Ed Koch and the Rebuilding of New York City -- Jonathan Soffer

7/23/2019 Ed Koch and the Rebuilding of New York City -- Jonathan Soffer

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Ed Koch ostentatiously rode a city bus to his inauguration. Robert Allison, the

driver o the M-6 bus that took the mayor-elect rom his home on West Fourth

Street to city hall on Inauguration Day, told him: Do a good job or us. According

to a New York imes/Channel 2 News poll, 59 percent o New Yorkers believed

Koch would make the city government more competent and eective, in contrastto the worn-out image o the outgoing Beame administration.1

Kochs role model was Fiorello H. La Guardia, the Lile Flower, who has been

called the inventor o the modern mayoralty or his hands-on style. Koch saw his

own frst day in oce as the moment the people took over City Hall, and he

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immediately reclaimed La Guardias desk rom a staer who was using it.2 Since the

Lile Flower was only fve eet two, the six-one Koch could not ft without making

the desk a lot taller. He sent it out to the citys carpenters, but they made the desk too

high. Koch kept the desk in his oce but gave up trying to sit at it.3

Size was not the only dierence between the two mayors. La Guardia had es-

chewed inauguration estivitiesthere was too much work to be done. He had

driven to the headquarters o each major agency to swear in and delineate the mis-

sions o each o his commissioners.4 Koch reveled in his inauguration and spent

much o the day at our celebrations, each in a dierent borough. Like La Guardia,

he was determined to be a great mayor. He talked so much and so compulsively that

day, especially about his ides fxes, that ew onlookers could have realized that he

would prove himsel able to listen as well as talk. He loved debate, and on most issues

was unusually willing to listen to an ideologically (i not always ethnically) diversegroup o advisers, as well as to dispute with citizens at the hundreds o neighbor-

hood meetings he would hold as mayor.

Kochs inaugural speech, which was more subtle than brilliant and received only

tepid applause, reected a neoliberalism that was ar more concerned with business

confdence than with armative action. Koch was aware that he was departing

rom the norms that dominated New York politics rom the time o La Guardia. 5

Opening with a trite reerence to John F. Kennedys Ask not what your country can

do or you, Koch told all New Yorkers who loved their city that they would have tosacrifce to save it. He paid homage to the social democratic traditions o the city: I

do not exaggerate when I say that New York is unique in the history o human kind-

ness. New York is not a problem. New York is a stroke o genius. From its earliest

days, this city has been a lieboat or the homeless, a larder or the hungry, a living

library to the intellectually starved, a reuge not only or the oppressed but also or

the creative.6

But the city had been too altruistic or its own good, leading to mistakes o the

heart, Koch concluded. By painting New Yorks welare state as an overindulgentmother, the new mayor implied that a strict ather had now taken over.7 Te leaders

o poverty programs, most o whom were black and Hispanic, were the chie targets

o his ire, though he did not name names: In the past programs that were meant to

help the needy ended up as bonanzas or the greedy. All too oen those who were

charged with caring or the disadvantaged turned the generosity o New Yorkers into

a orm o olly.8 While Koch promised to stand by poor New Yorkers (Te money

that is appropriated or the poor must directly beneft the poor), he closed his ad-

dress with an appeal to the well-o. Gentrifcation was the key to his program orNew Yorks revival, and Koch called or an inux o urban pioneers to reinvigorate

the citys neighborhoods. Koch gave priority to the interests o revenue providers,

not service consumers, and appealed or people with capitala category that, in


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1977, mostly meant white peopleto come to New York to rehabilitate and rebuild

the citys housing stock, create jobs, and make it economically viable again.9

Ed Koch intended to continue the austerity program, but he hoped to retain the

confdence o both fscal watchdogs and the citizens o New York who continued to

suer rom the extremes o neoliberal fscal discipline. He wanted to control the

citys budget and, in doing so, return power to the mayoralty. In total devotion to his

work he would surpass La Guardia, who had routinely worked ten-hour days.10

Koch, a man with lile lie outside politics, was determined to devote practically

every minute, including breakasts, to solving the problems o the city. 11 Like his a-

ther, Koch could imagine no lie other than one o unremiing hard work, and he

believed that by working eighteen hours a day he could manage both austerity and

improvement.

