The financial crisis of our cities — with Jacob Javits (1975) | ARCHIVES

Announcer: From the nation’s capital, the American Enterprise Institute for Public Policy Research presents Public Policy Forums, a series of programs featuring the nation’s top authorities presenting their differing views on the vital issues which confront us The topic, “Financial Crisis In Our Cities.” Now, here is Peter Hackes Peter: Many American cities are in financial crisis There’s nothing new about that But recently, some cities have found themselves on the brink of bankruptcy A recent study published by the American Enterprise Institute on the New York City financial crisis, also surveyed the financial situations in six other major U.S. cities That study shows that common factors causing ill health in our cities include an eroded tax base, an influx of unskilled, poor, and minority groups, decaying inner cities, obsolete services, unionization of public employees, and an increasing demand for anti-congestion and anti-pollution expenditures New York City may just be the first in a series of municipalities faced with economic crisis Welcome to another roundtable discussion brought to you by AEI, the American Enterprise Institute, a nonprofit, nonpartisan research and education organization Today, four experts will tackle the topic, “Financial Crisis in Our Cities.” Introducing our guests and moderating our discussion will be Melvin Laird Mr. Laird is a former Congressman, who later served as Secretary of Defense He also was counselor to the President of the United States Mr. Laird is now senior counselor for national and international affairs for the Reader’s Digest magazine Now, here is Mr. Laird Melvin: Welcome to the public policy forum sponsored by the American Enterprise Institute Our discussion topic, “The Financial Crisis of the Cities.” On our panel today, we have some very distinguished members who can make a great contribution, I feel, to this particular subject First, the Assistant Secretary of the Treasury, Sidney Jones, who has the responsibility of economic policy in the Treasury Department Next, Senator Percy Senator Charles Percy of Illinois is the senior senator from the state of Illinois, and of course, has a very close relationship with one of the major cities of the United States, Chicago Then, we have Senator Jacob Javits Senator Javits is the Senior Senator from the state of New York And New York recently has had some very serious problems, particularly in regard to its largest city Governor Hugh Carey will be joining us in just a few moments He’s had a little difficulty getting from the Washington National Airport to this studio here in the Statler Hilton Hotel in the city of Washington I’d like to ask to start off our discussion today, the Treasury Secretary, Sidney Jones, who has the responsibility in the economic policy area whether the Treasury feels that the problems of New York are symptomatic of problems facing other cities Secretary Jones: Almost have to give a yes and no answer Every city is faced with the problems of recession, the problems of inflation that erodes both their tax base, makes their services much more expensive However, I think when you talk about cities as we see it at the Treasury, there’s quite a range Many of the city and states were moving towards surplus by 1972/1973, before the recession caught up So I think that New York City with its very difficult problems is representative of what happens to all cities and states when you have economic problems, such as a recession, but I do not think that most cities or most states have advanced to that stage of the problem Melvin: Senator Javits, can the City of New York bring about the necessary changes so

that it can in the future, live within its receipts and have a balanced financial outlook as far as the future is concerned Sen. Javits: My answer is distinctly, yes, it can and it will For the next three years, the federal government, through the intercession of the Congress and President Ford, will enable us to deal with seasonal cash problems, which every business and every city has, that as the receipts of taxes come in a little bit lighter than the expenditures in a given year And in New York, that transit may take up to $2 billion for a year The United States will lose nothing, it’s fully secured, and the loan is simply on a revolving basis for one year, but it will enable the city to go through the three years At the end of the three years, and three years will be years of privation and sacrifice and the sense of a sharp diminution of services Melvin: Senator Percy, you have a constituency in the city of Chicago We don’t hear much about Chicago’s problems Do they have any? Sen. Percy: Of course Chicago has It’s a large metropolitan area, second largest in the country, and it has some of the same problems that New York has faced and every other urban area Since World War II, there’s been a flight to the suburbs, both the business is growing rapidly outside the city, but it has left the city, some of it, and the flight of the affluent white population has gone to the suburbs, taking their tax base with them The federal government has accelerated this by building super highways and expressways to move people rapidly and has also done it through the subsidization of middle income America through FHA, making it possible for them to build and own their own homes in the suburbs It has also been hurt, every city has, by large high crime rates, by inflation and the cost of doing business in the city, and then, by the severe restrictions on the states And in Illinois, this has caused the state of Illinois to deny assistance to Chicago schools just