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Sin Will Find You Out

The Streets Were Paved With Gold

by Ken Auletta
Random House, 345 pp., $12.95

On the west side of Manhattan, once called Hell’s Kitchen, a storefront church’s neon sign flashes the message “Sin will find you out.” That should have been the title of Ken Auletta’s new book on the New York City fiscal crisis, because that is his theme.

The sins of New York! An old story. Auletta introduces his version with a summary of Poe’s “Masque of the Red Death,” suggesting that New Yorkers reveled as death (in the form of financial doom) entered their midst. To flesh out his lengthy metaphor, Auletta provides details of life in today’s New York:

  • $300 per couple buys entry to a masquerade party at the mirrored and varnished discothèque Régine’s, where one can buy scrambled eggs and caviar for $19, Chivas Regal for $90, or—for the abstemious—a bottle of Coca-Cola for $6.

  • Better yet, wander down Fifth Avenue in pursuit of the “appliances of pleasure.” No, this does not mean sadomasochism has reached the Avenue. Auletta is referring to $4,900 Patek Philippe watches (the economy model), $35 boxes of Belgian chocolates, and $750,000 co-op apartments.

  • One block east on Madison, shop at boutiques paying rents of $50 per square foot and charging $235 for a child’s dress and $65 for jeans.

The sins of the beautiful people are many, but provoking New York City’s fiscal crisis is surely not among them. Why then does Auletta, a fine New York journalist, introduce his book on New York with the excesses of its inhabitants? First, he is grappling with a perennial question. Were the city’s troubles caused by factors beyond its control, such as population migrations, an imbalance in federal aid, a decline in its manufacturing base? Or were its troubles of its own making? He believes the latter.

Second, Auletta is disturbed that what Mayor Koch calls a renaissance—which Auletta says is confined to Manhattan—will lull observers into concluding the city’s troubles are over. “Manhattan,” he says, “is thriving.” But Manhattan fiddles while the other boroughs burn. To those people in the hinterland who always believed the city’s fiscal problems were the just due of its moral depravity, Auletta offers support. The city worsened its problems by the self-indulgence of its citizens, the short-sightedness of its leaders, and the native arrogance of both.

Finally, while Auletta identifies himself in his introduction as a New Yorker, born in Coney Island of an Italian father and a Jewish mother, he writes with the missionary fervor of a Midwestern Protestant. He is distressed by what he sees as the city’s blind revelry in the face of financial doom in 1975, a revelry that has started up once again with the influx of enormous private wealth to the city. He writes with the pain and the passion of one offended by sin. New York City is his Sadie Thompson.

Auletta has worked hard on this book. He has looked at countless studies, and has tried to make sense of the conflicting data and warring opinions. But ultimately the book fails because his own description of what happened to the city is hopelessly garbled. He cites anything and everything as a cause of the fiscal crisis: the suburbs, rent control, union power, growth of pensions, moral obligation bonds, shortterm debt, the transit strike, medicaid, taxes, pay parity, redlining, and Nixon. Of course, in this he isn’t precisely wrong. Somehow the city did manage to turn every trend against itself. New York City started out after World War II with the same problem every industrial city had: how to convert its war economy to a peacetime economy. Only, as usual, New York’s problem was a little worse, and it handled it a little less well.

Take rent control, a serious topic that Auletta mauls with gossipy trivia. For much of its history, the basic fact of life in New York has been its odd status as a renters’ town. New Yorkers rent. They don’t buy. (Until recently, they had no choice.) After the war, the city faced a serious housing shortage exacerbated by landlords prepared to charge gouging rents that would have forced thousands to move involuntarily, causing a huge displacement of population. The city yearned for stability. It chose to continue rent control. Fair? No, probably not. The city placed the cost of maintaining a stable population on a single group of unpopular New Yorkers, landlords. The city thus hurt its property tax base, destroyed some neighborhoods, discouraged investment in real estate, and generally prolonged the grand New York tradition of “you can always get something for nothing.”

