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https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis itj (-v Y02k C / ry Collection: Paul A. Volcker Papers Call Number: MC279 Box 29 Preferred Citation: New York City, 1975; Paul A. Volcker Papers, Box 29; Public Policy Papers, Department of Rare Books and Special Collections, Princeton University Library Find it online: http://findingaids.princeton.edu/collections/MC279/c217 and https://fraser.stlouisfed.org/archival/5297 The digitization ofthis collection was made possible by the Federal Reserve Bank of St. Louis. From the collections of the Seeley G. Mudd Manuscript Library, Princeton, NJ These documents can only be used for educational and research purposes ("fair use") as per United States copyright law. By accessing this file, all users agree that their use falls within fair use as defined by the copyright law of the United States. 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VOLCKER PRESIDENT, FEDERAL RESERVE BANK OF NEW YORK BEFORE THE SUBCOMMITTEE ON ECONOMIC STABILIZATION OF THE U.S. HOUSE COMMITTEE ON BANKING, CURRENCY AND HOUSING ON NATIONAL AND INTERNATIONAL IMPLICATIONS OF A NEW YORK CITY DEFAULT ON THURSDAY, OCTOBER 23, 1975 You have requested my comments on the national and international implications of a default by New York City, and I appreciate the opportunity to make some general observations on that problem. In doing so, I want to emphasize the City's problems cannot be considered in isolation from those of New York State and certain of its agencies. .The possibilities of avoiding a default by the City, or should it occur, of containing the impact of a default, will depend among other things, on the prospects for the State itself, and its capacity to assist its agencies and the City. I am sure the Committee is under no illusion that there can be a single, simple answer to the question of the implications of default. We know, of course, the volume of City securities outstanding. We can identify some of the institutional holders of those securities. We can observe what has happened in the market for municipal securities and in other markets as the threat of default has mounted. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis We can estimate the 2 prospective short falls in cash flow if the City is unable to find financing, and the size of the expenditur e cutbacks that would be necessary to-restore budgetary balance. But those observations can't provide a complete picture. We are not dealing just with measurable financial magnitudes but with the psychology of financial markets and the human reactions of workers and citizens to the prospect of a violent financial squeeze that would force immediate drastic curtailment of jobs and services. Perceptions of investors and judgments about the impac t of a default on the financial system cannot be anticipated entir ely on the basis of objective fact and rational analysis. Uncertainty and fear can feed upon themselves, and become the over-riding influence on events. The other side of the coin is that fear and uncertainty can be quickly dissipated when it can be convincingly demonstrated that there is gener al understanding of the nature and magnitude of the probl em, that means are available to deal with it, and that there is a broad consensus on the need to act. In evaluating the problem, I would like first to reiterate a few simple points that seem to be fundamental to any assessment of the situation. I will then touch upon some aspects of the present market situation and the implications for the future. Finally, I will outline the magnitude of the financial problems before the City, State , and State agencies z:3 it, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 3 Some Basic Points 1. An act of default--actual failure to meet debts or obligations when due --by an entity so large as New York City is bound to have great significance, both symbolically and because it would trigger other events. But at least some of the consequences are felt in advance of the formal act. Surely, default by the City, if it occurs, will have been one of the best advertised events in financial history. That possibility is already being discounted to some extent in the markets, as reflected most obviously in the current Prices of City and some other municipal securities. 2. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The effects of default by New York City would likely be greatly aggravated if it were followed, or - accompanied by, default by State agencies or by a prolonged inability of the State itself to finance its needs. As matters now stand, we -cannot be sure a State agency default will not actually precede default by the city. L. 3. The consequences of a City default would depend critically on the manner in which any such default is handled, and the measures taken to contain its impact. Should the relevant authorities be able to present promptly a fair and credible plan for rescheduling the debt, have an adequate legal basis for enforcing that plan, maintain interest payments at a reasonable level, and carry on essential services in a context of social stability, then major steps would have been taken to dissipate uncertainty and provide reassurance to the holders of New York securities. All these matters, in turn, will rest upon the ability of the City to formulate and finance an orderly, stringent program to restore its budgetary position. To the extent such plans are lacking, or are not credible, uncertainty will be exacerbated, with adverse consequences. The present efforts of the Emergency Financial Control Board in New York can help lay the basis for such plans. 4. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The financial problems of New York City, and to a lesser extent of New York State, are in part an out-growth of long-term social and economic trends, some of which have been aggravated by 5 the recession and by already exceptionally high levels of taxation. Planning to restore the financial position of the City, in or out of default, must recognize the importance of sustaining the economic base of the City over the longer run. 5. While the New York City problems could have national and, indeed, international consequences, the relevant question is one of degree. Whether these effects become pronounced and lasting obviously depends upon the skill exhibited in preventing, or in managing and containing, any default. Prolongation of the existing uncertainty is itself potentially damaging to the domestic and international markets and could affect our business recovery. Recent Market Behavior and Implications for the 'Future As summarized on Table I, outstanding publicly held securities of New York City alone, totaling $12.3 billion on June 30, 1975, accounted for about 5.8 percent of total taxexempt debt nationwide. The short-term City debt of $4.5 billion accounted for a much larger fraction, some 24.3 percent, of the comparable national total. In recent months, as the Table shows, about $2 billion of the City's debt has been refinanced unuer the auspices of the State Municipal Assistance https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 6 Corporation. This has cut City securities (long and short-term) outstanding in the market to some 10.3 billion, but MAC securities have of course taken their place. While I do not have precise data, holdings of City debt by the nation's commercial banks appear to total nearly $3 billion. The rest is largely unidentified as to holder, but individuals presumably account for the bulk of the total. There are cases of particular banks with exceptionally heavy concentrations of City debt relative to their capital or assets, but these cases are almost entirely confined to smaller institutions rather widely scattered over the country. These exceptional cases of concentrated holdings relative to capital do not include the large money market banks in New York City itself. While the total amount of New York City debt is certainly significant, it would not, in itself, mean that major national or international repercussions would follow from default. We should not lose sight of the fact that the securities will ultimately be repaid, and they will retain value. However, the scope of the problem cannot be defined by looking only at the City. felt by the State. Consequences have already been Certain of its agencies have been affected, particularly those agencies involved in a variety of social programs--housin -, dormitories, hospitals, and nursing homes --whose https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis ultimate financial health is intimately related to that of Currently, direct obligations of the State and the State. the securities of affected agencies taken together amount to more than the City's outstanding debt. short-term. Some $5 billion are While a part of this debt is seasonal, the agencies have a more or less continuous problem of refinance and the State will have substantial financial needs beginning in March or April of 1976. With so significant a fraction of the municipal bond market more or less directly related to the financial difficulties of New York, repercussions on the market generally are not surprising. As shown in Chart I, yields on municipal securities in general have risen significantly in recent months. The spread between high and lesser grade issues is now at historic highs. These developments should not, in my judgment, be traced entirely, and probably not even primarily,, to the New York City situation. There has been an exceptionally heavy volume of municipal financing this year, continuing through the summer. This financing came at a time when many banks and other institutional investors were not eager for additional tax-exempt income. The larger premiums paid for quality appear characteristic of all markets, and began well before the New York situation became critical. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 8 However, I have no doubt that uncertai nties generated by the New York situation have contributed to problems for a number of other State and local governments in recent weeks and months, and the stat istics cannot capture the full effect. Scattered reports of extraordinarily high interest rates, ranging to 11 or 12 percent, for new offerings of more obscure or weaker cred its have appeared; in a number of instances, municipalities accustomed to a number of bids for their security offe rings have been faced with a single bid or none at all; in a few cases, they have had to resort to private financing; and in some apparently rare instances, the money has simply not been made available in the desired volume or at all. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 9 I cannot tell the extent to which these developments (and somewhat similar develppments in the corporate market) would be further aggravated by default by the City of New York. As I indicated earlier, I believe a great deal would depend upon prospects for limiting default to the City itself--in other words, upon confirmation that a "domino effect" will not appear. A great deal would depend, too, upon the market valuation of New York City securities. Those securities are today heavily discounted when they trade at all. Effective yields are quoted at 20 percent or more for short-dated securities, and prices of longer-term bonds have in some cases declined to less than half their par value. If the prospect of default were to be effectively eliminated, prices could, of course, be expected to recover substantially. Even if there were a default, an orderly and credible restructuring plan could sustain and even enhance confidence in the ultimate value of the securities. The absence of any dramatic impact on the banking system thus far seems to me to reflect a correct appreciation of the fact that the direct exposure of major banks is limited, and that the Federal authorities--most particularly the Federal Reserve --have ample means at their command to meet either general liquidity needs or pressures on individual banks. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 10 Confidence on this point does not, however, mean that the situation carries no dangers for the national economy. In recent months and years, we have seen a tendency for business failures to rise, and with that, an increased need for banks and others to write down bad loans. This situation has arisen during a period when--partly because of inflation --capital positions of both banks and their customers have been under more pressure than earlier. Fortunately, the earnings flow of many banks has otherwise improved, and with recovery underway, the outlook for corporate profits generally is better. But, in current circumstances, the problems of New York can only contribute to more conservative --possibly overly conservative --attitudes by lenders--and,therefore,to more costly and difficult financing for businesses, housing, and municipalities in cases where credit standing is not of the highest quality. At best, the result will be some potential drag on Prospects for home-building, plant and equipment outlays, and state and local spending. drag an In terms of overall economic activity, that be countered by monetary and fiscal policies. But should the situation become seriously aggravated, at some point the process of recovery could be impaired, and not easily maintained by highly generalized monetary and fiscal measures. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 11 In an open economy like that of the United States, and particularly in the light of the extremely heavy flows of banking deposits and investment funds internationally, questions have also been raised concerning the international consequences and repercussions of the New York City situation. The United States would of course be affected by any impact on the exchange rate of the dollar and by shifts of foreign funds among various institutions or investment media. Foreign countries are in turn affected by, and concerned about, any major changes in the American economic outlook or in the general credit situation. Fortunately, as may be seen in Chart II, the dollar has been on a strongly rising trend since Spring, reflecting our strong trade balance, growing confidence in the strength of business recovery, and relatively higher interest rates in this country. In the most recent weeks, that trend has been interrupted; the dollar has declined erratically vis-a-vis important continental European currencies. Concern and uncertainty about the possible repercussions of the New York situation appear to have been a factor in this reversal. But it has not been the only factor; for instance, some declines in our interest rates relative to those abroad my have been at least as important. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 12 At least until recently, ny impression is that foreigners have not given much credence to the possibility of default. The Constitutional and traditional pattern of Federalism in the U.S.--with the cities being creatures of our States and with the States having sovereign powers --is not deeply understood abroad. Perhaps as a result, I have found that foreign officials or bankers have somewhat different attitudes toward the default of New York City than many Americans. The sophisticated foreigner is very much aware that large urban centers may have massive financial problems, because some of their own cities are in difficulty as well. What they find less comprehensible, against their own experience, is that a national government in the last analysis would permit an outright default of its major city, for in most instances in their countries there is a much more intimate.financial relationship between local and national governments. Consequently, the foreigner may react more to the symbolism of default, should it occur, than would Americans. For that reason, the international repercussions are even less predictable than the domestic. However, in the end, the attitude of foreign investors is likely to be influenced by the way we handle the situation and reactions of our own investors. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis To the best of my knowledge, no 13 significant amount of State or local paper is held abroad; in that sense foreigners are not at risk. Foreign investors, paralleling the tendencies of American investors, might wish to place a greater premium on "quality" in placing funds in the United States. Because the great bulk of foreign investment is already conservatively handled in this respect, the effects need not be great. Possibly more troublesome would be shifts of funds out of dollars, bringing at least transient pressures on the exchange rate, particularly if short-term interest rates on high -quality instruments fall in the wake of a default. In the context of our present exchange rate system, slippage of the exchange rate should not be equated with crisis. We have adequate means to maintain orderly trading, and in the end the exchange rate will reflect the overall health of the economy, and particularly the evidence others see that we persist in bringing inflation under control. The problem could of course be aggravated if the U.S. business recovery were severly affected or if confidence in American institutions generally were to be undermined. Foreign sensitivity in a sense does raise the stakes all around. It reinforces the need, if a default is not avoided, to contain its effects. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 14. Appraisal of the Financing Needs of New York Cit'LL the State, and the State Agencies I have emphasized that the severe economic, budgetary, and financing problems of ITew York City must be viewed in the context of the concurrent financing problems of the State and its agencies. While the State and its agencies are basically in a much stronger underlying position than the City, they have already been impacted to the point that recent new financing had to be arranged from official sources, and. normal market financing at this time is impossible in any volume.. Therefore, no "answer" to the problems presented by the plight of the City can be satisfactory or . complete unless confidence can be restored with respect to these entities as well. 1. The State While its relative position has declined over the past decade, reflecting a sluggish pattern of economic growth, New York State still ranks as one of the nation's wealthiest, measured by per capital income. measures, its tax burden is also highest. By most Taxes of New York State and local governments together took almost 16 percent of 1973 personal income, 37 percent higher than the national average (see Table II). Its total indebtedness (direct, lease purchase and moral obligation) has increased https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 15 from 2 .2.1; to $12.5 billion in the last decade, substantia lly faster than the national verae. Most of this increase has been accounted for by agencies; in relative terns , the direct long-term debt of the state has grown much more modestly, from $1.2 to $3.3 billion. But on June 30, 1975, after heavy seasonal borrowing, the State's direct short-term debt stood at over $3 billion. The combination of high expenditures, resistance to increases in already high taxes, and recession have combined to produce a difficult budgetary problem for the State, with a reportedly sizable deficit ranging to as much as $600 million or more for the year ending April 30, 1976. A shadow was first cast over the traditionally high credit standi ng of the State when it failed to respond to the finan cial difficulties.of one of its agencies, the Urban Development Corporation, in time to make possible timely repay ment of a maturing obligation. While that technical default of a weak agency was repaired, it did help to sensi tize investors to potential problems. Later involvement with New York City problems, reauiring substantial financing, poten tially aggravated the State's budget position and raised furth er questions. In the event, the State found that, after promising to lend money to the City, its capacity to borrow in the market to make good on that pledge was stric tly limited. It had to turn to state Pension funds and other funds under its own control. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 16 In the absence of further support to the City beyond current commitments--and tf it were assumed that aid to its agencies will not be necessary--my understanding is that the State can avoid any further market borrowing until late March or April. Substantial funds will be needed in Spring to meet budgetary commitments, including large payments for local aid. Because the market is now not open to it in size, the ability of the State at present to effectively assist the City is at best limited. Logically, its first priority must be to repair its own credit standing, a matter that would certainly seem to be within its remaining taxing capacity. 2. The State Agencies There are two large State agencies--the Housing Finance Agency and the Dormitdry Authority--with large amounts outstanding that must be rolled over. Moreover, additional debt must be issued if projects under construction are to be completed, and thus brought to the point of producing revenues needed for debt service. Both agencies are designed to be, and have been, self-supporting; both have debt that carry a "moral obligation" by the State to supplement, through the State appropriation process, the future flow of revenues in amounts sufficient to https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 17 cover the debt service on bonded indebtedness. Unlike the UDC, both agencies have normally enjoyed high standing in the market. For the two agencies together, about $1.5 billion of bond anticipation notes need to be rolled over or funded in the next year, averaging over $100 million a month. Additional sizable borrowings would be needed to complete current projects. Yet, as matters stand, neither agency can finance that volume of activity in the market. High interest costs on recent borrowings and new doubts about the economic strength of projects located in New York City have been a factor affecting investor appraisal of credit worthiness, quite possibly to an unwarranted degree given their "track record". Default by one of these agencies (or by one of the State's much smaller agencies) would affect the credit of the State itself, raising a further barrier to its reentry into the market. In such circumstances, the possibility of containing the repercussions of default by the City would be substantially diminished. At the very least, it seems clear that the State must now assume greater responsibility for the financial viability of these agencies. To the extent the State provides money to assist the agencies, there would, of course, be an additional drain on the State budget, reducing further its capacity to help the City. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 18 3. The City The magnitude of-the City's financial Problem has long been obscured by arcane bookkeeping and misleading budgetary Practices. However, progress is being made in developing more reliable and consistent estimates. The City's current operating budget was estimated to be in deficit by some $800 million prior to the recently announced cu Board. approved. by the Emergency Financial Control That is equivalent to about 7 percent of total operating expenditures. Perhaps a better measure of the size of the budgetary challenge is the fact that the deficit is equivalent to some 15 percent of the expenditures financed by the City itself, excluding debt service and its mandated share of welfare costs. (About 35 percent of this year's budget will be financed by State or Federal aid, largely related to mandated expenditure programs.) In a City already r. very heavily taxed, faced in recent years with large losses in jobs and outward movement of business and, therefore, with little natural bouyancy in revenues, the chance of increased City tax rates being of real assistance is, at the best, limited. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 19 Apart from the operating deficit, the Emergency Financial Control Board has just estimated that expense items still carried in the City's capital budget should total between $600 - '$700 million. Even if capital spending is confined to existing projects and essential repairs, it has estimated the amount of additional cash required this year could be of comparable or larger size. These cash drains include about $1 billion of maturing long-term debt, carried in the operating budget. But it is clear that the total debt of the City will rise a billion dollars or more this year, even with new economies now planned. Apart from the rise in the debt over the fiscal year as a whole, the city experiences substantial seasonal drains in its revenue flows through the late winter. Part of the seasonal and operating deficit has already been financed. However, the EFCB has estimated that, even if the City defaulted and refused to pay interest and redeem any maturing securities, the City would have need for more than $1 billion over the next six months. interest would add to this need. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Payment of 20 These peak totals could concei vably be reduced if some revenues could be advanced to help meet seasonal needs. But the basic point remains; even in default cash needs will be substantial. The keystone of any program to avoid or to manage default must be a most stringen t budgetary program --a program that provided reasonable assuranc e of balance or surplus in the operating budget, and some net debt reduction, over a limited period of time. Moreover, that program must be achieved without undermining the economic base for the future. Even with such a Program, some source of interim financing, beyond the amount of debt maturing, appears necessary if default is to be avoided, or, if default is to occur, to assure that it be mana ged in an orderly manner. Conclusion The full implications of defaul t by New York City cannot be foreseen with any con fidence. effects are already apparent. Some of the probable The risk of actual default pDbducing substantially more serious consequences nationally and internationally, with trou blesome implications for economic activity, is related in the first instance to the ability of the State of New York and its agencies to maintain their financial equ ilibrium. A crucial ingredient in the outcome would be the speed with which a realistic, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 21 credible plan of budgetary balance and reform, debt restructuring, and interim financing can be achieved for the City. Those ingredients seem to be essential to any successful approach to the New York situation, whether default occurs or not. o0o Attachments https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Table • New York City--Debt Position Dollars in billions) June 30, 1975 Maturities to date Balance (Col. 1 less Col. 2 Issued Publicly: Long-term Short-term TOTAL $ 7.8 4.5 $12.3 $ .4 1.61t/ $2.0 $ 7.4 2.9 $10.3 Does not include $.1 billion in short-term notes rolled over. NOTE: This is not an official statement of the City of New York. The figures contained herein are Federal Reserve Bank of New York estimates based on data obtained from various sources. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Federal Reserve Bank of New York October 21, 1975 Table II State and Local Taxes as a Percentage of Personal Income State Taxes as a Percentage of Personal Income Total New York U. S. State and Local Taxes as a Percentage of Personal Income Total New York U. S. 1963 4.8 4.8 11.0 9.5 1968 5.9 5.3 12.2 9.8 1973 7.9 6.5 15.8 11.5 Note: Taxes are measured on the basis of fiscal years ended in the respective years shown. Personal income is measured on a calendar year basis. Sources: U. S. Bureau of the Census, Governmental Finances (various issues); and U. S. Department of Commerce, Bureau of Economic Analysis, Survey of Curren t Business. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Federal Reserve Bank of New York October 21, 1975 October 21, 1 975 YIELD SPREADS DETiEE LE All HICII QUALITY IVIIMICIPAL BOUS Percent NEW ISSUE Baa MUNICIPALS 1 174‘ ss .4 ..4, A , , , -6 NEW ISSUE ...„, 5k\ - ------------e -' Aaa MUNICIPALS , 4. _111u_h_iiii tibilithi !did!! ti ii u_Iiilitlidillillit 3asis points 180\*\ YIELD ON Baa 11EVI ISSUE MUNICIPALS 160 MINUS YIELD 011 Aaa NEti ISSUE MUNICIPALS 140 120 100 80 60 40 111111111 lIlillill lit ii H II Ii ii I ii % r•... -% / \ I \ ..0--\ 1911 ef ..Z____-__#___ 1912 1914 1975 Note: Data are monthly averages except for the last plotting, which is as .of October 16, 1975. Source: Moody's Investors Service. Inc. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis HEGIIVE UAIL Ut tAbilithut. ur •1 iita UULLAR f OCLUtitl.F AiiiSE CURMICIES 01 13 MAJOR INDUSTRIAL CCETI IES, EXPORT-VEIGIITED 3 2 1 41 U i 1 . —1 - - -3 —2 —3 — -4 —5 -6 L.L.111 i ... Ill , 111 Li LI I ililtitil 1111111I II 2 June Pr'te:. 9 16 idly 23 30 .1 I I I LI Illitt 111.11_LI1 6 13 TO August 27 itlit ILI i ll 11111111 li 10 17 Sotenter 1975 24 ill,I hitt I II 111.11 t 1 11 1 15 22 Odder The effective value of the dollar is measured in terms of the deviation of daily New York offered rates for ti r,17 firm. SulTosnitian ceittral ratpc 1975, https://fraser.stlouisfed.org.Toqr: r,ipzencies Federal Reserve Bank of St. Louis 29 —7 1 Public Law 95-339 12426. Approved 8/8/78; H.R. Public Law 95-339 I: Loan Guarantees lent Guarantee Act - Title under guarantee, Loan City York to Treasury New of the interest on indebtAuthorizes the Secretary payment of principal and maximum length the conditions, the that stated States of New York. ;8; S. 785. after the date of the edness of the Cityprovided shall be 15 yearsRestricts city indebtguarantee approxof any indebtedness involved. ,e United States in funds of the city the pension of trust issuance in this Act to employee the under whenever . he United States guarantees guarantees Reservation edness Terminates such Fallon Indian city and the State. sold. or annually, of least indehtedness is, disposed States assess and collect, at year erved by the United Requires the Secretary tothan one-half of one percent per securities. not less of guaranteed fee guarantee Couna principal amount of escalate such fee to in,flie Tribes Business periodically on the outstanding the use cquire the right to vatioli. Authorites the Secretary tothe puhlic C r edit ma;ket. cuter to met before the obligor • within the Itesei duce the eligibility which ioust be city indebtedby the of trust conditions in held any be forth ill Sets commits to guarantee this obtain ovides that nothilig in Secretary guarantees or limited to:(1) the city is unable to rt.hts from not water but including, of ransfer submitted to the Secretary ness, • has city into (2) the reservation by this Act. credit elsewhere and expenditures other thErn capital items within the its three fiscal years of first the . to acquire lands a plan for bringing of each revenues for submits, on or before the balance with its tam n purposes.improvement such 30, 1978, and city beginning Juneyear thereafter, plans for bringing final the ,ty to: (1) the fiscal the construction of canal first day of each balance with its revenues no later than (2)the acres in the expenditures into beginning July 1, 1978. et- to irrigable four year period monitor to demonstrate to the 1,800 acres for fiscal year of the it of up to fiscal Requires the independent that it has the authority to control the satisfaction cif the Secretary entire period in which Federal guarduring the Committee on such guarantees city's fiscal affairs Conditions the making of conducted by ,n the Select audits annual antees are outstanding. ndment, S. Rept. 95-417 obtain agreement to statements and upon the city's accountants of its financial such audits. Sets ite independent public in assist shall Senate committee which eligible must fulfill to be assistestablish an audit amended State of New York Insular State financial that forth requirements the assurance ,inittee on Interior and including during the provided to the city for such guarantees Interior equal amount would be the State to establish a State on an of Committee ance in the year. Requires Rept. 95paying any interest and city's 1979 fiscal th amendment, H. the Treasury for is reserve fund to reimburse fails to pay and of which payment which the city House principal in calendar consent this Act. to develop guaranteed under productivity council be established House productivity. Dia that Stipulates employee e, amended methods to increase review and report annually and implement se amendments independent fiscal monitor to the rccts louse years council. • short-term notes in fiscal 1981 on the work of the :mate years city to offer to sell fiscal the Requires in bonds President not and long-term 1980, 1981, and 1982, terms and conditions including, but of additional program and 1982. List agreement by the city to implement a under this limited to, the outstanding indebtedness guaranteed outstand8/8/78; H.R. 11832. may be refunding any amount of guarantees that to guaranAct. Limits the total Allows the Secretary $1,650,000,000. Disarmament Act with respect indebtedness to time city any on accomat interest ing to principal and 1, 1979, Ind analyses required proposals. tee the payment of 1, 1979, and maturing prior to July are not budget January funds to pension • legislation or prior issued employee Arms Conrequired determination that the al year 1979 for the Atomic Enseasonal financing upon the sufficient amounts of considered to have failed to provide d the International to able without being violation of, the Internal pursuant to this Act requests of, or to be in requirements ipany its authorization category the meet Unitbureau and functional Revenue Code of 1954. enforce any right accruing to the -related Directs the Secretary to issuance of guarantees on city any result of the bring a civil action incomed States as a the Secretary to on Internaenforce Committee Authorizes to court the securities. from court or appropriate provision of United States district any related agreement, or any Rept. 95-1048 Act, House fiscal monitor, this in independent rule with special pliance by city, the State, the State law, by the d in House #254 or other party. Comptroller General to incall official roll .amended, other louse, or any and the specified transactions Authorizes the Secretary records, and otherindebtedness. Relations books, accounts, Committee on Foreign Foreign spect all financial affairs and Committee on to guarantee city relating to the city's :from the authority of the Secretary 95-843 the Rept. Terminates S. endment, 1982. indebtedness on June 30, without fiscal year limitation of such Senate appropriations provisions of this Act. Authorizes .d in Senate to carry out the necessary Code of 1954 be amended may Revenue sums as .:nate, to the Internal obligation guaranteed Amendments amendments II: Senate Title •ertain received on any during amendments with Makes interest income with respect to interest accruedInternal certain Senate Act this the under of I Title taxable under guarantee is in effect law shall the period such 1954. Stipulates that no provision of acquire House amendment to Bank of Code wancing Revenue in House authorizing the Federal Pi be construed as in Senate obligations. such cd to President 18 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis .1auesterressoramilinsigNMMINIONINIPPIR X#44$4: lb ,!! eo,.164# pat kvir. PUBL1C1.0t, °ilia-% I Public Law 95-340 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 5-10-78 5-22-78 6-07-78 6-07-78 6-08-78 6-08-78 6-09-78 6-23-78 6-28-78 6-28-78 6-29-78 ing. the Committee on Fink Reported to House from II. Rept. 95-112 ' 'Part 1) Finance and Urban Affairs, Committee on v .1),s and Reported to !louse from the Rept.. 95-1129 (Pal t I I) it. Means with amendment. ial rule in !louse. Measure called up by spec ed in House 6-08-78. Measure consider Con in. on Bank.. Fin. Motion to recommit to the ructions in rejected inst with Affrs. U. 2 Hse.,r.e.#431(109-291) amended. roll call #43 Measure passed House, (247-155) tee on Banking. Housing Referred to Senate Commit and Urban Affairs Committee on Banking. Reported to Senate from the . with ;unendment, S. Rcpt I lousing and Urban Affairs 95-952 nimous consent in Senate Measure called up by una ed in Senate 6-29-78. Nleasure consider nded, roll call #197 (53Measure passed Senate. aMe 27) Senate Conference scheduled in I louse Conference scheduled in 9 /louse. H. Rept. 95-136 Conference report filed in #595 call roll rt, repo ce House agreed to conferen (244-157) 0256 conference report, roll call 7-27-78 Senate agreed to (58-35) in House Measure enrolled 7-28-78 Measure enrolled in Senate 7-28-78 ident Measure presented to Pres 7-28-78 339 95Law ic Publ 8-08-78 6-29-78 7-10-78 7-18-78 7-25-78 amended Measure passed Senate, tee on Interior and Is. mit Com e lous I to rred Refe 4-05-78 nimous consent in 84. Measure called up by una se . 7-18-78 Hou in ed ider cons e sur Mea 7-18-78 amended, in lieu of BA Measure passed House. 7-18-78 738 to House amendment 7-27-78 Senate agreed in I louse lled enro sure Nlea 7-31-78 te Nleasure enrolled in Sena ident 7-31-78 Measure presented to Pres 8-01-78 Public Law 95-341 6-11-78 J.03-78 teho, en, sn,I ou ge.:tri Approved 8/11/78; S. 920. *Os on and gas aid ip ,,mc oil vey con to ma aho Okl .Autho;lies the State of 10(0 ated within the project designate64, leases to those lands situ Demonstration Area in Carter Ca.. onal eati :„1„ Recr 140 LP rat r Mur ende e surr Lak State of Oklahoma to Oklahoma. birects the States to issue a new deed to ed include oil scrit dced and the Unit lands, which deed shall of Oklahoma for such , conditiccii, uses d itte perm as nt pme the Intcrot 4,00 ti e‘ploration and des elo of y etar Secr the by s plan approval of development the naturs: I ehk! erve pres will ment elop n Arcs U assurances that such 'dev es of the Demonstratio horns kik Okla inc. and recreational valu of e Stat the ires . Requ maximum extent possible proceeds mu/ ent oh all of the gross subsequentirlt vw,m, to the Secretary 50 perL s land the on nt elopme sit suchesse from oil and gas dev Cts the Secretary to depo issuance of the deed. Dire of the Treasury as miscellanecill paid into the general fund . 'Set 18c . 12138. Approved 8/11/78; II.R Niguel. ral building in 'Laguna Dem hates a specified Fede Building." d '‘t,hc "Chet Holifiel the Committee on Public R-Cported to House from 5-19-78 H. Rept. 95-1210 on. tati spor Work .and Tran calendar in !louse ent cons by tip led Nleasnre 'cal 6-05-78 . se Ilou in ed ider Measure cais 6-05-78 Measure passeil-flouse 6-05-78 tee on Environment and Referred to Senat-Commit 6-07-78 Public Works the Committee on EnvironReported to Senate fron't 7-25-78 :sept. 95-1038 ks, Wor ic ment and Publ te Sena in Call of calendar 7-28-78 te Measure considered in Sena 7-2S-78 Measure passed Senate 7-28-78 Measure enrolled in House 7-31-78 Measure enrolled in Senate 7-31-78 ident Measure presented to Pres 8-01-78 340 8-11-78 Public Law 95Res. 102. Approved 8/11/78; S.J. to protect and cy of the United States edom to Stat that it shall be the poli their inherent right of freRequires ans ric Ame ve Nati or preset-% itional religions. cise their trad exer and , kess e:Op believe, ts:gencies, %alious Federal departmen the Presideni842 direct the the religious on act imp es duti whose and other insti't nent.alities cies and poli r thei uate eval ans to order practices of Nati% Americ Native religious leaders in with .on ul cons in es and ect procedur prot h, y ssar nece s nge the cha tices. to doe'niine and implen 4,;vt us cultural rights.amf prac igio rNel rica Anic ve Nati preserve d, in lieu of 11. p . sed House, amende 7/ 1 8/78 hfac080 Measure es to J. Res. 738 p *cy of the United Stat Declares that it shall he the nal ich.,ions 1 AlliCtir;111 Indians. itio ents and protect and pieserve the tiad , the 'deial depaitin Requires the President to dile and proe lures in consultation policies opriate agencies to evaluate their s leaders to d •rmine appr with native traditional religiou American eligious cultural ve Nati ect prot to y ssar changes nece rights and practices. ittee on the Select Col Reported to Senate from 3-21-78 ent, S. Rept. 95Indian Affairs with amendm Call of calendar in Senate 4-03-78 te Nleasure considered in Sena 4-03-78 116 cou Public. Law 95.342 CeiPtS. 10-20-77 public Law 95-340 ibile Law 95-341 pt.., 10-27-77 10-28-77 10-28-77 10-28.77 10-31-77 5-15-78 5-15-78 5-15-78 7-21-78 7-28-78 7-31-78 7-31-78 8-01-78 8-11-78 m the Committee on Reported to Senate fro amendment S. RrAt with s urce and Natural Reso "../*sLe 523 te under Measuresums, Placed on calendar in Sena nimous Consent . to he Considered by Una r" . nimous consent in 51111C 4' Measure called up by una te Sena in ed Measure consider amended Measure pass,?,d Senate, tee on Interior andIssill‘ff' P,t Referred to !louse Commit Affairs harge ii disc tee mit com 14 by Nleasure called up House 014 Measure considered in Ill,1 ' amended. in lieu of Measure passed House. '41 amendment with an 30 511 Senate agreed to House ment amendments House agreed to Senate se Measure enrolled in Hou te Measure enrolled ui Sena ident Measure presented tp Pres Public Law 95-342 • ,?.$ 4 4.,. and Reclamation Worm, rol Conc ing Min ace , the Surf for lila si f,..„ Amend: appropriated 525,000,000 1977 by authorizing to be unts as ',necessary fur salannOti 4, amo al ast*ki*, 1979; such addition cc beneqts; and such sums retirement and other emplo, 1,4s . 1980 sear al of ad Su , required for fisc Of 525,000.000 for each Authorins appropriations rmininh hydrologic con dete years 1979 and 1980 for operators. e ngs for speciqed coal and performing test bori Committee on LIO' t:I Repotted to Senate from theamendment,S. RtOr 5-09•78 with s urce Reso ral iti t Natu and 1 788 in Senate 5-16-78 Call of calendar ed in ScrAe Measure consider 5-16-78 Senate. amended Measnic 5.16-"/Y. by unaninious consent is up ed call sure Nlea 7-11-78 in House % ed ider cons e Measur 7-11-78 amended, in lieu dl , Measure passed House, 7-11-78 27 118 to [louse amendn nts 7-28-78 Senate agreed in Ilouse lled enro sure Nlea 7-31-78 te Measure enrolled in Sena 7-31-78 ident Measure presented to Pres 8-01-78 343 95Law ic 8-11-78 Publ Public La,95-343 Approved /11/78; S. 2463. July 24, 1978 TO: Board of Governors FROM: -//=;-77-`) Jay Brenneman -11,V-- SUBJECT: Conference Report on NYC Financial Assistance Act of 1978 (H.R. 12426) The conference colluaittee has reached agreement on the subject legislation, which is scheduled for a final vote in the House tomorrow and in the Senate tomorrow or Wednesday. As approved by the conferees, H.R. 12426 would authorize the Secretary of the Treasury to guarantee up to $1.65 billion in aggregate principal (but excluding interest) of taxable NYC obligations, at a minimum fee of 1/2 per cent per annum payable on any outstanding guaranteed securities. The guarantee authority (a) would be restricted to securities purchased and held by pension funds of the city or state; (b) could be used for seasonal or long-term financing within the limitations described below; and (c) would terminate on June 30, 1982. No direct loan authority is provided by the legislation. MM. cf4ky The $1.65 billion guarantee authority would be available in accordance with the following schedule and conditions: --FY 1979- $750 million, with ceilings of $500 million for longterm loans and $325 for seasonal financing. The latter, however, would be available only to city indebtedness issued before January 1, 1979; would have to be repaid before July 1, 1979; and could be used only if the city pension funds have reached the limit of their legal lending ability. --FY 1980- $250 million for long-term guarantees, plus the carryover of any unused portion of the $750 million authority for FY 1979; all of which would be available only for long-term guarantees, and would be subject to a one-House veto. --FY 1981- $325 million for long-term guarantees only, plus the carryover of any unused portion of FY 1979 and 1980 authority; all of which would be subject to a one-House veto. --FY 1982- $325 million for long-term guarantees only, subject to achievement of a balanced budget in accordance with generally accepted accounting principles; plus the carryover of any unused portion of FY 1979, 1980, and 1981 authority. Short-term guarantees for seasonal financing would thus be authorized for FY 1979 only; and all long-term loan authority would carry maximum maturities of 15 years. Other basic conditions, most of which were retained from the Senate version of the legislation, include: (1) requiring NYC to use at least 15 per cent of the proceeds from its annual long-term borrowing after 1982 to repay Federally guaranteed loans (subject to waiver by the Secretary of the Treasury), (2) specifying independent auditing procedures both to https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 7-1•`• -2- precede and follow extension of guarantees; (3) requiring New York State to maintain its 1979 level of aid to the City throughout the period of guarantees, except during any fiscal year that the City budget is balanced; (4) requiring New York State or an agency thereof to co-insure 5 per cent of the amount of the guaranteed obligations; (5) compelling New York City to test its ability to re-enter the credit markets in 1980, 1981, and 19827 (6) authorize the Secretary of the Treasury to go to court to enforce loan agreements made under the Act; and (7) requiring the City to establish a Productivity Council. Two more legislative actions must occur, in addition to the final approval of H.R. 12426, before Federal loan guarantees can be issued to NYC: (1) passage of an appropriations bill and (2) extension of Public Law 94-236, which preserves the tax-exempt status of NYC pension funds as long as they are participating in city financings. H.R. 12426 authorizes "such sums as necessary" for carrying out the provisions of the legislation, to be appropriated beginning October 1, 1978 "and to remain available without fiscal year limitation. . . ." Treasury and New York State contacts inform us that multi-year appropriations legislation is expected to be enacted without delay. The bigger problem is P.L. 94-236, which technically remains in effect through December 31, 1978, but which expired in effect on June 30 inasmuch as it was tied to the 1975 Seasonal Loan Program. Without reinstatement, it cannot be used for new financing arrangements as under H.R. 12426; and although Treasury Department has urged appropriate Congressional action, none has been initiated to date. cc: Messrs. Allison, Axilrod, Coyne, Ettin, Jones, Keir. Kichline, McKelvey, Petersen, Prell, Raiken; Mss. Marx and Minehan President Volcker Ned Guy https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 'pry L., Ibromm••• BOARD OF GOVERNORS or TI-IE FEDERAL RESERVE SYSTEM Office Correspondence To From Mr. Michael Prell Date July 14, 1978 Subject: New York City Federal Loan Guarantees Carol S. Marks The following conditions were agreed to by House-Senate conferees on Thursday, July 13, regarding federal loan guarantees for New York City. ,A. 1110W14 Amount 1. $1.65 billion long-term federal guarantees Year 1 2 3 4 2. NYC FY Amount 1979 1980 1981 1982 $500m $500m $325m $325m Specific Conditions .....,'„,4.44,44.4.44,- one-house veto one-house veto achievement of a balanced budget according to generally accepted accounting principles (GAAP). Up to $235 million seasonal guarantees a. available only during the first six-months of the City's fiscal year which began July 1. b. available only if city pension funds have reached the limit of money they can legally lend to the City and state pension funds meet the City's seasonal needs. c. repayment must be made before start of FY 1980. B. Maturities of bonds have a 15-year maximum. C. Bond purchases will be limited to State and local pension funds. D. An independent cowntittee will be established to make annual audits of the City's finances. E. State will be required to maintain the same level of aid that it is making this year. F. State or State agency must coinsure 57, of the amount of the guarantees. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis ' i‘ • ''..0 , a. -2- G. City must sell short-term notes to the public in 1980, 1981 and 1982 and long-term bonds in 1981 and 1982. H. After 1982, 15 per cent of any city debt must be used to repay and refund the guaranteed bonds, unless the Treasury Secretary waives the requirement. It is reported that this bill (#12426) will pass House and Senate chambers by the end of next week. •., https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis .0.11111.11•••• ick 1""•"" t PUBLIC LAW 95-339-AUG. 8, 1978 A .; " t• ude nararler r1 , 101. .• '• 01410.02.......0,40,00100011,4100, ., ^ NEW YORK CITY LOAN GUARANTEE ACT OF 1978 4. -" ••• • vr • v '• • • "*. "I" • •‘A • .. , • . • 0 "" . PP &• • r„ • 4. • 1., i!v r Ik) • .0 • • , t 4.0 ft 1 •, ,• • 29-139 0 - 78 (137) Cr' ;;:.• https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis „ r. • ".• S0600010021.001. Mon.rwarerrooraer • • , https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis •••••11, 92 STAT. 46 0 PUBLIC LAW Public Law 95 95th Congress 339 Aug. 8, 1978 [H.R. 124261 95-339—AU G. 8, 1978 An Act To authoriz e the Secret ary of the Treasu the city of ry to provide financia New York. l assistance for Be it enaeted.b y the Sena United States of America inte and House of Represen tatires of th Congffss asse e mbled, SHORT TITLE 31 USC 1521 . SECTION 1. note. Guarantee Ac This Act may be cited t, of 1978". as the "New York City Lo an TITLE I— LOAN GUA RANTEES 31 USC 1521 DE F1 N ITIONS . SEC. 101. Fo r the purpos e of (1) "city" me this title, (2) "State" ans the city of New Yor the, term— me an (3) "Secretary s the State of New Yko; rk; " means the (4) "indep Secret other entity endent fiscal monitor" ary of the Treasury: means an agen authority to authorized by the law of cy co nt the State wh , board, or ro l th e fiscal affair period for wh ic s of ic th e city during h has the and which au h assistance under th is title will be the entire stantially impathority the State has co venanted will outstanding ir ed during such pe (5) "financi not be subri od the State duly ng agent" means any ag; en au cy th orized by the or instrument of or in the alit law State, with reInterest of the city, and of the State to act on be y of no sp ec ot t he to r the city's fina subdivision ofhalf (6)"city the of (A) a fiindebtedness" means indencial affairs; na bt nc ed in ne g ss ag fo en r advanced to or applied fot, but only if the proc borrowed money and eeds r the benefit of the city, or ( thereof are (7) "fiscal ye B) the city; ar" means a section 111. fiscal year of the city, exce pt in GUARANTEE 31 USC 1522 . AU THORITY SEC. 102. (a) of the State, Upon the written requ est of the city in part, of in the Secretary may guar and the Go terest, princi ance with this pal, or both,antee the payment, in whvernor ole or not later th title, but any such gu of city indebtedness indebtednessan fifteen years after th arantee shall cease, to bein accorde date of the involved. fective (b) A guaran issuance of ef the city te e un der this title indebtedness is funds of the which is issued or is toeffective only with respec ci ty or of the State, an the State, or be issued to employee t to city otherwise di d shall terminate whenevof any agency of the ci pension sposed of by ty er interest not in such a fund such indebtedness is soor of vo (o lv ld or th in er than to a g a change in (c) When su be indebtednessever the payment of neficial ownership). ccessor in is guaranteed pr under this tiincipal and interest on tle, the Secret ci ary shall assety ss New York City Loan Guarante e Act of 1978. PUBLIC LAW 95-339—AUG. 8, 1978 92 STAT. 461 ly, a guarand collect from the issuer, no less frequently than annuallf of 1 per one-ha than less no of rate a at daily ted compu fee antee t of city indebtcentum per annum on the outstanding principal amoun the Secretary by d receive edness guaranteed hereunder. All funds fund of the in payment of such fees shall be paid into the generalguarantee fee the e escalat cally Treasury. The Secretary may periodi to induce the obligor to enter the public credit markets. CONDITIONS OF ELIGIBILITY title only 31 USC 1523. SEC. 103. The Secretary may make guaranteesunder this if— city (1) there is a reasonable prospect of repayment of the and terms its with ance accord in teed indebtedness to be guaran conditions; .(') the. Secretary determines that the city is effectively unable ere in to obtain credit in the public credit markets or elsewh needs; ing financ city's the meet to nt. sufficie terms and amounts tak(3) the interest rate on such city indebtedness is reasonable, other ing into consideration current average market yields for obligations guaranteed by the United States; long(4) during the four-year period ending June 30, 198'2, the borrow than (other city the of needs ing borrow term and seasonal h throug met be will title) this ing assisted or to be assisted under e commitments from the State, an agency of the State, privat will which ts amoun in s, market sources, or through public credit ity conbe.sufficient to enable the city, when the guarantee author erm and long-t its of all meet to ated, termin ferred by this title has s, and seasonal borrowino, needs through the public credit market may ary Secret the n, inatio determ such ing oemak e for the purpos will assume that all other conditions under this section are and be fulfilled; ing the city to (5)(A) the independent fiscal -monitor is requir other than itures expend all ng coveri s budget to adhere and adopt years of fiscal for not, would which of capital items, the results when the city beginning after June 30, 1981; show a deficit printing accoun ed accept lly genera with ance reported in accord or prior ciples and, for fiscal years of the city beginning on progress thereto but after June 30, 1978, to make substantial:beginning toward that goal, and, for each fiscal year of the. city ing the prior to June 30, 1981, but after June 30, 1978, is requir other itures expend all ng coveri s budget to city to adopt and adhere a deficit than capital items, the results of which would not showles estabprincip ting accoun with ance accord in • when reported lished under State law ; the approval • (B) the city has submitted to the Secretary, with accordance in and detail such in r, of the independent fiscal monito be, a with such accounting principles as the Secretary may prescriitems capital than other itures expend its plan for bringing all of full fiscal into balance with its revenues for each of the first threecity agrees the and 1978, 30, thine after ing years of the city beginn covered by to publish, after the completion of each fiscal year expendiand es revenu actual its iling reconc is analys an the plan, publish to and , itures expend tures with projected revenues and plan on tax the of impact the reflect which tions projec ic period rates; and https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 92 STAT. 462 Independent public accountants, opinions. Audit committee. Establishment. PUBLIC LAW 95-339—AUG. 8, 1978 (C) the. city submits, with fiscal monitor, in such detail asthe approval of the independent in accordance with generally the Secretary may prescribe and acc plan or bringing all of its expend epted accounting principles, a itures other than capital items into balane4 with its revenues of the four year period which no later than the final .fiscal year ning July 1. 