Lachman is source on fiscal crisis

AUGUST 10, 2008
State fiscal crisis: Gov. Paterson takes a cue from Hugh Carey’s playbook
    STATEN ISLAND, N.Y. — During his State of the State address on Jan. 9, 1975, newly elected Gov. Hugh L. Carey had a sobering message for the people of New York: “Now the times of plenty, the days of wine and roses, are over.”
    More than 33 years later, those now famous words were echoed by current Gov. David Paterson (sans the poetry) in an unusual televised speech on July 31.
    And when Paterson compared the state’s current financial woes to the 1970s, it prompted a slew of comparisons to the two eras. After all, sky-high gas prices, stagflation and sluggish economic growth are back in vogue.
    But those officials who lived and worked through the economic crisis of the Carey era — several of whom spoke with the Advance — said: “Not so fast.”
    “When Carey took office in 1975, New York City was facing a meltdown. The banks stopped issuing (treasury) notes to the state. It was a real crisis,” said former state Sen. Seymour Lachman, executive director of Wagner College’s Hugh L. Carey Center for Government Reform.
    “I don’t mean to diminish the current problems, but they are primarily budgetary problems,” he added.
    Lachman has been conducting research for a book tentatively titled, “Hugh Carey and the New York Fiscal Crisis: How America’s Empire State Avoided Bankruptcy,” that will show how Carey helped the state avoid bankruptcy. He said the book, which includes dozens of interviews with former Carey aides and government figures at the time, will cast new light on one of the most difficult economic times New York has ever faced, and the governor whom many credit for leading the state through it.
    Nonetheless, the present governor apparently recognizes there are lessons to be learned from his predecessor. Paterson recently met with Carey at a fundraiser at the former governor’s Manhattan home, and has also sought former Carey aides for fiscal advice. In June, he assembled a blue-ribbon panel to seek solutions to the Metropolitan Transportation Authority’s budget problems, led by Dick Ravitch, former MTA chairman and head of the New York State Urban Development Corp. under Carey, and Peter Goldmark, Carey’s budget director.
    Carey, who is now 89 and lives in Manhattan, was not available to speak for this article. But it’s likely he would have agreed with Lachman’s assessment.
    “It has been said that no governor in history faced more problems nor more trying times than we did in 1975,” Carey told a panel of interviewers inside his Park Avenue office in 1984, during a retrospective of his administration. “I was there, and I affirm that opinion with deep conviction.”
    Bill Cunningham, who served as Carey’s confidential assistant and later as Bloomberg’s campaign manager, said the scope of today’s financial problems are not as large as they were back then, but that should not diminish the urgency to fix them.
    “The point is, there is a large problem and the governor is right to point it out,” Cunningham said.
    Paterson’s television address was reminiscent of Carey’s first address to the public, which Cunningham called a “wake-up” moment that set the stage for some of the tough decisions lawmakers would have to make in the months ahead.
    “Nobody wanted to hear it. Nobody had heard it before. It was like throwing cold water on somebody’s face,” Cunningham said of the 1975 State of the State speech.
    Just days after he was elected, Carey learned about the state and city’s out-of-control fiscal practices, which caused short-term debt to skyrocket. For years, the city had been borrowing money to pay off loans, pushing back operating expenses from one year to the next, and sometimes reclassifying those expenses as capital expenditures. In 1975, New York City’s budget was about $13 billion, while its debt was $6 billion.
    New York City was also rocked by job losses. Between 1968 and 1975, the private sector cut more than 500,000 jobs. By the end of that year, about 20,000 city employees — including firefighters, police and correction officers and sanitation workers — were laid off, and another 40,000 were lost to attrition or transfer. Budgets for city services were dismantled, which many experts blame for the ensuing AIDS epidemic, a mass exodus of residents and a downward spiral of violence that would take hold of the city for the next two decades. There were 1,645 people murdered in the city in 1975 — more than the total of the last three years combined.
    The state had been managing its finances almost as recklessly as the city, floating so-called “Moral Obligation Bonds” to pay for projects. The bonds contained a “morally binding” pledge to pay back investors, often at exorbitant interest rates.
