Another Perspective

A Domestic IMF

Could New York City, 1975, serve as a model for how to escape our fiscal crisis?

By 4.15.10

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The numbers on federal overruns are ominous enough: the Congressional Budget Office reports a 2009 deficit of $1.4 trillion, projects that to increase to a staggering $1.5 trillion this fiscal year, and foresees trillion- or near-trillion dollar deficits for the rest of the decade. The states' fiscal outlook, however, is no better. Forty-eight states face budget shortfalls totaling $196 billion, or 29 percent of all state budgets, according to the Center on Budget and Policy Priorities. And it's not just the economic downturn that has caused the problem -- states' prospects don't look any better looking ahead to fiscal 2011.

States have balanced-budget requirements, meaning that they must either raise taxes or cut services to avoid deficits. For the past year, transfers included in the Obama stimulus package have spared states from making deep spending cuts. The funds allocated to help states meet their obligations, however, will mostly be used up by the end of this calendar year, long before the states will have their fiscal affairs in order.

If you lived in New York City during its 1975 fiscal crisis, the country's current budgetary woes might seem familiar. In 1975, the city brushed with bankruptcy, its finances drained by a creeping welfare system, bloated public sector, crashing housing market, and general economic malaise. When the president promised to oppose any federal bailout for Gotham, its residents almost despaired. The Daily News captured the public sentiment in the famous headline: "Ford to City: Drop Dead."

And yet one of the era's most prominent figures thinks that New York's problems then pale in comparison to the nation's difficulties today. Last year, Felix G. Rohatyn told the New York Times that "the New York City crisis was less dangerous than the current situation." He warned: "Maybe for the first time in history, the U.S. is faced with doubts about its destiny. In less than 50 years, we have gone from the American Century to the American Crisis."

Rohatyn's comments warrant special attention from budget watchers, because he is widely credited with saving New York City from bankruptcy with his stewardship over the Municipal Assistance Corporation, popularly known as the MAC or Big Mac.

The MAC was an emergency agency created in the midst of the 1975 panic as a last-ditch measure to save the city. It remained in place until long after the crisis abated -- it quietly voted itself out of existence in 2008. It was a creative approach to an apparently insurmountable fiscal challenge, and given the situation many states and cities around the country find themselves in today, it might be a concept worth revisiting. Rohatyn himself told the Wall Street Journal this week that a "domestic equivalent of the International Monetary Fund" -- very similar in concept to the MAC -- could be the "best response" to help U.S. states and cities avoid financial collapse.

The MAC came into existence after New York City found itself $11 billion in the red in 1975. For a period of several years the city had financed its outlays with short-term debt, but by late spring, with over $4 billion in short-term debt outstanding and no credible spending cuts on the table, the city could not convince the market to buy any more municipal bonds at any price. Facing the unthinkable prospect of bankruptcy -- Mayor Abraham Beame had even prepared a press statement announcing the city's default on its debt in anticipation of the feds' rejection of a bailout -- the state legislature created the MAC as a third-party solution to the stalemate between the city, its creditors, and labor.

The idea was that an independent outfit staffed by experts like Rohatyn would be able to recommend necessary budget adjustments and outline a fiscal path credible enough for the markets to believe in the city's long-term health again and resume purchasing city debt. In the meantime, the MAC's independent status would allow it to secure the funding needed to keep the lights on.

It was a qualified success. Ultimately, under Rohatyn's leadership, it would make the spending cuts the mayor and the city simply didn't have the stomach for. Acting as a mediator, it facilitated wage cuts and delays, tax hikes, the layoffs of 50,000 city workers, a tuition increase at City University, and a 30 percent increase in public transit fares. And by sending out experienced moneymen across the nation to advertise its debt offerings, it managed to sell $450 million worth of bonds when the city's prospects were gloomiest. As a model for states and cities facing the direst circumstances today, the MAC shows what might be accomplished by allowing a third party to step in and find a way to restore credibility to governments caught between powerful public sector unions and skeptical creditors.

On the other hand, a domestic IMF is no panacea. The MAC failed to achieve its goals in key ways. Although eventually it would procure commitments from state and city workers' pension funds and raise the financing needed to bring the city back to long-term health, it ultimately could not do so without further state and federal government help. The creation of the Emergency Financial Control Board (today known just as the Financial Control Board) imposed state oversight of the city's finances in exchange for $750 million in bridge loans. And in November of 1975, the Ford administration relented and agreed to back the city with almost $6 billion in loans over the next three years -- funds the city would eventually tap into for a total $2.3 billion.

In 1979, New York City finally reestablished access to the debt market. By 1985, the MAC's assistance was no longer needed.

Needless to say, today's fiscal reckoning is different from New York's in 1975. State governments, which are facing the most acute problems, are not worried about raising long-term debt, because of their balanced budget requirements. Instead, their biggest challenge will be enacting politically impossible overhauls of government employee benefits and public spending. Also, cities and states are relying on stimulus funds right now, but if and when the feds decide not to renew those transfers, they won't have the federal backing the MAC did.

If anything, the lesson of New York's experience with the MAC is that there is no substitute for timely spending cuts and public sector reform. Even the best and the brightest staffing a MAC clone won't be enough to save a government that lacks the prudence and the political will to take on spending.

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About the Author

Joseph Lawler, former managing editor of The American Spectator, is editor of Real Clear Policy. Follow him on twitter: @josephlawler.