A NEW YORK SOLUTION FOR BAILING OUT CALIFORNIA
July 8, 2009
California is like New York City during the early 1970s. During that time, New York city's government lived well beyond its means, and in April 1975 it was shut out of the public debt markets. The state then created the Municipal Assistance Corporation (MAC), a private body, to help. But despite support from Albany and threats of a wage freeze, not enough money could be raised to meet the city's cash needs, says Henry S. Rowen, a professor emeritus of the Graduate School of Business and senior fellow emeritus with the Hoover Institution, Stanford University.
Albany then set up a Financial Control Board to take over New York's fiscal affairs. It required the city to submit a "rolling four-year financial plan to the Control Board prior to the beginning of each City fiscal year and, to modify the plan as necessary from time to time" under state rules. MAC could dole out money to the city only if the plan was followed. New York was effectively put in receivership, says Rowen.
As part of the deal, municipal unions and New York banks bought city securities:
- Gov. Hugh Carey promised to balance the state budget, and there was a three-year moratorium on redeeming $1.6 billion in short-term city debt held by individuals.
- The city with the highest taxes in the United States also got a tax increase.
- President Ford agreed to an annual $2.3 billion federal loan for several years at an interest rate 1 percent above the government borrowing rate.
Still, matters did not go easily, says Rowen:
- Helping the city hurt the state's finances, as MAC initially had to pay more than 10 percent interest to sell its bonds.
- There was a continuing struggle to get the city's fiscal house in order, and the U.S. Supreme Court had to rule that the pledge of state revenues as security for MAC bonds was constitutional.
- The jobs of 40,000 city workers (out of 300,000) were eliminated.
- But the budget eventually was balanced and by the late 1970s, New York City began to gain jobs.
- MAC's role ended in 1984, and despite ups and downs more than two decades of good enough performance followed.
Source: Henry S. Rowen, "A New York Solution for Bailing Out California; In 1975, a Control Board cut spending, controlled the cash," Wall Street Journal, July 8, 2009.
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