts, they are just one part of this vast army of workers who make a city like New York even possible to live in.
--:-- Keith Romer: An hour or so after these sanitation guys roll through, my daughter packs up her bag. Am I going to need a raincoat today? I don't know the weather. And heads out to her public middle school. Bye, sweetie. Bye.
--:-- Nick Fountain: Where she will be educated by yet more city employees.
--:-- Keith Romer: Those sirens you are hearing, those are because just down the street from where my daughter catches her bus each morning, there is a fire station manned by, you guessed it, city employees.
--:-- Nick Fountain: Altogether, more than 300,000 people work for the city of New York. 300,000 people who make it possible for the city to function.
--:-- Keith Romer: And this marvel of social coordination, like so many things in our world, is made possible by money.
--:-- Nick Fountain: Yeah, my family pays city income tax and property tax and sales tax. And because my wife is self-employed, something called the Metropolitan Commuter Transportation Mobility Tax.
--:-- Keith Romer: And all of those taxes pay for the sanitation workers and the teachers and the firefighters.
--:-- Nick Fountain: Those city employees mostly get paid every two weeks. But the taxes and the big chunks of money that come from the state of New York or the federal government, those come on a completely different timeline.
--:-- Keith Romer: Income taxes are due in April. A lot of property taxes are due in July and January.
--:-- Nick Fountain: Lots of cities like Chicago, L.A., Houston, Philadelphia, San Francisco, they deal with this with a little financial magic trick.
--:-- Keith Romer: They move money from the future, when the taxes come in, to the present, when they need to pay their workers.
--:-- Nick Fountain: The cities pull off this trick by selling short-term debt, little IOUs that only last for a few months.
--:-- Keith Romer: Now, New York has generally had enough cash on hand that it hasn't had to use this short-term debt trick for a while.
--:-- Nick Fountain: Partly this is because New York is just very, very careful about this stuff.
--:-- Keith Romer: Because 50 years ago, it was very, very not careful about it. And the city stopped functioning in some of the basic ways a city needs to function to survive.
--:-- Nick Fountain: Hello and welcome to Planet Money. I'm Keith Romer. And I'm Nick Fountain.
--:-- Keith Romer: Sometimes to understand how things work, it can help to look at a moment when they stopped working altogether.
--:-- Nick Fountain: So today's show is going to be about New York City 50 years ago in 1975, a year when the city ran out of money and couldn't find anybody willing to give it to them.
--:-- Keith Romer: What it takes when no one trusts you enough to loan you the several billion dollars you need to get by.
--:-- Nick Fountain: And just how hard it can be to re-earn that trust.
--:-- Keith Romer: Thank you.
--:-- Keith Romer: The 1970s were a tough time for the government of New York City.
--:-- Nick Fountain: White flight and the loss of manufacturing in the city had taken a big chunk out of the city's tax base.
--:-- Keith Romer: At the same time, there was a big surge in demand for the city's really quite generous social services.
--:-- Nick Fountain: Big influxes of lower-income folks had moved to New York.
--:-- Keith Romer: There was a nationwide recession.
--:-- Nick Fountain: Steve Clifford remembers the city back then as an exciting place to live, but also a pretty dysfunctional place to live.
--:-- Steve Clifford: Everybody thought New York City was going to hell. Nothing seemed to work. The subways were, you know, 120 degrees in the summer.
--:-- Keith Romer: There was crime. There was dirt. There was just dirt everywhere.
--:-- Steve Clifford: Back then, Steve had two jobs. He ran a business with a friend of his making fiberglass furniture for interior designers.
--:-- Keith Romer: And he had started working part-time as a consultant for the city controller.
--:-- Steve Clifford: For one of his first projects, he spent a lot of time digging through the city's books.
--:-- Keith Romer: Steve had worked on city finances before.
--:-- Steve Clifford: And he did have an MBA from Harvard.
--:-- Keith Romer: But otherwise, he says, he was not your typical city hall employee.
