Financial History Issue 128 (Winter 2019)

The city would be destroyed by ser- vice cuts of this magnitude, the statement charged, for “the fiscal crisis is far less dangerous than the social crisis confront- ing New York City.” Amidst this mounting anger, it must have been hard for Albert Shanker of the United Federation of Teachers (UFT) not to notice that the city’s plans for getting through October 17 revolved around the teachers’ pension fund purchasing $150 million in city debt. The UFT members had struck against austerity in September; their contract was still under review by the EFCB. Why should the union now lift a finger to help? Indeed, Deputy Mayor Kenneth Axelson was sufficiently concerned about Shanker that he had contacted the Treasury Depart- ment earlier in the month to alert them to the possibility that the UFT might hold out on the bonds until its contract was signed. And on the morning of October 16, Felix Rohatyn noted with some concern that the UFT pension fund trustees had not given their “firm binding commitment” for the bond purchase. All the other union pension funds had already bought their share of the notes—but not the teachers. Following this conversation, Governor Carey spoke to Shanker to emphasize that negotiations with the Board of Education had to be considered “completely separate from, and unrelated to” the use of the teachers’ pension moneys to fund the city. Still, no one thought the teachers would actually refuse to come through. When Carey left the office in the afternoon of October 16 to go to the dinner at the Wal- dorf, he told his staff not to expect him back until the next day. Much of the Al Smith dinner proceeded as usual. The raised platform seating the city notables was so packed with tables that it took up nearly half the room. William Ellinghaus was there, as were Richard Shinn and Hugh Carey, Arthur Ochs Sulzberger and Mrs. Vincent Astor, James Cavanagh and Mayor Beame. The 1,700 assembled guests consumed oysters, steak and steamed baby Maine potatoes as they listened to New York’s legendary urban planner Robert Moses reminisce about Smith. But as the night went on, Comptroller Harrison Goldin noticed something odd. It seemed to him that the dais was empty- ing out, the notables seated there melting away. A bit before 10:00 pm, a waiter stopped by the comptroller’s table. Mayor Beame, he said, was requesting Goldin’s presence at Gracie Mansion immediately. By the time Goldin arrived, the city’s bankruptcy lawyers had already been meet- ing for hours in the basement rooms; the ashtrays were filled to overflowing. The teachers’ union, he was told, had voted against buying the MAC bonds, citing fidu- ciary responsibility. As pension fund trustee Reuben Mitchell put it, “We must watch that investments are properly diversified, that all our eggs aren’t put in one basket.” This “Welcome to Fear City” pamphlet offered safety and survival tips for New Yorkers and visitors during the financial crisis in 1975, as many of the city’s public safety services were reduced due to budget cuts. The members of the MAC board, arriv- ing back at the governor’s midtown office to sign off on their part of the deal, many still in formal dress from the dinner, got the news at the same time. Investment banker Felix Rohatyn burst into the room carrying the press release from the teachers’ union. The UFT had done enough to help the city, it proclaimed; now New York would need to come up with the money on its own. Up at Gracie Mansion, the mayor and his team of lawyers were getting ready to figure out how the city could declare bankruptcy and still keep running. Sidney Frigand, the mayor’s press sec- retary, later recalled (as quoted in a New Yorker essay about the evening of October 16 by writer Jeff Nussbaum) the debates about which workers were indispensable to the city’s operation. “Bridge tenders 22 FINANCIAL HISTORY | Winter 2019 | www.MoAF.org who raise and lower bridges were essen- tial. Teachers weren’t life-or-death.” Despite the lack of legal precedent for the default of a city like New York, the city’s lawyers, working through the night, drew up a bankruptcy petition to file in State Supreme Court that would protect the city’s assets from immediate seizure by its creditors. Mayor Beame signed it, as did attorney Ira Millstein and the city’s corpo- ration counsel, W. Bernard Richland. Meanwhile, Beame’s old friend and public relations counselor Howard Rubenstein prepared a press release in the mayor’s name that the banks would have found chilling. “I have been advised by the Comptroller that the City of New York has insufficient cash on hand to meet debt obligations due today,” the statement began. “This constitutes the default that we have struggled to avoid.” The document (which the New Yorker reprinted online with Nussbaum’s article) then went on to present the case for a for- mal declaration of bankruptcy. Unless the city made this declaration immediately, it would be legally required to use all of its remaining money to pay for debt service “rather than life support and other essen- tial services.” Under bankruptcy, on the other hand, it would be up to the courts to adjudicate what to do with the resources that remained. What followed was a list of the city’s pri- orities in the state of default. At the top were police and fire protection, sanitation and public health. Next were food and shelter for those who depended on the city, hospi- tal and emergency medical care for people without other resources and payment to any vendors who provided these services. Then the city would pay for the public schools, primary and secondary alike. At Carey’s office the mood was morose. Shortly after the governor heard that Shanker was pulling out of the deal he spoke to Richard Ravitch, a wealthy real estate developer who had helped Carey cope with the collapse of the Urban Devel- opment Corporation. Ravitch was person- ally acquainted with Shanker—they had been connected through the democratic socialist and civil rights leader Bayard Rustin. Later in the evening, Carey phoned again as Ravitch was climbing into bed. After the call he prepared to go meet the governor. They consulted briefly, and then Carey dispatched a police car to drive Ravitch to Shanker’s apartment. There, the

Financial History Issue 128 (Winter 2019) | Page 24