Aer the swearing-in Koch entered city hall to sign a shea o executive ordersstructuring his administration. One controversial measure raised the salaries o

managers so that they were signifcantly higher than those o their employees, inu-

riating union employees who had deerred wages and orgone raises or years. Te

most dramatic executive order banned discrimination on the basis o sexual orienta-

tion in employment, housing, credit, provision o city services, and by city contrac-

tors.12 Kochs new decree o equality or a whole class o citizens was momentous,

even i it riled social conservatives. Gays Laud Koch, Cops Cant Agree, com-

plained Rupert Murdochs conservativeNew York Post.13

Not all New Yorkers subscribed to Kochs version o liberalism. He preached a

gospel o eciency and argued that such intervention should primarily beneft the

interests o business and a broad middle class. Some o New Yorks poor were ready

to push back as early as the night o the inauguration. Te frst our inaugural cele-

brations or the new mayor went without a hitch, but at the fh, on Eastern Parkway

in the large plaza in ront o the Brooklyn Museum, marchers led by the Reverend

Herbert Daughtry drove away Kochs well-wishers. Te marchers were protesting

the acquial o a police ocer who had shot and killed a teenager at point-blankrange on Tanksgiving Day 1976, the latest in a series o police shootings o black

children in Crown Heights.14 With Kochs security in some conusion, Daughtry

seized the microphone. He wanted to get Kochs aention because, as a lame duck,

Beame had reused to seek a ederal investigation o the shooting.15

Te new mayor listened to Daughtry and then addressed the crowd, and the

night ended without great trouble. But later, speaking to the press, Koch set a com-

bative tone, declaring, Im never going to be silenced by demonstrators, beore

leaving or Gracie Mansion.16 Koch did set up a meeting with Daughtry on January12, just a ew days into his new administration, and agreed to write U.S. Aorney

David rager to request an investigation o whether the ocer had violated the dead

teenagers civil rights.17 But continued killings by the police, and tensions between


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the black and Hasidic communities, meant that Daughtry would remain one o the

mayors harshest critics.

When he got home to Gracie Mansion aer his frst long day as mayor, Koch was

wide-eyed at the sumptuous trappings o his new oce. He spent his frst night there

with members o his amily and marveled that it was possible to go rom hatcheck

boy to mayor o a world city. His brother, Harold, remembered siing with Ed in

their undershorts on that frst night in Gracie Mansion, drinking soda and watching

television: Would you ucking believe it? Tat a nice Jewish kid like my brother and

me, his brother, could be siing in Gracie Mansion? Beyond anything you could

dream up.18

Kochs new lie included duties that ranged rom welcoming the empress o Iran

to worrying about the discharge o raw sewage.19 Emulating La Guardia, Koch visited

city agencies almost every day to see how they were operating. Unlike Beame, whohad given a one-on-one interview once a year to each o the major papers, Koch

talked to reporters so incessantlysometimes even in the mens roomthat a wag

at the Times dubbed him unavoidably available or comment. Kochs chainess

proved a nightmare or his press secretary, Maureen Connelly. He didnt need a

spokesmanhe needed a muzzle, she later observed. Nearly every appointment he

made was leaked to the press, and he usually turned out to be the leaker.20

In his frst term the mayor traveled to public meetings all over the city and oen

took lumps rom the crowd. But his populist grandstanding wore o as he becameaccustomed to ame. He had originally planned to take the subway regularly and

spend weekends in his spartan three-room Greenwich Village apartment, where he

could still run out the door to Murrays or some stinky cheese. Te Times said that

it was important or the mayor to live in the mansion because it was a public space

unaached to any constituency and accused Koch o hypocrisy or supporting a

new law requiring city employees to reside in the city while reusing to move him-

sel.21 He began to take the limousine more and the subway less, and he largely aban-

doned his apartment or Gracie Mansion. He even got used to being accompaniedeverywhere by police. But he never abandoned his constant devotion to work.

sTep one : resTore The c iTy s creD iT

During his campaign Koch treated the fscal crisis as the elephant in the room that

he alone had the guts to take on. Now it was time or him to prove it. New York had

been shut out o the credit market because analysts believed that the cost o the citysdebt service had become too large a percentage o its revenues to guarantee that its

debts would be paid. Te impact was severe: money to replace equipment and repair

inrastructure dried up, and maintenance was deerred so long that some systems


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were beyond repair. Landlords were burning down acres o the south Bronx or the

insurance money, and entire blocks came o the tax rolls because owners ound it

less expensive to abandon their buildings than to pay the accrued property taxes.

For the frst six months o his mayoralty Kochs top priority was seeking ederal

guarantees o New Yorks bonds that would enable the city to fnance critical repairs

and give him breathing room to bring New York back into private credit markets. It

was more a political crisis than just a fscal crisis. When you lose your credibility you

lose the chance to borrow rom people and to gain confdence, said David Brown,

who served as deputy mayor or administration. Kochs mission was to reassure

Washington and Albany that we were doing things dierently.22 Regaining trust

meant convincing doubters at the highest levels. On the day Koch took oce, a

Carter administration ocial (probably Jack Watson, the White House staer in

charge o urban issues) told theDaily News that a long-term loan or guarantee hasalmost no chance in Congress and that hed heard rom a congressman who is con-

sidered a big riend o New Yorks that i the city insisted on long-term aid, it would

damage its chances o geing any aid at all.23

Koch knew that to convince anyone, he had to establish his mastery o the citys

byzantine fnances. How much money did the city need to dig itsel out, or exam-

ple? Shockingly, no one seemed to know. Beames estimate o the defcit jumped

rom $110 million beore the election to more than $240 million aer his deeat.