Auletta cites figures showing that 15 percent of current rent control families could pay more. (“A lot of shooting would be required to remove all the comfortable people enjoying rent-control privileges in buildings along Central Park West and South, up and down West End Avenue and Riverside Drive, up the East Side, down lower Fifth and upper Park avenues, and across the river in Brooklyn Heights.”) Only 15 percent? Seventy-five thousand out of 2.1 million apartments does not make the case that rent control is ruining the city.

Were Auletta to provide more data about this 15 percent—say, how well-to-do they are, where they live, what tax revenues the city forgoes on their account—he could make an analytic link with the fiscal crisis. Instead, as a sort of Rona Barrett of the policy, he pruriently delves into the rents and housing accommodations of various well-known New Yorkers.

The president of the American Stock Exchange, for example, pays $661 for an eight-room apartment in Yorkville. By how much is he, or his fellow victims singled out by Auletta, damaging the city’s tax base? If his apartment is worth $850 per month (Auletta’s lower estimate) and if the standard rule-of-thumb holds true that 25 percent of market rent goes to taxes, then his landlord should be paying about $212 per month in taxes and is probably paying $165 per month. Auletta doesn’t show any connection between the rent-controlled upper-middle class and the fiscal crisis—there is one, to my mind—and so fails to justify all his underground gossip on the subject. (Auletta does oddly suggest that if fewer rich men lived in luxury rent-controlled apartments, then “perhaps more upwardly mobile black families would live” in the city rather than in Scarsdale. By what reasoning would he expect this?)

No one knows what rent control has cost the city. The Federal Reserve Board, for example, claims that rent control costs the city $250 million a year in taxes. Some claim less, others more. Because the city has had controls for thirty-five years, it’s impossible to speak clearly about “market rents.” Further, most landlords can get economic rents from most tenants without the rents being subject to the market, particularly in Manhattan’s wildly inflated market. Traditionally, the selling price for a rental building is based on the total rent received. Thus rent control lowers the value of the property in a tight market. But the reverse is also true. For the past few years in New York, the apartment market has been soft. The guaranteed rental increases under the new rent stabilization system have increased property value to owners, frequently above the market. Like almost everything else in New York, rent control is a messy, difficult subject, filled with conflicting data, patent evils and benefits, and surrounded by raging emotions.

The same could be said of the other “causes” of the fiscal crisis listed by Auletta: e.g., greedy unions, overpaid civil servants, excessive borrowing. Raging emotions, however, impede analysis, and it is impossible to discuss Auletta’s book without first doing what Auletta never does: try to reconstruct what happened.

One can choose from any number of dates for the origin of the city’s fiscal crisis. My favorite—others will quibble—is 1961, the year the city first chose to borrow money to pay its ordinary, day-to-day, or “operating,” expenses.

The legitimate reason for a city to borrow for short periods of a year or less is to make revenues flow evenly alongside expenditures. Cities must spend regularly but receive their revenues irregularly.* In 1961, however, Mayor Wagner used a contingency fund—a kind of rainy-day account—as security to borrow short-term to meet his deficit. He was not borrowing legitimately. By 1965, the contingency fund could no longer cover his deficits. He borrowed money against future revenues expected from the federal and state governments, issuing what are called Revenue Anticipation Notes (RANs). RANs are a perfectly respectable short-term debt instrument, but they must be based on real, not imagined, revenues. Wagner began the practice of guessing at future revenues rather than relying on the previous year’s actual receipts. Wagner closed his last year’s budget gap with $56 million in RANs and left office.

While Wagner set the city on the path of borrowing to pay for operating expenses—a sin if there ever was one, to return to Auletta’s theme—he virtuously kept the city’s expenditures nearly level from year to year. This is important, because the city’s revenues—from city taxes and federal and state aid—were also level from year to year. Mayor Lindsay’s contribution to the city’s downfall was in continuing the still rather venial, if reprehensible, Wagnerian practice of illegitimate borrowing, while more than doubling expenditures between 1965 and 1972.