recently, this month So, we have the same problems But what we have that New York hasn’t had is what I’d call a stable government We’ve had a mayor for 20 years, who knows every in and out, and who is a sound fiscal conservative, and for that reason, he’s backed by many Republican businessmen because of his fiscal conservatism, and he’s run a very tight ship And he’s had deep close cooperation with industrialists and the banking community in running a tight ship And, of course, he has absolute control over City Council So that’s the big difference that Chicago has had The statistics in comparison with New York are quite startling, as it relates now to the double-A bond rating that Chicago has Melvin: Well, can New York bring back its discipline in the fiscal area during the next three to four years? Sen. Javits: I believe it can Now, I think that the veil of tears through which we’re passing is a very sobering experience Now, give or take the usual 10% for corruption waste, gold-plating politics, etc., even call it 15%, and there’s no estimate about New York that places the fraud and the chicanery above 15% But even if you grant that, the fact is that there is still a very, very solid base in New York and that its troubles can be overcome But I think that Senator Percy is absolutely right Now, whether they’re sitting on a keg of dynamite because they’ve covered up so much and sat on so much for so many years only time will tell But in the meantime, they’ve done very well, very much better than New York And we must now, because our hearts, and that’s been our big trouble in New York, have been much bigger than our pocketbook, we have to cut our cloth accordingly I don’t believe that should represent any diminution of the final basic services in New York, because that’s where the citizens on self-help comes in, which I believe can prove the difference But we have to build that in the next few years and we have to build a much better business and financial outlook by the officials who are elected In addition, New York has suffered from demography Remember that we’ve taken from the south and the Civil Rights Revolution probably as much as 1.5 million, maybe more of people who left the South because of inhospitable conditions there, in their view, and we’ve taken almost a million from Puerto Rico because the Puerto

Ricans are Americans and are free to travel Now, if our country wants to restrain travel and violate the constitution or change it, New York could do much better But in our case, they flock to New York My parents were immigrants too from Central Europe, and I’m sure that their manners were probably not much better than those of some of the newcomers to New York But they got over it, they worked it out I believe these New Yorkers will too, who’ve newly come, but we need this terribly difficult transition period, to work it out in the ways that I’ve just described So I think we’ll make it but I’m only giving an accounting for our troubles and what has caused our difficulty and the justification for the intercession of the federal government You can hardly pile on, on the back of New York If in New York, we pay a living welfare tab, which is roughly $80 per person per month, whereas in another state, like Mississippi, the payment is somewhere between $20 and $30, and people just can’t live on it, so they’ll move and they’ll move to where their relatives are, in New York Melvin: Of course, New York City only, there is about 20% of that welfare cost itself Isn’t that true the state and the federal government pick up the rest of that bill? Sen. Javits: Well, you know, it reminds me that the answer is yes, New York City picks up 25% But that reminds me of, you know, prettier than who? Because Chicago picks up none, and there are very few states that require their cities to pick up any part of the welfare load And when you realize the 25% is a neat $600 million a year, you begin to realize that New York has taken every rap, everyone, everyone in the book Why? Because as I say, it was thought by its own people, let alone the people of the rest of the country, that its wealth was limitless All New York can take it All the banks, all the brokerage firms, all the airlines, all the radio networks, everything, New York’s got it all Well, it hasn’t That’s not a bottomless source of money either, and we’re facing reality today in a very painful way Melvin: Senator Percy, this whole question of debt management is one that it’s staggering the debt As you look at New York City’s debt and the New York State debt and compare it with some of the other areas of the United States, do you think reforms are needed as far as municipal financing is concerned as regards to tax exempt status and perhaps substituting some federally insured bonds that pay taxes and so forth moving in a different direction in that area? Sen. Percy: I think reforms are needed I think first of all, as the Secretary has suggested, we need more accountability and we need better accounting in the cities A city can issue bonds, where corporation executives would be thrown in jail if they ever issued bonds on that basis They tell so little, in fact, they mislead the bond purchaser on the representations made Elmer Staats, Comptroller General of the United States, told the Senate just this week that there’d be no use even auditing the city of Washington’s books because the books are in such horrible shape, that an auditor couldn’t even make sense out of them Now, that’s true If a corporation did that, the SEC would file against them And we’ve regulated corporate bonds and corporate financial structuring for years I think we’re gonna have to do the same thing if we’re gonna