How Did New York City Government Recover from the 1970s Fiscal Crisis?

The legend has it that New York City avoided bankruptcy, and recovered to become the thriving city it was until recently, because all of its interest groups got together and agreed to “shared sacrifice.”  The public employee unions agreed to contract givebacks, and having their pension funds invested in the city’s bonds.  The banks agreed to roll over the city’s debts.  The rest of New York State, under the leadership of Governor Hugh Carey, agreed to shift resources to NYC.  And the federal government, after initially telling New York City to “Go to Hell,” finally decided it had sacrificed enough and agreed to a bailout.  These powerful players made the sacrifices, and ordinary New Yorkers reaped the benefits.

I’m here to tell you that the legend is a lie, a politically convenient lie.  The people negotiating in the room deferred and lent a little, but gave back nothing.  The ordinary New Yorkers outside the room then made all the sacrifices required to pay back every dime, and then some, in higher taxes and collapsing public services.  The poor were left to suffer and die unaided, with the Bag Ladies dying in the street, the schools collapsed, the infrastructure deteriorated, the police allowed city residents to be victimized by crime on a large scale, and the streets and parks filled with garbage. Property in large areas of the city was abandoned, and life expectancy fell.

Decades later, some city services hadn’t fully recovered. The beneficiaries, relocating to the suburbs, a few enclaves within the city, or retired to Florida, and the better off, were mostly unaffected.

In reality New York City recovered because things happened that those negotiating over its corpse could not have expected.  This post will explain, and use data to show, that high inflation was real reason New York City recovered from the 1970s fiscal crisis.


The myth of shared sacrifice, by those who in fact merely negotiated which sacrifices to impose on others, continues to be re-told.

Andrew Cuomo on ‘Man Who Saved N.Y.’

The story of how we averted disaster is grippingly told in a new biography of Gov. Hugh Carey by Seymour Lachman and Robert Polner, entitled “The Man Who Saved New York City.” The authors recount how Carey’s determined and creative leadership brought New York back from the brink of civic and financial catastrophe. In the end, the state recovered through shared sacrifice and a balanced approach that did justice to the interests of both business and labor.

By labor, they mean unionized public employees.  Not other workers living or working in the city. By business, they mean large financial corporations and the rich.  Not new businesses, and small business.  What about everyone else?   Their needs were not a priority in the 1970s, and are not a priority today.  It was, and is, the executive/financial class, the political/union class, and the serfs.

During the administration of Mayor John V. Lindsay, the public employee unions had cut one deal after another for increased pension benefits, allowing their members to retire years – sometimes decades – earlier than they had been promised with enriched, tax free pensions, and move away.  The cost of all these deals was shifted to the future. What happened at the time is described in the book While America Aged by finance industry critic Roger Lowenstein.

In 1966 the Patrolmen’s Benevolent Association won full pensions (that is equal to their full salaries) after 35 years.   A game of leapfrog ensued.  The sanitation workers, arguing they were also uniformed, got four pension sweeteners over the mid-1960s, vaulting them to a half pension after twenty years and virtual parity with the firemen and cops.  A panicked PBA came hurrying back for more.  The TWU, which had set off the pension bandwagon, demanded that it not be left behind…

The teachers got an even richer settlement – a pension of more than half pay after just 25 years (a rather short career for a white collar professional).  When Gotbaum saw he had been leapfrogged by the teachers, in 1970, he demanded an even sweeter deal.  The response of a Lindsay aide to one such pension demand was memorable.  “When would we have to start paying for it?”  Told that due to the peculiarities of the pension calendar, an increase would not affect the budget until three years later, by which time Lindsay would be serving out his final year, the aide breezily approved it.

According to data reported to the U.S. Census Bureau at the time, as part of the Census of Governments, adjusted for inflation into 2017 dollars, New York City’s pension benefit payments increased from $2.00 billion in FY 1967 to $2.99 billion in FY 1972 to $3.41 billion in 1977, nearly doubling in a decade.

But taxpayer contributions to the city’s pension funds only increased from $2.88 billion in FY 1967 to $2.98 billion in FY 1972, before soaring to $5.26 billion in FY 1977, as the cost of Lindsay’s deals was deferred.

