November 6, 1975
Page 35308
NEW YORK'S FISCAL CRISIS
Mr. MUSKIE. Mr. President, the problem of what action, if any, the Congress should take in response to New York's fiscal crisis is as complex as it may be critical. If for no other reason, the simple lack of a precedent makes the normal decision making process more difficult and risky.
A great part of the difficulty — despite conflicting statements to the contrary — stems from the fact that no one really knows what would happen in the event of a default by New York City.
How costly would the consequences be for other States? How much damage has already been done to the structure of public financing? How much more damage would be done by a default of New York? What measures should be instituted to put New York back on the path of financial responsibility? What are the implications of the New York problem for the courses of Federal/ State relations?
Predictably, these and similar questions are being hotly debated not only in New York and here in Washington, but throughout the country. In my own State of Maine, feelings run high both for and against Federal action.
On the one hand, there is every indication that New York City's problems are already having a marked and adverse impact on small Maine communities and on Maine's ability to finance needed public projects.
On the other hand, because Maine is a frugal State where every penny counts — and must be counted — there is genuine concern that New York City must set its fiscal house in order.
Beyond this — assuming New York City meets whatever standards of fiscal responsibility one might impose — there is the question of what type of assistance, if any, ought to be provided by the Federal Government. Even proposals for some form of loan guarantees, which involve no actual outlays by the Federal Government, have very serious implications which cannot be taken lightly.
In an effort to stimulate discussion of these and other questions, I would like to share with my colleagues some recent correspondence I have received on the subject.
First, there are the views of two distinguished leaders of Maine's financial community — Wallace Haselton, chairman of the board of the Depositors Corp. of Augusta, Maine; and John F. Grant, chairman of the board of Bankshares Co. in Bangor, Maine. Both discuss the impact which New York City's problems is presently having on Maine.
Second, there is a letter from Maine Gov. James Longley in which the Governor expresses some of the concerns which many Maine people have toward New York's past spending habits.
Mr. President, I ask unanimous consent that these letters be printed in the RECORD.
There being no objection, the letters were ordered to be printed in the RECORD, as follows:
DEPOSITORS CORP.,
Augusta, Maine,
October 25, 1975.
Hon. EDMUND MUSKIE
U.S. Senate,
Washington, D.C.
DEAR ED: Our bank alone processes approximately 30 million municipal notes and bonds in the course of a year. Obviously, we cannot hold this kind of volume thru their various maturities. As a consequence we must go to the national money markets in New York and Boston. This is another aspect of Maine's need to import money to finance its needs in light of our deposit gap. (Maine has 50% of the New England average in Per Capita Bank Deposits.) When we do this, we are told that the little known Maine communities must now go to much greater lengths to prove their acceptability in the national markets on any terms because of suspicious attitudes created by the New York situation.
In the case of general obligations backed by ad valorem taxes, the interest rate is a full point higher than a year ago. In the case of revenue obligations, and all water and sewer district borrowing fall in this category, the rate differential over a year ago is two to three full percentage points over last year, if any bidders appear at all. As you know, in the case of pollution abatement borrowing for sewers, the communities must borrow this money to meet environmental standards. They have no choice.
There is no question in our mind that virtually all of the increased interest costs cited above are due to the New York situation. We know this because the underwriters in the national money market centers tell us so. Municipal borrowing is only partly related to local conditions.
Overhanging this market is a fragile confidence which tars everyone with the same brush when a major threat appears against any substantial segment of this market. No single community is an island, the bell has tolled for all of us.
We cite the following examples of borrowing history which specifically reflect the phenomenon we have described.
In the case of Kennebec Sanitary Treatment District (Waterville area) on 1/22/74 they borrowed $3,675,000 at 5.69% for one year. On 1/22/75 the District attempted to borrow $6,100,000 for a year. There were no bidders and eventually a rescue operation was negotiated at rates between 9% and 10½%. The ultimate lenders said that rumors about New York City caused them to ask these rates. In September of this year Moody's downgraded this District, not because of any deterioration in credit worthiness but simply because the market situation indicated that they might not be able to roll over their debt at any rate.
In the case of the Auburn Sewerage District which borrowed $3,000,000 in March of 1974 at 6.23 percent, the experience is similar. In March of 1975 they paid 7.2 percent. The only other bid was in excess of 8 percent. Moody's gave them the same downgrading they gave to Kennebec Sanitary and for the same reasons.
Auburn Water District borrowed $600,000on January 3, 1974 at 4.85 percent. On January 10, 1975 they borrowed $660,000 at 7½ percent.
There is also the case of Fort Fairfield Utilities District (Sewer and Water facilities). They have attempted for three months without success to obtain $1,600,000. They received no response to their request for bids. It is safe to say they would have obtained this money at 6% percent to 7 percent a year ago. In view of their emergency situation, they have had to pay 8 percent for 30 months to a Maine bank who will hold the notes and make a sizeable amount of Maine bank deposits unavailable for our many other needs. All of this happened in the face of a Farmers Home Administration commitment to pay off the notes at the end of thirty months, making it a relatively riskless credit.
This is a national crisis. Perhaps these specific examples will show you beyond doubt the terrible burden being laid upon Maine communities because Messrs. Simon, Burns, and the regulators refuse to take their blinders off. The statement by Simon in April 1975 to the effect that a New York City default would not amount to anything on the national scene, should go down with the one made by the Titanic cruise director with the water lapping around his toes.
The impact of that stupid decision not to help our own "kinfolk" but send billions to South Vietnam, has been dramatic on the State of Maine. Please do everything in your power to get your fellow legislators to act NOW and issue a guarantee (not a grant) to New York City. Put in any covenants you wish to make it apparent it is going to hurt them drastically, but DO IT!