Koch, whose knowledge o municipal fnance was almost nil, had to learn how todecipher the citys budget practically overnight. Jim Brigham, Kochs budget direc-

tor, became Kochs teacher, spending hours with him, going through the budget line

by line to explain where the money came rom and how it was spent. Koch had an

especially hard time grasping that a budget was only a prediction, always subject to

change because o changes in revenues and expenses. At frst Koch thought that i

you put a number out, thats got to be it. Tats the number youre going to live with,

Brigham recalled. So when Brigham was able to show that the city had unexpectedly

collected enough money to allow Koch to raise employees pay, the mayor was uri-ous, because he had been touting numbers that showed that the city had no money

or a raise: He thought he had lost credibility. Aer awhile he fnally began to real-

ize that a budget is only an expectation, Brigham said. You cant predict the uture

with a hundred percent accuracy.24

Te new mayor assembled a task orce o senior ocials who gathered every

night to cra the our-year fnancial plan required by Congress and the states Emer-

gency Financial Control Board. Teir dedication was remarkable: serving meant

working two jobs, and meeting in a city building at 250 Broadway that had lile heat.Tey did without the basics. No one was allowed to have dinner until 11:00 at night,

because Phil oia, who was the Deputy Mayor o Finance, elt that i you were hun-

gry it would make you stay awake, but i you ate something youd be sleepy.25


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Koch began to show some talent or fscal planning, and he and his advisers de-

veloped an overall strategy that was admirably clearcut:

Balance the books with calculations based on recognizably conservative

and sober estimates.

Reorm and improve management while making careul capital invest-

ments that would improve productivity (such as computerization, so the

city could accurately count the number o its employees) and in inrastruc-

tureliterally, to rebuild things beore they ell down.

Adopt subsidies or business and cut red tape in order to convince David

Rockeeller and the rest o the business community, such as the Business

Roundtable, that Koch was going to run a probusiness administration.

Tis strategy panned out: Rockeeller, who as a young man had worked orLa Guardia at city hall, became a preeminent partner o the mayors in re-

establishing business confdence. Many other business leaders, particu-

larly rom the fnancial sector, including Felix Rohatyn o Lazard Frres

and Walter Wriston o Citicorp, played key roles.26

The heAlTh -cAre hemorrhAGe

Koch continued the citys austerity program to reestablish its credit, which made

sense on a local level. Te root problemthe cost o health carewas intractable,

beyond his power to fx without a massive realignment o political interests on a na-

tional scale. Providing health care or the uninsured was eating up a huge part o the

citys budget each year, and the city suered deeply not because o too much social

democracy at home but rom ar too lile participation by the ederal government.

While defcits in a budget as large as New York Citys may be overdetermined by the

continuation o many dierent expenditures, health care stands out as a categorywhere the ailures o the ederal and state governments to enact reorms were direct

causes o New York Citys long-term fscal instability.

Te ailure o the Ford and Carter administrations to ederalize health-care

spending and establish a system or caring or the uninsured was, by itsel, the cause

o nearly hal o New Yorks budget gap or all but three years o Kochs twelve-year

mayoralty. (See table 2). Approximately 35 percent o the citys population that was

younger than sixty-fve was uninsured or on Medicaid in 1985, according to a city

study.27 When Koch took over as mayor, the cost o caring or the uninsured was 106percent o the citys total budget gap, in part because o New York State required that

all local governments pick up 25 percent o the tab or Medicaid (which insures the

poorest people), a burden that no other major city in the country had to carry. While

Koch was temporarily able to trim these costs through improved collection practices


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and processing o patient insurance rom 1980 to 1983, aer that health-care costs

ballooned to 60 percent or more o the budget gap, climbing to a whopping 109

percent during the 1987 Wall Street crash. I Washington had taken over these ex-

penses, New York City would not have had a fscal crisis, it would not have had to cut

services, and city government would have been in a ar beer position to deal with

the public healthrelated problems o homelessness, AIDS, and drugs that plagued

Kochs last term in oce. Democrats generally supported such measures in their

1980 platorm, but Carter did lile to move them orward, one reason he was chal-

lenged or re-nomination by Senator Edward M. Kennedy.28

TABle 2

Cost of Health-Care Subsidies for Uninsured New Yorkers as a Percentage

of the Budget Gap, 197889

ye a r hh c Su B-

Sidy for

u ni nS u r e d

( M i l l i o nS )

Medicaid,

city Share

( M i l l i o nS )

total (Mil-

l i o nS )

c i t y B u d g e t

g a p * ( M i l -

l i o nS )

percentage

o f B u d g e t

g ap

1978 $234 $138 $ 372 $ 763 49 %

1979 234 404 638 600 106

1980 210 130 340 1,104 30

1981 166 134 300 1,063 28

1982 183 187 370 954 39

1983 207 217 425 854 50

1984 237 250 487 1,022 48

1985 272 253 525 870 60

1986 273 279 552 735 75

1987 332 300 632 577 109

1988 409 347 756 1,149 651989 409 465 874 1,018 85

*As set out in the annual fnancial plan submied to the Emergency Financial Con-

trol Board each January.