During the 1960s New York City’s highest paid public employees – teachers, police, fire, transit — demanded, and got, state laws exempting them from the city’s residency requirements.  They moved to the suburbs, along with much of the city’s middle class and many businesses.  The public unions took more and more and became richer and richer, even as the city became poorer and poorer.  And when the catastrophic consequences arrived, after Lindsay had breezily left office, what did they agree to give back?  In reality, nothing.

All those pension increases would be paid in full, every last dime, and exempted from the rising city and state incomes taxes needed to fund them. The public unions agreed to have some of the pension fund money was invested in city bonds, but the state constitution guaranteed the pensions would have to be paid in full regardless of the consequences for those still living in the city, so there was no real risk.  Pension benefits were cut for new hires only.  The unions also agreed to have some portion of their near-bankruptcy year salaries deferred by a few years, an off-the-books debt that was also paid in full.

The public unions also agreed to stand by as thousands of city workers were laid off, but those ex-workers were no longer in the public unions.    And since it is employees with less seniority who are expected to work, and because new employees earn so much less than those later in their career, the services provided by the city’s unionized public employees plunged by vastly more than the budget was cut.

You can see the way this works in the MTA’s proposed “doomsday budget.” The budget cut?  Perhaps 7 percent.  The employment cut through layoffs?  Perhaps 15 percent – because debt service, pension costs and retiree health insurance costs can’t be cut.  The service cut?  Proposed at 40 percent.

As for the banks and financial companies, and wealthy individuals, they had lent the city money without doing much due diligence because they got a really rich deal, with high levels of interest that were exempt from federal, state and city income taxes.   Why pay taxes when you can have the government go into debt, and force its residents to sacrifice to pay you interest, instead?

Noted Lowenstein since monies owed to pension plans (unlike wages and salaries) could be deferred, the pensions provided temporary cover for budget makers…When that no longer sufficed, the city began to patch the budget with short term loans. Then, in 1975, lenders stopped the game, and the city ran out of people and institutions to borrow from.

According to that same Census Bureau data, also in $2017, the City of New York’s debts, including those of New York City Transit that are not assigned to the broader MTA, increased from $58 billion in FY 1967 to $66 billion in FY 1972, even as investment in the infrastructure was de-funded and it was left to rot.   The city’s interest payments increased from $1.86 billion in FY 1967 to $2.49 billion in FY 1972.  After investors realized they might not be getting paid back, those interest payments jumped to $3.4 billion in FY 1977, back when the Bronx was Burning.

If the New York City had in fact gone bankrupt, like Detroit, it is likely that some of those city debts, run up by those leaving for the suburbs, would have been wiped out.  So that future city residents and businesses would not be forced to pay for them.  That would really have been “shared sacrifice.”

The largest Chapter 9 bankruptcy in United States history was Detroit, Michigan. The city filed on July 18, 2013, for relief on approximately $18-20bn in debt outstanding. In this bankruptcy, pensioners of the city were paid around 82 cents on the dollar, and holders of unlimited tax general obligation (ULTGO) bonds around 75 cents on the dollar. Holders of Detroit general fund paper received as little as 14 cents on the dollar.

To avoid being forced to share in the sacrifices, the city’s banks and wealthy agreed to roll over the city’s debts, in effect lending New York City even more money at high interest rates to avoid a short term crisis.  Thus providing time for the tax increases and public services collapse required to pay that money back to take place. That’s what “saving New York City” really meant – soaring taxes and collapsing services over several years, instead of bankruptcy in year one.

The State of New York, which has always taken more money out of New York City in taxes than it provided to the city in state spending, similarly provided New York City with loans, not actual cash.  Governor Carey had the state back Municipal Assistance Corporation bonds, allowing the city to go deeper in debt and keep the lights on.  The interest rate city residents had to pay on those bonds?  It was 14 percent, triple tax free.

The Man Who Saved New York City

Most state governments provide aid revenues to local governments, allowing some transfer of funds from richer to poorer localities.  New York State uniquely forces its localities to pay a large amount of aid revenues to the state government, specifically for social programs such as Medicaid and Welfare.   This policy, dating from the 1960s, was intended to ensure that middle class Baby Boomers moving to the suburbs would not have to pay as much for the poor people and seniors in nursing homes left behind in places such as New York City.