put our cities back on a sound basis Now, I think many cities are and I think Senator Javits has raised the issue, is Chicago sitting on a keg of dynamite here? We don’t want to destroy the rating of our cities Every city in this country is not in bad shape In fact, many of them are in good shape Chicago is in much better shape than the state of Illinois, wherein New York it’s the reverse The state is in better shape than the city And certainly, I applaud for Senator Javits He’s done the most magnificent job against the worst odds I’ve ever seen, an uphill battle every step of the way But he’s been extraordinarily cooperative in working something out In Chicago, we’ve tried to do it the other way Never spend more than you take in We have, even in anticipation in short-term borrowing, which New York goes into far too heavily We’ve never in short-term borrowing borrowed more than 75% of our tax receipts New York goes right up to 100%, and sometimes beyond, because they mislead you see as to what those revenues are gonna be They overstate their revenues, we understate our revenues Our debt ratio, therefore, today is, against New York, we have a $1678 indebtedness in New York and only $432 per capita in Chicago In New York, the indebtedness went up 102% in the last 2 years

We went up 62% in Chicago So we’re holding the lid down even with inflation And on a percentage of evaluation, property evaluation, it’s 16% in New York, it’s only 4% in Chicago So we’re not sitting on a keg of dynamite We’re a very soundly structured city Our state is not in that kind of shape The city is in very, very good shape As a ratio of indebtedness to income, we’re quite low in Chicago, 9%, 35% in New York, so there’s really no basis, or comparison But I think as a result of this work that Governor Carey has put in and Senator Javits, New York is back now on the road to recovery I think they’re gonna make it too, but it’s gonna be a tough cooperative effort Melvin: Your joint committee has been doing some studies of the method of distribution as far as revenue sharing is concerned and its effect on this problem Are you ready to recommend some changes in that? Sen. Javits: I don’t believe that we ought to change very much in it, because if we do, we’re not gonna get it We ought to change in the sense that the federal government ought to have more to say about what’s done with the money To many municipalities and many states, it is just kind of an extra prerequisite that comes in and isn’t really built in, in an intelligent way to add its services, which is what our Melvin: We wanna welcome the governor of New York, who’s made it from the airport and we’re glad to have you here, Hugh Gov. Carey: Hello How are you? Melvin: This is Secretary Sid Jones Sen. Javits: Sorry about that Melvin: Well, we understand we’ve been having a very interesting discussion about the problems of the cities And we’ve gotten into the question of revenue sharing and possible changes in the method of distribution In the discussion, it came up that 70% of all of the federal aides are going to 70% of our people that are in the metropolitan areas But there is concern as to whether the distribution formulas are correct in the present revenue sharing act Sen. Javits: If I may just finish that answer, Mel I think they are not fair to the cities New York, for example, New York City gets about $250 million a year, out of roughly almost $6 billion in revenue sharing, and even the state only gets about 10% of the total that is about $600 million a year The reason is that revenue sharing has not adjusted to the big factor of need and the concentration of need It is mainly on a population basis, etc And the formula, therefore, is weighted in favor of cities which may very well not need it as against cities which need it very, very urgently because of the pressure of their problems But as I said a minute ago, if I had any real feeling that we wouldn’t jeopardize the whole thing by pressing for major reforms, I’d be hot for them But I have the deep feeling that we’re better off going along with the present situation for a while yet, because I think if we start to change the formula, again, it is likely to be changed against us That is against the big, congested, really needy cities like New York rather than for us, at this time Sen. Percy: This is really a problem in the way the Senate is constituted constitutionally We face it in almost every issue with the votes cast with 2 votes from the state with half a million people the same as 2 votes in a state of 20 million people You have to compromise it out And it’s a battle between the House and the Senate, the House tending more towards population centers Those of us from urban industrialized areas, fighting for the higher formula where the people are And the smaller states obviously, saying, “We’ve got the same votes you’ve got, we want our share In fact, we want a disproportionate share We want it based on territory rather than people.” And that’s the way we netted out on sort of a compromise Sen. Javits: Well, then the final, the last…you know, the basic line as they say, may come because members are going to begin to realize that whatever they don’t pay in the peas they’re gonna pay in the bananas In other words, if cities get in very, very real trouble, they’re gonna have to do something about it anyhow, and so they might as well make these formulas more on a self-help basis than they otherwise would Melvin: Governor Carey, will New York make it? Gov. Carey: Why, of course, Mel, because senators are well aware of the timely help, which the president recommended is now a matter of course, I believe the appropriation will come forth in time But the key thing is the financial base is there now to rescue the city from a default,

