The Financial Crisis of New York City

What this fiscal crisis was really about?

People face financial crises all the time. Many people live all of their lives struggling to become financially free. Some get over it in the course of their lives but many people do not have the management and the courage to do so. But do only people face financial difficulties? No, not at the least bit. Everyone, every organization faces those kinds of setbacks. But good management and appropriate decisions help to get over those.

As an example, we can refer to the Fiscal Crisis of New York City in the 1970s. There was a severe cash shortage and there were many debts. New York was almost declared as a bankrupt city but it was not declared as such. New York was, even then, regarded as a prominent capitalist city but during the crisis it faced, banks and investors throughout the country were wary about the city. People left the city and at the airport, a handout was given titled, “Welcome to Fear City” highlighting how to survive in New York.

But when we look back from the present at those cataclysmic times, we may think that the pleasant present was a result of this crisis. How does that fit into realism? That’s what we’re going to acknowledge through this.

Reasons for the crisis

For a person, a drastic need for money or his/her poor management commences giving out financial crises. But when we analyze the fiscal crisis in New York we might find another thing or two. 

Mainly, the difficulties were blamed on the high salaries of the municipal offices and public workers. But in documentations, we can see that the New Yorkers were paid the same wages like that of the other states. Then how come only, New York faced these predicaments? The reason was as it was the biggest, most capitalist city in the United States, it had to provide its people with many benefits and welfare. It is a fact that New York had nineteen public hospitals in 1975. In addition to that, it had extensive mass transit, public housing, and all were given higher education for free. That was by the Municipal University System, which was the only one in the country. They had public daycares and decent schools as a plus.

New York was doing a fine job by managing the money it earned to provide the citizens with a well-furnished ‘New York’ experience. Even the Federal Government assisted this democracy. But it started to collapse when deindustrialization occurred. Deindustrialization was a result of many reasons including the movement of production facilities overseas, mostly to countries where the cost of labor is extremely low, and also to the SunBelt, where the producers could enjoy low taxes and also pay low wages to the workers. Due to this reason, people migrated to the suburbs. The higher society, mostly the company owners, also moved to other areas with their businesses and companies. In 1970 the population of New York contained 7,894,862 but at the end of that decade, it was noted to fall by 823,223, which illustrates a steep fall of the population of the city, to 7,071,639.

New York City
New York City

When the population dropped because of the flight of the white to suburbs, New York city’s tax income was destroyed. As I mentioned earlier, New York provided many outstanding municipal services, Medicaid, and many welfare services as a capitalist city. It’s true that at first, the federal government funded these services. During the years of the Great Society, Medicaid and Welfare expenses rose but as the Federal government helped New York kept the cycle going. By the 1970s, with the deindustrialization which led 25% of the citizens into unemployment, and the migration of the white into the suburbs which reduced the tax income of New York, New York was not able to hold up against its expenses. The unemployed 25% of citizens depended on welfare aids, thereupon it was also a huge burden to New York. 

Facing this catastrophic situation, the city was not able to operate under conventional standards and also was unable to pay off the ‘short-term debt which was burrowed when the crisis was just beginning. In addition to that, it was unable to borrow more and even the federal government refused to offer the city a bailout. All these reasons combined pushed the city towards declaring bankruptcy. 

Summarizing the reasons, we can jump to the conclusion that the financial collapse had many causes. Most prominent among them are, the overly optimistic forecasts of revenues, the underfunding of pensions, the use of capital expenditures for operating costs, and the poor budgetary and accounting practices. If the city government did not forecast revenues that were not yet acquired, then there will be no debts and after a short period of time, the city would have the ability to get over the crisis without much hassle. However, things went the wrong way, and ultimately the city was overrun with debts but no steady income. 

The Process of escaping bankruptcy

As the federal government refused to bail the city from declaring bankruptcy, something had to be done. The city was at the brink of bankruptcy as I’ve mentioned above, but to know how close it was, look at these statistics. In 1970 the city had $0 debt but in 1975, it had a huge debt of over $ 6 billion. The city was overly relying on debts. Though the debt amount was high, the income was not outstanding. As I stated above, New York did not adhere to the general standard of account practices and bookkeeping. Due to this and the situation of the crisis, the bond market of the city was also crashing. The value of the bonds fluctuated and banks refused to purchase bonds anymore. In this status, as Ken Auletta says in his book, ‘The Streets were Paved with Gold’, the city did not act as it was bleeding to death. On the contrary, it was actually hemorrhaging severely.   

The state then got to work and implemented the Municipal Assistance Corporation which was supposed to assist the municipal services and also, especially, to sell special bonds backed up with the sales tax. But when this was starting, the banks and the investors had already decided to avoid investing in New York due to its fragile economy. Therefore, the Municipal Assistance Corporation was a failure. It was not able to withhold the balanced budget any more than the city could have. It was then the Emergency Financial Control Board was put into existence. 

The Emergency Financial Control Board had full authority over the budget of New York and was able to directly interfere with any spending of the city. The state governor and also the mayor of the city had to be members of the board. It consisted of government officials and also some citizen representatives. What it did to get over the crisis at hand were serious budget cuts. It was appointed in 1975 and in three years’ time, about 6,000 police officers and 6,000 teachers lost their jobs. 2,500 firefighters also lost their jobs due to these job cuttings. However, with the help of Washington, the emergency financial control board was also able to bail out the city from the brink of bankruptcy.