In 1972, the City of New York sent $130 million in aid revenues to New York State (adjusted for inflation into $2017), according to data recorded by the U.S. Census Bureau as part of the 1972 Census of Governments.  In 1977, that figure had increased to $2.67 billion.   The State of New York was, in effect, allowing the City of New York City to borrow money to send to the State of New York, at 14.0% interest.  Debt that was to be paid in full.

It is worth a side trip to YouTube to view this video, the best description of what happened to NYC in the 1970s that I have seen or read.

Meanwhile in 1970 New York City accounted for 32.9% of New York State’s public school children, and 42.8% of New York State personal income tax revenues, but it received only 26.1% of state school aid revenues.  In 1977, with the NYC undergoing an economic and social collapse, it still accounted for 32.5% of New York’s State public school children, but it was down to 36.9% of New York State personal income tax revenues.  It’s state school aid? Still just 27.0% of the total. New York City’s share of the state’s school aid would only catch up to its share of public school children in the mid-2000s, and even then only as part of a deal to (once again) retroactively increase teacher pensions, sucking all that money (and more) out of the classroom.

As for the federal government, it didn’t provide New York City and New York State with any additional cash either.  Nor did to provide any loans.  All the rest of the country did to save New York is to guarantee that the additional money the city borrowed would be paid, in full, at high interest rates.  And it was.  The federal government did far less to help New York City than it has to bail out Wall Street and the wealthy, over and over, in recent decades.  Including right now.

The people of New York City were not helped.  They got a much higher tax burden, and lost some or all of their public services.  The city became unlivable.  A million people fled.  Property owners, seeing no future income, abandoned their properties in large areas of the city, with some torching the buildings for the insurance. Much of the city was redlined in response, by both mortgage lenders and property insurers.  Including the neighborhood where I have lived since 1986.

If something else didn’t happen, based solely on the deal to “save the city” through shared sacrifice and a balanced approach that did justice to the interests of both business and labor, New York City would have ended up like most older central cities.  Limping along for decades, providing catastrophically bad public services in exchange for high taxes as its population fell. Most of the beneficiaries of those taxes would have chosen to live in the suburbs, or behind a doorman on the Upper East Side or a gate at Breezy Point.


So how did the City of New York budget recover from the 1970s in reality?

Imagine that today some future group of politicians were to tell the rich that since the New York City residents of today didn’t benefit from all those debts run up previously, the city of New York isn’t going to pay them. It is only going to pay half.   They can try to get the rest of their money from former residents, former businesses, and former politicians instead.

Imagine that today some future group of politicians were to tell New York City’s public employee unions that all those retroactive pension increases, for workers who already got the richest pensions to start with, were unjust, and the rest of the workers, who have been made poorer, were only going to pay half of them.  They can try to get the rest of from other retirees now living in other states, or the politicians who voted for them.

In that case the City of New York’s current fiscal situation would be completely different. It would have the money to slow and then reverse the deterioration of the subways, invest more in services for the needy, even reduce its excess tax burden.

Well that is what actually happened to allow the City of New York to recover from the 1970s. In a “real” sense it only paid half, or less, of its debt and pension obligations. Not by formally going bankrupt the way Detroit did.  Not by the people in the room agreeing to get less than they had promised themselves.  They agreed to get every dime, as noted.

The City of New York paid half and less by paying a fixed amount in dollars, as the value of the dollar fell by half from 1970 to 1980, as a result of inflation. The bondholders and pensioners of 1980 found that the big tax-exempt score they had made in 1960s and early 1970s had been cut in half. It would then fall further.  As one can see by using the Consumer Price Index calculator from the Bureau of Labor Statistics,

…$50,000 in bond interest payments or annual pension benefits promised in 1970, when the Lindsay Administration was running up debts and retroactively increasing pensions, bought only $23,458 worth of goods and services in 1980, a decade later.   The real value of that $50,000 would continue to fall thereafter, though at a slower rate.

Those negotiating to “save the city” may have gotten every penny they promised themselves, but the pennies weren’t worth as much.  They got their comeuppance after all.  So did property owners, who saw the value of their homes and commercial buildings, and the rents they could get for them, plunge to levels that made the city attractive to new people and new businesses, despite high taxes and a lack of public services.  Otherwise, New York City would not have recovered.


To see this, let’s go back to the data.