The fateful year 1969 came in the middle of Lindsay’s mayoralty. This was simultaneously the last good year for the city’s economy and the beginning of the national recession which hit the city much harder than the rest of the country. By 1974, the city had lost 300,000 or 9.6 percent of private jobs. Lindsay partially made up for this loss by increasing municipal employment by 6.3 percent. He continued to increase his expenses, although not by the enormous leaps (a 19 percent increase in 1967, for example) of his earlier years. In doing so, Lindsay was pacifying powerful forces in the city, particularly the labor unions Auletta finds so greedy. But he was increasing his expenses at a substantially faster rate than his revenues and he made up the difference the only way he knew: borrowing.

Lindsay had two ways of borrowing to pay operating expenses. First, beginning in 1968, he shifted some operating expenses—salaries and training programs—into the capital budget, which is the budget set up to build and maintain the city’s plant. It is largely supported by long-term borrowing, which makes sense because it finances long-lasting structures like bridges, schools, and government office buildings. The next generation of taxpayers will pay for what they use. Lindsay’s practice of paying current salaries from long-term borrowing is like a family’s taking out a thirty-year mortgage to pay its grocery bill. This device got so out of hand that by 1975 the capital budget contained over $700 million in such expense items, roughly half the total budget. Second, by 1970, he had $420 million in outstanding RANs, uncovered by state and federal aid. He paid them off with new borrowing. From here forward, the city was unable to pay off its short-term debt at the end of the year. By 1975, it had $4.5 billion in outstanding short-term debt (and another $7.8 billion in outstanding long-term).

You may be wondering who was lending all this money to the city. Both Wagner and Lindsay issued debt “publicly,” meaning they borrowed on Wall Street. This is the normal way for cities to borrow and New York did so until April of 1975 when, as the phrase goes, “the market shut on the city.” A city borrows like this: It decides how much money it needs and for how long. It may need “seasonal” funds to tide it over from, say, January through May while it waits for federal or state aid owed it. In this case, it will issue notes. Or it may need “capital” funds, borrowed over thirty years to build, say, a bridge. It will then issue bonds. The city selects a “managing underwriter,” usually a Wall Street investment banking house, to head up a group of other Wall Street firms willing to buy the debt from the city at one price (say 98 cents on the dollar) and sell it to investors at a higher price—they hope at 100 cents on the dollar, or par. This difference, the “spread,” is their profit.

If the debt is issued publicly, anyone can buy the debt or, to put it less crudely, invest in city paper. Big banks can buy for their own portfolios; small investors can buy for their retirement. Traditionally, banks and insurance companies have dominated the municipal market. People with small amounts to invest were not active until fairly recently. But by 1974, banks no longer needed the tax exemption provided by municipals and began ridding themselves of tax-exempt paper in favor of taxable paper, which carries a higher yield. Wall Street began marketing tax-exempts more aggressively to the small investor, in part because the Street had lost its traditional, institutional investor.

At the same time as the marketplace was changing, New York City was plunging toward its fiscal crisis, issuing more and more debt at higher and higher yields. These high yields scared the banks—and lured the individual, but not necessarily very smart, speculator. Since municipal debt takes the form of unregistered “bearer bonds,” no one knows for sure who held New York City’s debt in 1975. The president of Morgan Guaranty said the six largest New York City banks held $1.2 billion of city securities—20 percent of their aggregate net capital—in March of 1975. The Securities and Exchange Commission (SEC) concluded that the banks held onto at least part of this debt because they couldn’t sell it—no one would buy it. The SEC also concluded that a large amount of city paper was held by small investors who did not understand what they were buying and who could not afford the loss that a city default would bring. The SEC’s conclusion is unproven.