but making it means more than that It means the redesign, if you will, and redirection of many federal grant programs to cope with the sprawl and the extension of the population into the suburbs and treating the problems of transportation, housing, and economic development on a regional kind of concept Because Houston is a healthy city because under the law of the state of Texas, Houston can follow its sprawling population into the suburbs by annexation and, therefore, it never loses its tax base But New York can watch industry and families move out and then return as commuters for employment or recreation or cultural diversion, but can’t claim a share of the revenues that they need to in the city Because historically, just as the Senate is constituted, it’s very difficult to get a commuter tax or a commuter assessment of any kind through a state legislature, because people will not vote for things that adversely impact the incomes of their constituents who live outside the city which needs the money It’s curious on the revenue sharing point As you well know, I was on the Ways and Means Committee when we designed that formula It’s not always the fault of the federal government that a formula is not perfect, or workable When we tried to design the formula to fit each of the states, every time we ran, the computer runs on the state of New York, the circuit breakers and the fuses blew on the computer and the lights popped And everything happened because historically, the Duke of York, who was the principal owner of the grants that became New York, gave out futile, if you will, gems to his friends, and villages, towns, counties, and all sorts of little government units have no correspondence You can have a village, which is larger than the city in parts of New York, and a county which gets an allotment, but within the county, a city may have more of the burden So, when you try to fit the formula to a map where the localities by name are different, and by design have different functions, the formula doesn’t work Therefore, I think the federal government has an opportunity when they design these formulas in revenue sharing or any kind of a block grant, to require some kind of standardization of boundaries and function as Connecticut has done The state of Connecticut has the county unit of government and that’s the basic unit around the state of Connecticut It makes it much more simple to deal with uniform kinds of governmental entities Whereas New York, as I stated going back to its origin under the Duke’s Grant, still has an incorporated village, unincorporated village, has counties which have supervisors, some have county legislatures, others do not It’s impossible to design a formula when there’s no uniform base for governmental activity within the state Therefore, both within the state and interstate, we should use the federal leverage to go toward regionalization because you’re never gonna settle the transportation problems of New York, New Jersey, and Connecticut, unless you treat the region The economic base as well for economic development is better treated on a tri-state or interstate basis The Port of New York Authority, which goes back to the days of Alfred E. Smith, is a compact between the states so the port is treated as an entirety Those kinds of things could pull together in better fashion the basic strengths of the region and the federal government would be in a better position to design programs to treat the entire region Sen. Percy: But it’s not one of the great problems that people have a fear and I can see where regional governance does make sense In Cook County, for instance, if New York City had what we have, Cook County picks up a great deal of health costs, where New York City has to pay it better than themselves But once you get federal money coming in, you start to get this federal control and you start to get standardization, and that’s where our federal system of government might possibly break down and it raises a lot of fears in people Gov. Carey: I know it does Sen. Percy: That the SOS, save our cities and save our suburbs all because of the fear they’re gonna be standardized But once they start accepting large federal grants, there’s bound to be some control for them Gov. Carey: Senator, when New York City got in trouble, the President and Dr. Burns and Secretary Simon and all of us involved, including the Senate Banking Committee and the House

Banking Committee, required the city undertake certain reforms to qualify for federal aid They were timely, they were necessary We were going to do them anyway, but there’s no Melvin: Would you have done them anyway if they wouldn’t have played hardball with you down here in Washington and in the Congress and in the executive branch? Gov. Carey: We would have done them but not with as much precipitated, I would say, action as we had to do them because default was looming on the horizon And to his credit, the president required these things and we were going to get them done anyway, but it took some heavy hauling to do them And now, they’re being done Sen. Percy: It’ll also help you governor in trying to overcome some of the pressure of labor unions that really, in a sense, I’m all for labor unions, but one in New York, they really carry Gov. Carey: Now, you did not have any political origins, Senator You came out of Bell and Howell and you had that private enterprise concept, which is a great thing to have And historically Sen. Percy: Well, I know, but we have labor unions with Mayor Daley deals within Chicago and they don’t rip off the city the way Gov. Carey: Well, I thought you might bring up Mayor Daley Now, what he did historically, is when he got a Democratic governor, he took many of the functions of the city and gave them to the state, welfare, housing, courts, all of those things, and put them under the state auspices and got the state to pay for them So that Mayor Daley does a wonderful job of running police, fire, and sanitation You can do those things well and be a good mayor Sen. Percy: We got a Republican governor for four years, what happened then? Governor Ogilvie is the one that was being lauded by Mayor Daley the other day Gov. Carey: Well, that’s since when Governor Walker became governor But what Mayor Daley did was take a lot of functions he felt the city could no longer handle with its tax base and transfer them to the state because he had an accommodation with the Democratic governor Mayor Beame would like do the same thing with me, and I well may inherit the jail, the corrections, the courts, and some of the city university problems on a planned and programmed basis That’s inevitable The states with the broader tax base working with the federal government have to take on more functions that historically have been handled by cities, but the cities can no longer manage to run a transportation system, a university system, a hospital and health system, a pier and wharf system, all of the things that normally would be handled by a state are really being handled by New York City with a narrowing tax base Melvin: You’re finding out those were great years in the House of Representatives, aren’t you? Gov. Carey: Yes, they were very…I was able to point a level finger of criticism constantly to the mismanagement of state and local governments before I became part of it Sen. Javits: Well, I should say that there’s one important thing which we have to remember from the Civil Rights struggle States’ rights were a big issue then, and the argument which we made for the civil rights legislation was that states’ rights are fine so long as you have a performance standard If they’ll do the job, great, but if they won’t do the job, we’re all citizens of the United States, and the United States has to step in to do it And I think that’s the issue here, that Senator Percy and the governor have posed, if the states will really do it and do it effectively, then I think the sentiment here is very strong to devolve the responsibility downward But if the states as they showed in that struggle, were unable to do it or unwilling to do it, or because of state pressures wouldn’t do it, then the federal government must, even with the disadvantage cited by Senator Percy because I believe our people want performance They expect our country to be run right And if to run it right the federal government has to step in, I believe they want it to step in That’s what it’s there for, but giving every opportunity first to the states and localities to do the job for themselves And that it seems to me is the whole principle of federalism It broke down in civil rights It hasn’t been working so far in this field of local and state government, but we want it to work And so, if we can do better because of New York’s great trouble, which is a lesson to the country, I’d personally been delighted, and as a senator, aid it in every way I can But I’m not going to see basic functions essential to the people unperformed because I have a hang up about the federal government doing it Gov. Carey: Well, I concur with the senator in this regard The concept of the block grant, which Congressman Quie was long a proponent of in education to get away from the bureaucracy and control mechanisms and categorical kinds of programs that laid down so many specifics, that the new art form of the ’60s was how to design a grant proposal The idea of the block grant works very well Revenue sharing, I think was recognized and rated by Fred Nathan over at Brookings as 95% effective in its implementation because it had a simple program under which the formula

worked The Secretary of Treasury required an audit and report And a curious thing, which is a good idea that the utilization of the money had to be advertised in advance before it was implemented to the public so they knew what the money was being used for No geraniums planted around the town parking lot and so forth You had to use it perhaps for a better communication system for the police department So the idea of a block grant with a simple control on it I think has great appeal, because we have now at county levels, legislators and executives who can perform these functions very effectively without constant federal bureaucratic direction and control So, where can we use block grants? Well, we can use block grants to better effect in housing We had the old 236 program and now we have Section 8, but it’s not working because there are so many stipulations in Section 8 that it doesn’t fit the demographic or the geopolitical problem of a given area or region We can use block grants further in mass transit, because different kinds of areas need different kinds of either bus or a monorail or a combination of rail and bus transportation systems, and the states are equipped to design and have those functions I think in economic development, the block grant system can work as well So, the more we move to block grants, the more I think you’ll get rid of some of the overload of bureaucracy at the federal level That’s a saving And at the same time, I think you’ll get better effective performance of the objectives of the federal government housing, transportation, education And I firmly believe that the block grant idea is one which will give us maximum initiative Sen. Percy: I’d like to