Adjusted for inflation into 2017 dollars, the city’s pension contributions and the interest on its debts totaled $5.47 billion in FY 1972, as Mayor Lindsay was running for President with the hoped-for support of retired NYC public employees living in Florida, and their unions.  By the next Census of Governments in FY 1977, that figure had soared to $8.66 billion.

Meanwhile, as the better off – including active and retired public employees – fled, the total personal income of all city residents left behind, also inflation-adjusted, fell from $275 billion in 1972 to just $235 billion in 1980.

Those who benefitted from those soaring costs were able to escape them just by leaving.  The burden was shifted to the poorer people who were left behind.

Then, however, the burden itself began to be diminished by soaring inflation.  The inflation-adjusted cost of pension contributions and interest on debts fell from $8.66 billion in FY 1977 to $6.13 billion in FY 1984.  It would remain below $8 billion until 2005.

Meanwhile, working young adults who did not require much in public services – who were not poor, did not have children in public schools, did not have health or social problems, did not commit crimes, and lived in Manhattan and were therefore able to travel to work without using the collapsing subway system, moved in.  The total income of city residents increased from $235 billion in 1980 to $353 billion in 1990.

New York’s public labor law guarantees that New York City public employees can never, ever get less without their consent.  They continue to get the same in wages and salaries, and more and more in health and pension benefits, even if the other people who are forced to pay for it are getting poorer and poorer.   By cutting deal after deal with themselves and forcing others to pay for them, New York’s political/union class, like the executive/financial class, has gotten richer and richer compared with the serfs.

With one exception.

During the late 1970s and early 1980s the wages of active public employees, and the pension benefits of retired public employees, were in fixed dollars that inflation was causing to be worth less every year.  The City of New York, then run by Mayor Ed Koch, could reduce its  “real” labor costs just by refusing to sign new contracts.

In 1969, including non-wage benefits, the average state and local government worker in Downstate New York earned 15.3% more than the average private sector worker (excluding Wall Street).  By 1975 that had soared to 27.9% more than the average private sector worker.  But by 1979, it was back down to just 14.8% more than the average private sector worker.

There were similar decreases in public sector compensation, relative to private sector compensation, in Upstate New York and New Jersey at the same time. But not since – other than briefly during recessions when large numbers of low-wage private sector workers are laid off, cutting their income to zero but increasing the average earnings of those still on the job.

To given an idea of the effect of inflation, in 1980 the MTA offered the transit workers union (TWU) a 10.5% pay raise over three years.  The union went on strike demanding a 30.0% pay raise over just two years, a 15.0% increase per year – claiming that the cost of living had gone up 53.0% since the prior contract.

All in all, costs from the past, with no public services in exchange, cost New York City residents 2.0% of their personal income in taxes in FY 1972. By FY 1977 that had jumped to 3.4% of their personal income.  Remember, the average state and local government tax burden in the U.S. has been in proximity to 10.0% of personal income for decades – though for New York it has been much higher.

Thanks to additional workers with jobs and businesses locating in the city, and the effect of inflation on past debt and pension obligations, the cost of City of New York interest and pension contributions fell to just 2.5% of personal income by 1979, and just 1.8% by the year 2000.


So now what?  New York City and New York State have re-Lindsayed, with soaring debts and one retroactive pension increase after another.

By 2017, the City of New York’s interest and pension costs had already soared to 3.0% of its residents’ personal income.  It would be far worse if Federal Reserve policy did not drive interest rates down close to zero, and inflate stock and bond prices making the city’s public employee pension funds appear better funded than they actually are.

Already up to 3.0% of the total personal income of all city residents despite the biggest boom in the city’s economy, relative to the rest of the country, since the 1920s, one that saw the personal income of its residents soar from just $235 billion in 1980 (in $2017) to $434 billion in 2000 and $617 billion in 2017.   In the past decade New York City had the strongest economy compared with the rest of the country, and the most favorable state and local government fiscal situation compared with the rest of the country, since the 1920s.  It may not have another boom like this, compared with the rest of the country, for another century.

Despite this boom, despite soaring tax revenues, the City and State of New York still are once again leaving the poorer people who will still be here in the future with huge bonded debts.  In addition to this on-the-books debt, they have left their pensions only 62.0% funded far less than that for NYC, better in the rest of the state.

They have failed to fund the renewal of the transit system, loading it with debt and leaving it in a downward spiral.  And now the MTA Board, having done the bidding of a generation and its politicians, is celebrating is success.