1978, and the city begins with the fiscal year beginday of eoch fiscal year thereafteis required. on or before the first !ruaranteed under this title is r during which city indebtedness submit a plan covering the, fououtstanding, to have prepared and fiscal year which will result inr year period beginning with such deficit: when reported in accord budgets which would not show a ance with accounting principles forth in subparagraph (A) set (6) the independent fiscal mon itor demonstrates to the sat isfact icn of the Secretary that fiscal affairs of the city for theit has the authority to control the entire period during which assi ance under this title will be outsta stnding; (7) t he .city has agreed— (A) .to obtain and submit practicable a fter the close of to the Secretary, as soon as each fiscal year of the cit during which the Secret y ary may title or during which Any city make guarantees under this indebtedness guaranteed hereunder is outstanding. an opi accountants setting forth the nion of independent public resu lts of an audit by such accountants of the financial fiscal year, which opinion shalstatements of the city for such l preparation of such financial describe any deviation in the accepted accounting principl . statements from generally es applicable to governmen bodies and shall state that the tal ments was made in accordance audit of such financial stateing standards and according with generally accepted auditaccounting records and suc ly included such tests of the were considered necessary •unh other auditing procedures as der (B) to establish an audit com the. circumstances; and mittee which shall assist in the deterniination of areas of of, and evaluate the results inquiry for, review the progress of, independent public accountan audits to be conducted by such the mayor of the city, the comts, and which shall consist of dent of the city council, two ptroller of the city, the presimunicipal finance, and two offi individuals with expertise in cers or employees of two different firms of independent pub engaged either by the city or lic accountants which are not such individuals and such offi by the comptroller of the city, to be. selected by the indepe cers or employees of such firms (8)(A) in the case of guaran ndent fiscal monitor; tees issued after June 30, 197 State has furnished to the 9, the that the amount of financial Secretary satisfactory assurances to the city during the fiscal assistance to be provided by the State issued will not be less than year in which such guarantee is to be was provided during the fiscthe amount of such assistance which al year ending June 30, 1979, I during any fiscal year for whi except which the Secretary has determch the city has presented a budget generally accepted accountin ined is balanced. in accordance with g principles; and (B) the. State or an agency accordance with applicable Sta of the State, subject. to and in under is made. by the Secretary te law, when any guarantee here, shall deposit in a fund app by the Secretary, an amount roved which, together with all amo unts • PUBLIC LAW 95-339—AUG. 8, 1978 pendent •i be and •iples, a al items val year r begin'lie first itedness , red and h such show a • ples.set satisrol the assistu011 as Iry city ler this (I herepublic y such such . the icuutal stateauditthe .res as UI •-ist in ,,gress y such -ist of presiHe in Ii tier., not , city, firms :0, the ances State to be 0.'hich wept .idget , with !al in here:eyed , mints 92 STAT. 463 previously so deposited in such fund, shall equal not less than 5 per centum of the principal of and of one year's interest on .the then outstanding city indebtedness then guaranteed under this title, and which shall, under the direction of the Secretary, be used to pay, or to reimburse the Treasury for paying, principal and interest which the city fails to pay, the payment of which is guaranteed under this title, but in no case will the fund be used to pay or reimburse an amount in excess of 5 per centum of the principal amount of and of one year's interest on all guaranteed city indebtedness outstanding on the. date of the failure; (9) the city has agreed, in addition to other efforts undertaken Information, . by the city to increase employee productivity, to establish a pro- availability to the ductivity council (A) which shall consist of representatives of public. the city government and of city employee unions,(B) which shall • develop and seek to implement methods for enhancing the productivity of the city's labor force, and (C) which shall have a representative of the independent fiscal monitor as an observer, and the independent fiscal monitor shall review and report, not less than annually, on the development and implementation of such methods such report to be published and made.available to the public, and 'transmitted to the Secretary ;. (10) the city has agreed to 'offer to sell for distribution to the public its short-term notes in fiscal years 1980, 1981, and 1982 and its long-term bonds in fiscal years 1981 and 1982, unless the Secretary determines that any such otter would be inconsistent with the financial interests of the city ; (11) the city has agreed that— (A) following the. fiscal yoar ending June 30, 1982, and during any fiscal year thereafter in which a guarantee under this title is outstanding, the city will pay or provide, for the payment. of city indebtedness than guaranteed hereunder, giving priority to city indebtedness having the longest maturity or maturities, in a principal amount not less- than 13 per centum of the net proceeds of city indebtedness issued in public credit markets during such year,except that the Secretary may modify or waive such 13 per centum requirement to the extent. he determines that its application (i) would substantially impair the city's ability to meet its essential capital needs, or (ii) would substantially overburden the -market for long-term city indebtedness; and . (B) as soon as practicable after the Secretary determines that the -city has demonstrated its ability to meet its longterm credit needs through public-credit markets. the city will implement a program satisfactory to the Secretary of refunding any outstanding city indebtedness guaranteed under this title for the purpose of achieving complete repayment of such indebtedness at. the earliest. practicable (late, taking into consideration such factors as the Secretary deems appro)riate, including the ,effect of such refunding on the city's need to maintain the city's continued access to public credit markets for its long-term credit needs; and (12) the city and the State are meeting their respective obligations under this sect ion. ' Any determination by the Secretary that the conditions set forth in this section have been met shall be conclusive,such determination to be evidenced by the making of such guarantee, and the validity of any guarantee so made shall be incontestable in tlw hands of the holder of https://fraser.stlouisfed.org .74011PRIMP11,04,-.. Federal Reserve Bank of St. Louis .4.111,111110.61111111P.orwoo..v... https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 92 sTAT. 464 31 USC 1524 . PUBLIC LA W 95-339—A UG. 8, 1978 .such city inde bt ed ne ss , except for on the part of frau the manner in . Knelt holder. The Secretd or material misreprese wh ary is author ntation ic h such gu the terms and conditions re arantees will be issued ized to determine •agree to with an quired by d,in ad indebtedness , the city, a financing this section, to requiredition to from,or gu ag ar en an t, teed, and an terms and cond y other partthe holders of the city it io ns y as in he of security may deem interest su guarantee unfor the repayment of appropriate,including ch other modified, am der this title. Any such amounts paid pursuantpro-vision . ended, or wa ived - in the other term or condition to any discretion of m the Secretar ay be LI y. MITATION S ON GU ARANTEE AUTHORIT SEr. 104.(a Y under this ti )(1) The authority of th tl e e aggregate'prin shall not at any ti Secrkary to extend gu me exceed $1 ci pal.amount ar (2) Duri ,650,000,000 antees outstand in the $750,000.000ng the. fiscal year beginn ing. ing on July•1 shall be avai lable for the , 1978, not to (A) of wh guar the guarante ich not to exceed $500,0 antee of city indebtedexceed after its date.e of city indebtedness ma00,0(X) shall be availablness— of e turing more (B) of whic issuance,and than one• yefor. h ar no t to the guarante exceed $325,0 after its datee of city indebtedness 00,000 shall be availabl the provisions of issuance, but. only maturing in one, year ore, for to the extent of subsec less (3) During authorized by the fiscal ye tion (b). the sum ar beginning on July 1, 19 79, not to ex (A)-$250,00 ceed (B) $750,0000.000. and ,0 00 re du indebtedness ced by the principal ing on the guaranteed prior to July 1, 1979 amount • of city da te on which th paragraph, , and outs e guarantees ta 'shall be avai ar e m ade Under ndla this than one year ble for the guarantee of be made unde after its date. of issuan city indebtedness matu or the House r this paragraphif prioce except that.no guaranring more tees may to July 1, 19 stance that it. of Representatives agrer' es to a resolu79,either the Senate disapproves su •(4) During tion stating ch guarant in subthe stun of-L the fiscal year beginninees. g on July 1, 1980, not to (A) $325,000 exceed . (B) $1,000,0 ,000, and amount of ci 00,000 reduced by th and (3) andty indebtedness guarante e sum of (i) the prin made under outstanding on the dateed under paragraphs(2)cipal by a resolutithis paragraph, and (i on which the guarante (A) i) are sentatives pu on agreed to by the Se the amount, if any, coes vered nate or the rsuant to pa shall be av House of Re ragraph ailable for th pre. more than on e guarantee,(3), e ye of ar ci af ty indebtedne ter its date of may be made ss Senate or the under this paragraph issuance,except that no gumaturing if Ho pr us io e r of to July 1, 1980, arantees Representati substance that ei ve (5) During it disapproves such guars agrees to a resolution stther the ating in the sum of the fiscal year beginn antees. — ing on July 1, 1981, not to (A) $325,000 exceed ,000, if with genera lly accepted the Secretary determines presented it ba ac , lanced budg counting principles, thatin accordance et,and the city has ot ii an in all pro to t law : the (d not i!. (e) title U.S.( agent. is autl State city oi (other repayti standir of such itate thi the pre PUBLIC LAW 95-339—AUG. 8, 1978 92 STAT. 465 (B) $1,325,000,000 reduced by the sum of (i) the principal amount of city indebtedness guaranteed under paragraphs (2)(A), (3), and (4) .and outstanding on the date on which the guarantees are made under this paragraph, and (ii) the sum of the amounts,if any,covered by resolutions agreed to by the Senate or the House of -Representatives pursuant to paragraphs (3) and (4), shall be available for the guarantee of city indebtedness maturing more than one year after its date of issuance. (b) The Secretary may guarantee the payment of principal or interest, or both, on city indebtedness issued prior to January 1-,1979, and maturing prior to July 1, 1979, but only to the extent that the Secretary determines, after taking into account any commitments the employee pension funds of the city have. made with respect to the purchase of city indebtedness maturing more than one year from its issuance, that the employee pension funds of the city are not able to provide sufficient amounts of seasonal financing- as required Under section 103(4) of this title without being considered to have failed to meet the requirements of section 401(a) of the Internal Revenue Code of 1954 (as such requirements apply to such pension funds) or being 26 1JSC 401. considered to have engaged in a prohibited transaction described in Section 503(b) of the Internal Revenue Code of 1954. .26 USC 503. REMEDIES SEC. 105. (a) The Secretary shall take such action as may be 31 USC 1525. appropriate to enforce any right accruing to the United States or any officer or agency thereof as a result of the issuance of guarantees under this title. Any sums recovered pursuant to this section shall be paid into the general fund of the Treasury. (b) The Secretary shall be entitled to recover from the borrower, or any other person liable therefor, the -amount of. any payment made pursuant to any guarantee agreement entered into under this title, atid upon making any such payment, the Secretary shall .be subrogated to all the rights of the recipient thereof. (c) Notwithstanding any other provision of law,the Secretary shall provide for the withholding of any payment from the UnitekStates to the city or State which may be or may become due pursuant to any law and offset. the amount of such withheld payment against any claim the Secretary may have against the city or State pursuant to this title. (d) The remedies prescribed in this title shall be cumulative and not in limitation of or substitution for any other remedies available to the Secretary or the United States. (e) With respect to any debt of the IThited States arising under this "Person." title,for the purposes of section 3466 of the Revised Statutes (31 U.S.C. 191), the term "person" includes the city and any financing agent. Notwithstanding the provisions of such section, the. Secretary Waiver. is authorized to waive, wholly or partially, the priority for the United States established thereunder with respect to any indebtedness of the, city or the Ii mincing agent issued after the effective date of .this title (other than any imrebtedness the proceeds of which are applied to the repayment prior to the stated maturity thereof of indebtedness (utstanding on or before the effective date of this title owed to the lender of such proceeds) if, in his judgment such waiver is necessary to facilitate the ability of the city to nieet its financing needs. No waiver under the preceding sentence shall by its terms subordinate the claims of the https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis r1,-,11.1.1111•11,1•••••••••••+,.. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 92 STAT. 466 Civil action. Jurisdiction. PUBLIC LAW 95-339—AUG. 8, 1978 United States to those of any creditor of the city or any financing agent. (f) The Secretary may bring a civil action in any United States district court, or any, other appropriate court to enforce compliance with the provisions of this title, any agreement related thereto, or any provision of State law related thereto, by the city, the State, the financing agent, the independent fiscal monitor, or any official of any of the foregoing, or any other party to any such agreement, and such court shall have jurisdiction to enforce such compliance and enter such - orders as may be appropriate. INSPECTION OF DOCUMENTS 31 USC 1526. SEC. 106. At any time a request for a guarantee is pending or indebtedness guaranteed under this title is outstanding, the Secretary is authorized to inspect and copy all accounts, books, records, memorandums, correspondence, and other documents of the city or any financing agent relating to the city's financial affairs. GEN Eli.% ACCOUN Ti NO OFFICE A UDITS 31 USC 1527. Report to Congress. SEC. 107. The General Accounting Office is authorized to make such audits as may be deemed appropriate by the Comptroller General of all accounts, books, records, and transactions of the city and any financing agent. No guarantee may be made under this title unless and until the city and any financing agent agree, in writing, to allow the General Accounting Office to make such audits. The General Accounting Office shall re,port the results of any such audit to the Congress. REPORTS TO CONGRESS 31 USC 1528. SEC. 108. Within three months after the date of enactment of this title, and at six-month intervals until :rune 30, 1982, and thereafter at twelve-month intervals, the Secretary shall transmit to the Committee on Banking. Housing, and Urban Affairs of the Senate and the Committee on Banking, Finance and Urban Affairs of the House of Representatives a report containing a detailed statement of his activities under this title. SEVER ABI LITT 31 USC 1529. SEC. 109. If any provision,of this title. is held to be invalia, or the application of such provision to any person or circumstance, is 'held to be invalid by a court of competent. jurisdiction, the remainder of this title title, or the. application of such provision to persons or circumstances than those as to which it is held invalid, shall not be affected thereby. TERMINATION 31 USC 1530. SEC. 110. The. authority of the Secretary to make guarantees under this title terminates on June 30, 1982. Such termination does not affect the carrying out. of any contract, guarantee,or other obligation entered into pursuant to this title, or the, taking of any action necessary to preserve or protect the interests of the United States arising hereunder, except that. no commitment to guarantee the payment of principal or interest on city indebtedness under this title shall be effective after such date. „r • • PUBLIC LAW 95-339—A11G. 8, 1978 92 STAT. 466 Civil action. Jurisdiction. United States to .those of any creditor of the city or any financing agent. (f) The Secretary may bring a civil action in .any United States district court. or any other appropriate court to enforce, compliance with the provisions of this title, any agreement related thereto, or any provision of State law • related thereto, by the city,. the State, the financing agent, the independent fiscal monitor, or any official of any of the foregoing, or any other party to any such agreement,. and such court shall have jurisdiction to enforce such compliance and enter such. orders as may be appropriate. • ^. !••;.•"; -•04';', • c t 4-, • • . ..4.11••1... • INSPECTION OF DOCUMENTS 31 USC 1526. SEC. 106. At, any time a request for a guarantee is pending or indebtedness guaranteed under this title is outstanding, the Secretary is authorized to inspect and copy all accounts, books, records, memorandums, correspondence, and other documents of the city or any financing agent relating to the city's financial affairs. am Report to Congress. , . ? r•vt. • c• .• SEC. 107. The General Accounting Office is authorized to make such audits as may be deemed appropriate by the Comptroller General of all accounts, books, records, and transactions of the city and any financing agent. No guarantee may be made under this title unless and until the city and any financing agent agree, in writing, to allow the General Accounting Office to make such audits. The General Accounting Office shall report the results of any such audit to the Congress. ••• k REPORTS TO CONGRESS 31 USC 1528. , ,• ds;1,4--11; ••, -• GENERAL ACCOUNTING OFFICE AUDITS 31 USC 1527. • . ;, As. p , SEC 108. Within three months after the date of enactment. of this title, and at six-month intervals until June 30, 1982, and thereafter at twelve-month intervals, the Secretary shall transmit to the Committee on Banking, Housing, and Urban Affairs of the Senate and the Committee on Banking, Finance and Urban Affairs of the House of . Representatives a report containing a detailed statement of his activiunder this title. > , , r • 41.e . r • . .4. • •SIATRABILITY tiesL 31 USC 1529. SEC. 109. If any provision of this title is held to be invalia, or the application of such provision to any person or circumstance, is held to be invalid by a. court of competent. jurisdiction, the, remainder of this title or the application of such provision to persons or circumstances Other than those as to which it. is held invalid, shall not be . affected thereby. . TERMINATION 31 USC 1530. SEC. 110. The authority of the Secretary to make guarantees under this title terminates on June 30, 1982. Such termination does not affect the carrying out of any contract, guarantee,or other obligation entered into pursuant to this title, or the taking of any action necessary to preserve or protect the, interests of the United States arising hereunder, except that no commitment to guarantee the payment of principal or interest on city indebtedness under this title shall be effective after such date. ...:•=• ;•. - • .• 4. • g I i7.0-....•91:r," '• k Amminimisommemineumummixlimmein.111111=1111111111•10 , er4s, Digitized •for FRASER • https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis • • PUBLIC LAW-95-339—AUG. 8, 1978 92 STAT. 467 AUTHORIZATION. - 4141, SEC. 111. (a) There are authorized to be appropriated beginning 31 USC 1531. October 1, 1978, and to remain available without fiscal year limitation, such sums as may be. necessary to carry out this title. ( - b) Any other provision of this title to the. contrary notwithstanding, the authority of the Secretary to make any guarantee under this. title shall be, limited to such extent or amounts as are provided in advance in appropriation Acts.. • ▪ • * '• . 1 A7' ': • .% •▪ 44,2'20. '' -4 ... • 4 44-v-,•4" 4 , ' TITLE II—AMENDMENTS -TO THE INTERNAL'REVENUE CODE OF 1954 SEC. 201. TAXABILITY OF CERTAIN FEDERALLY GUARANTEED OBLIGATIONS. (a) CERTAIN FEDERALLY GUARA NTEED OBLIGATIONS.—Section 103 of the Internal Revenue. Code. of 1954 (relating to interest on certain 26 USC 103. ••••• governmental obligations) is amended by redesignating subsection (f) as subsection (g) and by inserting after subsection (e) the following new subsection: "(f) CERTAIN FEDERALLY GUARANTEED OBLIGATIONS.—Any obligation the payment of interest or principal (or both) of which is guarr:nteed in whole or in part under title I of the New York City Loan Guarantee Act. of 1978 shall, with respect to interest accrued during the. period for which such guarantee is in effect,. be treated as an obligation not described in subsection (a).'". (b) OBLIGATIONS .1.1AY NOT BE ACQUIRED BY FEDERAL Fis.xcixo 12 USC 2285a. BANK.—Nothing in any provision of law shalt be construed to authorize the Federal Financing Bank to acquire any obligation the payment of interest or principal of which has at any time been guaranteed in whole or in part under title I of the New York City Loan Guarantee Act of 1978. -(e) EFFECTIVE DATE.—The, amendments made by subsection (a) 26 USC 103 note. shall apply to taxable. years ending after the. date of the enactment of this Act. - 2 • • „ , k (.• • • ,2:0. ••-t. I. ";;;. '•S.• ^,P;)• • • " • 11 '2.. •, t. t • 1. • lc •• 1 ' 4 `. • 1111 • 1.„ • •• ,)"." • .•• . ,••• 4. , 6:,' "••••• *••,.." • ' IIII oh IIIIMinMM . Approved August 8, 1978. • 71M7 , 7= . - ..• LEGISLATIVE HISTORY: HOUSE REPORTS: No. 95-1129, Pt. 1 (Comm. on Banking, Finance and Urban Affairs), and Pt. 2(Comm. on Ways and Means); and No. 95-1369 (Comm. of Conference). SENATE REPORT No. 95-952(Comm. on Banking, Housing, and Urban Affairs). CONGRESSIONAL RECORD, Vol. 124 (1978): June 6-8, considered and passed House. June 29, considered and passed Senate, amended. July 25, House agreed to conference report. July 27, Senate agreed to conference report. WEEKLY COMPILATION OF PRESIDENTIAL DOCUMENTS, Vol. 14. No. 32: Aug. 8, Presidential statement. .T 0 1 ^ 41111101111111&&4111111,,—.0-4,•••-•-........---••••poik.,. ••• . • Digitized•,;,(44.....: for FRASER **, •-•,..4•• • t https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis • • . PUBLIC LAWS studies, such contract, or evaluations as are necessary rid of this Act, e implementation National center for Education appropriate the to rrovide House of the Congress and to ch ic • at least annually, programmat prolects and programs rning ams progr • Act and other Federal ocation of handicapped children. days after , not later than 120 er ach fiscal year, the Commission appropriate committees of the the a report on Congress the ide toward the provisions of free d c education to all handicappe all ing a detailed description of ties conducted. the ants to States which have met an have resents of this Act and lan, to be used for the provision the .ion and related services to um three to five. Sets a maxim .f $300 per child. the to relating provisions under this Act to State ayments te s, and to local and intermedia •ies. the in changes proposed y specific learning with hildren ess. to the Congr , be submitted ren 1 presently to mean those child basic in one or more of the ing ncesses involved 4,71 understand or 'Itritten, which lage, spoken ty aifest itself in imperfect abili or do , speak, read, write, spell, :ulations. Health, Education, Secretary of recipient of assure that each positive make this Act shall employment in advance and :loy programs individuals in upped •is Act. State or upon application by any intermediate or agency nnal grants , the Commissioner to make of the cost of altering r all remove to equipment nqs and rrierE. into enter to the Secretary tion, institutions of higher educa other educational agencies, or the for agencies, 'onprofit on centers of operation rid the for materials and , edia ttee •ted to Senate from the Commi tbor and Public Welfare with iment, S. Rept. 9(4-168 nt ire called up by unanimous conse nate ire considered in Senate ire passed Senate, amended, roll *227 (83-10) rred tc House Ccmmittee on ation and Labor in ore called up by special rule ore considered in House lieu ore passed House, amended, in .P. 7217 orence scheduled in Senate erence scheduled in House , H. erence report filed in House 94-664 S. ,?rence report filed in Senate, . 911-145 t under e agreed to ccnference repor #715 oension of rules, roll call 4-7) https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Pub. L. 94-144 rence report, 11-19-75 Senate agreed to confe roll call *513 (87-7) 11-19-75 Measure enrolled in House Senate 11-19-75 Measure enrolled in President 11-20-75 Measure presented to 11-29-75 Public law 94-142 Pub. L, 94=143, Approved 12/9/75; H. R. 10481. Act Financing Seasonal Cit New to k lf pon written request 8[the tiry Prov est d orize thereof (auth New York or a financing agent tary of the Secre the , York) New of by the State agent city or such Treasury may make loans to the Act. this to ct suble than the last Matures such a loan not later year in which it was city's fiscal day of the percent one rate at made, and sets the interest yield on the current average market greater than Secretary Permits the United States obligation. he deems appropriate. to require such security as due under this Act Permits him to offset payments payments to the city. by withholding other Federal this Act at any Limits outstanding loans under bits extension Prohi ,000. 