The City of New York was on the precipice of bankruptcy in 1975. The City had over 330,000 employees and a $5-billion deficit. The City was borrowing money merely to pay operating expenses and interest on their outstanding loans. Bankers were poised to cut off credit to the city. The federal government, through President Gerald Ford promised that he would not bail the city out of the mess it had gotten itself in. That prompted the New York City's Daily News to print the headline: "Ford To City: Drop Dead" (see image below).

But the State of New York also brought in a new governor in 1975, Hugh Carey (1919-2011; pictured), who quickly realized that the financial well-being of the state was inextricably tied to that of the city of the same name. Carey was a war hero and later became a lawyer, having graduated from St. John's Law school and admitted to the New York State Bar in 1951. He was practising law at Harris Beach when he won the governorship, as the Democrat candidate.

It was baptism by fire and Carey rose to the occasion. In his inaugural speech he gave in the New York legislature, he admitted that the state was:

"... living far beyond our means (and) the days of wine and roses are over".

Indeed, the City of New York was insolvent but not yet bankrupt because there were still bankers to lend the city money to pay day-to-day expenses. So close to the city come to bankruptcy that the New York Times found a copy of the October 17, 1975 statement by then Mayor Abraham Beame that the city was bankrupt. In fact, the city had a small army of lawyers getting ready to go to court to protect city assets from creditors.

Hugh CareyBut disaster was averted. The governor, Hugh Carey rolled up his sleeves and proceeded to write the textbook on resolving municipal insolvency. Through his political skills and leadership, he showed the world how the impossible could be done; and that rather then screaming and yelling at other levels of government and the banks, more could be achieved by partnership and cooperation.

He very publicly asked everybody in the state to be prepared to make sacrifices, promising that the political institutions would set the example by keeping expenses low the rate of inflation.

The greatest problem for New York City was that New York State was itself in financial difficulty. Carey's predecessor Nelson Rockefeller had spent wildly later admitting:

"Poor Hugh. I drank the champagne and Hugh Carey got the hangover."

The first initiative was that of Mayor Beame, the mayor of New York City, who ordered massive layoffs of visible employees. While this was welcome news, it had little effect on the confidence of the financial markets because the financial crisis had occurred during Beame's watch.

Carey had the state guarantee new loans to the city.

He created a new agency, the Municipal Assistance Corporation (dubbed "Big MAC"), to receive the city sales tax revenue but also to manage the cities loans.Daily News Headline 1975

He created an Emergency Financial Control Board to nickel and dime every single line item of New York City's spending including the essential but difficult job of obtaining concessions from the unions representing city employees.

Ultimately, the municipal unions were critical to the reversal as they ended up buying much of the new bonds necessary to restructure the city's massive debt.

Under Carey's leadership, the State of New York rescued the City of New York from financial ruin. Carey later told an academic conference that:

"New York City was carried like a litter case by New York State until it became ambulatory."

By the end of 1975, the federal government was sufficiently impressed that they finally lent the City money, $2.3-billion.

Carey is often credited not only with saving New York City from bankruptcy but also with the distinction of having put the state of New York back into financial health. By 1978, the City of New York had a balanced budget and near-bankruptcy a thing of the past.

References:

  • Chen, Ilin and Arnold, Laurence, "Governor Saved New York From Ruin", The Globe and Mail, August 8, 2011, page S10
  • Duhaime.org, Famous & Celebrity Bankruptcies
  • Kramer, Daniel, The Days of Wine and Roses Are Over (Lanham, Maryland: University Press of America, 1997)
  • Roberts, Sam, "When The City's Bankruptcy Was Just a Few Words Away", the New York Times, December 31, 2006