--:-- Steve Clifford: I was late to start as a hippie. But I, you know, I had long hair. And, you know, I wore jeans and tashiki and whatnot.
--:-- Keith Romer: Had a loft in Soho. I was taking lots of dope.
--:-- Steve Clifford: Money was tight for the city back then. So Steve says New York made extensive use of that financial magic trick we mentioned earlier, where it took the money it was going to get in the future and transported it to the present.
--:-- Keith Romer: Yeah, the city would sell IOUs for lots of things. For the real estate taxes it expected to receive, for the state and federal aid it was counting on later in the year.
--:-- Steve Clifford: And banks were plenty happy to buy up all of these IOUs. They paid a pretty good interest rate.
--:-- Keith Romer: Lots of individual investors, big insurance companies, other banks were happy to take those IOUs off the bank's hands.
--:-- Steve Clifford: And rating agencies said New York City debt was pretty safe.
--:-- Keith Romer: You could look at Park Avenue and you can say, these guys can't go broke.
--:-- Steve Clifford: I mean, you want to talk about, you know, real property? I mean, these things are worth billions. The city can't go broke.
--:-- Keith Romer: Now, Steve's small part in this whole drama had to do with what he found when he poked around in the city's books.
--:-- Steve Clifford: How would you describe the financial record keeping of New York City?
--:-- Keith Romer: Well, there was no record keeping.
--:-- Steve Clifford: I mean, there was a balance sheet. There was an income statement.
--:-- Keith Romer: And, you know, there were the computers whirring in the background.
--:-- Steve Clifford: And, you know, what was going on was the Wizard of Oz.
--:-- Keith Romer: See, Steve had gotten his hands on all this different information about all the different funds and accounts and sub-budgets that had anything to do with the city's finances.
--:-- Steve Clifford: And I started to, you know, just almost for the fun of it, started adding these things up.
--:-- Keith Romer: And what he discovered was a very, very big problem.
--:-- Steve Clifford: What had happened was for the, at least for 10 years, there was a totally uncoordinated charade of different people devising different gimmicks that produced accounting revenue but didn't produce cash.
--:-- Keith Romer: Steve says for about a decade, New York City made moves that appeared to balance the city's budget, but very much did not.
--:-- Steve Clifford: The city would, in various places, just delay an expense, like a payment for the pension funds.
--:-- Keith Romer: It supposed to be paid in June 30th but we pay it in July and then it go into the next year budget Give us more for this year
--:-- Steve Clifford: Or the city would pretend that its estimate at the beginning of the year for how much tax it would take in was the final number that went on its balance sheet regardless of how much money it actually took in
--:-- Keith Romer: And in a narrow sense, all of this was legal.
--:-- Steve Clifford: But these kinds of financial shenanigans didn't exactly accord with generally accepted accounting principles.
--:-- Keith Romer: And if you squint just right, you can maybe even feel a kind of sympathy for the politicians who are doing this stuff.
--:-- Steve Clifford: All of the things they were elected to do, to launch new government initiatives or provide the generous social services New York City was famous for back then, to help people, to make the world a better place, all of that takes money.
--:-- Keith Romer: Moving some things around on the balance sheet made it possible.
--:-- Steve Clifford: Also, it let them add jobs and raise wages and make nice with powerful unions whose votes they were going to need in that next election.
--:-- Keith Romer: Yes, also that.
--:-- Steve Clifford: But once you stop squinting, what you see is that all of this budgetary sleight of hand, it was funded by debt, by those IOUs the city kept selling year after year.
--:-- Keith Romer: Nobody understood the cumulant effect of all these things.
--:-- Steve Clifford: Absolutely no one.
--:-- Keith Romer: So Steve wrote up everything he found and took it to his boss, the city controller, Jay Golden.
--:-- Steve Clifford: I started explaining all these gimmicks to him and said, look, we got $3 billion in debt and no way to pay it because it's all been created by these gimmicks.