Sources: Oce o the Mayor, City o New York, Executive Budgets or the City o

New York, 197989, New York City Municipal Library; Charles Brecher and Ray-

mond D. Horton, with Robert A. Crop and Dean Michael Mead,Power Failure: New

York City Politics and Policy since 1960 (New York: Oxord University Press, 1993),table 15.2, 336; Citizens Budget Commission, Managing the Budget in the Bloom-

berg Administration, December 7, 2001, www.cbcny.org/NYC_Fiscal_Outlook.pd

(April 27, 2008); Oce o Strategic Planning, Health and Hospitals Corporation,

NYC Medically Uninsured Summary Data, December 1988, City Hall Library, 27.


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But health care reorm that would put the city back on an even keel was at best a

long-term prospect. Instead, Koch tried the more conventional route o seeking

long-term fnancial guarantees rom Congress so that the city could raise private

capital to restructure its debt. He aced some erocious opposition, even though the

loan guarantees would ultimately net the ederal government a proft. Te rhetoric

deployed against New York was old as the Bible.29 Gothamites (whom some Ameri-

cans could not distinguish rom Sodomites) had to suer because o their sin. Neo-

liberals and conservatives all oered their own explanations o the fscal crisis, charg-

ing that the proigate excesses o an overly generous welare state and union

demands had led to the budgetary downall. Republican Utah senator Jake Garn said

that New Yorks ocials were liars when they claimed that the city would go bank-

rupt without ederal loans and guarantees. Representative Richard Kelly, Republi-

can rom Florida, explained, Te unions have orced industry out o the city. Teuniormed services are the highest-paid in the U.S. o A. And welare? City politi-

cians keep jacking up the rates to get the gheo vote. No doubt about it.30

New Yorks worst enemy, according to Koch, was the quirky senator William

Proxmire, the Wisconsin Democrat who chaired the Senate Banking Commiee.31 A

gady who had made a career o publicizing waste in the ederal government, Prox-

mire aacked New York so oen that theNew Yorkerdeclared, Some consideration

has been given here to see i he could be prosecuted as a common scold.32 Proxmires

skepticism about providing aid to New York City had some justifcation. New Yorksgovernment was ull o corrupt sinecures. In one o the most blatant examples, Abe

Beame gave Bronx Democratic chair Stanley Friedman, a midnight appointment or

lie to the Board o Water Supply. Te part-time job came with secretary, limousine,

and a salary o $25,000 per year (the equivalent o $89,000 in 2009 dollars).

But Koch ought gra, which helped his case with the senators. When Beames

appointments became public, Koch had called or the abolition o the water board,

and as soon as he took over as mayor, he obliged Friedman to resign or the good o

the city beore the Senate hearings began.33

Koch lobbied Albany to repeal the HeartLaw, which allowed cops with coronary ailments to retire at three-quarters pay,

whether their illness resulted rom the stress o the job or rom donuts. He shared

Proxmires outrage about the Lindsay administrations sweetheart deal or Yankee

Stadium. Although Beame had opposed the project when he was comptrollerit

required the city to pay or the approximately $100 million renovation o Yankee

Stadium, our times the original price tag o $24 millionhe had continued the

project even aer the fscal crisis orced him to reeze almost every other city con-

struction project, abandoned plans to renovate the surrounding neighborhood, andshied $300,000 originally budgeted or the neighborhood to the Yankees to buy

equipment or the team. wo days aer Kochs inauguration, Proxmire and Edward

Brooke, the Massachuses Republican who was the ranking minority member o

the Senate Banking Commiee, publicized an ominous leer they had sent to rea-


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sury Secretary Michael Blumenthal declaring that they are yet to be convinced that

the ederal government should lend New York City any more money aer the sea-

sonal loan program expired on June 30. In response, the Daily News tried to do its

civic duty. Hoping that a headline like its amous Ford to New York: Drop Dead,

which had goaded Ford to grant the city ederal loans, would spur Proxmire to drop

his opposition, it dubbed him Senator Scrooge.34 Unortunately, he co-opted the

moniker and even wore a Senator Scrooge nametag to his oce Christmas party.

Koch dedicated the next six months to persuading Congress that it was a maer or

equity and justice while puing into place an elaborate set o laws and agreements

to meet the preconditions or obtaining ederal aid.35

Proxmire wanted the city to meet our requirements beore he would even sched-

ule hearings on the loan guarantees:

1. A fnancial plan detailing how New York would reach a balanced budget by

1982, according to generally accepted accounting principles

2. A package o increased state aid to prove that local remedies had been

exhausted

3. Selement o a three-year contract (later reduced to two years) with the

unions

4. Persuade city unions to support ederal legislation permiing additional

investment in city bonds by the citys employee pension unds, eventhough they had already put 35 percent o their holdings in such invest-

ments. Te investments were clearly below the standards o prudence de-

manded by existing ederal regulations, which prohibited all other pension

unds rom taking the kind o risks with employee money that Proxmire

tried to mandate or city pension unds.