Today we can look back at the city’s burgeoning expenditures careening ahead of its modestly growing revenues and ask: Was the city totally mad in those days? How did it think it could get away with such vast short-term borrowing? How did it expect to pay off the cumulative deficits, which were growing so dramatically that they totaled $5.1 billion at the end of fiscal 1975?

The answer is simple: The city believed in its future as a perpetual attraction to both business and middle-class residents. Mayor Lindsay and his advisers—along with a lot of other New Yorkers—thought that if they could just hold on, continuing to spend for all those wonderful programs they and the federal government had created, the city’s economy would eventually generate enough money to pay for the deficits they were racking up.

The city was wrong, as Auletta points out with unbecoming satisfaction. The resilience was no longer there. The local economy was in deep trouble. Surely Lindsay’s advisers knew the approximate figures. Between 1958 and 1974, the city lost 347,000 or 36 percent of its manufacturing jobs while the country at large gained 4.1 million or 26 percent. Almost a third of this loss was in the clothing business, but most other decentralized industries lost as well: printing down 22 percent; leather down 43 percent; food processing down 53 percent. Nearly every manufacturing sector in the city lost jobs. (Some of this loss was made up in services; finance, insurance, and real estate gained 54,000 jobs.) The data showed that the city was losing jobs in precisely the small-manufacturing industries that had made it great.

The crucial statistics—payroll jobs, number of employed residents, and the unemployment rate—from 1970 onward make the city’s downward spiral gruesomely clear. Payroll jobs declined every year without fail, from 3.74 million in 1970 to 3.17 million in March 1978. (The latest figure, joyfully received by the city, is 3.2 million, still 500,000 fewer jobs than in 1970.)

But while payroll jobs are increasing, the number of employed residents is not. The figure stood at 3.15 million in 1970 and stands at 2.79 million today. In 1970, the unemployment rate stood at 4.8 percent, high for the time. It increased steadily until it hit a staggering 11.6 percent in July 1976. It has bounced around since then, settling at 8.5 percent in the latest figures.

These and other data mean that the city’s economy has probably hit bottom and is on its way to a modest recovery. It does not mean that the city will return to its relatively prosperous postwar economy. Too many things have changed. Too many large businesses have moved out; too many small ones have closed. Too many New Yorkers have left for the suburbs or the “Sunbelt.” The service economy has replaced the manufacturing economy. The New York of the future will bear little resemblance to the New York of the past.

Auletta goes on at length about the fall of New York but gives short shrift to its salvation, temporary as that may be. The city was on the verge of catastrophe in June 1975, when it faced default on $4.5 billion in outstanding short-term debt owed to both a few big banks and to thousands of unidentifiable small investors. It had nowhere to turn for help. The city couldn’t possibly pay off $4.5 billion in one year. But even without trying to pay it off, the city could not meet ordinary, day-to-day operating expenses.

Today the city has paid off all but a tiny amount of notes, and these are secured by an escrow account. It is back in the short-term market. Default is remote. What happened? In 1975, the Municipal Assistance Corporation (MAC) was created by the state to save the city by forcing or cajoling—whichever worked—investors to trade in their short-term debt for long. They did. MAC solved the city’s financing, though not its budgetary, problems.

Anyone unfamiliar with MAC will not understand how it works from Auletta’s description. Here are the facts. The state legislature, whipped into line by Governor Carey (D) and Senator Warren Anderson (R), had set up MAC in June of 1975 to refinance and stretch out the city’s absurdly short and onerous debt, keep an eye on the city, and provide it with some funds to operate. The subdued city agreed, in principle, to institute a number of budgetary and accounting reforms. (That the city was not sufficiently chastened to institute these reforms in practice became clear as the summer went on and the city balked at every specific reform proposal.)

In July and August MAC issued $1.88 billion in MAC bonds. With this money, it redeemed $771 million in city notes and advanced $1.046 billion to the city for daily operations. By the end of August, however, neither the public nor the banks would buy more MAC securities.

