Felix Rohatyn — Holocaust survivor, investment banker, US military veteran and ambassador to France — died this week at 91. He lived a remarkable life, escaping Austria and then France as a child and rising to the top of New York’s financial world. He’s most remembered, though, for a public role. In 1975, Gov. Hugh Carey tapped him to save New York City from municipal bankruptcy. He ably did that — in large part through financial innovation.
Starting in the 1950s, New York spent beyond its means. In the mid-60s, the city began borrowing to paper over gaps between day-to-day revenues (taxes) and spending. By the spring of 1975, New York projected a billion-dollar “cash-flow interruption” against $5 billion in annual tax revenues, because the city’s banks were nervous about lending money to an insolvent city and were about to cut off the cash.
The city didn’t need money just to fund its current-year deficit; it needed it to refinance the $3 billion in short-term debt it had already incurred. Otherwise, it would default — representing the biggest bankruptcy ever in the world of municipal finance.
To avert a default, the standard story goes, New York state and the federal government stepped in. The feds guaranteed state-issued bonds to save the city. In return, the state appointed a panel of wise men (and one woman) to oversee the city’s spending. The city embarked on a firm path of fiscal responsibility. New York was saved through fiscal discipline, and went on, starting in the 1980s, to thrive again.
This story is partly true. New York did spend beyond its means, and it did need rescue, and the city’s top financiers and businessmen, led by Rohatyn, engineered that rescue after the political class had failed.
Contrary to the accepted narrative, though, New York never cut back its spending on a sustained basis. Starting in the mid-70s, the city laid off police, sanitation, education and other workers, and those cuts contributed to an atmosphere of decline, not resurrection, and helped accelerate population loss. Within a year, Rohatyn realized the error and sought to avoid more layoffs.
In mid-1975, Carey appointed Rohatyn to head a new entity called the Municipal Assistance Corporation, a shell corporation to raise debt. Lawmakers allowed MAC to raise billions from bond investors by automatically diverting city sales taxes to the state, which would transfer them to MAC. MAC would use this sales-tax revenue to pay the interest on its debt.
The city, thus, would lose control over a big portion of its own tax revenues (and, through a separate state panel, its budgeting authority). Because of this mechanism, as well as an eventual federal guarantee, investors considered MAC bonds safer than the city’s general-obligation bonds, still paid out of general tax revenues the city might squander. Rohatyn bought the city time.
In the early ’80s, Wall Street took off, and new residents and tax revenues poured in. In 1975, tax collections totaled $5 billion; by 1985, they had reached $11 billion. New York City invested in better infrastructure and began to reverse the cuts in public services that had plagued the ’70s and early ’80s. The city began using its tax dollars more wisely.
New York was still a high-tax, high-spending city after Rohatyn, but it became better run. Today’s record revenues — $59 billion in major tax revenues in 2018 — are more than twice the 1975 total, after accounting for inflation. Today, New York City owes $90 billion, nearly three times the total owed in 1975. Per capita, that’s nearly $11,000 per person, nearly 60% more than the runner-up city, Chicago.
MAC-style structured finance — and the city’s fantastic wealth — keep this carousel going.
And what of that short-term debt New York borrowed — its MAC debt? New York never paid it back.
In 2004, the state, through a different shell nonprofit, the Sales Tax Asset Receivable Corporation, borrowed $2.5 billion to refinance its remaining 1970s-bailout debt. Peel off layer upon layer of refinancing, and New York still owes money that it borrowed in the early 1970s. The long grace period that Felix Rohatyn helped create for New York may not last forever.
This piece originally appeared at the New York Post
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Nicole Gelinas is a senior fellow at the Manhattan Institute and contributing editor at City Journal. This piece was adapted from City Journal. Follow her on Twitter here.
This piece originally appeared in New York Post