--:-- Keith Romer: Now, Jay didn't know what to make of me because I was still this hippie guy, you know, who wore jeans to work and sandals to work.
--:-- Steve Clifford: And so I go in and tell him, look, the city's bankrupt.
--:-- Keith Romer: I mean, you know, his reaction was, that can't be.
--:-- Steve Clifford: Steve did manage to pretty quickly convince his boss that, yes, the city was, in fact, in a rough spot.
--:-- Keith Romer: But even if the city completely swore off the budget shenanigans that had created that $3 billion deficit, it still owed billions of dollars more because of the shenanigans it had already done.
--:-- Steve Clifford: And in the meantime, for the city to avoid default and keep functioning, it had to keep borrowing.
--:-- Keith Romer: When it came time to pay off one of those IOUs, kind of their only move was to issue more IOUs.
--:-- Steve Clifford: The only thing they could do was roll it over, roll it over, roll it over.
--:-- Keith Romer: Towards the end of 1974 and into 1975, the trust that the banks had that New York City would make good on its debts and avoid default slowly started toe-road.
--:-- Steve Clifford: And the interest rates that the banks demanded on those IOUs drifted higher and higher.
--:-- Keith Romer: The banks started saying, wait a minute, what's behind this rolling over?
--:-- Steve Clifford: And they say, well, the faith and credit of New York City.
--:-- Keith Romer: And the banks say, well, that's great.
--:-- Steve Clifford: Now, how much money does the faith and credit have?
--:-- Keith Romer: And that's when it all went nuts.
--:-- Keith Romer: It all came to a head one day in February of 1975.
--:-- Steve Clifford: The moment was actually included in a film by the BBC.
--:-- Keith Romer: Good morning, ladies and gentlemen.
--:-- Steve Clifford: Today, the city of New York is working for competitive bidding sale, $260 million tax anticipation notes, of which $100 million will mature.
--:-- Keith Romer: That morning, the city tried to hold an auction of IOUs, where syndicates of banks would come in and put their bids into a little tin box.
--:-- Steve Clifford: But that day, there were precisely zero bids.
--:-- Keith Romer: The announcement on behalf of the controller is that the offer, which we had expected to receive an announce at 2 o'clock this afternoon, is now expected at 4 o'clock.
--:-- Steve Clifford: Well, does this mean that you have not been able to sell them so far today?
--:-- Keith Romer: We will have a further announcement at 4 o'clock.
--:-- Steve Clifford: Yeah, that day, nobody thought it was worth lending the city any more money.
--:-- Keith Romer: A couple weeks later, the city was able to sell some new short-term debt, but that was the end of the line.
--:-- Steve Clifford: And without being able to roll over its debts, New York City only had enough cash on hand to get through a month or two.
--:-- Keith Romer: So having the city run out of cash, I mean, what you would have is the welfare checks don't go out and you don't pay the cops on the same day.
--:-- Steve Clifford: And, I mean, you can imagine what, I mean, total chaos.
--:-- Keith Romer: The person presiding over this fiscal debacle was the city's mayor, Abe Beam.
--:-- Steve Clifford: When journalists demanded to know what was going on, he put the blame on the state of New York and the federal government for not sending more money to help the city fund its social services.
--:-- Keith Romer: The basic cause of our crisis, among other things, is the fact that the city of New York is carrying costs which are not appropriately New York City costs.
--:-- Steve Clifford: One of the people watching this drama unfold was Donna Shalala.
--:-- Donna Shalala: She was not a big fan of Abe Beam.
--:-- Keith Romer: He was short, inarticulate, bumbling.
--:-- Donna Shalala: Donna would later become the Secretary of Health and Human Services and a congressperson.
--:-- Keith Romer: But back in the 70s, she was a politics professor with an expertise in the relationship between city and state governments.
--:-- Donna Shalala: The mayor, the mayor Abe Beam was totally over his head.
--:-- Keith Romer: He couldn't even explain, even though he had been the controller of the city, he couldn't even explain how many employees they had.