This was MAC’s first great crisis and by no means the last. Banks and individual investors feared the lack of controls on city spending. When Carey had proposed MAC to the legislature in early summer, he found that Mayor Beame had gotten there first and had talked key legislators into passing a “toothless” MAC, one that gave MAC directors no real power to control city spending. In September Carey summoned Beame to Albany, gave him a copy of legislation creating the new Emergency Financial Control Board (EFCB), and told him it would be passed the next day. It was. In thirty-six hours, the city’s sovereign power to spend and borrow had been turned over to a state agency, the EFCB.

This was an impressive use of power, notwithstanding Auletta’s disparaging view of it. A Democratic governor from Brooklyn, politically unknown to upstate Republicans, asked them for emergency legislation to save that symbol of moral decay and economic profligacy on the Hudson. And they did.

The alternative, for those who think the legislature had no choice, was the one recently followed in Cleveland, Ohio: Let the city default. Do nothing. In the field of finance, there is always the Do-Not-Act Alternative. That is the dark possibility that would-be rescuers of any financially troubled institution must forestall. If the creditors—old ones or proposed ones—are willing to sit by and do nothing while the institution’s cash runs dry, then the choice to do nothing can become the choice to kill the institution. And look who New York City’s creditors were: the commercial banks and a couple of big investment banking firms, who were identifiable, and the small investors, who were not. The state could only deal with creditors it could identify, and the banks were unwilling to invest more money in the sinking city unless they were assured that they’d get their new money back.

The banks had good reason to fear they might not get their money, either from their old city investments or their new MAC investments. MACs were selling well below par (and, indeed, continued to do so until January of 1977 when most MACs began selling at a premium). Of course the banks were scared. They watched MACs dip lower and lower in the summer of 1975. They were afraid this was the end of the line for MAC and for their money invested in MAC. They were afraid that stockholder suits might challenge their past investments in city paper as well as their entanglement with MAC.

The banks and the state wanted to spread the risk around among a few more players. They hit on two untapped investors: the city employee pension funds and the federal government. Both had capital available to invest—though neither one relished the idea—and both had a clear stake in keeping the city solvent. In September 1975, the pension funds bought an initial $370 million in MAC bonds (they ended up taking 40 percent of city and MAC debt between fiscal 1976 and 1978). In November, the federal government agreed to a $2.3 billion yearly seasonal loan program to begin in fiscal 1976 and end in fiscal 1978.

By Christmas of 1975, the city had an odd assortment of partners yoked together by necessity: banks, pension funds, state and federal governments. Each partner, to save itself, had to save the city, but no partner wanted to do more than it had to. They spent the next three years haggling and fighting, but their partnership held the MAC structure together and kept the city going.

The brilliance of MAC lay in two matters: (1) it was a conventional financing solution borrowed from private business, but shrewdly adapted to a public problem; (2) it was held together and driven through hundreds of obstacles by the enormous will of Felix Rohatyn, the investment banker appointed chairman of MAC by Carey. Rohatyn came up with the financing solution, then charmed, coerced, and begged warring parties into submission. Without him, the city would have defaulted on payrolls, defaulted on loans, and moved into bankruptcy.

Auletta shrugs off Rohatyn’s achievements: “As was true in Vietnam, the city ignored past lessons and was pulled deeper and deeper into debt. By 1978, Rohatyn—ignoring the lessons of the UDC’s 1975 collapse—urged the state to place its ‘moral obligation’ behind the city’s bonds because they could not be sold without it.”

Perhaps Auletta has forgotten that if the city did have any real alternatives to MAC, no one was pressing them publicly. The state put its moral obligation behind the bonds to make them eligible for purchase by banks and pension funds. By law, banks can only buy investment grade securities—ones backed either with the moral or general obligation of the state. The market would not have touched a bond backed by a city pledge—that, after all, was the whole point.