Koch tried but could not meet all those conditions. Ultimately, under the pressure

o the expiration o the seasonal loan program on June 30, Proxmire relented andscheduled the hearings.

Koch understood that he had to show the Senate Banking Commiee that he

could make credible budgets. He understood that producing an honest and accurate

accounting o the citys money was the frst step to restoring its credit in Washington

and elsewhere. A budget is simply a series o complex predictions about the uture.

Koch agreed with those who wanted the citys budget to be as realistic as possible.

As a result the frst budgetary news out o city hall was not good. Te true defcit,

Koch reported, would be almost $500 million, not $243 million, as Beame had pre-dicted aer the election, and ar, ar larger than the $110 million that Beame had

predicted beore the election. Tough Koch based his number almost entirely on

Beames fgures, he chose to eliminate a fnancial pathologypaying or recurring

but unaordable expenses by placing them in the capital budgetin eect, the city


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had been paying or its groceries with a credit card and paying only the minimum

balance. Some o these expenditures were so essential that they could not simply be

eliminated. But generally accepted accounting principles required that the capital

budget be reserved or specifc kinds o expenses, usually construction and signif-

cant repairs and improvements to the inrastructure, and distinct rom operating

expenses, especially i they were recurring. Beame acknowledged the need to stop

borrowing or expenses, but he had said that it would take until fscal year 1986 to

make the switchover. Koch promised to do it by FY 1982 i he got the loan guaran-

tees, a orthright move calculated to please both bondholders and Congress and to

impress upon them that the citys true problems were too big or the city and state to

handle on their own.36

Proxmire and Brooke had argued that the state should do more. Te city had

heavily invested its pension unds in bonds issued by a state agency, the MunicipalAssistance Corporation (Big MAC), which borrowed money by issuing municipal

bonds secured by a frst lien on particular city tax revenues. But New York States $9.2

billion pension und, administered by long-time State Comptroller Arthur Levi,

had not bought signifcant quantities o Big MACs paper and was one o the last

sources o wealth that the state had le untapped.

Koch went to Albany on January 15 to change Levis mind about investing pen-

sion unds in MAC or other city bonds. Te comptroller saw these as imprudent

investments that would compromise his fduciary duty to the states pensioners. Al-bany was snowy, camouaging the cold expanses o the new state oce building

complexalabaster and marble temples o 1960s modernism erected by Nelson A.

Rockeeller at a cost o $1 billion. At Kochs frst sighting o the monstrosity known

as the Empire State Plaza, he compared it to Brasilia or something built by the Pha-

raohs o Egypt. Even native Albanians oen complained o Rockeellers edifce

complex.37

Arthur Levi seemed to be chiseled out o marble, too. He was a legendary fgure

in state governmenta product o the Brooklyn regulars, he had been the statecomptroller since the 1950s. He had seen mayors come and go and in 1961 had even

run a utile campaign against Wagner out o loyalty to Carmine De Sapio. 38

Te seventy-seven-year-old Levi was lile prepared or Kochs condescension.

Te mayor brusquely declared at the outset that their meeting was a waste o time

unless Levi was willing to commit to purchasing city bonds with state pension

unds. Levi categorically reused to compromise. No power on earth is going to

make me violate those responsibilities, Levi declared in private, as he had in pub-

lic. Koch reached no compromise but baited Levi by satirically repeating thecomptrollers oath o oce. At the time Koch seemed totally childish, but there was

a method to his madness. Koch generated headlines that made one point crystal

clear at the Senate Banking Commiee hearings: Levi would buy no New York


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City bonds without passage o the ederal aid program, despite Proxmires aempts

to orce Levi to do so.39

On January 20 Koch sent the citys our-year fnancial plan to reasury Secretary

Blumenthal. Te mayor proposed a combination o cuts, increased aid rom Wash-

ington and Albany, and the continuation o ederal seasonal loans to keep cash ow-

ing. In addition, he asked or a new program o long-term ederally guaranteed loans

to allow the city to borrow fnancing or its capital construction needs and help re-

structure its debtvital to saving a city whose sidewalks, bridges, and water and gas

mains were crumbling. Te Ford administration, during the 1975 crisis, had granted

only short-term loans on the ground that the program could be terminated quickly

(he also was no doubt inuenced by reasury Secretary William Simons punitive

aitude). Te seasonal loans had ailed because o the citys chronically weak econ-

omy, shortage o revenues, and continuing enormous mandated expenditures likeMedicaid.