0,000 $2,30 to one time is in compliance city the s unles loans er of furth with the terms of past loans. Seasonal City York New Establishes the and authorizes Treasury the in Financing Fund to it. Authorizes appropriation of $2,300,000,000 or ds of the city the Secretary to inspect recor Prohibits loans agent thereof. any financing Accounting unless the General Act under this to conduct audits of the Office is authorized agent thereof. State, city, and any financing of this Act on Terminates the loan authority 1978. June 30, the Committee on 11-06-75 Reported to House from with Banking, Currency and Housing 2 (Part I) amendments, H. Rept. 94-63 ttee on Ways and 11-06-75 Referred to House Commi Means the committee on 11-13-'75 Reported to House from , H. Ways and Means with amendments Rept. 94-632 (Part II) by special rule in 12-02-75 Measure called up House in House 12-02-75 Measure considered , amended, roll 12-02-75 Measure passed House call #728 (213-203) Committee on 12-03-75 Referred to Senate Affairs Banking, Housing and Urban by unanimous consent 12-03-75 Measure called up in Senate in Senate 12-03-15 Measure considered n to refer to 12-03-75 Motion to table motio rs Banking, Housing & Urban Affai 540(57-23) Committee passed Sen., r.c.* in Senate 12-03-75 Cloture motion filed Senate 12-04-75 Measure considered in d Senate, roll call 12-05-75 Cloture motion passe 41553 (70-27) in Senate 12-05-75 measure considered e, roll call *566 12-05-75 Measure passed Senat (57-30) House 12-08-75 Measure enrolled in Senate 12-08-75 Measure enrolled in President 12-08-75 Measure presented to 12-09-75 Public law 94-143 Pub. L. 94-144. Approve 12/9/75; H. R. 6692. July the period Authorizes appropriations for 197E, as may be 30, mber Septe gh throu 1, 1976, activities for and necessary to conduct programs on June 30, 1976, rized autho was ng fundi which not affect any other provided that this Act shall for such period. law authorizing appropriations 6-11-75 Committee on Reported to House from the amendment, Government Operations with 1 rehr.14. ' f•'d 4.‘ https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis COMMITTEE REPORT ON TIIE NEW Y ORK CITY LO AN PROGRAM On April I an and Urban Affa d 2, 1976, the Senate Committe City Seasonal Fiirs held its first oyersirlit hear e on Banking. Housing nancino• Act. ings on. the New This law, Public York La w9 b 4143 was enacte the midst of grea d on t Co De ntroversy.:NeW mber 9, 1975 crisis since the York Ci had ce gone from crisis, in Municipal Assi credit. markets closed to it inty to behalf of the. Cistance Corporation (MAC) waApril 1975. In June, the ty s fo an rm d re ed ceive eertain reve to borrow on ings. By August nu as well, andb th it was apparent that the markes to cover these borrowets were closing Board was estae State stepped in. The Emerge to bl ncy Financial CoMAC is he d, wi th broad authorit th e ntrol Go ve rn or • contracts, and y to run the City's fiscal and as Chairman, and with to fi na im ncial affairs, to re pose a three-year required the Ci ject wage fr its budget intoty to draw up and implement eeze. The State law also a ba Fi and City official lance by June 30, 1078. Th nancial Plan to bring. s sought financia en ment. l assistance from in September, State the Federal gove After long an rnand the Administd often contentious deliberati to New York Ci ration over the need for Fe ons within the Congress deral financial as ty, an agreemen tion with New t was worked ou si ance Yo t by the Administ rk St at e following points an d straCi ty officials, which : included the • A State pass ed term City note three-year moratorium on to 6 percent; s coming due, and a. reductio$1.6 billion in shortn in the interest • More than $2 rate • $2.5 billion in00 million in additional City taxes; period of the fi loans from the union pens na nc n funds over ia l pl an , to needs; meet the Cityio 's regular borrow the • $800 Million ing ea to the City; an ch year in advance aid paym ents from the St • Up to $2.3 bi d ate ll io n a ye ar in seasonal.financi Fe de ra l lo ans to cover th ng needs through The New Yo e City's June 30 the Federal loanrk City Seasonal Financing Ac , 1978. Secretary of the s. It provides that the loans t was passed to authorize ar to be made on Treasury determ repayment. The ines there is aere ly the lo an asonable prospeif s mu st be repaid in full City's fiscal ye ct. of ar at s, th wi e th interest at a end of each of th Treasury's cost ra e te of one percent ab borrowing. A Credit Agreof ove the em en t concluded betwee the various Ci n the Fe and State author the terms and ty ities pursuant deral government and co nd it to th io ns of the loans an regular reports to d repayments.e Act spelled out th e Tr ea su It al ry on New York .and its progress under the Financ City's financialso required In the course of ia condition l Plan. Committee on Ba Senate debate on the New nk Yo in rk g, Housin City legi ation, commitment to the conduct contin g and Urban Affairs undertsl oo uing oversight of the New Yokrka firm City (1) dr: 8•4 —- - - —• - — - --- • -- - • . tr, , 111111 . 1 1 . 111111r •••• —- —- - p J AWN,v,/ i• , • t • , • .4, d •• https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis toward fiscal responsi financial situation and time progress being made the firSt set of hearFor bility under the Seasonal Financing propTam. close look at the'City's a ake to need ings, the Committee saw time our findings and 'recomprogress and problems.,This report details ngs and information heari the in given mendations, based on testimony obtained subsequently. S FINDING", AND ItECOAIMENDATION in repot-ts by the Special 1. Find;rill.-1110 l.40111111itiN` 1111(1-: eVidel1e.0 City is falling behind Deputy (State) Comptroller that New York required-by its Financial schedule in making expenditure reductions ing its targ,ets.and making Plan, even though the City claims to bo meets budf,et cut-; and revenues City' time If substitute cuts where necessaiy. this will raise ,;erions quescontinue to lag behind its own projections, the Financial Plan and out carry lo tions about the City's ability Federal loan progmam balance its budget by June :10, 1978, when the expires. rtance of the execuIlecommendation.—In view of the crucial impo mmends that the reco e itte Comm tion of the Financial Plan, the unting. Office, _Acco ral Gene the of tance assis the Treasury, with s expenditure City' the of ses analy conduct or obtailt independent the Treasury further reductions and revenue estimates, and that ess. The Committee progr s City' develop its capacity to monitor the ned the services of retai DOW has sury Trea understands that the t. effor an 'Arthur Andersen Sz Co. to aid in such than one-third of the 2. Finclipy.—The Committee f. inds that more Financial Plan prosed Revi expenditure reductions contained in the depend.on State or Federal 1976, 25, h Marc on posed by Mayor Beanie Since the. hearings retake-over of programs now funded by the City.nts on this from either itme comm no ned obtai vealed that the City had ittee believes that time the State or the Federal government, the Comm sm by including alreali of e degre r highe a Financial Plan should show St ate and Federal osed prop ternative reductions to back up all of the and Urban Development's ing Hous of nt assistance. The Departme on 8 housing subsidies to recent rejection of the City's request for secti($30 million in fiscal year ing hous c publi for reduce the City's spending support to.. the Commit1977 and $55 million in fiscal year 1978) lends tee's view. ds that the Secretary llecononendation.—The Committee recommen to provide_ Federal not or her whet ing of the TreasUry, in determin cial Plan _adopted Finan loans in fiscal year 1977,.review carefully the Control Board. cial Finan y genc Emer the by the City and approved by would raise Plan cial Finan Failure to adopt and adhere • to a realistic Federal the y repa to ty abili s City' serious doubts about New York 1979. year loans and re-enter- the credit market's by fiscal maintaining the current 3. Finding.—The Ccmmittee finds that ss of the Financial Plan, three-year wage freeze is vital to the succe the City's budget. if of hird one-t or since the wage base is $4 billion, tentative agreement with . the cost-of-living increase provided in the oved, and then extended appr been the Transport Workers Union had have cost the City about to the municipal employee unions, it could https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis S75 millio connwnds n more over li li concerned the. Control Board fe of th? Fizum Hal P fo that any p lan. The C dtt1) a v isc gr r rejecting that agri o 4,Tr011 tintc(1 to t .49nent butmmittee unions. Evs he . for nef, remai million or en a minor raise T rottatio with the WOFIcers would etns a m n ft m o t uni ed to City doubts on. t le, which would employees cipal employee h u e n C d i e t c r y's abilit ould cost S• mine I lus F - Recomme v to in 20 three-year ndation : The k.10I repay the Federalancial. Plan and ca 0 -I n l t o w n a a i n g t s t e eet fr seriously consider en eeze is not, maintec0n1ntends that if ding, the the curi.e ained, t 4. vm ,(ing. City provi —The CommitteeFederal loan progthae Secretary shoulnt d d e m cities, or o s its employees a finds that. the frin . re ltir m f g e t h b e e n F e ederal gov fits New Y ore gener benefits of er ou o tures, 1)01 Iifer the greatest. po nment or private in s than those of othrk • er d te u n nt s o t ia r w y l. .C and in the than a one future. Yefor reducing person uts in fringe p e r e e n t t n o verall re el expend the City Recomme question a ndation.—The Comduction in these beneis proposing no morim n e fi i y benefit red Financial Plan w ttee recommen ts. d h u i s c c t t h i h o i a ns in labor tt do June 30, 19 contracts es not include .substhe Secretary 7 ant negotiated 5. FindiPg.6. for the periial hinge administer ---=-The C.sommitt od. after York City ed under State law ee finds that the r ' e Recommens housing stock an is a major cause o nt control progra State confr clation.—The Com d time erosion of its f the decline of Ne m needed to ont this problem sq mittee recommend real estate tax bas w e. ph ua s 6. Findingase out rent controlrely and, if necessa that.the City and r . . y — , The Comm • take the ac York City itt tions markets afmay not be able to ee finds there is a po m te e ss r e ib t J ility that une :30, 1 all of its cr Federal lo 978 ed N bankruptc an program expires. If the (..av cannit needSin the privaew y , o t it u n b l wi o ess it can rrow after te ll be -face Governor me d tution pro Carey told the Commet its credit need with the prospectthe s hi o i Recamme bits the State fr ttee that the Ne through the Sta f tion takes ndation.—Since a om lending to a mun w York State Constte. iofficials g at least two years,mending the New icipality. to removeive immediate consi the Committee. reYork State Constit needs, or any constitutional deration to taking commends that Sta uel t impedime nt to meetthe necessary actio e 7. Findinse face a potential N i n n g e g . w — the City's The Commi York City stantial d cre t $941 milliebt oblig,ations comtee finds that thebankruptcy in 1978 dit has not p on in notes current ing due after Ju City will have s . these oblirovided in its plan ly under moratorine :30, 1978, includubincrease tigations. There will for an accumulat um, and that the C ing and to inc me wages of City em also be intense prion of funds to repity pl re es a Recomm ase other expendi oyees, to expand sure on the City y importancendation.—The Comtures as well as to capital constructi to on, after fiscale of assuring that mittee recommen reduce taxes. markets, t year 1978 if it isthe City's budget ds that, in view of and submi he'Secretary of th to regain access will remain balan the through 1 t to him a tentati e Treasury reques to the private cr ced ed ve financia 981. t l plan for the City to prepa it re the fiscal years 1979 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Tdo 4 FOCI'S OF THE OVERSIGHT HEARINGS prior to the oversight hearings, the Committee NV:lz, 111(erned following tlw New York City passage of the Seasonal :Financing Act. A repc,rt done for the Trew:urv by the accounting firm of Arthur Ander,•en & Co., issued onjamtarv 14, raised- a -number of questions about New York City's Financial Plan and its ability to achieve a balanced 'budget by June 30, 197S. The .Ander!,:en report. cont(buded that the City was 'far behind sf:hedule in in itking the $200 million in bud(ret chits required for fisc,:l p,ar 1976, that its revenues could fall far short of the estimates in the Plan, and that the City's iv-count lug ,,.\-,tems: were in such bad shape that it was impossible for City 101'het. officials to control expenditures effectively ress made under the Financial Plan. or chart the pro, While the City denied the existence of some of the problems pointed Omit. ifl the Andersen report and saidthat others were being worked out, its first financial report to the Trea:mry, issued on February 15, showed there 'WAS cause for concern. The report revealed an increase of $297 million in the City's projected deficit for the Financial- Plan period. The total deficit was estimated to be Si.021 billion, up from the $724 million figure contained in the Financial Plan presented to Congress and the Administration during the debate on the legislation. This meant that in order to achieve a balanced budget by the end of. fiscal year 1978, the City Would'have to cut its budget by.$410.million for each of the next two fiscal years—twice the amount or the cuts required for fiscal year 1976 and two-thirds higher than the cuts originally planned for fiscal years 1977 and 1978. Subsequent reports suggested that. Mayor Beame was planning to "backload" most of the budget cuts int6 the third year of the Financial Plan, in hopes of receiving Federal aid, and that Governor Carey believed ft "stretch-out" of the Federal loan program would be needed. Members of the committee expressed their concern that there appeared to be no firm resolve to take the actions needed to balance the City's budget. Meanwhile, New York -City faced the threat of a mass transit strike on April 1, the opening day of the hearings, if negotiations. between the State-run Transit Authority and the Transport Workers Union failed to result. in a contract agreement by that date. The outcome of these negotiations was seen as crucial to the City's ability to maintain the three-year wage freeze, a major element of the Financial Plan. In the oversight hearings, the Committee's attention focused on three main areas of concern. 1. Protection of the Federal interest. Will New York City be able to repay the Federal loans provided under the Act by the end of its fiscal year, June 30, 1976, as required by the law? Looking ahead, will the City be able to show a reasonable prospect of repayment of Federal loans in the two succeeding fiscal years, in order to qualify for continued financial assistance under the Act? 2. Prospects for New York City's balancing its budget by June 30, 19M. Will the City, under the aegis of the Emergency Financial Control Board, take the actions necessary to reduce expenditures and arrive at a balanced budget by the end of its 1978 fiscal year, when the V.CH 111)0111", deVC101)111011i s ()I ...11661110Wal6iiiIIIM.114.11.1i1.4,000/V. 4 . Jf• h.caolidisoarow https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 5 Federal ,loin program expires? Is the City on budget reduction; required in fiscal year schedule v,-it Ii respect to 1976? Have City officials developed a realistic and workable Financia l Plan for .making the necessary budget cuts in the next two fisca year l s? 3. Prospects for the City's re-entering June 30, 1978. Will the City be able to rega the credit markets after meet all its borrowing needs in the privatein investor confidence and markets without Federal assistance from fiscal year 1979 onward? Members of the Committee explored e questions at length in the course of the two days of oversighthes t hear ings. The following persons appeared as witnesses at the hear ings: William E. Simon, Secretary of the Treasury , who is charged with administering the New York City Seasonal ncing Act,. Hugh L. Carey, GovernOr of the State of Fina Nev York and Chairm an of the Emergency Financial Control Board. Abraham I). Beanie, Mayor of the City Sidney Schwartz, Special Deputy (State)of New 'York. of New York, who performs the audit.funcComptroller for the City tion for the Emergency Financial Control Board. Elmer B. Staats, Comptroller General of the United States, General Accounting Office, who is authorized unde r the Act to make such audits RA may be deemed appropriate and report the results to. the Secretary of the Treasury and to the Congress . Joel W. Harnett, Chairman, and Burton H. City Club of New York, a non-partisan civic Marks, President, The tors the performance of the City governme association which monint. The remainder of this report describes the the oversight hearings and the Committee's information obtained in. recommendations based on that.information. PROTECTION OF THE FEDERAL INTEREST The Committee is reasonably confiden loans in this fiscal year will be paid back tinat this point that Federal full by June 30, 1976. In his prepared statement, Secretary Simon said he was "satisfied that there exists a reasonable prospect that the entir repaid." He announced the schedule of repa e $1.26 billion will be• April 20, $240 million on May 20, $250 mill yments: $270 million on million on June 30. Mayor Beanie ident ion on June 20, and $500 revenues pledged for repayment of the ified $1.94 billion in City loans, most of which are anticipated State assistance payments. Gove rnor Carey assured the Committee that New York State would be able to borrow the funds it needed in the private credit markets in orde r to make those assistance payments to the City. New York State began its spring scheduled, and New York City then borrowing effort on April 15 as made its first repayment to the Treasury slightly ahead of time—on Apri l 6. There appears to be no reason to doubt that the other fiscal year 1976 repayments will be made in timely fashion. However, apparent changes in the repa cause for concern about the true size of yment schedule give some the City's deficit. According to a schedule circulated by the Treasury to the Appropriations Committee last December, there were supposed to be $941 million in S.R. 900--2 ;04,411111111_, ".e https://fraser.stlouisfed.org ' Federal Reserve Bank of St. Louis , 6 ion in May, and none by the loans outstanding in April, $596 mill dule, there will still be $750 sche end of ,June. Under the present about. 60 percent of the total, million in Federal loans outstanding, not be repaid until June 30, will ion as late as June 20, and .$.500 mill . the very last day of the fiscal year d that the City intends to borrow The 'Committee remains concerne ion it repaid on June 30, and mill back on. July 2 at least the $500 e the planned repayment meets Whil ion! bill $1 as h niuc as perhapsis not convinced that a. one-day the letter of the law, the Committee 0 million or more represents .a hiatus followed by a new loan of.$50 have ,rani It appears the City may lving true seasonal financing pr%, revo a for need tant cons a .patterned its cash how so that it has dision to $1 billion, Nv hich raises seasonal credit of from $500 iniiiutiy after ets mark it cred the into turbing questions about its re-c June 30, 1978. y to examine closely the City's The Committee urges the Secretar underlying the need for a large July loan request and die reasons . It would seem advisable that the infusion of Federal cash at that time government's financial exposure Secretary act to minimize the Federal . Looking toward the longer term, at this early point in the. fiscal yearsteps toward revising the City's the City and State should take thing out sonic of the 'seasonal revenue collection schedule and smoo the City's borrowing needs and ce shortfalls.. This would in turn redu the attendant interest costs. enter into the Secretary of the These questions should continue to or not to provide the July 2 Treasury's deliberations over whether7 fiscal year. The law requires 197 loan and subsequent loans in the e is a "reasonable prospect of ther e rmin dete that the Secretary to the City. The question of repayment" before he Makes a loanloan- is genuinely due to seasonal whether or net the City's need for the that determination. shortfalls should continue to bear on 1978 ED BUDGET BY JUNE 30, PROSPECTS FOR A BALANC et by June 30, 1978, depends The achievement of a balanced budg and adhering to.'a workable ting crucially on New York City's adop do this, it will raise serious doubts Financial Plan. If the City does not ral loans and re-enter the credit about its ability to repay the Fede efore, the Committee urges the markets by fiscal year 1979. Ther consideration to the proposed Secretary to continue to give detailed ation of it reasonable prospect Financial Plan in making his determin ral loans. Fede of repayment of the fiscal year 1977ie announced a revised Financial Bean or May , On March 25, 1976 l years 1977 and 1978. This is the . Plan to close the budget gap in fiscainal Financial Plan was drawn up first detailed revision since the orig er the new Plan, the City would and presented in October, 1975. Und million----$379 million in fiscal year Cut its spending by a total of $862 1978. Added to the $200 million in 1977 and $483 million in fiscal yeareved in this fiscal year, the combined annualized cuts planned to be achi now wipe out the present deficit, budget cuts would be sufficient to lus. surp l smal a come out with calculated at $1.051 billion, and to r for coming up with a.concrete. layo A the ds men Com tee mit The Com doing this ahead of the April 15 plan for balancing the budget and for advance of the Committee's in budget submission deadline and up .the Plan required many hard ing draw that w kno We . ings hear https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 7 decisions to cut more slashed. Mayor.Bea and more out of *a budget that has City has taken to dame listed in his statement some of th already been e actions the te: reduced employ since January.1975— ment, by about 45,0 n de 00 people. cr ea se of 15 pe class sizes; cut back on trash collections;rcent; instituted huger school and so on. eliminated 40 fire. comp anies, Nonetheless, the Co mm it teecontinues to that not everyone ta hear disquieting ru mors . a feeling among Ci kes the three-year - plan seriously, ty that, there is off icials that after the will be more easy November an extension of themoney flowing and the City will aselections there k for an Fe deral loan program budget cuts. and a stretch-out ofd get the The Committee take s the three-year Fina and it would be shee ncial Plan quite seri ously, would support an exr folly for anyone, to assume that, th te e Committee ns ion of the Federal June 30, 1978 expi loan prog thought of asking fo ration date. Secretary Simon stram beyond the ated th r an extension never ev a move has no suppor en entered his mindat, the t in th e . Such Co mmitte it, is the Committee' s view that selions e, and as this report indicates, Plan would be grou nds for the Secretar deviations from the Financial any further loans to y the City under theof the Treasury to terminate The Committee's ov Seasonal Financing Act. about the City's prog ersight hearings revealed seri ou re s ss qu to es tions da te , ab proposed Financia ou Plan, and about th t the feasibility of the recently pitfalls looming ahlea e Ci ty's ability to avoi d .certain the Plan, Such as a d which could seriously jeopardize the success of ne w la bor contract which three-year wage free would undermine th ze. e A. Progress of the fi scal . year 1976 budget reductions The new Financ l Pl an assumes that, th budget savings reia e $200 million in an quired fo- fiscal ye nualized Beame testified to ar 1976 will be . achi th eved. Mayor at ef fect and added th 94 percent on target at, the City is pres . ently However, both the Co mp tr oller General, Mr Deputy (State) CoMp . Staats of the City's claims troller, Mr. Schwartz, question, and the Special ed the accuracy . In a report submitted to cial Control Board the Emergency Fina co ve ri ng th ne period through Ja Mt. Schwartz cont nuary 31, 1976, ended that only 39 tions were on target pe ., while the City ma rcent of the planned reductarget. intained it was 82 percent on When questioned ab ou t th is disc that they counted the savings differen repancy, City officials claimed actions were subs tly and, furthe responded at, a latetituted where slippage occurred.rmore, that other substitute cuts woulr point in the hearing that he ha Mr. Schwartz the figures were no d be on target by the fiscal year d been told the 's end but that t yet ready for revi Since the Committe ew. e' s he ar in gs , th the budget cuts s grown, not dimi e controversy over the progress of on April 28, Mrha . Schwartz contennished. In separate reports released from 20 to 64 perc de ent behind (dependid that the City was anywhere its expenditure re ng on the program) in meeting on target. Specificduction goals, while the City said al it was virtually ly , Ci ty Budget Director had been only a Kumm had been made up6 percent lag, amounting to $16erfeld said there million, and that through substitute cuts. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 8 ial In view of the crucial importance of the execution of the Financ nce the assista with ry, the Treasu that Plan, the Committee believes indeof the General Accounting Office, should conduct or obtain e, revenu and ions reduct iture expend pendent analyses of the City's le s availab analysi an such have to ought ary Secret estimates. The coining before deciding whether or not to provide Federal loans in the s with sation conver uent subseq from tand unders fiscal year. We Andersen and Treasury officials that the accounting firm of Arthurthe Committee eless, Noneth e. purpos this for d Co. has been retaine ty as well, capaci ring monito urges the Treasury to develop its own ial Plan. Financ the of ion execut the of ance import given the crucial should and effort this in The General Accounting Office should aid ndent indepe own its ss Congre the e .provid to n also be in a positio evaluation of the City's efforts. ting system, The poor quality of New York City's financial accounof the City's cy accura the noted by many observers, casts doubts on carry out and plan to ability its on also and ions, claimed budget reduct that the out d pointe ony future expenditure cuts. The GAO testim i.e. basis, cash a on itures expend for t accoun to City's policy has been revfor t accoun to and when they were made and not when incurred, This is enues on an accrual basis, whether they were received or not. the rmore, Furthe the exact opposite of accepted accounting practices. the at itures expend ling control for system ve City has had no effecti their time they are made or for ensuring that agencies stay within budget ceilings. ry and the Section 6.7 of the Credit Agreement between the Treasu sh an. establi to City the es requir ties various City and State authori ses exwitnes GAO The 1977. 