    The crisis came to a head when banks realized those bonds were not legally binding and the state could not afford to pay them back. At the same time, the city hit rock bottom and could no longer get any credit. Then-Mayor Abraham Beame journeyed to Jerusalem’s Wailing Wall and scribbled the word: “Help.” But that help was not to come from President Gerald Ford and the federal government, who refused to bail the city out, prompting the famous Daily News headline: “Ford to City: Drop Dead.”
    Carey had to act immediately. He proposed a 10-cent gas tax to raise an estimated $500 million in revenue — a move that was quickly quashed by the state Legislature, sent even his Democratic allies running for cover and caused his approval ratings to take a significant hit.
    But instead of stepping back, that was when Carey rose to the occasion, Lachman said. He assembled a disparate panel of both Albany insiders and outsiders to put together a plan to save the city and the state.
    “He surrounded himself with the very best people, whether they were Democrat or Republican, even if they never worked in government before, and even if he didn’t know them,” Lachman said. Among the “Carey People” were Ravitch, Goldmark and investment banker Felix Rohatyn.
    Their solution was to create the Municipal Assistance Corporation (MAC) and the Financial Control Board (FCB), which essentially took control of city finances from Beame. The MAC improved financial planning and fiscal transparency. It also converted the city’s short-term bond debt into long-term bonds.
    The FCB was comprised of the governor, the mayor, city and state comptrollers, and three industry experts, including Rohatyn. It required the city to adopt accepted accounting practices, and work toward financial responsibility so that banks could trust the city to pay back loans. It also had veto power over the city budget.
    “Basically, the governor of New York, Hugh Carey, was also serving as Mayor of New York City at the time,” Cunningham said.
    Carey, who started his political career as a congressman, then convinced some of his former colleagues — which included former House Minority Leader Ford — to have the federal government guarantee $2.8 billion in loans.
    Not only was the city able to avoid declaring bankruptcy, it paid back the federal government by the end of Mayor Ed Koch’s first term in 1981. By 1982, banks resumed buying short- and long-term municipal bonds from the city.
    Fast forward to 2008.
    This year, much of state’s woes lie with Wall Street, rather than New York City itself. The city’s financial industry lost a record $22.4 billion in the first quarter, doubling the record losses amassed all of last year. Bonuses are forecast to plummet by 20.5 percent. Of the 188,000 people employed in the sector in 2007, about 25,000 are expected to lose their jobs, New York’s state accountancy office says.
    Despite a projected budget deficit of $2 billion in the next two years, the city has no plans to lay off any significant number of employees.
    “I think that was one of the lessons (Mayor Michael) Bloomberg learned from back then, when they had to make such Draconian cuts to satisfy federal government,” Cunningham said.
    “In the end, those really hurt the city the most,” Cunningham added.
    Keeping up appearances, and keeping crime down, has proved a boon in these tough times. Many experts credit tourism for keeping the local economy afloat. The Bloomberg administration has aggressively advertised the Big Apple as a vacation destination, helping to drive up the number of tourists to 46 million in 2007, up more than 10 million from 2002. The industry is expected to provide about $31 billion in revenue for the city this year.
    Without a similar alternative for revenue, and facing a $6.4 billion deficit next year, the state has to resort to more drastic measures. Paterson proposed $1.23 billion in spending cuts, a hiring freeze and reducing the state workforce by 1,000.
    The governor has already heard grumblings of opposition to that plan from the state Legislature. Part of the problem, according to Koch, is the financial picture is “muddled” right now, as opposed to the 1970s, when it was crystal clear.
    “During our crisis, everybody knew we were headed for disaster, and everybody wanted to cooperate,” Koch said.
    The former Mayor suggested that Paterson imitate Carey by empanelling a team of experts to suggest solutions for today’s issues. The governor has already heeded that advice, this week assembling a dozen-member economic advisory panel led by Joseph Stiglitz, a Nobel Prize-winning economist at Columbia University and former senior vice president of the World Bank. The group is expected to meet ahead of the August 19 emergency Legislative session.
    Lachman recommends another panel that would investigate the financial practices of the state’s 700-or-so authorities and corporations, which have collectively amassed more than $240 billion in debt.
    Cunningham also believes Carey himself provides a “great role model” for Paterson, because he made tough, politically unpopular choices that later proved to be fiscally sound.
    “He clearly wanted to do the right thing, and he was willing to suffer the short-term political slings and arrows,” Cunningham said. “More than a quarter of a century later, the lessons he lived through are being taught to the new governor.”