[Congressional Record Volume 141, Number 136 (Tuesday, September 5, 1995)]
[Senate]
[Pages S12627-S12629]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                      BIG MAC TO GO; HOLD THE LIES

 Mr. SIMON. Mr. President, one of the most thoughtful observers 
in the Nation today is Felix Rohatyn, an investment banker, who has had 
considerable leadership experience at both the local, State, and 
Federal levels.
  He was chairman of New York's Municipal Assistance Corp., from 1975 
to 1993 and helped put the pieces together when New York City was in 
such desperate straits.
  He had an article recently in the Washington Post that comments 
specifically about the District of Columbia and New York City, but it 
is really much more than that. He is really talking about what our 
priorities are as a Nation and what we must do to revitalize urban 
American and revitalize the Nation.
  To the timid souls in the House and Senate and the administration who 
are afraid to face our problems and come up with realistic answers to 
those problems, because realistic answers are not going to be 
immediately popular, I would note his comment:

       Many of our actions were deemed to be political suicide 
     when first considered, but it is worth noting that Governor 
     Carey's approval rating was the highest ever in December 1975 
     when we had carried out the most painful parts of the 
     restructuring.

  The American public yearns for genuine leadership, not public 
relations talk. Instead to much too great a degree, we are providing 
the public relations talk but not genuine leadership.
  I ask that the Felix Rohatyn article be printed in the Record, and I 
urge my colleagues to read it.
  The article follows:

Big Mac To Go; Hold the Lies; New York's Recipe for Recovery--and What 
                         D.C. Can Take From It

                           (By Felix Rohatyn)

       Watching the evolution of the District of Columbia's fiscal 
     crisis inevitably brings to many of us here in New York City 
     memories of our own brush with bankruptcy in the 1970s. There 
     are too many differences between our situation 20 years ago 
     and the District's today to draw direct parallels. Still, 
     there are lessons in our successes--and in our failures--that 
     may provide some useful insights to those trying to direct 
     the District's future.

[[Page S 12628]]