--:-- Donna Shalala: Donna lived in New York City, so she was paying attention to what was happening.
--:-- Keith Romer: But her main focus at the time was a book she had started writing.
--:-- Donna Shalala: And then history came knocking on Donna's door.
--:-- Keith Romer: I got a phone call from the governor of New York, Hugh Carey.
--:-- Donna Shalala: Just beginning the summer, it must have been June of 1975, he called and said, what are you doing for the summer?
--:-- Keith Romer: By then, the state had already prepaid $800 million in aid to try to keep the city from defaulting on its debts.
--:-- Donna Shalala: But Governor Kerry wanted a longer-term solution, and he had a new plan, which he proceeded to explain to Donna over the phone.
--:-- Keith Romer: Yeah, he had helped to create a brand-new government entity to help fix New York City's debt problems, and he wanted to know if she was willing to be a part of it.
--:-- Donna Shalala: He made it sound like it was going to be a quick in and out.
--:-- Keith Romer: Just a little summer project for you and then go back to your book.
--:-- Donna Shalala: Yeah.
--:-- Keith Romer: How did that work out?
--:-- Donna Shalala: Well, I never did finish the book, but I had a life-changing experience.
--:-- Keith Romer: Governor Kerry's new government entity was called the Municipal Assistance Corporation, or the MAC.
--:-- Donna Shalala: It was created as a way for New York City to get its hands on the money it needed without anyone having to lend directly to the city itself.
--:-- Keith Romer: Like, look, we get it. You don't trust the city government to pay you back.
--:-- Donna Shalala: So forget about the city government. Lend Mac the money instead and let them worry about the city.
--:-- Keith Romer: And Mac did have a couple of things going for it.
--:-- Donna Shalala: It got first dibs on sales tax collected in the city. So it definitely had money coming in.
--:-- Keith Romer: And it was backed not by the credibility of New York City, but by the credibility of New York State.
--:-- Donna Shalala: It was originally set up to issue bonds to stretch out the debt of New York City to give them some time to get their house in order.
--:-- Keith Romer: I think that's the simplest way to explain it.
--:-- Donna Shalala: Donna was 34 years old and the only woman on the MAC board.
--:-- Keith Romer: The rest of the board was made up of the heads of big companies, a senior partner at a powerful law firm, and this famously charming investment banker named Felix Rowden.
--:-- Donna Shalala: He had an instinct, not for politics, but how to pull people together to get decisions.
--:-- Keith Romer: I think I was a pain in his butt initially, but he coached me along and we became very good friends.
--:-- Donna Shalala: And I learned a lot from him about leadership.
--:-- Keith Romer: Rohitin was really good in front of TV cameras.
--:-- Donna Shalala: He had this great overbite smile, these two big bushy eyebrows, and he was just so fundamentally calm.
--:-- Keith Romer: It was almost like he was wryly amused by everything that was happening.
--:-- Donna Shalala: I really never knew how really fraudulent the accounting was.
--:-- Keith Romer: I mean, they did things with numbers here that they just absolutely unbelievable
--:-- Donna Shalala: They would estimate revenues you know going ahead one century and estimate their expenses as of yesterday
--:-- Keith Romer: But this is kind of a way of life.
--:-- Donna Shalala: Roedon was known as a dealmaker, but his main thing was mergers and acquisitions, not getting people to buy New York City's debt.
--:-- Keith Romer: He just assumed, because he didn't know a lot about municipal finance, that we could go into the market with bonds that were backed by the full faith and credit of the state, that had first dibs on New York City government money, that were at 8 or 9 percent, and that the market would just absorb those bonds.
--:-- Donna Shalala: And how did that turn out?
--:-- Keith Romer: It was much more difficult.
--:-- Donna Shalala: No one believed in the credibility of New York City government.
--:-- Keith Romer: We had to peddle the bonds, the MAC bonds, all over the country.
--:-- Donna Shalala: And so we all got on airplanes.
--:-- Keith Romer: With David Rockefeller.