The only alternative to MAC was bankruptcy, whose advocates seem to think it would have gotten debt service off the city’s back and provided a fresh start. That’s just not true. There’s no evidence that the bankruptcy of New York City would have resulted in a court ruling that the city could repudiate its debts. But even if it had, what kind of future would the city have faced after repudiating $13 billion of debt? Companies that go bankrupt cease operating. The city had to go on. Who in his right mind would have ever lent a dime to the city again? And without financing, how would the city build needed schools, bridges, fire houses, or maintain what it had? If only current revenues were available for construction, all capital building or maintenance would come to a halt for several generations. And make no mistake: Generations would pass before the city—once it repudiated its debts—could get back to the market.

A more moderate form of bankruptcy, one being widely promoted in New York today, would be to repudiate debts and obligations only partially. This view presumes a sensible judge would say, in effect, “Everyone gets 80x$ on the dollar—lenders, welfare recipients, contractors, suppliers, cops, everyone.” Its proponents see this as orderly. But life would certainly not go on as usual after such an event. Everyone who could get out would. City workers and suppliers would simply desert the city. What sensible supplier of, say, stationery would stick around to be paid 80x$ for what sold at $1? When the city failed to pay bills to its creditors—many of whom are local businesses—they would sensibly decide to stop paying taxes and put aside their tax money as a sort of lien against their legitimate unpaid city bills.

The city had no choice in 1975 but to accept the MAC solution along with MAC’s set of partners. But how promising is this partnership for the long run? In Rohatyn’s view, what’s good for MAC investors is good for the city. He’s not afraid that either the unions or the banks will push for any measure that’s truly destructive of the city because such a measure would damage MAC bonds. But it’s not apparent that the conjoined interests of MAC investors add up to the interest of New York City. The cartel of banks and unions will yield a couple of advantages. The city will probably not suffer crippling strikes or outrageous union demands since either will increase the interest rates on new MAC issues and lower the secondary market value of old MACs. The banks will probably keep a sharp eye on city expenditures for a few years to come and will act as a reasonably effective force in keeping spending down and budgets accurate.

However, the unions will push for policies that will have the effect of eroding the city’s resources. The powerful pension fund consultant Jack Bigel, for example, has been insisting that the city can handle its future gaps by “attrition,” i.e., not replacing people who leave or retire. He’s probably correct on the numbers. But if the city relies on full attrition—saving $336 million next year alone—it will face monstrous problems in using its work force properly. If Mayor Koch backs down from his proposed layoff policy, then he had better get some written assurances from the unions that he will be able to promote and demote as necessary, abolish jobs, create new ones when needed, and fill all positions with those qualified rather than simply with those next on the list. Without such assurances, the city will face chaotic, impossibly inefficient service. Which brings us to the heart, and passion, of Auletta’s book: labor.

There are many problems with this book, but the fundamental one is that Auletta, for some reason known best to himself, did not write the book he really believed in. As he rambles on about econometric trends, world moral decay, the failure of democracy, one can imagine his eyes glazing over as he reads his own prose, deadened by the weight of mangled data, misplaced participial phrases, and wantonly convoluted sentence structure. But when he reaches his beloved topics of labor and government mismanagement, suddenly his words come to life as he races forward to exorcise the evils that both have perpetrated on the city of New York. He gives not so much analysis as indignant and often useful lists showing how the city is mismanaged.

  • City taxpayers spend in constant dollars three times more than they did ten years ago to receive the same level of police, fire, sanitation, and education services.

  • Between 1961 and 1971, the municipal hospital system’s patient services dropped 20 percent while 4,000 new employees were hired.

  • Between 1961 and 1975, city labor costs increased three times as fast as the number of employees, discounting inflation.

When set against the city’s economic decline, argues Auletta, these facts seem to add up to a disaster. But, he adds, warming to his subject, they also add up to an opportunity. And who would disagree? If the city’s going to cut its budget, it must cut labor costs, which hovered for years at 45 percent of the city’s budget.