With coffers set to run dry before 2021, MTA may be forced to borrow more for survival

According to MTA Chairman Foye the regional transit system, the asset on which the metropolitan New York economy and New York State tax base relies, now faces a situation of enfeeblement at best case scenario and extinction at worst.  This after one tax increase after another “for mass transit” over the past 20 years, including an extra 1/3 percent tax on all work income and a 1/8 percent sales tax that all of us have to pay.  The MTA plans to pledge decades of that revenue into the future to borrow even more now.  Meanwhile, funding for the MTA capital plan pretty much halted after 2010, leading to a “state of emergency” of collapsing service by 2014.

I recall hearing the leaders of the Transit Workers Union on the radio in the 1990s, explaining why their members should ratify the latest labor agreement.  “We took all their was to take,” they said.  But did they?  They and everyone else certainly has “taken all there is to take” out of the MTA as to today.

Those of Mayor Lindsay’s time could say it was a mistake.  But it isn’t a mistake when you do it the second time.  It’s a game plan, somewhere in a tablet written in gold leaf.

And with the current recession, one that was due with or without the pandemic, ordinary New Yorkers are once again being presented with tax increases, fare increases, service cuts, garbage piling up in parks, closed pools and beaches, remote or partially remote school without child care and with less learning.  And layoffs of later-hired public employees.  All while all those retroactively enriched pensions and debts get paid in full, to those leaving the city for the suburbs or Florida.

A budget crisis caused by the pandemic — and exacerbated, critics say, by the de Blasio administration — feeds the narrative of a deteriorating city with trash piling up on the streets and rising crime.  Poisonous to property values and rents, it influences decisions by ordinary people and CEOs about whether to be in New York.  “If you have this momentum that we seem to be developing, that’s just going to erode the city’s credibility to sell itself,” said James Whelan, president of the Real Estate Board of New York.

The DeBlasio Administration, like Lindsay and Rockefeller, Giuliani and Pataki, Bloomberg and Spitzer, and Cuomo, has given away the store the special interests he hoped would back his campaign for higher office.

Claiming there was “plenty of money.”  The budget crisis was not “caused by the pandemic,” but by an inevitable correction in the national and local economy that COVID-19 has merely accelerated.

The slowdown was already underway in early 2019, with a financial crisis starting (in the repo market) in late 2019.  The equivalent of the mortgage freeze-up that started in August 2007, about a year before the late 2008 collapse.

And a city, state and MTA budget crisis, with service cuts and tax increases, was already underway last year.  Based on deals that not only pre-date COVID-19 but in most cases pre-date the DeBlasio Administration, though DeBlasio made sure the beneficiaries of those deals gave nothing back.

So now what?  Either New York City’s debt and pension obligations fall by at least half, so that future residents and businesses are not forced to pay for past plunder, with rents and property values falling by perhaps as much, or the destruction of New York City that seemed possible in the 1970s might very well occur.  And unless we get a dose of hyper-inflation, I wouldn’t expect that relief to happen the same way it did back them.

Put bankruptcy on the table, and make all the vested interest sits there and negotiate with someone who demands fairness for the people of New York City! 

Not one of the purported next Mayors or Governors, and neither of the two major political parties, qualify.  They are all implicated in what they have collectively done – in this city for the second time.


Note, I didn’t create a new spreadsheet with the data and charts in this post, since some of it was already in a spreadsheet from the earlier compilation of data from the 2017 Census of Governments.  The spreadsheet used to make the additional charts is here.

Total Spending Census of Gov Charts

I have a spreadsheet of Census Bureau data on City of New York revenues and expenditures starting in 1967, but I usually express that data per $1,000 of city residents’ personal income, and readily available personal income data from the Bureau of Economic Analysis starts in 1969.

1 thought on “How Did New York City Government Recover from the 1970s Fiscal Crisis?

  1. larrylittlefield Post author

    When I discuss how much worse off later-born generations have been with my mother, she knows exactly who to blame. Felix Rohatyn, the legendary banker who engineered New York City’s escape from bankruptcy!

    “Push off the costs, push them off to the future, that’s what he said and did,” according to my mother. And since that seemed to work out OK, people just did that with everything after that!

    If NYC had gone bankrupt maybe all the other stuff after that, here and elsewhere, in the public and private sectors, would not have happened.

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