throw a solution out there and see where you can support it or chew it up And it involves the executive branch of government as well as our votes I think the Highway Trust Fund has to be busted I think it has to be dissolved I think it’s a disaster right now It has an $8.5 billion surplus of unspent money, and we’ve completed over 99% of the National Highway System, and yet that money sits there It causes states to wanna keep paving over everything when their mass transit is starving So, dissolve it Create a National Transportation Trust Fund, or just put it in general revenue and see if we can’t have a sensible transportation system that’s integrated, and not just one based on building highways because they’re causing our problems They make us all the more oriented to get it out of the city, move farther out Move the affluent out Move the factories out Let the workers commute by automobile, which is certainly making us far more beholden to the Arab oil, OPEC countries, then it’s in the national interest to get rid of this But how do we do it? Melvin: Secretary Jones, do you wanna comment on that? Secretary Jones: Yeah, I’d like to The appropriation may be there, but I can assure you the money is not there We have weekends when we almost ran out And this year, we will have to go Melvin: You’re familiar with that? Gov. Carey: I think it should be clear Secretary Jones: There is no cash balance in the Highway Trust Fund There is no cash balance in the Social Security Fund If you’re going to spend those money, you have to borrow the monies to spend them, because there’s no cash balance, or divert the revenues from somewhere else Sen. Percy: But the important thing that’s being developed now, and I hope we’ll continue with it is you’ve all said what can be done on the negative, cut expenses, cut the deficit, hold things down Now, America has never grown that way, but we’ll do it because we have to It’s not about Secretary Jones: Not necessarily about cutting the federal budget All we wanna do is slow down the momentum of it It’s gone up 38% in 2 years Gov. Carey: Wait a minute When you slow down the momentum, you’re putting my people out of work We have 12% unemployment Look at the history of the Reconstruction Finance Corporation under Franklin Delano Roosevelt It began actually under Herbert Hoover, but Franklin put it into work, and Jesse Jones ran it, and it made money for the federal government They took plants and even localities going into the tank and brought them back to life and supplied jobs It was a guaranteed mechanism It said that if you build this plant or you continue to operate this business, we’ll put the capital behind you in form of a guarantee in order to get you back into production And when you have the liquidity developed again, you’re getting your capital returned through profits, pay us back It worked Why don’t we start it up again? Sen. Percy: Governor Carey Melvin: We’re getting a little away from the subject here the financial crisis of the cities Now, that’s important Gov. Carey: The financial crisis of the city of New York will never be solved as long as we have 12% unemployment across the state and 20% unemployment in the ghettos and 37% unemployment among young minority men and women in the cities who are out of school and out of work Sen. Javits: Well, I don’t think there’s any question about that That’s New York’s deepest endemic problem the fact that we do not really try to implement the Full Employment Act of 1946 And to do that, it’s gonna take investment than enterprise It isn’t gonna be done by the dead hand of restricting everything

That’s really what the governor is saying and I thoroughly agree with him Melvin: Senator Javits, just as in passing here, as you travel around this country, and as I’ve been in Arizona and Illinois, Wisconsin, and Minnesota quite recently, there is not an understanding of that problem And there is a real criticism of so-called high living, high pensions, high salaries that are envisioned by many of our people in this country So I don’t think that story has gotten across very well, and there’s going to have to be some discipline in the cities, too Sen. Javits: I couldn’t agree with you more about the discipline, but we also have to keep our eye on the fact that positive measures have always been America’s salvation That’s all That’s the only issue I raise, adding to the stock of wealth Secretary Jones: But as you know from the treasury, our basic thrust has been to increase capital investment But it’s awfully difficult to increase capital investment when the federal budget rises 38% in 2 years, and the federal government comes in and takes out a third of a trillion dollars in 10 years So no one has said anything about cutting anything, or trying to slow down this eerie momentum, which has really eroded our fiscal responsibility Gov. Carey: But I’m trying to solve the problem Melvin: Ladies and gentlemen, could we just pause for a few moments? Peter: The questions raised by city financial problems are many and far-reaching Solutions are often difficult to find Our panelists have presented differing solutions, but in general, they agree on some of the lessons learned by the New York episode and on some of the danger signals that can be spotted in any city that’s headed for financial trouble The big question, of course, is having spotted those dangerous signals, what long-range policies can be adopted to help the cities maintain their solvency during times when they are plagued with the problems of inflation and recession at the same time Now, to challenge our speakers, let’s go to our experts in the audience Deke: My name is Deke [SP] Nathan I’m at the Brookings