The Municipal Money Chase: The Politics of Local Government Finance by Alberta Sbragia

Author:Alberta Sbragia [Sbragia, Alberta]
Language: eng
Format: epub
Tags: International Relations, Political Science, General
ISBN: 9781000303674
Google: SayhDwAAQBAJ
Goodreads: 49788457
Publisher: Routledge
Published: 2019-07-09T00:00:00+00:00

The Coming of the Financing Crisis

The combination of all these strategies eventually took its toll. The practice of issuing new debt to retire old debt reached its zenith in 1975 when the city incurred more than $9 billion in new debt, mostly short-term and all at higher than normal interest rates.16 In the six years from 1970 to 1975, New York City doubled its total indebtedness from $5.8 billion to $12.3 billion. A full 36 percent of this, $4.5 billion, took the form of short-term notes.17 The city’s borrowing in itself accounted for more than 25 percent of all the debt issued on the national municipal market,18 and interest payments on the debt consumed 14 percent of the city’s entire budget.19

This increased borrowing took place at the same time that conditions on the municipal bond market prevented it from absorbing the city’s debt. The national recession in the early 1970s set off a wave of short-term borrowing by cities that more than quadrupled between 1967 and 1975.20 During the recession, furthermore, commercial banks and insurance companies—the traditional purchasers of municipals—suffered declining profits and, hence, lost much of their economic incentive to invest in tax-exempt, low-interest securities. The municipal bond market contracted, leaving only private individuals and households as major potential investors. In a contracting market, cities like New York, which was borrowing not only for expansion and development but also to pay for day-to-day survival, were particularly disadvantaged. New York City had to go to the market with over $4 billion in short-term securities between October 1974 and February 1975, and it had to pay interest rates nearly one-third above the market’s average yield of 6.8 percent.21

The shaky condition of the national market for state and local securities was greatly weakened in the winter of 1975 by the default of the Urban Development Corporation, a New York State public authority.22 The anxiety of investors that was caused by this failure triggered a series of self-protective moves on the part of the city’s banks, which were already feeling the pressure of the contracting market. Ironically, because the banks occupied partly contradictory roles as both underwriters and investors in city securities, their actions had the unintended effect of placing them in an even more vulnerable position and led directly to the transformation of the fiscal crisis into a financing crisis.

As underwriters, the banks and financial institutions play a quasi-public role that is crucial to the operation of the U.S. system of municipal finance: They act as agents or salesmen for the city. When the banks underwrite city securities, either individually or as part of a syndicate, they purchase the entire issue with the intent of selling it to the public or “primary” market—namely, other banks, brokers, insurance companies, or private investors. The banks earn a profit by raising the cost of the issue to the public above their own costs, thus creating what is known as the “spread.”

As “voluntary” investors, banks are comparable to other investors. They decide to buy a certain

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