--:-- Donna Shalala: As in one of the Rockefellers.
--:-- Keith Romer: We landed in Dallas, private plane, went to the Dallas Athletic Club to meet with the bankers, the great Texas bankers.
--:-- Donna Shalala: And when we pulled up, one of his staff members came and said, Donna can't go in the front door because they don't allow women in the front door.
--:-- Keith Romer: And he said so we'll take her around and she can go in the back door to meet with you and David Rockefeller turned to me and he said Donna he said I've never gone in a back door in my life he said follow me and he walked me right through the front door of the Dallas Athletic Club
--:-- Donna Shalala: Were you able to convince any Dallas bankers to purchase Mac no
--:-- Keith Romer: Someone stood up and said why should we invest in a place in which the mayor doesn't know how many employees he has
--:-- Donna Shalala: David Rockefeller couldn't answer that question so I don't think we sold many bonds that day
--:-- Keith Romer: Mac had trouble selling bonds kind of everywhere.
--:-- Donna Shalala: Legally, MAC was a completely separate entity from the city of New York, but potential bond buyers still had a hard time totally trusting them.
--:-- Keith Romer: Which meant the city was getting closer and closer to running out of money altogether.
--:-- Donna Shalala: Mayor Beam announced a series of spending cuts.
--:-- Keith Romer: The city would pull back on social services and eliminate jobs.
--:-- Donna Shalala: The very large and very powerful city workers unions were understandably not real happy with the mayor's plans.
--:-- Keith Romer: What do you want? No! What do you want? Now! What do you want? Now!
--:-- Donna Shalala: The sounds of people striking and protesting layoffs.
--:-- Keith Romer: In New York, a large group of laid-off policemen and their supporters gathered in protest near City Hall.
--:-- Donna Shalala: Go, state! Go, state! Go, state!
--:-- Keith Romer: At airports and hotels, members of the police union handed out brochures to tourists titled, Welcome to Fear City.
--:-- Donna Shalala: The brochures warned how dangerous the city would be when police were laid off and offered tips for how to survive a visit.
--:-- Keith Romer: Don't take the subway. Stay off the streets after 6 p.m. Do not walk anywhere.
--:-- Donna Shalala: In early July, in 90-degree heat, sanitation workers staged an unofficial but very comprehensive strike.
--:-- Keith Romer: No garbage has been picked up in the city since the weekend.
--:-- Donna Shalala: The refuse piles up at the rate of 28,000 tons a day.
--:-- Keith Romer: The woman from Manhattan thought the layoffs could have been avoided.
--:-- Donna Shalala: I think it's a terrible, terrible thing.
--:-- Keith Romer: I think Beam and all his other people should take $2,000 off their salary.
--:-- Donna Shalala: How do you feel about having 5,000 less cops on the street and 28,000 tons of garbage on the sidewalk?
--:-- Keith Romer: Terrible.
--:-- Donna Shalala: I'm frightened stiff.
--:-- Keith Romer: I was afraid to ride the trains before I walked the streets.
--:-- Donna Shalala: Now you can be sure I'll be locked in the house.
--:-- Keith Romer: For Donna, the sanitation workers' strike was sort of the worst thing that could have happened.
--:-- Donna Shalala: It was a disaster.
--:-- Keith Romer: Right in the middle of what we were trying to do.
--:-- Donna Shalala: We had garbage all over the streets.
--:-- Keith Romer: Do you remember sort of like walking down the streets of New York?
--:-- Donna Shalala: Yes.
--:-- Keith Romer: Smelling trash all over the place.
--:-- Donna Shalala: In some parts of the city, people threw the piled up garbage into the middle of the street.
--:-- Keith Romer: And lit it on fire.
--:-- Donna Shalala: Meanwhile, Felix Rowden, the public face of the Mac board, was everywhere.
--:-- Keith Romer: On TV, in the newspapers, doing everything he could to get the bankers and the union leaders and the state and city officials to get on the same page and find a way to stave off default.