1, July by system ting accoun te adequa that farpresszd serious doubts as to whether the City could even meet and the ts accoun its of stale c chaoti t presen the given ne, off deadli out. them hten straig to magnitude of the effort required continue The Committee urges both the Treasury and the GAO to possible, as y rapidl as system ting accoun pressing the City to reform its most the e provid to order in ements improv m interi te and to institu underttee Commi The le. availab accurate and complete information of the stands from testimony it has received that a full-scale audit system ting accoun the until done be City's financial condition cannot t in is reformed. Regular and complete audits are an essential elemen the of on entati implem ore, Theref restoring the City's credit rating. seek to is City the if needed ly urgent is system ting new accoun • private credit after fiscal year 1978. and 1977 years fiscal for plan al financi ed propos the in B. Weaknesses 1978 , the While some of the projected expenditure cuts are questionable its in lies Plan ial Financ ed propos the of ss most glaring weakne s nment Gover l Federa and reliance on the assumption that the State to order in City, the by funded now ons functi will take over certain achieve the required reductions in the City's budget. year 1977, $51 Of the $379 million in budget cuts planned for fiscal For the next million, or 14 percent, depend on State or Federal action. additional year, the percentage jumps dramatically. Of the $483 million t,'require percen 50 , or cuts planned in fiscal year 1978, $241 million by the med perfor now ons functi in mainta Federal or State funding to City. 9 The State is asked to carry the major share the load. Under the revised Financial Plan, the State would assuof me the funding of the courts, probation and Corrections system's, and sity system, at a phased-in cost of $24 million also of the CitjUniverin 1977 and $2.40 million in 1978. • • However, when Governor Carey MIS quest hearings about the City's plans, he was quiteionNI in the Committee that New York State was "not in a position todiscouraging. He said become host to any spending programs or absoib programs from other ment." While stating that there would be discussion levels of governwith the Legislature, the 'NI-Ivor, and the panels works on the proposals jug on the transition, Governor Carey said none of the requested trans fers were going to happen'overnight." The Committee does not dispute the. City's right- to request. the State to take over some peop%anms, in view of the Nonetheless, we feel Obligat NI to point out thatCity's financial these assumptions in the Financial Plan are questionAle and that the tate hums _not. yet made any commitment to pick up ;he prog tin-F4 the City wants • transferred. The City infi peopo.-cd altotnativ reduc e tions Legislature does not take the neeessary actio in enr e the State reductions ainount to $24 million jfl fiscal year ns. The alt.7il mive. 1977 and $127 million in fiscal year 1978. While these cuts wc•uld mnahe the State to take over the courts, probation and up for a failure of corrections systems, -they would not touch the funding, 1100(15 of the City University Doubts also arose in the Committee's- mind regar ding the proposed Federal role in reducing the City's budget outla ys. According to the revised Plan, the major portion- of the 70,300 units in the State and. City public housing- programs'would be transferre d to the Department of Housing and Urblm Development's secti S rental subsidy program, taieter either •the provisions for rehabon ilitated housing or for existing housing.'The sayings to the City were projected at $15 million for fiscal year 1.977 and $40 million for fiscal year 1978, and eventually the City envisioned HUD's taking over the whol e program, at an annual cost Of $250 million. In addition, the City plan ned to put .the rent increase exemption program for senior citiz ens under section 8, for a savings of 515 million in each of the next the Financial Plan document admitted that two,fiscal years. While might not even be permissible under existingsome of these, act-ions exuded a blithe confidence that these admin HUD regulations, it. istrative barriers .could be overcome—in time. to save the City $85 milli on, over the next two fiscal years. When HUD Secretary Hills was questioned New York City Plan in an appropriations heariabout this part of the staff knew anything about the proposal. After ng, neither she nor her the Secretary reported to the Appropriations further consultations, day that apparently no New York City offici Subcommittee the next the Department of Housing and Urban als had even approached feasibility of this massive transfer of housingDevelopment about the on May 6, HUD rejected the City's request subsidy programs. Then for the section 8 subsidies, thus confirming the Committee's doubts. The Emergency Financial Ccut.rol. Eont Financial Plan submitted by tile Mayor andd is studying time revised is scheduled to report its findings in early May. The Board is authomized to applove the Plan • 4t 4 trh14 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 10 and to require any changes it &elm-. necessary before giving that approval. Since the Governor is also Chairman of the Control Board, he should play a crucial role in decidiiT the likelihood of the City's achieving the projected cuts. The Committee urges the Treasury to follow- el0,4,1y the (lcqiberaan.alyses it feels are tions of the Board, and to do any in needed. If the Finaneial, Plan is ilot workable, because it relies on State id Federal actions that will not be forthcomimr, then the Secretary should insist that on the City anti the Control Board adopt a realistic Plan. If they still do not do s- o. this ought to be frrounds•for cutting off the Federal loans.' C. Pitfalls threatening the success of the financial plan Even if New York City comes up with a.. viable Financial Plan, there are many pitfalls lying in the City's path which threaten the success of any plan, however well designed. Threats to matntaining the three-year wage freeze.—The Committee's most immediate, concern is with the three-year wage freeze declared by the Control Board, which is a crucial element in the Financial Plan. Since the City's wage base is around $4 billion. or one-third of its budget, even a small wage increase, say 5 percent, would wipe out all of the $200 Million in cuts scheduled to be achieved in fiscal year 1976, and might scuttle the FinancialPlan as well. The contracts of all the City employee unions and the so-called "covered agencies" independent of the Mayor's control (BOard of Education, Health and Hospii al Corporation) expire this year, except for the teachers union which has been working without a contract since last year. . Traditionally the transit Workers settlement has been the bellwether for the City employee contract negotiations, even though the Transit Authority is a State agency and not under the Mayor's control. Since. the transit workers contract expires on March 31, while the City labor contracts end on June 30, the earlier transit settlement has generally been used as a benchmark by the municipal employee unions. The Transit Authority reached a tentative agreement. with the Transport Workers Union at 4:00 ft.111. On April. I, thus staving off a mass transit strike due to begin at 6:00 0.m. That agreement, which contained a cost-of-living increase, was turned over for review by the Emergency Financial Control Board, -which is authorized to l(ject any contracts not in compliance with the Financial Plan. The cost-of-living increase provided in. the 'tentative •agreement raised disturbing questions. First, the. additional funds to cover it were supposed to come from "productivity increases," but these were not defined in the agreement, and there was no indication of how prochictivity increases would eliminate the need to spend more money, in the absence of substantial attrition or lay-offs. Second, and more importantly, the agreement would have changed the formula for cost-of-living increases from 10 for every 0.4 percent rise in the cost-of-living index to 10 for every 0.3 percent rise. While this .may sound • small to begin with, it turns out to be enormously costly over time. It means that every worker potentially would get a dollar's worth of cost-of-living increase where he once got 760, which comes out to a 3.3; percent increase in future costs. This is precisely the sort of generosity that got the City in trouble to begin with. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis "Pr https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis L 11 Estimates prepared by the City's budget office showed that thiSsettlement, if approved, would have cost the Tionsit Audiolily $71.3 million more in 'payroll spemling. If the co,:i -of-living increase and formula change. were then extended to the City unions--and pressures to do so would.have lven 1mmense-11ml the cost to the City would have been about $375 million over the life of the Financial Plan, with $94 million of that, attlibut able to the -101mul; change alone. Both Mayor Beame and Governor Carey told the Committee flatly that the City would not provide any more subsidies to the Transit Authority for pay increases beyond the $1s3 million in subsidies contained in the Financial Plan. The . Transit Authority does, of course, have the ability to raise fares in order to pay for the increase, although the Mayor pointed out, lhat this would have a number of adverse repercussions on the City's residents and its economy.• However, other unions cannot fall back on such a revenue-raising option. Thus, the spill-over effect of a transit workers pay raise on the other employee unions would have severe consequences for the City's. Financial Plan, even if there were no immediate expenditure impact. Recent developments raise: hope that State and City officials will. stand firm on this vital issue. 'First, the Control Board referred the transit workers.agreement to State Attorney General Lefkowitz for a legal opinion, lie ruled that the cost-of-living raise in the tentative agreement did constitute a wage increase and thus violated the State's wage-freeze.law. Then Governor Carey announced on April 30 that the Control Board had rejected the contract and instructed the Transit Authority to negotiate and submit a new contract by May 15. The Governor held the door open for some increase in .pay, but said it would have to be more clearly tied to worker productivity. The Conunittee commends the Control Board for rejecting this key contract and believes this action shows a real determination to set New York City's financial affairs in order. Nonetheless, it is obvious that the pressures to give ground will be great from here on, and whether the City and the Control Board will be able to withstand these pressures remains an open question. If no new agreement is reached with the transit workers, them will be a mass transit strike beginning on :July 1, just before the Democratic National Convention oPens at Madison Square Garden. During that same time period, the difficult negotiations with the City employee unions will be taking place, and there is considerable doubt that the City can get:agreement by June 30 on new contracts that comply with the Financial Plan. This raises the threat .of more. strikes in early July. In the past, the City has been willing to pay a high price for labor peace. That is one of the root causes of its present financial distress. The Committee believes the City and State must stand -firm. A pay raise to the transit workers would set a dangerous precedent for the City's labor negotiations. Judging from tile figures cited previously, any increase approved and then extended to all City employees would cost a minimum of $200 million over the next: two yea's. Thus even a minor raise could undermine the Financial Plan and cast doubts on the City's ability to repay the Federal loans. Under these circumstances, the Secretary should seriously consider ending the loan program. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis U the wage question is important Reducing fringe benclits.---- Although to the question of fringe benefits, and in itself, it is inextricably linkrsedconside:aHe potential for hp proving this is an area which on'eprosperl.s. While a Congressional Budget. NOW York City's financial not way out flat -New Yt.lk(-1; y's solarir.s are ,enee that its °lice stiuiy has evie sit es, titer,-is of line with thoEe of othermelor eciti other muniel panties, or of the of thos ed e\ce far its fringe bemf rprise. • Federal government or privateyente t into the fringe benefit problem inl wen imon test n's Simo Secretary fisca astonishing figures. In the currenthealth some detail and revealed some s, sion —pen fits bene ge frin ee year, the bill for City employcome to over $2 billion, half the total insurance, vacations, averages out to more than $S,600 payroll. The cost of the-;e: benefitse is higher than the average income per employee, and this figure alon Even if vacations are not counted, per person throughout the cOuntry.City we kers-ratTe from 34 perer,nt fo• fringe and retirement beneitsse pay, while The national average is less ba. of ent pex 51 to as hirrit a.; • than 20h percent. benefits. ge frin ee loy emp of believes that this area The Committee under m fro out New York City to get offers the best opportunity for of the past: and to reduce the ruinous the costly contract settlemenks. The Committee is not suggesting that burden of escalating labor cost ld be di;advantaged relative to other New York City employees shou or private sector. But at the present r workers, whether in the public edibly privileged coMpared to othe e time, many City employees are incr som bear ld dinate fringe benefits shou workers. Those who receive inor financial retrenchment. ced 'for 's City of the costs of the m the Secretary's testimony, shows The following chart, taken fro ge benefits: frin the current costs of certain key Millions Pension Social Security e Health and hospitalization insuranc Union welfare funds -Union annuity funds Uniform allowances Training funds Total SI, 165 214 170 107 36 19 1 $I, 712 up the largest item. The City has Pensions and Social Security make from the eia1 ecui ii V:ystern, aw announced its in;ention to withdrever,. it is evident, from the above how . 1978 ch Mar of as effective s are the -111:-,11c:--,t piece of the pie. that Social Secmity contribution be entitled to a reasonable penWhile a long-time worker should ing pensions goes beyond the sion, the City's method of comput the retirement income often goes bounds of strict reason, just as er received in his last year on the beyond the take-home pay the work etary, a married New York City a job. In an example cited by the Secr with 25 years of service, receives employee who retires at age 65, disposable income in the last year pension equal to 125 percent of his res for other cities are Atlanta, 43 of his employment. Comparable figuas, 52 percent; Los Angeles and percent; Chicago, 47 percent; Dall and Detroit even come close to Memphis, 54 percent.. Only Denver 1 and 104 percent, respectively. New York City's level of generosity-9 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 13 New York State Mayor Bennie told the Committee that theof pension benefits. level the in tions reduc bits Constitution prohi that can be done to Even if the Nlayor is correct,. there is much on burdcn, includpensi e futur 's 'City the e. amend State law and reduc oyee contribuempl of t ing such things as restoting the requiremen the metiu:d of ing chang —and part in taken tions—a step already computing pension -entitlement. City also pays $36 On tOp of the regular pension benefits, theh in twn provide still whic million a year into Union Annuity Funds, groups. more retirement benefits for cor.tain employeeNew York City pays .Health benefits is another expensive item. time of $.170 million a 100 percent of employee health insurance. to the , certainly more .11111year. That is far more - generous than most citiesthis is.not the end of rnment—and even erous than the Federal gove The City also feeds -$107 million a year ded. provi its benef h the healt which then. allows - the into something called union welfare funds, e or retired, with still unions to provide their meMbers, whether,activ eling and legal servmore benefits: free dental care, eyeglasses couns en, get unlimited ices. To top it off, some employees, such as firem and abuse. sick leave, which is an open invitation to waste pays out $19 million City The on. menti ves deser One final item to employees who are year in uniform allowances, much of which goes me to the ridiculous is subli the From rms. unifo not required to wear but a short step. million in fringe Mayor Beame has proposed a reduction of $24 barely more than just is That benefits in his revised Financial Plan. as higher education one percent of the total, while basic services such Mayor claims that The nt. and health are being cut 13 and 14 perce should be entitledeto no cuts in pensions are possible, that everyone re funds. welfa free health care, and that all unions have the Mayor and The Committee remains highly skeptical and urges rs' overly worke City in the Control Board to work for far larger cutscuts in fringe benefits in l antia subst out With generous fringe benefit,. certainly more than labor contracts covering the period after June.30, Financial Plan can ble credi a that ts doub e one percent, the Committe the Federal loan nuing be developed, and this is essential for conti program. increases, there is Given the continuing pressure for take-home pay ce, and that is to balan in et budg its keep only one way the City Can inc,the levels of cut back on fringe benefits. It can be done--by reducits,t‘by increasing benef g utin comp of od meth benefits, by changing the is one.type of budget employee contributions, or by other Means. This more in the future. lot a and now g thin savings that can mean some the way of the in ls . Pressures for additional spending.—Other pitfaland will continue to are e Ther ion. Financial Plan deserve brief- ment cuts and allow addibe intense pressures on City officials to rescindrsity is an outstanding Unive City . The tional spending here and there decide where they example. For weeks the administrators refused to . Lengthy debates made be to had said would make the cuts the City resulted. Finally, and spirited street demonstrations were all that on a rationing rsity Unive the pa the Mayor simply, and wisely, be it June 30 gone, was y mone the ever when that program and said w(wk, but it will this ly umab . Pres or May 1, there would be 110 more 14 s is hardly a model of sound planning and cooperation. The .Mayor' the between tions nerrotia ted action does appear to have accelera and State aid, City University and the State On the issues of t uition the INIayor's beyond tely .comple A more troublesome development, Legislature State the byy Stavisk the of passage control, is the .munici-. State's the ; re(11111'0!• e over the Governor's veto. This 111Pfl!4lIr as in kVA same the at on educati for g spendin e pnlities to continu to forced is the City if previous years. Mayor 13eame claims that million $147.9 !nd sp, . to have will it law, y Stavisk implement .the has more a year for education than the Financial Plan projects. lie on educati al addition this offset to made be. could announced cuts that but spending, including lay-offs of 5000 more municipal employees, if courts State the in' law the e challeng to lie has said he intends first the the Board of Education presses to get the funding increase. Since ed request y formall has Board the ement, Ittyor made .that announc in the $157 million more in fiscal Vcar 1976 funding than is proyidedamount that of million $121 that Mayor's budget and has claimed y bill. is needed .to bring the budget into compliance with the Stavisk al addition the if City the sue will Board officials have stated th0ly obvious will this suit., the loses City If the ming. fortheo funds are not . have. serious implications for carrying out the Financial Plan. great of area another is control .—Rent control rent of The problem to concern and great political sensitivity. Secretary Simon pointed control rent cited and base, tax estate real City's the erosion of the York's as the major cause of the "aging, decay and decline .of New rental 300,000 1960, Since ing. compell are figures housing stock." The running y currentl are units.have been abandoned, and abandonments at a rate of 30,000 units a year. In the last, ten years, the City's hoinsing stock increased only 2 percent. And interestingly enough, poor. there is no evidence to show that rent control benefits the me Quite the contrary, it helps a small, privileged group of long-ti lled uncontro in rents up driving while class, residents, largely' middle . units. There is no doubt that rent control is a highly emotional and politidelegation cal issue. Indeed, members of the New York Congressional Decemb er, last City the to ce assistan while pleading for Federal control. threatened to vote against any bill that would threaten renthearings, Mayor Beame sidestepped the issue at- the Committee's while Governor Carey, admitting, the problem, ended on this rueful note: "Frankly, it is an election year, and we have more tenants than landlords in the Senate." ing The •Committee cannot view with complacency the continuthe mirrors which ons, collecti tax estate real City's the in decline State decline of its housing stock. Whatever the political costs, the the and , problem control rent t the confron to have will Legislature the not issues, c economi City should rest its case on the broader nes o political narrowly The gloomy economic on tlook.—The final pitfall, the most troublesome of them all, is New York City's economic situation, now and in the foreseeable future. Governor Carey spoke grimly of the "factors which are undermining, frankly, the structure and the hopes and the future, of the City." These include an unemployment rate of 12.2 percent the the loss of 141,000 private sector jobs in the last year alone, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 13 . increase in welfare costs, the loss of cOnstruction jobs due to cut.; in the capital budget, and the undeniable fact that New York City is lagging behind.the rest of the country in terms of economic recovery. The GAO witnesses also emplis,.-,ized the 'economic- problem and spoke of the need for the City to institute long-range economic forecast in. • • The 1-tinicipal Assistance. Corporation has been delegated the t ask of studying and proposing measures to.aid We City's economic development, including changes in tax laws which discourage business invest, ment. The Conunittee realizes 'that economic recovery is crucial to.the City's regaining financial neon Ii and urges the Treasury Department to aid the City in its effort to fashion a sound economic development program. JUNE 39, 1978 PROSPECTS FOR RE—ENTERING THE CREDIT MARKETS AFTER The last remaining question, and ultimately the most important, is whether New York City will be able to get off the Federal dole and back into the private credit markets by July 1, 1978, when the Seasonal Financing Act expires. That depends not only on the City's balancing its budget, a very difficult task, as has been shown, but also on its regaining investor confidence, which is much harder to gauge. • Secret-4y Simon expressed "cautious optimism" about the City's prospects. He indicated that if he were a . private lender, he would look favorably on a city which had successfully 'weathered a. severe financial crisis, acted firmly over 30 months to wipe out a $1 billion budget deficit and correct a decade of financial neglect, and had developed first rate financial accounting and management systems. The .Committee is more skeptical. Comptroller General Staats described the magnitude . of the problems facing the City even if it completes the Financial Plan and survives to June 30, 1978: . • $941 million in publicly held notes under moratorium coining due in November 1978, and another $1 billion in institutionally held debt coming due in instalhnents. between 1978 and 1986. 1 • Strong pressure foi. catch-up wage increases, when the threeyear. freeze ends, if it. is successfully maintained; plus the problem of losing good employees during the period of the freeze. • The problem of having 8555 million in operating expenses still included in the capital budget. All Of these are-factors which will put enormous strain on the City's budget immediately after it comes through the rigors of the three-year Financial Plan. If the budget, is in balance at that point, and St ate law requires that it be so,it will be very hard to maintain that balance, especially if there is no significant increase in revenues. The Committee is concerned that these factors could make newly issued New York • City obligations unattractive to investors. New York State has encountered unusual diffieulty in marketing its obligations this year, despite a balanced budget. a history of high bond ratings, and no tradition of financial gimmickry. The State's problems have stemmed 'largely, though not wholly, from its association with the City's financial problems. If New York State finds it hard to escape those associations, how can New York City escape its own history? point. oiler a new I There is reason to beliver that the Municipal Assistance Corporation will at sonic reduce substanexchange for the notes under moratorium. at a more favorable interest rate, which could tially the amount of notes coming due in November 1978. • ••0, , 341 ti ' 1;• A ,V14 fo 1. 16 ' rt, a,44 • **- •. t'' • the be facing .New York City atntial esse Because of the problems that will is it eves beli ttee ommi (..l it end of the Financial Plan period, the ance .with section 6.11 of the Cred that the Treasury insist on compliy to use its best .efforts on and after to the Agreement which requires the Cit borrowing needs without tesortcrucial July 1, 1977, to meet its seasonal a be well d coul 7 197 l year Federal lonns.