In return or all the additional help, Koch proposed to bring the citys budget into

true balance by 1982. He would reduce city spending by $174 million through a par-

tial hiring reeze, improvements in productivity, reduced welare eligibility and [wel-

are] overpayments, and an across the board cut o 3% per year in all non-labor re-

lated city expenses, such as supplies and electricity or a total cut o 12% over the

course o the our-year plan. He also postulated somewhat quixotically that the city

would peg employees raises to increases in their productivitythough his assump-tion o a 6 percent annual ination rate suggests that he thought he could get the

unions to accept urther cuts in the real wages o their members. Te plan also made

the somewhat risky assumption that subsidies to the Health and Hospitals Corpora-

tion (HHC) and the ransit Authority would remain static, but Koch would later

expend considerable political capital to reduce the size o the HHC to ft the fnan-

cial plan.40

In the our years between 1978 and 1982, Koch would cut twenty thousand jobs

by arition, imposing a hiring reeze in all departments except police, fre, correc-tions, sanitation, and education. Tese cuts came on top o the sixty-one thousand

city jobs eliminated since the crisis began in 1975. Te Koch plan also proposed an

increase o $283 million in annual state and ederal aid to help und a laundry list

projects totaling $657 million. Reportedly, Koch did trim some items that Beame

had proposed and that had met with considerable derision in Washington, such as

ederal unding o fre control in New York Harbor. Te state, Koch hoped, would

make its revenue-sharing ormula more generous, taking over the program called

Aid to Families with Dependent Children (AFDC) and all costs o the senior col-leges o the City University.

Te most contentious element o the plan was new borrowing. New Yorks capi-

tal needs were enormous. Years o austerity had made New York hazardous and


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leaky. Water main breaks and gas explosions had become more requent, and signif-

cant construction and maintenance were urgently needed in other areas. Koch pro-

posed a $5.1 billion budget or capital improvements during the our-year term o the

fnancial plan. He hoped, long beore the term was over, to sell a small proportion o

bonds at high interest to private investors as a way o gradually reentering the normal

market or municipal bonds. Most o the rest o the fnancing would come rom

bonds sold to city and state pension unds, with ederal guarantees and a continuing

waiver o ederal regulations to allow them to invest a larger proportion o their hold-

ings in city securities than was normally permissible.

In February, Koch, Carey, and their subordinates hammered out a plan that

would give the city approximately $200 million in increased aid rom New York

State. Tat spring they shepherded the enabling legislation through the state legisla-

ture. In Washington the Senate Banking Commiee initially voted a preliminaryresolution opposing ederal aid, a major setback.41 Koch managed to oset the bad

news rom the Senate by obtaining a frm declaration o support rom President

Carter, although the mayor had had to push hard to get it.42

cUTBAcks, lAyoffs , AnD G iVeBAcks

Koch geared up to win over the Senate Banking Commiee. Planning or that votewas part o a sophisticated Washington strategy. Koch frst brought a somewhat hos-

tile Carter administration on board, promising that aid to New York could be a vic-

tory or a president who had been labeled as bad at working with Congress. And to

win that victory, Koch understood what was not obvious, given Democratic majori-

ties in both houses: Republican votes were the key to success. A big margin in the

House would help push the measure through a reluctant Senate. Koch also had an

insiders advantage as a ormer member o the House Banking and Currency Com-

miee; this became clear on April 26, when the House commiees subcommieeon economic stabilization approved the loan guarantee program by a lopsided 122

vote. On May 3 the commiee surprised even its chair in approving the loan guaran-

tees with a bipartisan vote o 32 to 8. Te commiee vote built momentum. But,

artully, the House leaders delayed a vote on the oor until it would have the most

impact on the reluctant Senate commiee.43

Despite this good news, the remaining hurdles were considerable. On May 23

Proxmire derailed the whole process, canceling the Senate loan hearings in view o

the act that no agreement has been reached on the labor contracts or on any o theother outstanding issues in the New York City fnancing situation. Koch was able to

convince him to reschedule or June 6 only by promising to get a labor agreement by

that date.44


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One o the key preconditions or the ederal loans was the conclusion o multi-

year labor agreements that the city could aord. New labor agreements were also a

priority or Koch, who came into the labor negotiations naively hoping or signif-

cant givebacks, such as increased managerial exibility. He blamed the municipal

unions or running up wages and causing defcits, and he spoke grandiosely o a no-

cost selement that would be paid or entirely in givebacksagreements by unions

to ease work rules.

Koch prided himsel on his negotiating skills, but his style was that o a conron-

tational divorce lawyer. Municipal labor negotiation is generally a process o concili-

ation rather than conict. His frst oray into the feld did not add to his luster,

though he was smart enough to avoid the catastrophic transit strike that gave John

Lindsays administration such a poor start. Kochs adversarial stance probably saved

some money, but his boast that he could achieve a labor selement without raisingwages was empty.