--:-- Donna Shalala: I still cannot believe that these men, who are very decent men, aren't going to come to the conclusion that their future, along with everybody else's in the city, is in their hands, that they're not going to do something about it.
--:-- Keith Romer: After the break, Mayor Abe Beam takes a little trip down to Washington, D.C.
--:-- Donna Shalala: And President Gerald Ford inspires one of the most famous headlines in New York City history.
--:-- Keith Romer: This message comes from NPR sponsor Charles Schwab.
--:-- Donna Shalala: Financial decisions can be tricky.
--:-- Keith Romer: Your biases can lead you astray.
--:-- Donna Shalala: Financial Decoder, an original podcast from Charles Schwab, can help.
--:-- Keith Romer: Download the latest episode and subscribe at schwab.com slash financial decoder.
--:-- Donna Shalala: This message comes from NPR sponsor Adobe.
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--:-- Keith Romer: You can do all that with the all-new Adobe Acrobat Studio.
--:-- Donna Shalala: Learn more at adobe.com slash do that with Acrobat.
--:-- Keith Romer: Okay, so here was the problem facing New York in the summer of 1975.
--:-- Donna Shalala: The city owed billions of dollars in short-term debt that it did not have the money to pay for.
--:-- Keith Romer: It also needed to pay the salaries of all its teachers and police officers and sanitation workers, and it didn't have the money for that either.
--:-- Donna Shalala: And no one would lend it any more money to get out of this mess.
--:-- Keith Romer: Even MAC, the Municipal Assistance Corporation, that had been created to be this safer proxy to lend to because it was backed by the state of New York.
--:-- Donna Shalala: Even Mac was having a hard time selling its bonds.
--:-- Keith Romer: On its own, Mac couldn't solve the city's gargantuan debt problems.
--:-- Donna Shalala: Donna Shalala says nobody really knew just how bad things would get if the city defaulted on its loans and ran its reserves down to zero.
--:-- Keith Romer: But they knew it would be bad.
--:-- Donna Shalala: It would have been the end of the growth of New York City.
--:-- Keith Romer: The school system would have been totally underfunded.
--:-- Donna Shalala: Municipal jobs would have shrunk.
--:-- Keith Romer: It would destroy one of the great economic engines of the world.
--:-- Donna Shalala: A default would have been bad for the investors who held the IOUs from the city and would have to take a loss.
--:-- Keith Romer: Bad for New York real estate developers who would have had a harder time getting loans themselves.
--:-- Donna Shalala: For the city workers unions whose members would face layoffs and wage cuts.
--:-- Keith Romer: For the state of New York who would have its biggest city basically stop functioning.
--:-- Donna Shalala: And, last but not least, bad for the federal government, which would have the country's financial capital in full-on meltdown.
--:-- Keith Romer: But at the same time, bad as it would be, no one really wanted to be on the hook for bailing New York City out of its multi-billion dollar hole.
--:-- Donna Shalala: And Donna says this is where Felix Rohitin really shined.
--:-- Keith Romer: He just had confidence in his ability to do the grand deal.
--:-- Donna Shalala: A deal that would require buy-in from everyone.
--:-- Keith Romer: People had to take cuts. Everybody had to give something up if they wanted to keep New York City solvent.
--:-- Donna Shalala: Whenever you turned on the news, there would be Felix Rodin, warning about the possible consequences of New York City defaulting, how a lot of big companies that were headquartered in the city might just pick up and leave.
--:-- Keith Romer: And once that starts, then you've created a situation where in 10 years, You have a city where you have more and more services required and less and less people paying for the services and you might end up with a gigantic slum
--:-- Donna Shalala: Away from the cameras Rorden was constantly trying to convince all the big players in the city to do their part
--:-- Keith Romer: It was his effort to get the unions and the real estate industry and the businesses all to share the pain as he would say it
--:-- Donna Shalala: And the only way he could do that was to make sure that they understood the implications of bankruptcy
--:-- Keith Romer: Here are the advantages to you. And guess what the disadvantages are?