       The first of those lessons is that recovery was not rapid 
     and--for reasons both of our own making and beyond our 
     control--it was not permanent. It took New York City almost 
     six years from the time we lost access to the financial 
     markets in 1975 until we regained it in 1981, having balanced 
     three consecutive budgets in the meantime. Now, 14 years 
     later, New York City is again in the throes of a serious 
     budgetary crisis which shows no signs of early resolution.
       To the extent that we succeeded, much is owed to a few 
     factors: putting able and responsive people into top city 
     management positions; enlisting the cooperative efforts of 
     all parties--state and city officials, labor, business--who 
     contributed to the problem in the first place; getting 
     financial controls into place; building public support for 
     the tough actions needed; securing help from higher levels of 
     government. To the extent we failed, it was because we relied 
     too much on stopgap measures and postponed structural reforms 
     needed to secure the city's future. There are caveats for the 
     District in all this.
       Many of the forces that drove New York City towards 
     bankruptcy in the '70s are not unlike those that now cast a 
     shadow over the District's, and, indeed, the entire country's 
     future: excessive borrowings, escalating budget deficits, 
     excessive public spending and shrinking private employment, 
     compounded by weak political leadership. Just as the 
     District's problems had been building for many years, under 
     the nose of the mayor, city council and their federal 
     overseers on Capitol Hill, New York's crisis was obscured for 
     many years by imaginative bookkeeping and by lenders who 
     looked the other way.
       By May 1975, when the banks refused to provide additional 
     loans to the city, short-term debt had climbed from 
     practically nothing six years earlier to almost $6 billion. 
     (In each of those years the city's budget was reported to 
     miraculously, ``in balance.'') The city work force had 
     ballooned to 300,000 people while private employment (and tax 
     revenues) plummeted during the recession of the early 1970s. 
     When newly elected Gov. Hugh Carey, formerly a liberal 
     Democratic congressman from Brooklyn, appointed four private 
     citizens (including me) to recommend a course of action, we 
     were 18 days away from a default and a bankruptcy filing.
       During the next six months, we put in place practically 
     every new structure and agreement that served as the ultimate 
     cornerstone to our recovery. Some survive to this day. These 
     were the main components:
       Getting control. In this and many other instances, strong 
     bipartisan leadership at the state level was crucial, support 
     that the District must look to the federal level to supply. 
     Under great pressure from the governor, practically the 
     entire top management of the city was replaced, including the 
     first deputy mayor, budget director, and deputy mayors for 
     finance and operations. All but one of the new appointees 
     came from the private sector. They, together with the 
     executive director of the Emergency Financial Control Board 
     (EFCB), constituted as capable a management team as the city 
     ever had.
       The EFCB, analogous to D.C.'s new financial control board, 
     consisted of the governor, mayor, city and state comptrollers 
     and three private citizens appointed by the governor. It had 
     the power to set the level of city revenues and to reject any 
     budget submitted by the mayor not in compliance with the 
     long-term plan. All major city contracts, including labor 
     contracts, were subject to its approval. Once these control 
     structures were in place after the usual political struggles, 
     we had total cooperation from city officials--including Mayor 
     Abraham Beame, despite the high cost to his political career.
       The EFCB's veto power and the shared commitment of top city 
     management meant that it was possible to translate the 
     requirements of the approved budget plan into actual savings. 
     It is always easy to demand or promise cuts on paper; it is 
     much harder to pocket them. This is especially true if, as 
     some in the District are urging, reliance is placed on the 
     voluntary response of city workers to accept buyouts or on 
     privatization to cut costs and payrolls.
       Getting the facts. We knew the numbers we were working with 
     were meaningless and that we needed a factual basis for any 
     long-term plan. It took many months, but ultimately the city, 
     with the help of outside experts, put in place a system of 
     financial controls and accounting second to none.
       Just as the true dimensions of the District's fiscal gap 
     were revealed only over a period of months, New York City's 
     1975 deficit turned out to be almost triple the initial 
     estimate--close to $1.5 billion on a total budget of about 
     $13 billion (including about $600 million of expenses buried 
     in the capital budget).
       Negotiating a social contract between business and labor. 
     Key to our success was enlisting the help of those who had 
     created the problem. The city's labor and business 
     leaderships (including the banks), as well as the state and 
     city themselves, provided a relatively small number of people 
     who could make commitments on behalf of their constituents 
     and deliver them.
       Having a common goal was important; carrying it out was 
     agonizingly difficult. The ``social contract'' provided labor 
     support for deferring all wage increases, at no interest 
     cost, and a minimum 6 percent attrition rate. Ultimately 
     60,000 workers, 20 percent of the work force, went off the 
     payroll through layoffs or attrition. Pension benefits were 
     rolled back, while union pension funds purchased $2.5 billion 
     of city bonds (which proved a good investment for retirees).
       Just as the District is beginning to do, we looked hard at 
     city functions to see which were essential and which we could 
     live without. Tuition was imposed, for the first time, at 
     City University. Transit fares were doubled. Services were 
     sharply cut, with the worst impact borne by the school 
     system. Rigid cost controls were imposed. Taxes were 
     temporarily increased.
       The banks, in turn, supported creation of the Municipal 
     Assistance Corp., a state agency directed by a board of nine 
     private citizens and authorized to issue up to $10 billion of 
     long-term bonds, backed by a portion of the city sales tax. 
     MAC financed the phaseout of the city deficit by 1980, as 
     well as a dramatic increase in the city's infrastructure 
     investment by 1985.
       All of these actions resulted from difficult and often 
     acrimonious negotiations. For example, after the initial wave 
     of 20,000 layoff notices, striking sanitation workers 
     disrupted the city and greeted arriving passengers at Kennedy 
     Airport with signs saying: ``Welcome to Stink City.'' This 
     scared the mayor into rehiring a number of workers--which, in 
     turn, caused financing for MAC's first private market bond 
     offering to collapse. Still, we were able to stop the 
     bleeding.
       Getting outside help. For all the pain, the city's 
     redemption depended importantly on help from the state which 
     assumed certain of the city's costs for courts, correction 
     and higher education. At a critical time, the state also 
     purchased $250 million of MAC bonds and provided MAC with its 
     ``moral authority'' to maintain our credit.
       Federal help, while psychologically critical, was far more 
     limited (Remember the famous New York Daily News headline 
     ``Ford to City: Drop Dead.'') Still, the Ford administration 
     provided a limited amount ($1.5 billion) of seasonal loans 
     which was replaced by the Carter administration by long-term 
     loan guarantees which were totally paid off in the early 
     1980s.
       Building public support. Being open with the public and 
     consistently explaining actions and goals helped the city's 
     emergency management build and sustain a positive public 
     spirit (an effort made easier by the natural pride and civic 
     spirit of New Yorkers). The fact that New York has a number 
     of powerful newspapers also helped to create the public 
     support our political leaders needed to carry out extremely 
     painful actions every day--the details of which were almost 
     impossible to explain on television. Many of our actions were 
     deemed to be political suicide when first considered, but it 
     is worth noting that Gov. Carey's approval rating was the 
     highest ever in December 1975 when we had carried out the 
     most painful parts of the restructuring.
       Important as these stern measures were, the city could not 
     have moved its budget into balance after four years without 
     the help of the national economic recovery and the 
     revitalization of the city's own private sector. And a 
     sharply accelerating public investment program helped 
     generate the strong local economy. Budget cuts alone will not 
     create recovery.
       But it is also true that temporary budget cuts won't solve 
     much of anything. And here is where we made our greatest 
     mistake: Postponing fundamental reform. We believed that we 
     had basically changed the city because we had balanced the 
     budget and regained our credit. We were wrong.
       The economic recovery of the 1980s seduced the city back 
     into some of its prior spending habits. Prosperity is the 
     enemy of reform. The work force swelled to pre-crisis levels; 
     cost increases were not offset by productivity increases; 
     full pension benefits were restored. No serious though was 
     given to the gradual elimination of certain services or to 
     the possible privatization of functions like the municipal 
     hospital system or to restructuring the school system. No 
     real improvement was made either in the quality or efficiency 
     of service delivery. Similarly, temporary measures were 
     always taken to deal with long-term reductions in the city's 
     revenue base. By the time Mayor Rudolph Giuliani came on the 
     scene in 1993, a major structural deficit was again built 
     into the city's budget.
       The problems our mayor--like the District's--faces are 
     greater than those of the 1970s, in both the private and 
     public sectors. Much higher levels of crime, drugs and AIDS; 
     rising caseloads for welfare and Medicaid funds; inadequate 
     public schools; high taxes and poor quality-of-life and 
     unsustainable labor costs--all these are driving taxpayers 
     and businesses out.
       Ultimately, however, success in New York, as in every city, 
     will depend on the private sector. But for a city to retain 
     its advantages as a cultural, communications and financial 
     center, it must provide a level of public service far 
     superior to what most provide today. It must have an educated 
     work force and first-class public schools; safe and clean 
     streets; attractive and affordable public transportation; a 
     business-friendly tax environment; a thriving entertainment 
     district; airports and railroad stations friendly to the 
     traveler; partnership between universities and high-
     technology companies; and adequate housing for employees. 
     These are all things that only cooperation between the 
     private and public sector can provide.
       In this regard, the District may have some advantages New 
     York City did not enjoy. 