At the outset the unions held some signifcant cards as important creditors. Koch

needed them to get the loan guarantees through Congress and to keep buying bonds

with their members pension und money. Union leaders were strongly unifed and

assigned a union head to court each o the seven deputy mayors and other major

fgures in the administration.45 With the high ination o the 1970s, union members

had suered real losses because o deerred cost-o-living increases (COLAs) and

layos. Union leaders could point to a membership that had already made sacrifcesand was expecting results. Proxmire unwiingly gave the unions a tremendous ad-

vantage by holding the loan guarantee hearings hostage to a selement.46 Moreover,

the unions had vastly more sta resources than the city or act-fnding and negotia-

tion. An interviewer or the Fiscal Observercommented that the City o New York

is a lile twerp up against big-time, experienced unionsthe oce o Municipal

Labor Relations has an annual budget o $750,000, which happens to equal the ee

that that the PBA [Police Benevolent Association] is paying its new lawyer.47

Te transit workers contract would expire frst. Negotiating their contract is al-ways a dicult proposition. A transit strike shuts down the whole city, costing bil-

lions. Any increases granted to the transit workers would set a precedent or all other

city labor contracts, and an overly generous selement could require a politically

unpopular are hike, particularly galling to a riding public that had become accus-

tomed to the worst service in living memory. But Koch had only indirect control o

the negotiations conducted by the Metropolitan ransportation Authority (MA),

a state agency run by a board jointly appointed by the mayor and the governor.

Te fnal selement cost the transit authority about $100 million (with the po-tential or an additional $16 million in COLAs), with a 6 percent raise spread over

twenty-one months. Tat amount was easible under the Koch fnancial plan, but

the prospect o similar selements with other city unions meant the city would be


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paying its workers $715 to $800 million more than it had been, which produced

howls rom Washington.48 Proxmire denounced the transit deal as outrageous, al-

though his insistence on a ast selement had undermined the citys bargaining posi-

tion. However, the wage package remained in line with national averages.49

By the time the transit selement was in hand, revised budget estimates had be-

gun to reveal revenues in FY 1978 sucient to give city workers a raise. Te unex-

pected surplus eventually rose to $610 million.50 Negotiations with the municipal

unions began in earnest on June 2, aer Proxmire agreed to hold hearings our days

later. Koch retreated rom his initial reusal to grant raises. Aer a twenty-fve-hour

negotiating session, the talks dramatically deadlocked over the return o $200 mil-

lion in deerred wages that the workers had given up in their 1975 contract to help out

with the fscal crisis and that Beame had promised to pay back in the next sele-

ment.

51

Koch and Felix Rohatyn, however, asserted they had no obligation to payuntil the city could aord to do so. Finally, late on June 3, under pressure o the up-

coming Proxmire hearings, Koch and Victor Gotbaum, the head o the American

Federation o State, County and Municipal Employees (AFSCME), the largest pub-

lic employee union, agreed to send the maer to arbitration, which eventually

awarded most o the money to the workers.52

Te day beore the Proxmire hearings, the city and AFSCME reached agreement

on a selement that would cost $757 milliona bit less than the transit workers, but

signifcantly more than the initial oer. Te same day the city council and the Boardo Estimate passed the $13.5 billion budget.53 Negotiator David Margolis, no riend o

the unions, considered it a good deal. So did Gotbaum, who, despite his dicult

personal relations with the mayor, saw that frst contract in positive terms: We be-

gan to get some decent selements. We really were able to go back to standard col-

lective bargaining when Koch took over.54

showDown wiTh senATor scrooGe

With not one day to spare, Mayor Koch was ready to take on Senator Scrooge as the

ederal loan guarantee hearings began on June 6, 1978. Te hearings opened with

Proxmire stating his misgivings: It troubles me greatly that the commiee will be

conronting, in these 4 days, the same pleas or fnancial aid to prevent a New York

City bankruptcy that we heard 3 years ago in 1975and rom many o the same peo-

ple as well. Giving New York needed long-term fnancing or capital improvements

would entangle Washington in the citys aairs or a generation, Proxmire warned,and guarantees would remove the pressures on the city and keep it rom making the

tough decisions needed to revive its credit, turning it into a guarantee junkie. Fi-

nally, he worried that other cities would be inspired to spend irresponsibly in the

belie that the ederal government would come to their rescue.55


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One might have expected Kochs testimony to ollow the initial presentations by

New Yorks two senators, Daniel Patrick Moynihan, a Democrat, and Jacob K. Javits,

a Republican, but instead Koch arranged that the frst witnesses would be two Re-

publican congressmen, J. William Stanton o Ohio, the ranking Republican on the

House Banking Commiee, and Stewart B. McKinney o Connecticut, who was the

ranking minority member o the House banking subcommiee that had already ap-

proved the guarantee bill. Stanton declared that he had spoken with the House Mi-

nority Leader and had been told, Tere is no Republican party position on this

particular legislation. Both testifed to their aith in Ed Koch to solve New Yorks

problems. Hes extremely well liked, loved on both sides o the political aisle; and

Im here to ask or more continued aid to a great degree because o him. I just have

great confdence that he can do the job and no maer what program you come up

with its gong to be up to him to do it, Stanton told the more skeptical senators.

