Creeping Away From the Abyss

This weekend, a friend told me that New York City is still paying off debt incurred during the administration of John Lindsay (1966 – 1973). I’ve worked in municipal finance so that didn’t sound far-fetched, but it made me want to learn more. After doing a little research I discovered a bailout story with a familiar ring: once, a badly run institution was pulled back from the brink of bankruptcy. The rescuers were reluctant, but the institution was too important to be allowed to bust. This interesting tale didn’t help me answer the question about the Lindsay administration’s debt, but it did give me some insight into what a long road it is from bailout to stability.

In the 1970’s New York City kept its books like Enron. According to a 1977 SEC report, the city balanced its budget using "an array of gimmicks - revenue accruals, capitalization of expenses, raiding reserves ... and ... the creation of a … corporation whose purpose is to borrow funds to bail out the expense budget." Like Lehman Brothers, the City's unhealthiest habit was short-term borrowing. New York's favorite mechanism was Tax (or Revenue) Anticipation Notes - debt instruments that allow the spending this year of next year’s tax revenue.

New York City's finances began their departure from reality in the early nineteen-sixties. As the New York Times characterized it: "Mayor Wagner, to some extent, and Mayor Lindsay to a much larger extent … ignored fiscal realities ..." When the oil embargo of 1973 kicked off a nation-wide recession, New York’s tax revenues were less than anticipated. In 1974, the unfortunate Abe Beame became mayor just as NYC’s creditors were getting wise. The Beame administration trotted out the usual balance-sheet polishing tricks, but by March of 1975 no one would lend money to New York City.

The City went looking for a hand-out and was rebuffed by the state of New York and the by federal government.

The state came around, but it wanted a lot in return. The Municipal Assistance Corporation for the city of New York Act (McKinney's Public Authorities Law § 3030, L.1975, c. 169) established a new, state-run financing agency to obtain short-run operating money and the New York State Financial Emergency Act for The City of New York (McKinney’s Unconsolidated Laws s. 5401, et. seq., L 1975 c. 868) imposed fiscal discipline so that the City could get back to floating its own bonds.

The state-backed Municipal Assistance Corporation (MAC) was able to restructure the City’s outstanding short-term debt into long-term debt and in 1978 the federal government passed the New York City Loan Guarantee Act, (P.L. 95-339) which did exactly what it sounds like it did. The federal loan guarantees came with “strict limitations and conditions … for the purpose of insuring that … the city gets out from under the federal guarantees as rapidly as possible.” (S. Rep. 95-952)

The climb back to solvency was grueling. Through the MAC, the City issued its first Revenue Anticipation Notes in 1981. The MAC continued to issue bonds on the City’s behalf from 1975 until 2004 (see New York City Official Statement Archive). In 2005, a new agency called the Sales Tax Asset Receivable Corporation floated $1.869 in Sales Tax Asset Revenue Bonds for the purpose of redeeming all of the debt issued by MAC. The City remained subject to the Financial Emergency Act until 2008.

More here.