Institution here in Washington And my question I think I would address to the whole panel We’ve done some research on the social and economic problems of central cities And what you find that’s quite striking is that the central cities, the core cities with the deepest problems, are particularly located in the northeast and North Central regions of this nation And if you look at the West, and the Southwest and the South in the United States, you find many cases where central cities are much better off than their suburbs, where annexation and consolidation have created situations where you don’t have core city problems Now, that seems to me to point at something which has been discussed in what I think has been a very good discussion and conversation today and that is, how can we devise a federal aid strategy? And many of you talked about changing federal aid programs that doesn’t, in effect, punish people who’ve consolidated and expanded and reformed local government in the West and in the south If we aid the cities, the older cities in the northeast and north central regions, which have core city problems, and which have not done these things to spread burdens and reform government, from the point of view of what most people would consider the correct direction, as many people talked about here So, my question really sums up to, how can you devise federal aides which don’t discriminate against people who do good things in an effort to aid the core cities with the deepest problems? To me, this is a very central dilemma that’s been alluded to in good ways, and I’d like to hear some direct comments on it, if I could Melvin: Will you comment on that first and then we’ll go to Governor Carey and then to Senator Percy Sen. Javits: I really don’t think it’s a dilemma because think of what our oldest cities have contributed to this country You know, the country owes them a great debt going way back before it became a country, and therefore, the fact that their problems are different and have to be modernized and brought along does not mean that their values should not be preserved It would take at a minimum 25 years to 50 years to replace New York as a revenue source alone New York City produces over $15 billion a year for the federal government in tax revenues New York gets back at the most, if you figure everything, including what the Secretary calls transfer payments, $3.5 billion That’s $12 billion net In order to get that out of a Houston or a Fort Worth and Dallas or some other central place that may replace New York, it’d take you 25 to 50 years So for those values, the United States has to show some special understanding for these older cities with their older troubles, like, New York, especially where the demography

of the country and the constitution of the country require them to assume these burdens Melvin: Senator Percy Sen. Percy: Very briefly, Deke Nathan’s question is a good one And I do think for the most part, not all programs have to gravitate toward where the problem is, and the older cities do have a preponderance of problems But I think we can’t ever, with the largesse of federal assistance, have a disincentive for cities to not do what is in their long-range best interest We can never, for instance, continue to bail out a city that has a practice, such as New York has had, of enabling employees in their last year of employment, their 20th year, to load it with overtime So that we can take specific cases, a man earning $15,000 a year as a salary gets $17,000 a year when he retires because he loads that last year We can never reward a city that feels forever it can go on with rent control, which for a while, distort the market and give arbitrarily low rents, but which then destroy the incentive to invest and to build and create new rentals of property, and therefore, new property can be taxed They’ve gotta pay for it someplace And we can’t have a system that will forever be an incentive to bail them out of those practices which have to be discouraged, not encouraged Gov. Carey: Yes The question that Deke asked, I think is really the fundamental question in society I think what one has to decide is what is a national function, and what is a local state function? The care and well-being of the people is a national function, which I think we could possibly assume it is, then perhaps the federalizing of welfare so that everybody has a minimum level is a legitimate step I don’t think that means, however, that the people of the areas you mentioned should be required to pay for pension funds, which are not employee contributed or tax free or tuition free universities and hospital arrangements If they want the local and state services, then logic supposes they should pay for it Sen. Percy: Are we still on Deke Nathan’s question? Melvin: Yeah, let’s go to the next question Yeah Marion: My name is Marion Barry I’m a member of the D.C City Council in Washington and also Chairman of the Finance and Revenue Committee I’d like to really try to bring this down to some realities in terms of what I see in the cities I get the impression people say that, “If you just manage what you have better, it’ll be all right.” But if you look at the increased costs in city governments, and even in state governments, you find the increased costs comes in the aid to dependent mothers for children The increased cost comes in Medicaid The increased cost comes in trying to figure out a way to rebuild housing in the inner city And it seems to me that that’s the kind of thrust I like to raise here And why is it appears that the administration, from the executive side is opposed to really pushing forward for 100% federal funding of welfare of