--:-- Donna Shalala: And slowly but surely, Rohiton helped broker these pretty astounding seeming deals.
--:-- Keith Romer: Like some of the city's biggest property owners agreed to pay hundreds of millions of dollars in real estate taxes months before those taxes were due.
--:-- Donna Shalala: After months of haggling, the city employees' unions signed up to take billions of dollars from their own pension funds and use that to purchase the bonds that Mac was having such a hard time selling on the open market.
--:-- Keith Romer: Everybody was concerned about their own jobs, whether they were in the private or public sector.
--:-- Donna Shalala: It sounds almost like the commonality of purpose that comes in a war or something, where if this goes down, we're all going down with it.
--:-- Keith Romer: Well, that was exactly the feeling.
--:-- Donna Shalala: Why would the real estate guys have paid their taxes in advance?
--:-- Keith Romer: Out of loyalty to New York City, yes.
--:-- Donna Shalala: But at the deeper sense, they and Felix understood that this great city, on its knees, that the country couldn't survive without New York.
--:-- Keith Romer: I mean, there is also in that story, as I understand it, they also got a discount, right?
--:-- Donna Shalala: Absolutely.
--:-- Keith Romer: But we got the cash.
--:-- Donna Shalala: And Donna says that same Big Apple mix of public spiritedness and naked self-interest kind of drove all of these deals.
--:-- Keith Romer: Well, it's transactional. It's a New York transaction.
--:-- Donna Shalala: Yeah, right? Like, I'm going to do the right thing, but I'm also going to get a little piece of the deal for myself.
--:-- Donna Shalala: When it came to the state of New York, the things it wanted the most from the city were assurances that the debt problem would not get any worse and that none of this would ever happen again.
--:-- Keith Romer: Creating the MAC was just the first part of a plan that developed over months.
--:-- Donna Shalala: The second part of the plan went like this.
--:-- Keith Romer: In exchange for funding a $2 billion aid package to the city, the state legislature forced the city's elected officials to give up a lot of their power over their own budget.
--:-- Donna Shalala: New York City politicians would no longer be able to just fund every exciting new initiative or genuinely important social service by fiddling with a balance sheet.
--:-- Keith Romer: A presumably more responsible but less democratic entity was created to watch over the city budget, the Emergency Financial Control Board.
--:-- Donna Shalala: The control board got the final say over basically every last financial move the city made and made sure that the city was making the deep cuts it had to to actually balance its budget.
--:-- Keith Romer: The state essentially took away home rule from the city for the financial part of the city.
--:-- Donna Shalala: But even with the real estate folks paying their taxes early and the unions using their own pension funds to prop up MAC bonds and the state throwing in billions more, there was still one big piece missing.
--:-- Keith Romer: One institution whose involvement would do more than just fill the hole in the budget.
--:-- Donna Shalala: One that hopefully would signal to markets that New York City wasn't going to be allowed to fail.
--:-- Keith Romer: That institution? The federal government.
--:-- Donna Shalala: Yeah.
--:-- Keith Romer: In the fall of 1975, Mayor Abe Beam traveled to Washington, D.C. to plead his city's case.
--:-- Donna Shalala: What we want is the use of the federal government's credit through guarantees on our securities until we are able to reenter the credit markets on our own.
--:-- Keith Romer: In other words, Beam was asking the federal government to bail out New York City.
--:-- Donna Shalala: But the president, Gerald Ford, was not having it.
--:-- Keith Romer: Responsibility for New York City's financial problems is being left on the front doorstep of the federal government, unwanted and abandoned by its real parents.
--:-- Donna Shalala: In a speech at the National Press Club, Ford made all the usual arguments you hear made against any bailout.
--:-- Keith Romer: Why should taxpayers make investors whole on a bad bet they made?
--:-- Donna Shalala: What kind of example would bailing out New York give to other cities who might be tempted to cut corners with their budgets?