[[Page S 12629]]
     The biggest one, so far, seems to be the willingness of the Republican 
     leadership in Congress to encourage fundamental change to 
     improve the District's long-term prospects. Tax benefits, 
     school vouchers, extensive privatization, increased 
     infrastructure investment and more should be tried not only 
     in Washington, D.C., but in every metropolitan area. A 
     bipartisan interest in developing a real urban agenda in 
     America is way overdue. Without such an agenda, no city plan 
     anywhere in this country is realistic in the long run.
       Some of the problems we face in New York as well as those 
     of the District were self-inflicted and due to irresponsible 
     policies. Many others, however, are not of our doing. Only 
     national policies can deal with national problems such as 
     poverty, health care, crime, education and immigration. The 
     idea that sending welfare and Medicaid back to the states 
     will be viable is total fantasy--simply an excuse for massive 
     cutbacks with unfathonable results.
       America is the only advanced Western democracy that does 
     not consider its cities as both its cultural and economic 
     crown jewels. In Europe, cities existed long before countries 
     came into being. The notion that Paris, Rome, London, Berlin 
     or Amsterdam could face the kind of economic pressures and 
     physical neglect that is faced by America's major cities is 
     unthinkable. Without a change in the appreciation of what 
     cities mean to the U.S. economy, we will ultimately be doomed 
     to fail here in New York, and the District of Columbia will 
     be a permanent ward of the federal government. If the cities 
     fail, ultimately we will be doomed to fail as a society and 
     as a nation.

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