New York Worries

New York City is assured of being able to pay its bills until December, but the possibly dire effects of an eventual default continue to stir up worry all over the country. Last week a federal study indicated that about 100 of the nation's 15,048 banks had invested sums equal to 50% or more of their capital in New York City bonds and other obligations and thus would be in serious trouble if a default caused the value of those securities to plunge. The banks would probably not be wiped out: Federal Reserve Chairman Arthur Burns has pledged that the Fed will lend generously to any bank threatened by a New York default. The banks nonetheless might have to stop making new loans and call some of their old ones, while trying to rebuild their capital, thus hurting businessmen and consumers in states as far away from New York as Missouri, Texas, Arkansas and Florida.

A New York default would seriously shake the value of bonds issued by other cities; some municipalities are already finding it hard to raise money from investors. New York Mayor Abraham Beame therefore won unanimous support from his 14 colleagues on the executive committee of the U.S. Conference of Mayors, who journeyed with him to Washington last week to plead for federal aid. With a touch of hyperbole Denver Mayor William H. McNichols told Congress's Joint Economic Committee that "every city in the nation is like a tenant in the same building." The mayors proposed two alternative plans: 1) that the Federal Government guarantee a new kind of bond issued by financially strapped cities which would not be exempt from federal taxes on the interest; 2) that the Government make direct, short-term loans to cities in need.

Most of the Congressmen present sided strongly with the mayors. Committee Chairman Hubert Humphrey, onetime (1945-48) mayor of Minneapolis, shouted at Treasury Secretary William Simon, a witness: "You can't stand there day after day and say that all they [New York] can do is go bankrupt. I'm an internationalist, but I'm damn sick and tired of thinking you can save everybody else in the world but the 8 million people in New York City!"

New Budget. Simon offered only the cold comfort of a promise to recommend changes in federal bankruptcy laws that would permit New York's essential services to continue unhindered. President Ford later met with the mayors in closed session and said the White House would be glad to study their proposals but that should not be taken to mean the Administration's hands-off policy had changed. He also suggested that New York State consider raising its sales tax two points, making it a wrenching 10% in the city, as a means of raising money for the Big Apple. But the state-controlled Emergency Financial Control Board (EFCB), which now supervises the city's finances, swiftly rejected Ford's proposal.

The city is nonetheless getting some help. Last week twelve big corporations with headquarters or major operations in New York, including Exxon, Union Carbide and IBM, agreed to buy $20 million of bonds to be issued by the Municipal Assistance Corp., a state corporation that is raising money for the city. (Older, higher-yield MAC bonds have been holding steady in price.) The EFCB and city hall are fashioning a new, presumably realistic budget for the present fiscal year, which Beame will announce on Oct. 20. In December, though, the money crunch begins anew: the city will have to come up with more than $3 billion over six months to meet a variety of obligations, including past debt coming due. Unless the Administration begins to recognize the urgency of the matter, the specter of default will then loom larger than ever.

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