--:-- Keith Romer: I am prepared to veto any bill that has as its purpose a federal bailout of New York City to prevent a default.
--:-- Donna Shalala: I am fundamentally opposed to this so-called solution.
--:-- Keith Romer: The next day, the New York Daily News busted out a headline for the ages.
--:-- Donna Shalala: Ford to City. Drop dead.
--:-- Keith Romer: Do you remember seeing that headline?
--:-- Donna Shalala: Of course.
--:-- Keith Romer: I had it for a long time framed.
--:-- Donna Shalala: But despite what Ford said in his speech, the federal government, and Gerald Ford in particular, were caught in the same incentive trap as everybody else.
--:-- Keith Romer: The country couldn't afford to have New York City actually descend into bankruptcy.
--:-- Donna Shalala: And Ford had a presidential election coming up, And New York had a lot of electoral votes.
--:-- Keith Romer: So in December of 1975, the United States itself was finally pulled into Felix Rohitin's grand bargain.
--:-- Donna Shalala: The government ponied up more than $2 billion in short-term loans to New York City.
--:-- Keith Romer: I talked to Jerry Ford about it years later.
--:-- Donna Shalala: He used to have a conference in Vail.
--:-- Keith Romer: And I used to sit next to him at dinner because he told his wife I was the only one that knew anything about football.
--:-- Donna Shalala: But I talked to him about that.
--:-- Keith Romer: Did he regret it?
--:-- Donna Shalala: No, because he said, from his point of view, it forced the city to pull itself together and to get it done.
--:-- Keith Romer: And that's where the story usually ends.
--:-- Donna Shalala: Grand bargain achieved, fiscal crisis averted.
--:-- Keith Romer: But in reality, it wasn't quite that neat.
--:-- Donna Shalala: It took years of raising taxes, slashing public services and cutting back the number of police officers and teachers and sanitation workers to get the budget to balance.
--:-- Keith Romer: And the city became a harder place to live, especially if you were poor.
--:-- Donna Shalala: But the math, the actual numbers in the city budget, did start to reflect reality, how much the city took in and how much it sent out.
--:-- Keith Romer: And eventually, the markets finally started to believe what the city was saying about those numbers.
--:-- Donna Shalala: In 1979, for the first time in four years, New York City was once again able to sell its short-term debt.
--:-- Keith Romer: It's worth noting, New York City, not the last place in the country to be completely overwhelmed by its debt.
--:-- Donna Shalala: Philadelphia and Washington, D.C. in the 90s, Detroit and Puerto Rico in the 2010s, each one had a similar debt crisis.
--:-- Keith Romer: But because of New York City, they also had a playbook to follow, a series of difficult and painful moves that could eventually lead them back out of that crisis.
--:-- Keith Romer: The New York City debt crisis was not the only economic debacle of the 1970s, if that happens to be your thing.
--:-- Donna Shalala: We've also got an episode about the 1970s out-of-control inflation and one about Richard Nixon trying to manipulate the Fed.
--:-- Keith Romer: You can find links in our show notes.
--:-- Donna Shalala: Also, we here at Planet Money, we have made a book.
--:-- Keith Romer: If you'd like to pre-order it, you can go to planetmoneybook.com.
--:-- Donna Shalala: Today's episode of Planet Money was produced by James Sneed with help from Sam Yellowhorse Kesler and Julia Ritchey.
--:-- Keith Romer: It was edited by Jess Jiang, fact-checked by Sierra Juarez, and engineered by Debbie Daughtry and Cena Loffredo.
--:-- Donna Shalala: Our executive producer is Alex Goldmark.
--:-- Keith Romer: Special thanks today to Denis Coleman, David Schleicher, Liall Clarke, Kevin Hennigan and everyone at Classical King FM in Seattle.
--:-- Donna Shalala: You're kings.
--:-- Keith Romer: I'm Keith Romer.
--:-- Donna Shalala: I'm Nick Fountain.
--:-- Keith Romer: This is NPR.
--:-- Donna Shalala: Thank you for listening.
