The Streets Were Paved with Gold - Ken Auletta [60]
The previous chapter attempted to show how the city was victimized. Now let’s briefly probe the motives.
How and Why
A common denominator for past city budget decisions was politics. The actors worried about the next election, not the next generation. “There is a common theme running through all of these trends,” Comptroller Goldin, ignoring his own role, told the Treasurers Club in 1975, “the short-sighted approach of fiscal finagling which takes us one year at a time toward the day of reckoning.” The public and investors were told the city’s budget was balanced when it wasn’t. It was made to appear balanced through an array of Houdini-like tricks. This artistic energy inevitably resulted in snowballing but hidden deficits. To cloak them, the city, with the support of its banks, invented money by borrowing it. “Wall Street is only ten blocks from City Hall,” observes Senator Daniel Patrick Moynihan of the world’s financial capital. “From Wagner’s third term to Beame’s second year, the city was, in effect, printing money.”
The philosophy behind this stratagem was once succinctly stated by James Cavanagh: “It is better to borrow than to tax.” “For a number of years,” said the SEC staff report, “the City was incurring increasing deficits in its operations. In order to finance these deficits and to appear to comply with the legal requirement that it balance its operating budget, the City, among other things, increasingly resorted to the sale of ‘short-term’ debt securities.” It didn’t take long before the city was borrowing to repay borrowing. The note addiction became so acute that by 1975 the city needed to borrow $800 million in notes each month—all repayable within a year. A January 21, 1975, memorandum from Clifford to Comptroller Goldin warned of the “massive increase” of $5 billion in short-term debt since 1970 and said that $2.4 billion of this was due solely to “budget gimmicks (i.e. disguised deficit financing) and recognized deficits.”
Most of these gimmicks were sanctioned by the state. The how and why is contained in—of all places—the voluminous legal briefs prepared by Mayor Beame and Comptroller Goldin’s two law firms (at a cost to taxpayers of more than $1 million in legal fees) to challenge the SEC’s charges:
The budget experts of both the legislative and executive branches of the state government analyze the City’s proposed budget and make their own estimates as to projected revenues and expenditures. Their concern is obvious: any gap must be filled by aid—which the state must then fund—or by taxes—which the state must authorize. Estimates made by state officials often differ substantially from those of the City, generally expressing an expectation that the City’s revenues will be higher and its expenditures lower than the City has foreseen. The result is an “agreement” as to the size of the budget gap. Ultimately, at meetings involving the Governor, legislative leaders, the Mayor, and often members of the Board of Estimate, decisions are made as to how that gap is to be filled … the State’s judgment is invariably to minimize its obligations to provide aid and its need to authorize taxes.
The reluctance by the State to provide aid or taxing authority creates the need to develop alternative means of financing the gap. These alternative mechanisms include what (in the Staff’s view) are “gimmicks.” Yet these “gimmicks” are State-created: the State passes upon and has the final word as to whether they are adopted. They are enacted as State statutes set forth in the New York Local Finance