•Such effort S in fisca the markets when the loan period nter re-e to ity abil 's City the of loans test "cold turkey," after the Federal ends. If the City Ities to do this fall fiat on its face, with disastrous it may well have been cut l consequences. ism on New York City's financiaht (oug There is a need for .cold, clear real the e rais to ty bili onsi tee's resp prospects, and it is the Commit City may not: be able to borrow after the. that is fact The s. question there is no dispesition On the part the Federal 101111 program ends,and loan program. of the Committee to extend the City should be working together to the and ate Therefore, the St ate post-197S period. .NeNV -York SI make contingency plans for the pe at that point, while the City Should be in sound financial sha meet all of its credit needs in the may need more time before it cansitional period, the State should. be private market. During that tranthe City the money it needs to keep in a position to step in and lend operating beyond June 30, 1978. the New -York State Constitution on is Governor Carey testified that municipality. If his interpretati currently prohibits loans to a that State officials should - give imcorrect, the Committee believes ng their Constitution to remove this mediate Consideration to amendi t two years to complete the amendy prohibition, since it takes at leas face a potential New York Cit ment process. Otherwise, they will . bankruptcy in the latter part of 1978 off, d '% • e ,\ , 'r 0 4 Ni 11 11.1111Mmiliimmis 111 . . . 10111 • , ".i•;•:05*.7.4. ••, *,) Q.. • • • ..ke"c t* • -N • 14:' , .,.. - , V or*, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis • abrade. -• _ • .........1•111.•••• • dt ,. f 1 •4 . '"'#4." t _ •c.f v•", A"'s •4•:, 1 (....; • - .Admisomml ••• •.• • ...• 4.P 44*k. 7.11 ADDITIONAL VIEWS OF Ml. GARN This first set of oversight heariiTs has been most have been clearly shown that New York City is not revealing for we complying NVitil it5z ob4,rations- under the 3-year financial plan. The (it v is behind schedule and its estimated revenues and expenditures have been entirely unrealistic. As the economic conditions of ,t he city and the region fail to keep pace with the national rate of economic growth, the Outlook for the city's .financial survival is grim. It is a form idable task to contend with external economic. factors beyond a city' s of prosperous years, but New York City is too control in the best pli!dit to withstand the external economic force crippled by its own s which are further eroding the city's tax base. Whatever skepticism there was prior to overs quickened by the testimony presented before ight. henvin7s was the committee. The Comptroller General of the United Stales opinion,the 3-year financial plan has lost itstestified that in his expert usefulness. Far too many problems go unresolved _and will remain so for tion and commitment to achieve fiscal reform a lack of determinafor the city. We don't doubt that, NeW York City will due in June. But. in light Of the testimony hearrepay its Federal loans and the continual developments in New York d before the committee not understand nor agree with the "cautiou 's financial crisis, we do s optimism'' of Secretary Simon that the city will be in a position to repa the second and third years of the plan. We are y its loans on time in the illusion of loan repayment when in fact especially troubled with is merely a roll-over of the seasonal debt with a 2-day gap. Thus, initthis regard, the financial plan is faulty and misleading inasmuch as it is designed to treat fl cash flow problem .when New York City's is a cash We fear that New York City officials will deficit problem. eventually request an 'extension of the 3-year loan plan. We firmly supp ort Chairman Proxmire's opening remarks in the oversight hear ings warning New York City officials that under no circumstances will the committee approve such an extension at any time. There is no ques budget cuts and measures are being delayed tion that vitally needed more sympathetic Congress and Whit( Ifou and put oil in hopes of a se Secretary Simon should exert greater pres after the 1976 elections. officials to demonstrate their accountabili sure on New York City loans until the necessary steps have beenty by withholding seasonal taken to cut expenditures according to plan. • The committee should hold oversight .hear ings again after the June 30 loan repayment.(headline to assess the city' plan. If it is found that the prospects for futu s compliance with the re loan repayments are just as bleak as they appear now, steps inevitable: the bankruptcy of New Yorkshould be taken to allow the would no longer be running up its ever-incCity. At least, then the city reasing cost of debt service. JAKE GARN. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis (17) o f+ — — — Ira! •-•nr-r_-rar• • .1.• . . ,• • • • V !*, •', 1•4 1 • .1 L• I• 2 - tc: , I ' • - 11 ' , 4 r • - 4c(octr : dp. 4• AN. 4s,,,,,r.,41# 4: -0* I • t` t •' -• 4., A , :erg,, • ii4 •S '71 r.'":1"7 ". •—• e.t. ADDITION v". N AL VIEWS OF MR. H For the most ELMS Loan Progra part, the Committe e m ' s is R e a port on the n excellent. situation. I New York and realisticCity summary of further valuabalso believe that Sena to le r in Ga si rn's addition the current ght into the Unfortunatel pr al views ad Report tend y, however, the veryoblem. d s fr to an co k nfirm my wo appraisal of the Report th rs th t e at fe Comi ar would give a that New Y ny objectives..Indeed, there is nothnittee in observer any name it, is evork City will ,be able to encouragemge in survive bank nt City's Financentually called). Both th ru pt cy ( .are erected ial plan which is supp e Federal bail-out plby whatever which is veryupon a foundation of osed to make the ba an, and the il premises an realistic. d assumption-out work, I am more co s, none of nv in ce d the bail-out than ever th we put off throute, for we are only at it Was a serious mi stake to take City's proble e day of reckoning, w - forestalling the inevit e ms able. Whi ar , b e y simp allowing the still further. City's enormly adding to New Yorle W e ar e al so poning the ous debt to k posure of doing a disservice .t accumulate borrow, speex he country. B nd and spenthe end resultof the "to y posttax and tax, public awar d" syndro suffers the faeness necessary to pume, we are denying_ the borrow and t te co As has often of New York City, its own house in order untry the be before it en remarked response.to o , and as Se n e of m y cr only differen questions et ting these ovary Simon agreed in is a printing ce between New Yordu k pr Ci ty and the ersight hearings, the commit legali ess. The Federal deral Gover G o ze v d e rnment. caFe la rceny agains nment New York n prin t fu a n tu respective ir d the Federal Gove re generations. Bott money. and responsibility h rn of the past ment ought to face uthe City of —before it is p too late. • to their JESSE HEL (10) MS. 0 4? 4 ; https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis • 9.. wateassolvo' -,••44.4 •, https://fraser.stlouisfed.org Alr Federal Reserve Bank of St. Louis Statement by J. Charles Partee Managing Director for Research and Economic Policy, Board of Governors of the Federal Reserve System before the Subcommittee on Commerce, Consumer and Monetary Affairs of the Committee on Government Operations U. S. Congress October 8, 1975 , - 41 I am glad to appear before this Committee today to describe briefly the program of analysis that has been carried on by the Federal Reserve staff in order to keep the Board informed of developments and implications of the New York City financial situation. A great deal of work of the kinds I will be describing has been done at the Federal Reserve Bank of New York as well as at the Federal Reserve Board. As the New York City financial crisis began to deepen this past spring, following shortly upon the temporary default by the Urban Development Corporation -- a so-called "moral obligation" agency of New York State -- it became clear to us that there might be four separate areas of passible involvement by the Federal Reserve System for which background analysis or contingency planning would be needed. First, it seemed conceivable that the Federal Reserve would be approached by the City with an application for emergency credit assistance. Efforts were made, both at the Federal Reserve Bank and at the Board, to assess the basic financial position of New York City, in order to be prepared for such an eventuality. Governor Mitchell has already testified before this Committee, on June 25, as to the considerations the Board would have had to take into account if it were to consider the use of our existing authority in support of the City. Our second concern was for the possible implications of a New York City default on the behavior of the financial markets and the performance of the economy generally. In this regard, I should point out that there is little historical precedent to go on in evaluating the ; •; https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis L • - - -2probable repercussions of a failure of this magnitude, other than for the events surrounding the Penn-Central bankruptcy in the spring of 1970. Nevertheless, we have been following developments in the municipal securities market and in State and local employment and spending trends with unusual care, and we have attempted at every opportunity to probe investor sentiment as to current and prospective New York City developments, both in the United States and abroad. see. Until very recently, when New York State and various other governmental units lave been caught up in widening investor concerns, the staff view generally has been that a New York City default would not be likely to have significant national repercussions, though its financial and economic effects in the New York area could of course be substantial. Jig /•-• Third, the Federal Reserve necessarily would be concerned with any failure of financial markets to function because of its role as the ultimate source of liquidity to the economy. In the event of a major default, financial flows could well become distorted for a Tim. ••• Some commercial banks might suffer deposit outflows or have unusual needs for liquidity. Some municipalities might find it impossible to carry on planned financings in the market, and could find themselves in a temporary liquidity squeeze. Similarly, participants in the municipal market -- both investors and dealers -- might be unable to liquidate positions as planned, and could find themselves in necessitous need of temporary credit accommod ation. Our contingency plans for use of the Federal Reserve Bank discount window a source of temporary financing that could accommodate larger than ordinary flows of credit through the banking system -- https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis were therefore reviewed, up- 4 )4 -3dated, and adapted for possible use in the event of a municipal securi ties market collapse. Fourth, the Federal Reserve System has a bank regulatory responsibility, especially with regard to the supervision of statechartered member banks. Through the spring and summer, the Federal Reserve Bank of New York kept itself informed as to the portfolio positio n in New York City issues by the City's major banks. Then in August, in order to spot where problems were most likely to develop, Federal Reserve examiners were asked to identify, from their worksheets, those state member banks throughout the country that held New York City, State or State agency securities accounting for a sizeable proportion of their capital accoun ts. Later that month, we obtained current data from these banks as to their holdings of New York City issues. I am submitting separately, for the Committee's use, a general summary of the results of these informal survey s. The Federal Reserve staff intends to keep fully abreas t of the financial and economic ramifications of the New York City problem on a day to day basis. All that can be said with confidence at this point is that the potential repercussions will depend import antly on the precise character of developments in the market and in the City's situation as they take place. „ • • https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis REPORT OF A SURVEY OF SIGNIFICANT STATE MEMBER BANK HOLDINGS OF THE OBLIGATIONS OF NEW YORK CITY, NEW YORK STATE, AND NEW YORK STATE AGENCIES September, 1975 In order to determine the potential exposure among State member banks to adverse developments in the market for municipal and State obligations of New York, each Federal Reserve Bank in August Nov ft of this year was requested to provide information about State member banks which held concentrations of New York City, New York State, or New York State Agency securities as of the last examination report. For this purpose, a concentration was defined as holdings III IIII II amounting to more than 10 per cent of a bank's capital for any of "7 7 the three groups, or to more than 20 per cent of capital for the three groups combined. Principal New York State agencies included the Housing Finance Agency, the College DoLfflitory Authority, and the Urban Development Corporation. The selection of the 10 per cent lower cutoff of holdings of a single group of securities relative to capital was made in view Folwm""- of the fact that loans to a single borrower are normally limited to 10 per cent of capital. While the limitation does not specifically apply to a bank's holdings of municipal securities, it was deemed appropriate for the purpose of assessing any possible points of potential bank exposure. It should be noted that the data on securities were reported at par value, and were taken from examination worksheets on hand at the Reserve Banks that were not necessarily current but may date from as https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4,<4i -2long as a year ago. Over the intervening period, it seems probable that institutional holders had lightened their investments in New York obligations, on balance, especially since the Urban Development Corporation default on February 25, 1975. Moreover, the data on securities holdings were not broken down by maturities. Many holdings could have been short-term debt and by now have been liquidated. Of the 1,064 State member banks, 130 or about 12 per cent of the total fell within the survey guidelines. Fifty-one of the banks reported are located in the State of New York. The remaining banks are scattered throughout the country. Table I reflects data for 112 of the survey banks which held New York City obligations. Seventy-seven of these banks held debt of the City amounting to only 10 to 20 per cent of capital. Of the remaining 35 banks, six banks held New York City debt amounting to over 50 per cent of capital; but five of the six were smaller banks-with less than 10 million in total capital. When holdings of New York State and New York State Agency obligations are added to the analysis, the majority of banks fell into the 20 to 50 per cent of capital category as shown in Table II. This shift is primarily due to significant holdings of New York State debt. Seventeen banks were reported with total New York City, New York State, and New York Agency obligations greater than 50 per cent of capital. However, 15 of these banks, again, were smaller banks-- with less than 10 million in total capital. ' https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -3hrs. On the whole, the State member banks with holdings of New York obligations reported in the survey were rather small in size. Moreover, the percentages of capital reported do not represent cause for alarm and, as previously indicated, the incidence of potential exposure has probably decreased since the last examination. In the view of the Division of Bank Supervision and Regulation, though there were a few State member banks with holdings of New York obligations representing relatively high percentages of capital, the situation on the whole appears to be quite manageable. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis OPP' ir! TABLE I. DISTRIBUTION OF STATE MEMBER BANKS BY CAPITAL ACCOUNT AND BY HOLDINGS OF NEW YORK CITY OBLIGATIONS AS A PER CENT OF CAPITAL Capital Account (In millions of dollars) New York City Obligations as Per Cent of Capital 20-507 10-20% Over 507 Number of banks) Less than one 1 to 10 10 to 25 Over 25 9 12 2 46 12 3 _ 8 14 5 1 77 29 6 LIMMINIII••••• Totals F . A 4,v L I . F TABLE II. DISTRIBUTION OF STATE MEMBER BANKS BY CAPITAL ACCOUNT AND BY HOLDINGS OF TOTAL NEW YORK CITY, NEW YORK STATE, AND NEW YORK STATE AGENCY OBLIGATIONS AS A PER CENT OF CAPITAL Capital Account (In millions of dollars) Total New York City, New York State, and New York State Agency Obligations as Per Cent of Capital 10-207 20-50% Over 50'/. (Number of banks) Less than one 5 14 5 31 37 10 10-25 2 6 Over 25 3 15 1-10 2 K' W Totals https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 41 72 17 ••••• ) For release on delivery Statement by George W. Mitchell Vice Chairman, Board of Governors of the Federal Reserve System before the Subcommittee on Commerce, Consumer and Monetary Affairs of the Committee on Government Operations House of Representatives June 25, 1975 I https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis •.i • https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Mr. Chairman: I am pleased to appear before you today to present thq Board's views as to the use of Federal Reserve credit facilities in providing emergency assistance to financially troubled cities. I want to state at the outset that we interpret the System's present powers to engage in such lending operations, except as member banks are involved, to be quite narrowly circumscribed by law. The recent financing difficulties of New York City provide a case in point. These difficulties cumulated rapidly during this past winter and spring, and reflected the growing reluctance of private investors to purchase the City's short-term note issues. Since the City already had a very large amount of short-term debt outstanding, and was incurring a substantial current operating deficit as well, any inability to issue new debt raised immedite problems in finding the cash to pay off maturing obligations and meet the City's current bills. In searching for alternative means of resolving the developing financial there were at times suggestions th2t. the Federal Rerr,rve might be a possible source of credit in its role as an ultimate source of liquidity to the ecouomy. However, 112 application for credit wrIs received from the City, either at the Federal Reserve Bank of New York or the offices of the Board of Governors. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis If a formal request had been received by the Federal Reserve for the emergency credit accommodation of New York City under the circumstances that had prevailed, however, I am obliged to state that, in my judgment, the Federal Reserve would have had to turn it down. The City had not fully exhausted possibilities for State assistance, and its basic need for credit did not appear to be of a temporary character since no near-term means of repayment--while continuing to provide the City's basic services—appeared to be at hand. Direct extensions of emergency credit to institutions that are not members of the Federal Reserve System can be provided under either paragraph 3 or paragraph 13 of Section 13 of the Federal Reserve Act. Paragraph 13 provides that any Federal Reserve Bank, subject to such regulations as the Board may prescribe, may lend to any individual, partnership or corporation on promissory notes secured by direct obligations of the U. S. Government or r.n acr,erey thereof. Loans under this paragraph are limited to 90-day maturities. Unless an entity in need of assistance possesses large amounts of direct government obligrl inns, the nbility of a Reserve Bari: to provide credit assistance under this paragraph is very limfted. Paragraph 3 of the Act empowers the board of Governors, in "unusual and exigent circumstances" and by an affirmative vote of at least five members of the Board, to authorize the Federal Reserve Banks to make certain types of direct loans to individuals, -3- partnerships or corporations. Paper discounted by Federal Reserve Banks under this paragraph must be of the "kinds and maturities made eligible for discount for member banks under other provisions" of the Federal Reserve Act. This means, among other things, that the paper may not have a maturity of more than 90 days at the time of discount. The paragraph further provides that the paper shall be "endorsed or otherwise secured to the satisfaction of the Federal Reserve Bank," which the Board has construed to mean that a Reserve Bank should ascertain that the security offered is adequate to protect the Reserve Bank against the risk of loss. In light of these restrictions in the law and the background as to the intent of the law, the Board has concluded that, in considering the extension of emergency credit to particular borrowers, the following conditions must be met: https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis (1) unusual and exigent circumstances exist; (?) potcntiril h.-rr have ehcunted oLlIcr scurccs of funds; (3) the borrower is solvent and has adequate collateral; the bortower*:; need is for short-term acco:nmodation and its basic financial position will permit early repayment; and (5) failure to obtain Reserve Bank credit would have a significant detrimental economic and financial impact on the surrounding area, the region, or the nation. 11, -4- These criteria highlight the essentially low-risk and temporary character of System emergency lending, as well as the general economic purpose behind it. ,liquidity. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Such lending is intended primarily to provide Though short-term needs of this type can develop among either large governmental units or business enterprises, in most cases the need can be accommodated without relying directly on the Federal Reserve simply by turning to commercial banks--who will rely on their own or Federal Reserve resources--to extend the needed credit. When this is not possible, as seemed to be the case with New York City, it is likely that the difficulties encountered in the private credit markets reflect more fundamental credit-risk problems and that temporary credit accommodation will not be sufficient to correct the situation. In addition to the emergency lending powers contained in Section 13 of the Federal Reserve Act, Section 14(b) authorizes the individual Federal Reserve Banks to purchase and sell obligations of StatL and local go Lal Lodie3. The AcL 'chat. tlieLl governmental obligations mature in no more than six months from date of purch,9se and thnt th,?y 1-1c. iqsfle,d in nnticipntion of the collection of taxes or in anticipation of the receipt of assured revenues. The 14(b) authori y had its origin in the original 1913 version of the Federal Reserve Act. The House Report on the Act indicated 'chat the provision was designed to open an outlet through which idle funds of Federal Reserve Banks could be profitably channeled and to provide a means to enable Federal Reserve Banks to make their discount rate https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -5.: effective in the market at those times when member bank borrowing was slack. There is nothing in the Act or its legislative history to indicate that this authority was intended to be used as a channel for financial assistance to public bodies. Moreover, the authority has not been used since 1933, since enactment of Section 10(b) permitted the Federal Reserve to advance credit to member banks on the strength of their own promissory notes, as well as through the discount of eligible paper. Given this background, the Board does not believe that Section 14(b) contemplates the purchase of municipal obligations as a means of aiding financially distressed communities. In view of these existing constraints on System emergency lending, it may be asked whether it would be desirable to legislate broader powers that would permit Federal Reserve accommodation of financially distressed communities. While the Board has not con- sidered any specific proposals toward this end, I would strongly caution against any nronosals that would rrovidP dirr,ct accec.- to central bank credit by hard-pressed governmental units. My reasons for reaching this judgment are as follows: First, thc critIcnl issue for particular mullicipaliti,ls is how governmental functions and sources of revenues are dispersed between it and the State government. Prospective sources of funds must be commensurate with the projected costs and expenditure programs in order to balance out over the longer run. Access to a source of temporary credit will not help to achieve such a balance, and it may r-- -6- tend to defer or prevent the remedial actions that are necessary, difficult as they may be. Second, central bank involvement in providing temporary credit accommodation to State and local governmental bodies will necessarily require that standards be set determining which localities will be eligible or ineligible for credit accommodation. This would involve the System in making credit judgments on the finances of numbers of State and municipal governments, thus subjecting the Federal Reserve to intense political pressure to make exceptions for Ois city or that because of special circumstances. Moreover, the need to exercise administrative discipline over borrowers in order to assure timely repayment would tend to draw the System into political issues of local budgetary policy. A central bank, in our judgment, should leave this issue to other agencies of the Government. Third, increased access to central bank credit by munici- I https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis palitir?s sufferin Aczr- of firlanci:J cYstress ou1c: lc,tcl to similar urgent demands for credit by other kinds of borrowers. If central bank credit is extended to our cities, for example, why nnt for a host of other purposes, ouch as the immense investment that will be required to achieve energy independence? A proliferation of demands for credit from the central bank would drastically change the character of the assets of the Federal Reserve System, from prime paper of highest quality to an assortment of soft loans and, in the process, severely damage the Government's access to financing. It https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -7- could undermine our ability to control the volume of bank reserves and hence the supply of money. In the extreme, the result could be a debasement of the nation's money and ruinous domestic inflation. For these reasons, if your Committee should conclude that the financial pressures on key municipalities requires the provision of special Federal financing assistance in the period ahead, the Board would strongly urge that this be done through a separate facility rather than the Federal Reserve. Federal monies or credits would still be expended in any such venture, but it would not involve the use of high-powered central bank funds. Such a separation would thus leave the Federal Reserve free to pursue its other responsibilities for monetary and bank regulatory policies, which are difficult enough in themselves. I would urge caution, however, even in proposing the establishment of a special Federal financing facility to assist with the financirg rced2 of our n rnJ 1r,c.:11 gn1Trry-ncntal !odic. such a facility must have sufficient oversight powers to permit it to play an effective role in correcting the fundamental financial problems of client comavniLics, if tii fedrdl assi:Aauce is co be ploductivu. This would be bound to create a Federal presence in local issues of taxation and spending, a varied and shifting political and social terrain indeed. In the spirit of our traditional system of separation of powers, it may well be better to leave local problems to local solutions. V • -81 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The special program of financial assistance which was developed for New York City at the State level through the formation of a new agency-the Municipal Assistance Corporation--is an illustration of Statelocal resourcefulness. The Corporation is authorized to provide up to $3 billion in credit to the City and, as it does so, valuable time will be gained in which the City can take the steps needed to restore its credit standing with the private investment community. I hope that the City's actions will soon make it possible to carry on needed refinancing and other debt operations in the normal manner. -o0o- r- C.A.T. 7723/75 Essential Points to Consider 1. The ultimate goal is resolution of New York City problem consistent with minimizing short- and long-run risks in dealing with the New York City situation. a. Short-run risks -- possible damage to process of economic recovery, potential damage to securities markets, potential hardships facing City residents, etc. b. Long-run risks -- Fed, aid would establish dangerous precedent rr (Federal involvement in local affairs, reduces need for fiscal discipline). c. A program of Federal assistance containing sufficiently stringent eligibility conditions and a minimum of Federal exposure could achieve this goal. Program outlined in testimony does this. d. Some voluntary measures of reorganization of City finances could also be a pre-condition for Federal aid. Such measures might be reduction of pension fund costs and reorganization of City debts (stretch-out of maturities, reduction of interest). Such measures would also reduce long-run risks. 2. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis There is a case to be made for Federal assistance, even in the event of default. - - City has large cash flow needs. Such needs are, of course, much smaller in the event of default. However, some source of funds (pension funds, Federal assistance) would be needed if City is to avoid great hardships. -23. r ' •• https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Present laws would not provide Bankruptcy laws should be revised. for orderly environment in event of default of New York City. Default is a possibility since enactment of legislation of Federal assistance is unclear. • •••, " rd- J ;- • .4 Public Law 94-143 94th Congress, H. R. 10481 December 9, 1975 21n Rct nal financing for of the Treasury to provide seaso To authorize the Secretary the city of New York. House of Representati-res of the • Be it enacted by the Senate and assembled, ress Cong in United State8 of America fl SHORT TITLE "New SEcTiox 1. This Act may be cited as the York City Seasonal Financing Act of 1975". New York City Seasonal Financing Act of 1975. 31 USC 1501 note. FINDINGS AND DECLARATIONS 1501. owing findings and declarations: 31 USC SEC. 2. The Congress makes the. foll onal seas in obta to city of New York (1) It is necessary for the the city's revenues and expendifinancing from time to time because al basis, are not received and annu tures. even when in balance on an ut the year, disbursed at equivalent rates througho or may be unable to obtain such (2) At the present time the city isy sources. omar seasonal financing from its cust seasonal financing, in order that (3) It is necessary to assure such essential governmental services. tain main may York the city of New W.M...••••.1111.1.••••••••••••••• r** 1. • %. , city and State of New York, (a) "City" and "State" mean the respectively. agency duly authorized by State (b) "Financing agent" means anyest of the city with respect to the law to act on behalf or in the inter city's financial affairs. y of the Treasury. (c)"Secretary" means the Secretar 31 USC 1502. 15?. • • • ,sr. • DEFINITIONS SEC. 3. As used in this Act: • ••••••••• • ' t. • • ••• • • •• • \ • 4, ••4:. •• • ••• '1'1 • ''• LOANS city or a financing agent, the 31 USC 1503. of the SEC. 4. (a) Upon written requestcity or such financing agent subject y may make loans to the Secretar case of any loan to a financing to the provisions of this Act, but in the jointly and Severally liable be l agent, the city and such agent'shal thereon. later than the last day of the (b) Each such loan shall mature not, and shall hear interest at an made was city's fiscal year in which it greater than the current average annual rate 1 per centum per annum le obligations of the United etab mark ing tand outs market yield on comparable to the maturirity matu to ods States with remaining peri y, at the time of the loan. etar Secr the ties of such loan,as determined by SECURITY FOR LOANS under this Act, the Secretary SEC. 5. In connection with any loan g agent and, where he deems ncin fina may require the city and any necessary, the State, to provide such 31 USC 1504. security as he deems appropriate. 89 STAT. 797 •• vs . • n • - • Digitized for, FRASER . ., . https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis •- • • r ,• • •— Pub, Law 94-143 "Person." - 2 - December 9, 1975 The Secretary may take such steps as he deems necessary to realize upon any collateral in which the United States has a security interest pursuant to this section to enforce any claim the United States may have against the city or any financing agent pursuant to this Act. Notwithstanding any other provision of law, Acts mak?ng appropriations may provide for the withholding of any payments from the United States to the city, either directly or through the State, which may be or may become due pursuant to any law and offset the amount of such withheld payments against, any claim the Secretary may have against the city or any financing agent pursuant to this Act. With respect to debts incurred pursuant krthis Act., for the purposes of section 3466 of the Revised Statutes (31 U.S.('. 191) the term "person- includes the city or any financing agent. • r Wit—set , LIMITATIONS AND CRITERIA 31 USC 1505. Sp% 6. (a) A loan may be inade tinder this Act only if the Secretary determines that t•here is ft reasonable prospect of repayment of the loan in aceordance with its terms and conditions. In making the loan, the Secretary may require such terms and conditions as he may deem appropriate to insure. repayment. The Secretary is authorized to agree to any modification, amendment, or waiver of any such term or condition as he deems desirable to protect the interests of the United States. • (b) A.t no time shall the amount of loans outstanding under this Act exceed in the aggregate $2,300,000.1)(10. (c) No loan shall be provided under this Act unless (1) the city and all financing agents shall have repaid according to their terms all prior loans u nder this :c k t w hich have m atured,and (2) the city and all finaneing agellIS shall be in compliance with the terms of any such outstanding loans. REMEDIES 31 USC 1506. SE('. 7. The remedies of the Secretary prescribed in this Act be cumulative and not in limitation of or substitution for any shall other remedies available to the Secretary or the United States. New York City Seasonal Financing Fund. S. (a) There is hereby established in the Treasury a New 'York City Seasonal Financing Fund to be administered by the, Secretary. The fund shall be used for the purpose of making loans pursuant , to this Act. There is authorized to be appropriated to such fund of $2,300.000,000. All funds received by the Secretary in the the sum of principal of any loan made under this Act shall be paid payment into the fund. All income from loans and investments made from the fund shall be covered into -the Treasury as miscellaneous receipts. Moneys in the• fund not. needed for current operations may be invested in direct obligations of, or obligations that are fully guaranteed as to principa and interest, by, the United States or any agency thereof. After l all loans made pursuant to this Act have been repaid. the balance fund shall be returned to the general fund of the Treasury. of the (b) The Secretary is authorized to sell, assign, or otherwise transfer from the. fund•any note or other evidence of any loan made pursuant to this Act to the Federal Financing Bank and, in addition its other powers, such Bank is authorized to purchase,. receive, to or otherwise acquire the same. ..•Arairs...-awit, .4..,,. 4.4.•:- -.Ana.,..........65,...k......t. .. . . 1' , .• • ,,• - • .. b?:,....- ,. •'. :...s.,;.....La.,•:,.."' ..-'''`; .A *• 4, . e....04,,, '1'. - ;..... b. 4.",y, .. :,...., •4• -...,....,... ..-..,...„.„.- ....,,,,k -,,,,, 4,,.,.., i. • "'",' ft..'-.' , ..1..,ii ,,('• N '•', '‘..... , i 5 •,, ...,:14: •"•. tj.iip.", ,c 4...l'i4`...., 4,. .., :": • .;,.), t,, ',., A •4!'.4 ... ‘i .. 4, ,. . . , t •.' I ,, •••• ......,, ,- •,,,, .•-• -• -: •• ,.• " • .....• •. 4 . • .., • • • ',f i,.•• l••••••-7 ,‘....? f .. ..' . • ,. ,.,•,,.(:, •-• • :. ,f ; 9•,4'.,z•-...",....,, 10. FUNDING Establishment. 31 USC 1507. Appropriation authorization. SEC. 89 STAT. 798 ,Z,T'T-(\,• etsmommer.,. ••••••••-•-wwr-irrirwr., -,-mesmisorarr, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis . ANit„4.._ a.,iciezi •• • December 9, 1975 -3- Pub. Law 94-143 be Appropri ation (c) There are authorized to be appropriated such sums as may authorization. .Act. this of tration necessary to pay the expenses of adminis INSPECTION OF DOCUMENTS loan is outSEC. 9. At any time a request 'for a loan is pending ortoa inspect and 31 USC 1508. standing under this Act, the Secretary is authorized , and copy all accounts, books, records, memorandums, correspondence finanits to relating agent ng financi any or city the of ts documen other cial affairs.. AUDITS 1509. SEC. 10. (a) No loan may be made under this Act for the. benefit 31 USC of any State or city unless the General Accounting Office is authorized to make such audits as may be deemed appropriate hy either the Sec-, retary or the General Accounting Office of all accounts, books, records if any, and transactions of the State, the political subdivision, politica l involved, and any agency or instrumentality of such State or results the report shall Office ing Account General subdivision. The of any such audit to the Secretary and to the Congress. TERM I NATION loan under this SEC. 11. The authority of the Secretary to make any does not affect the 31 USC 1510. Act terminates on June 30, 1978. Such termination prior carrying out of any transaction entered into pursuant to this Act or proto that date, or the taking of any action necessary to preserve under tect. the interests of the United States arising out. of any loan this Act. Approved December 9, 1975. • tt„,, • N, • LEGISLATIVE HISTORY: _Abe flpsaVisirr toi Currency and HOUSE REPORTS: No. 94-632 Pt. 1 (Comm. on Banking, Housing), Pt. 2(Comm. on Ways and Means). and Urban SENATE REPORT No. 94-443 (Comm. on Banking, Housing Affairs). CONGRESSIONAL RECORD, Vol. 121 (1975): Dec. 2, considered and passed House. Dec. 3-5, considered and passa Senate, 89 STAT. 799 GPO 57-139 • t• https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis — r-1.0 eteAsa sJ https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis A https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis For release on delivery Statement by Arthur F. Burns Chairman, Board of Governors of the Federal Reserve System before the Joint Economic Committee October 8, 1975 I am here to join you in discussing the economic and financial problems posed by the financial crisis of New York https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis City. The difficulties now facing New York stem from the erosion of its financial position over the past decade. During this period the expenditures by the City's government grew rapidly while revenues failed to keep pace. To close the gap between its revenues and expenditures, the City relied increasingly on borrowed funds. Not only capital expenditures, but also the mounting deficits on current operations, were financed in this fashion. By the end of 1974, New York City's outstanding debt amounted to over $13 billion, much of which was in the form of short-term notes -- that is, obligations maturing in a year or less. Investors may learn slowly, but their innocence does not last forever. As poor management of New York finances persisted, at first a few but in time more and more investors became concerned about the City's financial condition. During the past winter and spring the City began to experience very serious difficulties in rolling over its debt -- to say nothing of adding to its outstanding indebtedness. -2- Unfortunately, the City failed to take clear-cut remedial measures, and there was some loose talk about an investor conspiracy against the City. The basic facts, of course, were quite simple. First, commercial bankers, being aware of their responsibility for other people's money, felt they may already have approached -- if not exceeded -- the limits of prudence in their holdings of New York City securities. Second, the many thousands of individuals who invest on their own account likewise focused on safety; they were no longer much tempted by promises of an exceptionally high yield. Investor confidence in the City's finances thus dwindled, while its need to pay current bills and to refinance maturing obligations became more pressing. Once this stage was reached, the possibility of default on the City's obligations became very real, and it was so advertised almost daily in our nation's newspapers. The financial crisis confronting the nation's largest city prompted the government of New York State to offer financial and managerial assistance. Starting in April, the State put at the City's disposal substantial sums that were not scheduled for payment until some months later. Then, around mid-June, the State legislature created a new agency -- the Municipal Assistance https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -3- Corporation (MAC). This agency was empowered to sell up to $3 billion of its debt obligations, which were to be backed by certain tax revenues that otherwise would have gone to the City, and then to make the proceeds of its borrowing available to the City. Armed with such broad authority, MAC sought to wring some clarity out of the City's tangled finances and to help develop a budgetary plan that could lead the City back to a balanced budget. These measures, however, proved insufficient to restore investor confidence in the City's financial management, and even the new securities issued by MAC soon came under a cloud. To ward off imminent default by the City of New York, the State adopted firmer measures on September 9. First of all, control of the City's finances was turned over to a State-dominated Emergency Financial Control Board. Second, the power of MAC to issue debt securities was enlarged. Third, the State sought to arrange additional financing of $2. 3 billion for the City, of which $750 million in loans was to be provided by the State. This financial plan was designed to tide the City over until early December, and it was hoped that by that time the newly organized Control Board would have in being a sufficiently -4 strong program of budgetary restraints to enable the City to resume the sale of its securities to the investing public. But when investor confidence is once shaken, it can rarely be restored quickly or easily. The new financial plan failed to elicit enthusiasm on the part of investors. In general, the financial community remained skeptical about the City's ability to avert default and rebuild its financial strength. The concern of market participants was heightened by a judicial ruling on September 29 that brought into question a portion of the financial aid package, namely, the purchase of MAC bonds by the State pension funds. Beyond that, the recent intertwining of the State's finances with the City's finances has troubled many investors and damaged the State's credit standing. Thus, the stresses and strains that developed in the municipal securities market over the summer months have become more acute in recent days. Since the summer, and to an increasing degree in recent weeks, the participants in the municipal market -- that is, investment bankers, securities dealers, and ultimate investors -have been attempting to reduce their exposure to the risk of loss. This has affected not only securities bearing a New York name, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -5- but also issues of some other State and local governments. Thus, many securities dealers have sought to cut back on their inventory of municipal securities, and they have often found it necessary to offer bonds for sale at prices considerably below their purchase price. Underwriters of municipal issues have generally scaled back on their participation in new offerings, thereby protecting their capital in an uncertain and volatile market. Some underwriters have gone so far as to withdraw entirely from bidding syndicates. And investors -- the ultimate buyers of municipals -- have been tending to shift to higherquality municipal securities or to categories of investment judged to be less hazardous. Trading in the market for outstanding tax-exempt bonds has therefore slowed appreciably and the spread between bid and asked quotations has widened. These developments are characteristic of a period when investor confidence has been shaken, and they are indicative of a weakened market. The recent behavior of investors and dealers has resulted in a rise of the yields on municipal securities to the highest level ever experienced in the tax-exempt market. Yields for even the highest-rated borrowers have risen over the past few months. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -6- Some of this increase has been associated with the upward drift of open-market interest rates since mid-year. In addition, municipal yields have been under upward pressure because of the heavy volume of new tax-exempt issues flowing to market. The market for tax-exempt securities is more concentrated, and therefore smaller, than for taxable bondc. Hence, when unusually large amounts of such securities 17ilve to be placed, larger yield adjustments relative to taxable markets are likely to occur. Nevertheless, until the last two weeks, I would judge that the yields on the highest-rated municipal issues have not been out of line with those available on corporate bonds of comparable quality. In choosing among tax-exempt securities, however, investors have become increasingly selective. The differences in yields, comparing lower-rated bonds with higher -rated issues, have increased considerably since last spring and have become unusually large. Thus, the average yield on Moody's A-rated bonds now exceeds that on Aaa-rated bonds by more than a full percentage point -- or about three times the risk differential required by investors during the preceding six years. Thus, the interest cost for lower-rated borrowers coming to market has risen materially. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -7- The deterioration of the market for municipals of less than the highest quality has been especially pronounced for obligations of New York City, New York State, and certain of the State agencies. In the case of the State proper, investors have become concerned that the resources being diverted to the City are damaging the financial position of the State itself. Some of the State's agencies that issue "moral obligation" securities rather than "full faith and credit" obligations have been unable in recent months to finance themselves in the public market. There now appears to be some tendency on the part of investors to underestimate the financial strength of these agencies -- an attitude that stems at least in part from the temporary default earlier this year by the Urban Development Corporation. To a lesser extent, there has also been some reluctance by investors to acquire the securities of similar agencies in other States. During the past week or so, the impact of the market's unease has spilled over to a wider range of securities. Significant increases in yields have occurred in the case of some outstanding bonds of governm.ental units that enjoy a high financial standing. Moreover, a few issuers have not received any bids for their https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -8- bonds, or have rejected the bids received because the interest cost was deemed excessive. These developments reflect increasing concern over the crisis of New York City. If the weakness of the market for municipals were to persist and spread further, many soundly run, creditworthy communities and public agencies could have great difficulty -or suffer excessive costs -- in raising needed funds. Holders of municipal securities, among which financial institutions are numerous, would to some degree be affected, and so might others less directly involved. Hence, if the New York City crisis remains unresolved, and if the fate of New York State remains tied to the City's, the process of economic recovery now under way in our nation could be injured. Until this most recent turn of events -- which I trust will prove to be a transitory phenomenon -- the market for municipal securities, taken as a whole, functioned very effectively. During the third quarter of this year, even as pressures associated with the New York City problem intensified, new bond issues amounted to about $9.5 billion. This is by far the largest volume ever for a third quarter, and it would have been a record even in tb.e absence of the $2.4 billion of MAC bonds sold during the period. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -9- In seeking ways to resolve New York City's crisis, the suggestion has occasionally been advanced that the Federal Reserve might serve as a source of emergency credit. No formal application for such credit was ever received by the Board or the Federal Reserve Bank of New York. But I want to explain why we probably would have disapproved such an application had it been made. As the ultimate source of financial liquidity in the economy, the Federal Reserve has certain powers to extend emergency credit even to institutions that are not members of the System. But the use of that authority is tightly circumscribed. The basic provision -- contained in Section 13, paragraph 13, of the Federal Reserve Act -- states that emergency loans with maturities no longer than 90 days may be made by the Federal Reserve Banks on the basis of promissory notes backed by Treasury or Federal agency securities. To qualify for credit assistance under this provision of law, a local government would have to possess sizable amounts of unencumbered Federal obligations. This would be an unusual situation for any distressed borrower and it obviously does not apply to New York City. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -10- The lending authority under paragraph 3 of Section 13 of the Federal Reserve Act is broader, permitting the Board, in unusual and exigent circumstances, to authorize Reserve Banks to make loans on the kinds of collateral eligible for discount by member banks. Such paper may not have a maturity of more than 90 days and must afford adequate security to the Reserve Bank against the risk of loss. Furthermore, in view of restrictions of law and Congressional intent, certain conditions must be met in order to permit the extension of emergency credit under this authority. Among these conditions is a requirement that an applicant has exhausted other sources of funds before corning to the Federal Reserve, that the borrower is basically creditworthy and possesses adequate collateral, and that the borrower's need is solely for short-term accommodation. It does not appear that New York City is now in a position to meet all these requirements. Certainly, its finances would hardly permit early repayment of emergency borrowings. In addition to the emergency lending provisions in Section 13 of the Federal Reserve Act, the Reserve Banks have authority under Section 14(b) to purchase short-term obligations of State and local governments issued in anticipation of assured -11- revenues, subject to regulations by the Board. Legislative history indicates that this authority was designed to assist the Federal Reserve Banks in meeting their operating expenditures, and also to enable them to make the discount rate effective when little borrowing took place at the discount window. There is nothing in the Federal Reserve Act or its legislative history to suggest that Section 14(b) contemplated the purchase of municipal securities as a means of aiding financially distressed communities. The Congress, of course, could amend the Federal Reserve Act so as to relax the requirements for extending Federal Reserve credit to financially troubled governmental units. But the Board of Governors would have the gravest doubts about any such action. If loans were to be made to State or local governments, the Federal Reserve would have to involve itself in the activities of these governmental units, including particularly their expenditure budgets and the adequacy of their revenues. Moreover, since numerous demands for credit might ensue, the Federal Reserve would have to set standards of eligibility. Being thus placed in the position of having to allocate credit among governmental units, the nation's central bank would inevitably become subject to intense political https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -12r pressures, and its ability to function constructively in the monetary area would be undermined. The Board fully recognizes that the Federal Reserve System has the responsibility, subject only to restrictions under existing laws, to serve as the nation's lender of last resort. Over the years, we have therefore developed contingency plans to deal with possible emergency situations. As I previously informed the Chairman of this Committee, our plans have been adapted recently to cope with the financial strains that might be associated with the default of a major municipality. In that event, I assure you, the Board is prepared to act promptly. The contingency plan calls for lending to commercial banks through the Federal Reserve discount window beyond the amounts required by normal discounting operations. Credit pro- vided in this manner would assist banks in meeting their temporary liquidity needs. Not only that, the proceeds of the special loans made at the discount window could also be used by the banks to assist municipalities, municipal securities dealers, and other customers who are temporarily short of cash because of unsettled conditions in the securities markets. In addition, the System would, of course, be ready to use its broad power to stabilize markets through open market purchases of Treasury or Agency securities. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -13- In the event this contingency plan has to be activated, the Board will make funds available on whatever scale is deemed necessary to assure an orderly financial environment. The Board recognizes that sizable extensions of Federal Reserve credit would run the risk of leading to a substantially larger expansion of bank reserves and the money supply than is consistent with longer-run monetary objectives. Clearly, therefore, any such expansion must be only temporary. In time, any excessive growth in bank reserves would need to be corrected through offsetting open market operations and through repayment of bank borrowing from the System. There are also certain supervisory and examination questions that may arise with respect to banks in the event of a major municipal default. Ln. this connection, the Board and other regulatory agencies have plans to revise procedures that apply to the valuation of defaulted securities, so that any writedowns may be postponed until the market has had a few months to stabilize and thus provide more reliable indications of their value. Even so, a default may ultimately require writedowns that could seriously impair the capital of some banks. In that event, -14- the Federal Deposit Insurance Corporation has statutory powers to assist Federally insured banks that might find their capital impaired by a decline in the value of securities in their portfolio. I understand that the Corporation is prepared to implement, with appropriate safeguards, its contingency plans for dealing with insured banks that require a temporary infusion of, supplemental capital for the above reason. I think it evident from the far-flung scope of our contingency plans that we believe a default on debt obligations by New York City could produce serious strains in securities markets. For a time, it could also adversely affect municipalities that need to issue new debt. The like is true of financial institutions that hold such securities in significant volume, and also of individual investors who have part of their life savings at risk in these bonds. I still believe that the damage stemming from a prospective default by New York City is likely to be shortlived. Indeed, the possibility of such a default has already been discounted to an appreciable degree by the market. But I am also aware of the =certainty that inherently attaches to a judgment on this score; and I recognize that a default, besides being a very serious matter for the City and State of New York, could have troublesome consequences for the nation at large. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -15- The very fact that this Committee and other committees of the Congress are holding hearings on New York City's finances implies that concern is spreading that a New York default may injure the economic recovery now in process. I have said enough to indicate that I feel this possibility can no longer be dismissed lightly. That, however, does not ease the task that the Congress faces in dealing with the New York problem; for the precise issue is whether Federal financial assistance to New York may not cause national problems over the long run that outweigh any temporary national advantage. As this matter is debated by the Congress, the adverse effects of a New York City default will undoubtedly receive full attention -- as they indeed should. I would only urge that the longer-run risks also be considered thoroughly. A program of Federal assistance to the City may well lead to demands for similar assistance for other hard-pressed communities, even those whose distress was brought on by gross negligence or mismanagement. Substantial Federal credit -- whether through insurance, guarantees, or direct loans -- would compete directly with the already huge amounts of Federal financing needs. Most important of all, the provision of Federal credit for local government will necessarily inject a major Federal presence in local spending and taxing decisions. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis , -16A It is highly important, therefore, to recognize that the issue of assistance to New York City goes to the very heart of our entire Federal system of separation of powers -- a system that, despite enormous economic and social changes, still prevails in our country. ,• 0 3 # Cf./ n g•-•f 47. c , For release on delivery 11111Mkt..- Statement by Arthur F. Burns Chairman, Board of Governors of the Federal Reserve System https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis before the Subcommittee on Economic Stabilization Committee on Banking, Currency and Housing House of Representatives October 23, 1975 el` I am here to discuss with this Committee the financial • 4 ,05- crisis of New York City. '.5‘, The difficulties now facing New York stem from the erosion of its financial position over the past decade. During this period the expenditures by the City's government grew OrevAt.- rapidly while revenues failed to keep pace. To close the gap between its revenues and expenditures, the City relied increasingly on borrowed funds. Not only capital expenditures, t5; 5' but also the mounting deficits on current operations, were financed in this fashion. kf By the end of 1974, New York City's outstanding debt amounted to over $13 billion, much of which was in the form of short-term notes -- that is, obligations maturing in a year or less. As poor management of New York finances persisted, at first a few but in time more and more investors became concerned about the City's financial condition. During the past winter and spring the City began to experience very serious difficulties in rolling over its debt -- to say nothing of adding to its outstanding indebtedness. In the absence of clear-cut remedial measures by the City, the possibility of default on the City's obligations became very real, and it was so portrayed almost daily in our newspapers. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 1 2 The financial crisis confronting the Nation's largest city prompted the government of New York State to offer financial and managerial assistance. Starting in April, the State put at the City's disposal substantial sums that were not scheduled for payment until some months later. Then, around mid-June, the State legislature created a new instrumentality -the Municipal Assistance Corporation (MAC). This agency was empowered to sell up to $3 billion of its debt obligations, to make the proceeds of its borrowing available to the City, to wring some clarity out of the City's tangled finances, and to help develop a budgetary plan that could lead the City back to a balanced budget. These measures, however, proved insufficient to restore investor confidence in the City's financial management, and even the new securities issued by MAC soon came under a cloud. To ward off imminent default by the City of New York, the State adopted firmer measures on September 9. These included creation of a State -dominated Emergency Financial Control Board to manage the City's finances, expansion of MAC's authority to issue securities, and a plan to arrange additional financing of $2.3 billion for the City. 'r•-• • https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis ' This financial -3 package was designed to tide the City over until early December. It was hoped that by that time a strong program of budgetary restraints would be in place and that it would enable the City to resume the sale of its securities to the investing public. But the new financial plan failed to elicit any enthusiasm on the part of investors. The financial community has remained skeptical about the City's ability to avert default and rebuil d its financial strength. Moreover, the intertwining of the State's finances with the City's finances has troubled investors Ind has damaged the State's credit standing. The concern of market participants was heightened this past week by the extraordinary difficulties encountered in arranging for the City's efunding needs on October 17, and default was averte d by only an hour or two. Thus, the stresses and strains that began to .levelop in the municipal securities market in the summe r have become more acute with the passage of time. Since the summer, and to an increasing degree in recent weeks, the participants in the municipal market -- that is, investment bankers, securities dealers, and ultima te investors -have been attempting to reduce their exposure to the risk of loss. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis This has affected not only securities bearing a New York • ,s 4 name, but also issues of some other State and local governments. Thus, many securities dealers have sought to cut •••• l'_...re•er..% • •• back on thei.r inventory of municipal securities. Underwriters of municipal issues have generally reduced their participation in new offerings, and some have withdrawn entirely from bidding syndicates. And investors -- the ultimate buyers of municipals -- have been tending to shift to higher -quality municipal securities or to categories of investment judged to be less hazardous. w Trading in the market for outstanding tax-exempt bonds has therefore slowed appreciably and the spread between bid and asked quotations has widened. These developments are characteristic of a period when investor confidence has been shaken, and they are indicative of a weakened market. The behavior of investors and dealers in recent months has resulted in a rise of yields on municipal securities to the highest level ever experienced in the tax-exempt market. Yields for even the highest-rated borrowers have risen conspicuously, but a part of this increase is doubtless due to the enormous volume of municipal securities issued during the third quarter. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis • , s Pr- -5- In the past two to three weeks, open-market interest rates have declined somewhat. The municipal market has benefitted from this development, as well as from various indications that the Federal Government is becoming more concerned about New York's financial problems. Nevertheless, investors in municipal securities remain hir:hly selective. The obligations of New York City, New York State, and certain of the State's agencies continue to be shunned by investors. And the effects of investor uncertainty have spilled over to other governmental units as well, some of which have not errreceived any bids for their bonds or have rejected bids because the interest cost was deemed excessive. If the weakness of the market for municipal securities were to persist and to spread further, many soundly run, creditworthy communities and public agencies could have difficulty -or suffer very heavy costs -- in raising needed funds. This would tend to induce cutbacks or stretchouts in local spending programs. In addition, holders of municipal securities, which include many banks and other financial institutions, would to some degree be affected, as might the attitudes of others less directly involved. Hence, if the New York City crisis remains https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 1,111111111111w , -6- unresolved, and if the fate of New York State remains tied to the City's, the process of economic recovery now under way in our Nation could be impaired. In seeking ways to resolve New York City's crisis, the suggestion has occasionally been advanced that the Federal Reserve might serve as a source of emergency credit. No formal application for such credit has been received by the Board or the Federal Reserve Bank of New York. But I want to explain why we probably would have disapproved such an application had it been made. As the ultimate source of financial liquidity in the economy, the Federal Reserve has certain powers to extend emergency credit even to institutions that are not members of the System. But the use of that authority is tightly circum- .111,„, at, • scribed. The basic provision -- contained in Section 13, paragraph 13, of the Federal Reserve Act -- states that emergency loans with maturities no longer than 90 days may be made by the Federal Reserve Banks on the basis of promisso ry notes backed by Treasury or Federal agency securities. To t qualify for credit assistance under this provision of law, a local government would have to possess sizable amounts of unencumbered Federal obligations. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis This would be an unusual -7- situation for any distressed borrower and it obviously does not apply to New York City. The lending authority under paragraph 3 of Section 13 of the Federal Reserve Act is broader, permitting the Board, in unusual and exigent circumstances, to authorize Reserve m- • Banks to make loans on the kinds of collateral eligible for discount by member banks. Such paper may not have a maturity of more than 90 days and must afford adequate security to the Reserve Bank against the risk of loss. Furthermore, in view of restrictions of law and Congressional intent, certain conditions must be met in order to permit the extension of emergency credit under this authority. Among these conditions is a require- ment that an applicant has exhausted other sources of funds before coming to the Federal Reserve, that the borrower is basically creditworthy and possesses adequate collateral, and that the borrower's need is solely for short-term accommodation. It does not appear that New York City is now in a position to meet all these requirements. Certainly, its finances would hardly permit early repayment of emergency borrowings. In addition to the emergency lending provisions in Section 13 of the Federal Reserve Act, the Reserve Banks https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis • -8- have authority under Section 14(b) to purchase short-term obligations of State and local governments issued in anticipation of assured revenues, subject to regulations by the Board. Legislative history indicates that this authority was designed to assist the Federal Reserve Banks in meeting their operating expenditures, and also to enalle therei o make the discom t rate effective when little borrowing took place at the discount window. There is nothing in the Federal Reserve Act or its legislative history to suggest that Section 14(b) contemplated 11111161.m. , the purchase of municipal securities as a means of aiding fireanciallv distressed communities. rirr- The Congress, of course, could amend the Federal Reserve Act so as to relax the requirements for extending Federal Reserve credit to financially troubled governmental units. But the Board of Governors would have the gravest doubts about any such action. If loans were to be made to State or local governments, the Federal Reserve would have to involve itself in the activities of these governmental units, including particularly their expenditure budgets and the adequacy of their revenues. Moreover, since numerous demands for credit might ensue, the Federal Reserve would have to set https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis • A -9- standards of eligibility. Being thus placed in the position of 1111•111.01.... having to. allocate credit among governmental units, the Nation's c.entral bank would inevitably become subject to intense political pressures, and its ability to function constructively in the monetary area would be undermined. 110-fr The Board fully recognizes that the Federal Reserve System has the responsibility, subject only to restrictions under existing law, to serve as the nation's lender of last resort. Over the years, we have therefore developed contingency NM. 11. •• ' plans to deal with possible emergency situations. As I have already indicated in testimony before the Joint Economic Committee, our plans have been adapted recently to cope with the financial strains that might be associated with the default ' of a major municipality. In that event, I assure you, the Board is prepared to act promptly. The contingency plan calls for lending to corn.xn.er cial banks through the Federal Reserve discount window beyond the amounts required by normal discounting operations. Credit provided in this manner would assist banks in meeting their temporary liquidity needs. Not only that, the proceeds of the special loans made at the discount window could also be used by the banks to assist municipalities, municipal securities ea: https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -10- dealers, and other customers who are temporarily short of cash because of unsettled conditions in the securities markets. In addition, the System would, of course, be ready to use its broad power to stabilize markets through open market purchases of Treasury or Federal agency securities. https://fraser.stlouisfed.org•,,_ Federal Reserve Bank of St. Louis In the event this contingency plan has to be activated, the Board will make funds available on whatever scale is deemed necessary to assure an orderly financial environment. The Board recognizes that sizable extensions of Federal Reserve credit would run the risk of leading to a substantially larger expansion of bank reserves and the money supply than is consistent with longer -run monetary objectives. Clearly, there- fore, any such expansion must be only temporary. In time, any excessive growth in bank reserves would need to be corrected through offsetting open market operations and through repayment of bank borrowing from the System. There are also certain supervisory and examination questions that may arise with respect to banks in the event of a major municipal default. In this connection, the Board and other agencies have plans to revise procedures that apply to the valuation of defaulted securities, so that any writedowns ; ••,;' -11 - may be postponed until the market has had a few months to stabilize and thus provide more reliable indications of their value. Even so, a default might ultimately require writedowns thai could seriously reduce the capital of some banks. In that event, the Federal Deposit Insurance Corporation has statutory powers to assist Federally insured banks that might find their capital impaired by a decline in the value of securities in their portfolios. I understand that the Corporation is prepared to implement, with appropriate safeguards, its contingency plans for dealing with insured banks that require a temporary infusion of supplemental capital for the above reason. I think it evident from the scope of our contingency plans that we believe a default on debt obligations by New York City could produce serious strains in securities markets. For a time, it could also adversely affect municipalities that need to issue new debt. The like is true of financial institutions that hold such securities in significant volume, and also of individual investors who have part of their life savings at risk in these bonds. I still believe that the damage stemming from a default by New York City would probably be shortlived. • r https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis : -12- Indeed, the possibility of such a default has already been discounted to a considerable degree by the market. But I am also aware of the uncertainty that inherently attaches to a judgment on this score; and I recognize that a default, besides being a very serious matter for the City and State of New York, could have troublesome consequences for the Nation at large. The very fact that this Committee and other committees of the Congress are holding hearings on New York City's finances indicates that concern is spreading that a New York . https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis default may injure the economic recovery now in process. I have said enough to indicate that I feel this possibility can no longer be dismissed lightly. That, however, does not ease the task that the Congress faces in dealing with the New York problem; for the precise issue is whether Federal financial assistance to New York may not cause national problems over the long run that outweigh any temporary national advantage. As this matter is debated by the Congress, the adverse effects of a New York City default will undoubtedly receive full attention -- as they indeed should. I would only urge that the longer -run risks also be considered thoroughly. A program of Federal assistance to the City may well lead to demands for of, -13- similar assistance to other hard-pressed communities, even though their distress may have been brought on by gross negligence or mismanagement. Substantial Federal aid -- whether through insurance, guarantees, or direct loans -- would compete directly with the already huge amounts of Federal financing needs. Most important of all, the provision of Federal credit for local governments would necessarily inject a major Federal presence in local spending and taxing decisions. These longer-run dangers have a vital bearing on our Nation's future; but they can be exaggerated, just as the immediate consequences of a New York default can be -- and perhaps are now being -- exaggerated. It is entirely clear to me that if the Federal Government had previously yielded to the entreaties for aid that New York officials kept pressing, neither the City pwwww.- nor the State would have gone as far as they now have in restoring some hope for eventual order in the City's finances. Earlier intervention would have been a disservice to the people of New York as well as to the Nation at large. But it also seems to me that the effort thus far made by both the State and the City is still inadequate. And while I take a more serious view of the potential economic consequences of a New York default than I did three ••••• . ' https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -14- months ago or even three weeks ago, I am not ready to recommend o the Congress that financial assistance to New York is now ; 4••• required in the Nation's interest. I was asked at a recent Hearing what advice I would give if Congress were inclined to legislate assistance for New York. My reply was that stringent conditions should in that event be laid down, so that no municipality would seek Federal financial aid unless such a request became unavoidable. proceeded to list a half-dozen conditions; and, if I may, I • shall now restate them somewhat more fully. MR' One essential condition prior to receipt of any Federal assistance would be that the municipality has exhausted all other sources of funds. This would require, of course, that the municipality demonstrate that it is unable to obtain credit through the public issuance of securities, or through private placement of securities, or direct loans from banks or other private lenders. A second condition that seems to me essential is that the State assume control over the finances of the municipality in difficulty. When a local government reaches the point where no source of funds is any longer available, its management of https://fraser.stlouisfed.org • *Federal Reserve Bank of St. Louis -15- finances can no longer be relied upon. State control would mean that a local government has lot its fiscal authority, and this should serve as a powerful deterrent to other mayors or city councils across the Nation from ever placing their municipality in such a position. A third essential condition for Federal assistance, I believe, should be that the State levy a special State-wide tax, the proceeds of which are pledged to cover one-half of the deficit faced by the municipality. The requirement of such a tax would materially strengthen the State's resolve to put whatever pressure is needed on the troubled municipality to work its way toward a balanced budget. It would thus insure that the State will discharge adequately its own responsibility to enforce fiscal discipline on a troubled municipality. No governor or State legislature will welcome the prospect of levying a special State-wide tax for the benefit of a municipality that has mismanaged its affairs. But this very reluctance would provide some assurance that Federal assistance would not be expected until an effective City-State program of remedia l action, no matter how politically troublesome this may prove, has been developed. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis • V -16- Fourth, prior to receipt of Federal assistance, a detailed financial plan would need to be presented for approval by the VIMINIIMMW• Federal authority charged with administering the assistance program. Criteria for accepting a plan would have to be spelled out -- such as the use of standard accounting procedures, unrestricted access by the Federal authority to all local financial records, provision for retiring short-term debt other than that required to handle seasonal discrepancies between expenditures and receipts, and so on. Clearly, the plan should provide for hmor•••••••- restoration of sound municipal finances within a relatively short period and certainly within two fiscal years. Fifth, a municipality that obtains a Federal guarantee for the payment of principal and interest on its issuance of new securities should be required to pay an appropriate guarantee fee. The municipal security should be taxable, but tax-exempt bonds might be permitted in special cases -- for example, if return to non-guaranteed status were thus eased. In such cases, the guarantee fee would naturally have to be much higher than if the security were taxable. Sixth, and finally, the Federal guarantee program should be of limited scope and duration. The total amount of https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis • -17- guaranteed debt should be set at the lowest practical figure. The debt instruments should be of short maturity so that the powwow- guarantee may be reconsidered periodically. In order to minimize Federal exposure to risk and to assure compliance with the approved financial plan, the Federal Government POPP. should have authority to withhold revenue-sharing funds from a delinquent municipality. At the end of a relatively short period, say three years, all Federally guaranteed debt under the program should have expired. If conditions along the several lines I have here suggested were included in a legislative plan for assisting troubled municipalities, the number of applicants that might seek Federal aid would be severely limited. It is highly important to recognize that the issue of assistance to New York City goes to the very heart of our system of separation of powers between the Federal and State governments -- a system that, despite enormous economic and social changes, is still honored by our country. If there is to be any legislation on assisting local governments, it should at least be designed so that the longer -run risks to our Federal system of government are kept to a minimum. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis WI" 1111111111Pr • -18- « Before bringing this testimony to a close, I want to make two additional comments briefly. First, recent attention to New York City's difficulties has brought to the fore certain shortcomings of our bankruptcy laws. It is highly important that the Congress enact legislation that would enable the judiciary to deal with a municipal default so that reorganization of outstanding debts, service or employee contracts, and other financial obligations may proceed in an orderly and expeditious manner. Second, the behavior of financial markets has recently been disturbed by the grave uncertainties surrounding New York City finances. A quick but well considered decision by the Congress to assist or not to assist New York is now urgently needed. Almost any resolution of these uncertainties may be better than prolonged debate and controversy. Financial markets do not thrive in such an environment. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis , 411.