56

Hewas ollowed by Richard Kelly, a conservative Florida Republican (later convicted

o bribery in the 1980 Abscam scandal) who argued rather simplistically or bank-

ruptcy, accusing Koch o capitulating to the unions: Te people that run that town

must quit spending so much money. Tere is no other solution.57

Koch was determined not to be intimidated. He stood his ground, arguing that

the labor selement was a relatively small proportion o spending. Union givebacks

on work rules were insignifcant, but Koch pledged to fght or reorms in the uture,

denouncing the practice o giving a whole day o to police ocers who donatedblood. Ten he started ticking o the measures he was taking to see that New York

was beer managed:

Commiing to a budget strictly balanced according to generally accepted ac-

counting principles. Tis involved not only a balance o expenditures and revenues

but removing all expense items rom the capital budget.

Guaranteeing independent audits o city fnances.

Strengthening the Oce o Operations. Instituting a computerized integrated fnancial management system.

Expanding economic development eorts.

Keeping a tighter rein on employees, with commissioners disciplining em-

ployees or taking excessive sick leave and other abuses.

Beer scrutinizing the reliability and perormance o city contractors.

Evaluating poverty and model cities programs and terminating contracts

with those that ailed to pay adequate benefts to their employees.

Koch knew that these proposals were politically popular but pledged to imple-

ment them even i they were not. What happens when I do these things? he asked

the commiee rhetorically. Tere are picket lines around City Hall and in ront o

Gracie Mansion, but those thingsthe measures that I takewont be deterred


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simply because there are people who get upset that there is a change going on be-

cause the change is intended to use our city dollars, our state dollars and our ederal

dollars to a ar beer extent than ever beore and to remove the incompetence. Tat

was the clincher that helped to win over some o the initially hostile senators.58

Proxmire went on the oensive, harping on a amiliar theme: Why didnt New

York go to the Wall Street bankers who had lavished loans on Tird World countries

in the sixties and seventies? He thought New York banks should invest at least as

substantial a percentage in New York City as they do in some o those Arican and

South American countries. Te trouble with this idea was that many debtor nations

had deaulted on their loans and the banks had lile cash to spare. Koch, well ac-

quainted with oreign aid rom his time on the House Appropriations Commiee,

replied that the ederal government should also be as generous to U.S. cities as it was

to oreign nations: I you would only do or us what you do or the Latin Americanand Arican countries, we would not ask or more, but we are not even asking or

that. . . . What we are asking or is a guarantee where the ederal government is going

to make money as a result.59

Te Wisconsin senator insisted that short-term seasonal loans directly rom the

ederal treasury were preerable to President Carters proposal or long-term loan

guarantees, even though, as Koch pointed out, seasonal loans required cash outlays,

whereas loan guarantees would actually beneft the U.S. reasury. Guarantees are

cheaper, less risky, involve less cash on the part o the ederal government, and willget you and us out o this exercise aster, the fnancier Felix Rohatyn told the com-

miee.60 Te seasonal program proposed by Chairman Proxmire would assure

[that] the city is a permanent fscal cripple, without access to the private credit mar-

kets, insisted Harrison J. Goldin, the citys comptroller.61 In response to Proxmires

proposal to require the New York banks to invest 1 percent o their assets in propping

up the city government, David Rockeeller and Edward L. Palmer, who chaired the

executive commiee o Citibank, argued that they were already meeting their re-

sponsibilities to both New York and their stockholders, and Palmer accused Prox-mire o avoring a socialistic system o credit allocation.62

Te hearings were a tremendous success or Koch and or New York. On June 9

the House voted 247 to 155, a margin Koch termed overwhelming, in avor o a $2 bil-

lion guarantee. Te magnitude o this accomplishment contrasts with the 10-vote

margin in the House that had approved the bailout in 1975. Senator Proxmire declared

that the vote was a tribute to Mayor Koch, who is highly respected in the House.63

Even New Yorks supporters were surprised when, a week later, the Senate Bank-

ing Commiee voted 123 to send its bill or $1.65 billion in long-term loan guaran-tees to the Senate oor, and days aer the House passed the compromise on the

lower fgure, the fnal bill passed the Senate on July 27. In any case, in a high-profle

ceremony on the steps o New York City Hall, Carter, in a rare moment o harmony

with New York politicians, praised Koch or his fscal discipline.64 Even Senator

Proxmire was impressed with the new mayor, describing Koch as a star. 65

Ed Koch and the Rebuilding of New York City -- Jonathan Soffer

Documents

Transcript of Ed Koch and the Rebuilding of New York City -- Jonathan Soffer