Other than that, the financial control board became the scapegoat of some actions too. That is to say, the politicians do not like cutting the budgets because they will gain a bad reputation in politics. But in this situation, the financial control board forced the city officials to do what was necessary and took the blame for the relevant actions willingly. In addition to that, it made the governor of the state and the mayor of the city members of the team make them partners leading to effective communication between the two leaders. Also, that made the governor responsible for the budget fluctuations in the city and thereby he actively worked to improve it. The financial control board made it a must to follow the standard and accepted accounting practices in order to keep clear records of the income and the expenses. 

All of these changes made the NYC budget balanced. Then banks agreed to buy short-term and long-term bonds from the city which eventually made the city stable and balanced again.  

Effects and implications of the crisis

As Ikechukwu Joseph has put, ‘Every problem has an immediate cause, many remote causes, short-term and long-term effects. So, what are the effects of this problem? Effects are not always negative or not always positive, for they can be good or bad from the perspective of the receiver. In here. I’m going to include my opinion about what changed in society and in the governing system of New York City after the crisis happened and after it was solved. 

First of all, the main thing that New York learned from this crisis and the solving process was how to act in a financial crisis in the future. In the 1970s, they were not ready for a financial calamity and were surprised when that struck a blow. But in 2009, with the great recession and the global financial disorder, New York knew what to do. As mentions, the mayor when this recession happened, Mayor Micheal Bloomberg, did not hesitate and burrow loans to run the city. That is because he knew what steps to take. He froze some wages and cut some jobs. It got over the crisis very successfully than it did in the 1970s. As per the philosopher, George Santayana, it’s true to say that those who cannot remember the past are condemned to repeat it. But in this situation, Mayor Bloomberg remembered the past and took every action to alter the happenings in history.

As I said in the previous part, about 6,000 police officers lost their jobs in 1978. This resulted in higher crimes in the city. There was no one to uphold the law. The number of police patrols was reduced drastically. People had full control over the streets. When a crime was reported, the police were very slow to respond. That was why, at the airport, tourists and visitors were given a handbill titled “Welcome to FEAR CITY” focusing on how to survive in the crime-ridden New York City. In addition to that, firefighters also lost their jobs making a vast number of fires unattended in New York city. Many buildings were burnt down due to this. This was a huge disaster to the city too. Though it was once one of the top locations to travel to, tourists did their best to avoid it as there was only death and destruction to see.  

Another long-term effect and implication of this crisis is the downfall of the working class. What this crisis did was, destroy the least of financial freedom that the working class of the city had. Again, as I have mentioned above though New York was a capitalist city, it proved its worth with a much appreciated democratic vision. It might occur to someone that New York provided more services than it could sustain. But for me I think, it was the sudden deindustrialization that destroyed the cycle going. It could have managed to prosper with all those liberalism with the taxes and the manufacturing it offered. But with deindustrialization, the tax income of the country got destroyed and also many other sources of income were lost. However, after the crisis, the working class not only lost their jobs but also lost most of the things they enjoyed for free. This made the working class more and more pressured in society. The city officials were forced to raise the subway fares, charge a fee at the Municipal University System (CUNY), close public hospitals, and much more. It is quite apparent that these steps made everything a burden for the working class.  But on the contrary, the rich were much delighted as always. The city totally depended on them. If not for the banks the city would have to declare bankruptcy. Therefore, it is quite apparent how the way of crisis solving of the city affected the working class. This made the gap between the rich and poor unimaginable in the crisis years, which can also be applied to today’s society.    

Looking at it from a different perspective, makes me wonder that without these changes, the city would not have evolved into what it is at present. If it kept giving those welfare services and Medicaid in large amounts, the city will not be developed today as much. But of course, the city could have managed to keep on. Maybe if this fiscal crisis never happened, in 2009, the city would go down a steep curve with high expenses due to uncancelled welfare and Medicaid. However, it was because of this crisis and because of the steps taken to control it, that New York is developed into the status that it is in. 

I assume that now it is clear to you all that this incident helped a great deal to mold the New York City that it is today. However, the current situation, the pandemic, has many things in common with what happened in the 1970s. The streets look empty in the same way they looked empty in the 1970s. The number of unemployed people is rising day by day. The businesses are closing due to the falling economy. But there is a huge difference between the two incidents because back then it was only New York that was struggling, but at present, we can see not only American cities but the whole world screaming for help. That is the main difference that I am seeing right now. Back then, it was New York that dug its grave, though many outside causes gave rise to the problem, mainly it was New York that made it worse by burrowing continuously. This time, it is very different because this is totally outside the control of New York. There might be vast job cuts again and many municipal services will be canceled, repeating the history once again like it did in 2009.

The Conclusion

In the conclusion I would like to mention, from the beginning of the crisis, the state officials, the city officials, and also most importantly, the general public helped in solving the problem. If they showed much resistance when there were budget cuts and welfare cuts, the city would be lost by now. It is true that they protested, but it seems like they understood the situation and in my opinion, they did not take those protests to a drastic level. 

In addition to that, this crisis was the main reason for the massive development in the city. Because of this crisis, the extensive expenses of the city were reduced thereby led to saving more money for development projects. The creation of the Emergency Financial Control Board also helped the city a lot. Though they did not impose a control period on the city, I believe that it was because of them that the politicians and the officials made responsible work of the city.  However, the NYC fiscal crisis made a large gap between the rich and the poor, because almost every municipal service which was free before started to charge fees. Many welfare bonuses were cut and many people lost their jobs. It is truly a dark age, probably the darkest age, in the history of New York according in my opinion.

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