Failure to act, in spite of the geniuses advising the President, has already cost this nation more than the entire debt of New York City and New York State.
Thank you for reading this.
Sincerely,
WALLACE M. HASELTON,
Chairman of the Board.
P.S.—Sunday's paper indicates we are going to GIVE Egypt a billion dollars, or so, but we think it is not in order to guarantee even that amount of New York City debt. If you can follow that logic, you are a better man than I!
MERRILL BANKSHARES, CO.,
Bangor, Maine,
October 28, 1975.
Hon. EDMUND S. MUSKIE,
U.S. Senate,
Washington, D.C.
DEAR ED: I am writing you today regarding the current situation in New York City about which as a banker and a taxpayer, I am greatly concerned. To the best of my knowledge, including our own banking group, banks in our State do not have any great concentration in New York City securities. In the case of our own bank, we own only $500,000 in New York City bonds out of total municipal holdings of some $70,000,000. While we could absorb a loss on these New York City securities with no adverse consequences, we are greatly concerned with what the City situation and the lack of confidence regarding municipal securities has already had on our portfolio and that of the banking system throughout the country. As a result of the City crisis since the first of the year, we have seen a depreciation on our overall portfolio of some $3,000,000 which is of concern to us and could have an adverse effect upon our capital position at a point in time in the future should the City default.
Furthermore, as many of our Maine municipalities and political subdivisions are too small to obtain Moody or S & P credit ratings, they are finding it increasingly hard to obtain short and long-term funds from the major money markets and are turning more and more to the banks in the State of Maine. Already in Maine we are seeing our local municipalities, school districts and other public bodies having to pay much higher rates on their short and long-term obligations as a result of the New York City situation. In some cases, they have had to pay as much as 3 percent more than their good credits warrant. I know of several cases in which sanitation districts were able to obtain only one bid at rates in excess of 8 percent for one-year money.
While I, personally, am sympathetic to the argument that the City is getting "their just desserts" for many years of gross financial mismanagement, I am greatly concerned regarding the much greater consequences, including those that pertain to our own situation, that a default of the City would have upon our overall economy. Furthermore, default of the City coming on top of the real estate problems and other major bankruptcies, such as W. T. Grant (which the banking system in this country is attempting to absorb) could have a disastrous effect on our whole monetary system.
In conclusion, while it is against my own principles, I feel that the Federal government has no choice but to come up with some Federal guaranty program to keep the City from going under.
However, this guaranty program should not set the precedent for similar bailouts and rewards for fiscal mismanagement inother cities. It should be structured with extremely punitive restrictions on New York City so as to make this a most unattractive alternative for other public bodies.
If you have any other questions on this matter where I can be of help please don't hesitate to let me know.
Sincerely,
JOHN GRANT.
STATE OF MAINE,
EXECUTIVE DEPARTMENT,
AUGUSTA, MAINE,
October 28, 1975.
Senator EDMUND S. MUSKIE,
Senate Office Building,
Washington, D.C.
DEAR ED: Thank you for your October 21st letter and your reassurance to me and the citizens of Maine that your every effort is aimed at improving the performance and competence of government.
I wrote you originally with my suggestions for some federal cost savings as well as to express my views on the financial crisis in New York City because you are Maine's Senior Senator and because of your position as Chairman of the Budget Committee.
I felt then, and still feel, that you are in an ideal position, not only to look out for the interests of Maine people, but to lead the way in bringing fiscal responsibility to the federal government.
Your recent statements have indicated you are pursuing those goals and you express every indication of practicing what you preach.
You asked in your letter if I had any further comments on the New York City default. I would make the following observations for your consideration:
(1) I resist the "domino theory" that has been put forth by some to the effect that if New York City defaults the same thing might happen to other cities. I feel we should be equally or more concerned about a "reverse domino theory." If we pour billions of taxpayer dollars to salvage a city that has been fiscally irresponsible, I think it could have a disastrous effect on states like Maine who have made a commitment to bring about fiscal responsibility. It is going to be difficult to convince the people of Maine that they should tighten their belts if they see their hard-earned tax dollars go to bail out a city that has proceeded to date on a spend, spend, spend philosophy.
(2) I feel strongly that specific steps New York City must take on its own must be outlined to the remainder of the nation before one dime of federal money is committed. For instance, what is New York City going to do about high salaries, extremely liberal pension plans and a bureaucracy which, by all estimates, is completely out of hand.
I repeat what I said in my previous letter to you: if New York City can afford these things, fine. However, the point I want to make is that I do not think it fair to make a Maine taxpayer who will have to survive without any or even on a $5,000 a year pension support a $15-20,000 pension for someone in New York City.
(3) If the decision is made to provide New York City with federal funds and if the funds are to be used for salaries and pensions, it would be my strong recommendation that a ceiling be required so that the federal money would not be used to support levels higher than the State of Maine average, to the extent Maine taxpayers are directly or indirectly involved, in actions of the federal government.
You inferred in your letter that the New York crisis had already affected Maine to the extent that it had increased rates on bond sales. While I agree that the city's problems may have had some effect, I also believe there are other factors involved, including the unstable economy and the overall fiscal irresponsibility of government. In addition, while we need to concern ourselves with interests and/or dividends or return of principal of bondholders, these were risks they assumed and for which they have received income in return as part of that risk and we have to ask ... should citizens of Maine who do not have enough money to invest be penalized to further protect those who did and who in many instances did so because of the tax shelters provided?
As you know, we have been trying very hard to get Maine's Triple-A bond rating restored. We made a trip to New York last week for that purpose and I am enclosing a letter to Moody's Investment Service in that regard.
Very truly yours,
JAMES B. LONGLEY.