Auletta, therefore, presents another list, showing his notion of the kind of goofing off, waste, and excessive benefits that should be cut:

  • City employees enjoy in practice a four-day work week.

  • The Transit Authority’s union contract prohibits part-time employees (although this has been slightly modified in the most recent contract).

  • School secretaries who are members of the teachers’ union receive paid sabbaticals.

  • After debt service, pension benefits are the largest cost in the city’s budget for items that do not involve delivering a service—$1.2 billion in fiscal 1979. Taxpayers pay about 90 percent of pension funding.

  • The city pays the full cost of health and hospital insurance for every employee and his family, plus all retirees and their families.

Auletta’s great weakness is that he is careless of detail and disdainful of the problems inherent in changing anything. He is no respecter of institutions and their strengths. He glides over those details readers need to know in order to judge just how entrenched—and therefore difficult to change—some particular benefit might be. For example, he attacks the “prevailing wage” system by which certain categories of workers must be paid the wage prevailing for that job in private industry. (Auletta says this applies to “maintenance” workers, but they are only one of the categories involved.) This, says Auletta, is “through special arrangement.”

Such a description is hardly fair and understates the difficulties involved in changing a settled practice. In fact, this one is required by the state labor law’s Section 220, passed in 1938. Changing the law is the job of the state legislature, which has not permitted an amendment to be introduced in committee, much less passed.

The constraints on the city’s ability to get itself out of its destructive relationship with labor are many. The municipal unions have had an agency shop since 1977. All but 4,500 city workers are represented by unions. All but 2,000 of the city’s approximately 25,000 managers are in unions. The city pays the salaries of 126 employees whom it releases to the unions for full-time union work. Koch has been trying, without success, to modify many of these practices. He is energetic and bold, but he is new to his job. He has yet to win an important skirmish with labor. He is up against such tough labor leaders as Victor Gotbaum and Albert Shanker, and so far they have proved a match for the mayor.

The problem with this book is not that Auletta fails to mention these or any other facts. The problem is he fails to use his data to build a precise and coherent argument. This is an angry, passionate book whose anger, unfortunately, tends to obscure the analysis it might have presented.

Auletta never makes it clear that in 1975 the city faced two different, though related, problems: How to get the financing it needed to keep out of default and how to balance its budget. The financing problem was the immediate one (as it always is) and was the one that had to be solved first or there’d have been no city left to face the second problem. So while the city’s rescuers toyed with budget reforms (many of which were more symbolic than real) they put most of their efforts into refinancing the debt. As it turned out, the city’s problem in spending too much on operations was far worse than anyone had thought. Somehow the city never did quite get around to cutting its budget other than incrementally.

The most important lesson from the crisis is this: It did not fundamentally reshape the city. Auletta knows this and is enraged by it. Indeed, rather than reshaping the city, the fiscal crisis took two important interests—labor and the banks—and formally made them arbiters in financing the city in a way unmatched in any other American city. The city was saved from bankruptcy in 1975 by a partnership of former enemies. The true price the city may end up paying for its sins is not merely the high debt service it must bear over the next twenty years. The city also faces the indefinite loss to its creditors and to the state of its sovereign powers to spend and borrow as it sees fit. That the city proved unfit four years ago has subjected it to the will of those who, for other reasons and in other times, may prove tragically unfit as well. Beneath Auletta’s rage there is a rational fear—that the city will have paid for its prodigality without achieving the warm return to health and shelter we have been led to believe all prodigal sons eventually receive.

  1. *

    For example, by the time New York State’s fiscal year began on April 1, the state had forwarded to the city only one-fourth of the education aid it owes, while the city had spent over 60 percent of its education budget. Thus each year the city has had to borrow short-term about half a billion dollars to cover the difference between its expenditures on education and its receipt of state aid.

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