all kinds, as well as health benefits And the other part of that whole question is with Section 8, which is a colossal flop, in terms of trying to build some housing So if we say that we’ll liberalize welfare rules which means that a person can come into Washington in 30 days, get on the road We didn’t ask them to come In some instances, we welcome them here Yeah, but we didn’t ask them to come always Or if the cities have decayed to the point where there is no more land to be used, as in the southwest where you can continue to get new land and get virgin territory So my question to the Assistant Secretary is, what is the administration gonna do specifically to move toward 100% federal payment for welfare and health? I think that’s very, very important outside of a national health insurance, but just right now to do that And the other area deals with housing, and this is to Senator Percy and to Senator Javits about the Congress, what are they going to do I know you are two individuals to push, but what are you gonna do in terms of the Congress, to make the executive come forward with this kind of program or impose this kind of program on them Because I resent the fact when people say that the cities of the East are mismanaged There’s probably no question about that But I suspect if you look at the governments of the Southwest, and the West, you’ll find that they have some antiquated management problems, too So that’s my general kind of concern I’d like to address to the assistant secretary and to the senators, and to anybody else who wants to pitch in Melvin: Secretary Jones? Secretary Jones: Yeah So, I think you start with what are your national priorities? And I would say that once you arrange those in a certain sequence, then you can figure out what types of revenues you’ll need to pay for those Now, if you want to go to the federalizing of welfare payments, which I’ve mentioned,

I think would be a constructive thing to do is basically, you have to recognize that that doesn’t come out of thin air That has to come out of someone paying the tax revenues for that We have not had the tax revenue continue to meet the demands of even putting on a system So if I try to say, “What am I gonna do about federalizing welfare?” I should be required and every other member of congress and every other member of the administration should then be required to say, “What is he going to cut out?” As soon as you begin to start Marion: The defense budget, I would cut Melvin: Oh, wait That’s where you stop Secretary Jones: I’m very sorry We’ve cut that 40% in real terms since 1969 while we have doubled social payments in real terms since ’69 There are some and Mr. Laird may want to comment and say that may be enough or may have been too much even So when you say that you want something more done, you’ve got to identify what you want less done That means you’ve gotta look at those total federal programs going from $7 billion in federal grants and loans in 1960 to $60 billion in 1975 Now, as far as the guarantee types of programs, there is a great myth in our system that somehow a guarantee doesn’t cost anyone anything Principle number two of economics beyond the concept of there is no free lunch is that when you advantage someone, you disadvantage everyone else And so where you give the full faith and credit of the federal government to one borrower that disadvantages every other borrower, so there is a cost to it You must recognize these kinds of trade-offs I myself personally, individually would support the federalization of welfare payments I would strongly support the negative income tax as a much more efficient means of providing a status, a minimum threshold status rather than the 1009 social delivery programs that we have, which tend to be bureaucratic, inefficient, costly, and are really not satisfying either the recipients of those programs, they’re costing the taxpayers more than they evidently should, and they’re not really being supportive to anyone So what is the administration gonna do about it? We tried in 1970, as you remember, the Welfare Reform Bill It got down to the 5-yard line and wasn’t punched in The liberals said, “You’re not giving enough.” The Conservatives said, “You shouldn’t give anything.” No one supported it, and this thing died aborted But that process can start again once people decide that the present situation is intolerable Gov. Carey: Mr. Chairman, if I may When you get to the 5-yard line and you’re about to punch over, as you’ve put it, I was in the Congress then, we made a massive effort We got that bill through the House twice and it died in the Senate Now, when you get that close, you don’t give up You get the ball again, you change your play and go over the goal line The President said when he was inaugurated, President Ford, that one of his major goals was the achievement of a national health program, the National Health Insurance Program, where is it? And if we’re all for the federalization of welfare now, why isn’t that a primary objective of this federal government? There’s no disagreement Why isn’t there an initiative going on right now for the federalization of welfare payments? I agree with Mr. Barry that that would help the District of Columbia greatly, would help our state greatly And if that’s a national policy, why isn’t the administration out there fighting to get that through the Congress? Either the national health, which the president said would be one of his first objectives or the federalization of welfare? We are not gonna have credibility in the country anywhere if we state our objectives and then fail to try to reach them Sen. Percy: Well, Hugh, I don’t think you have a very good reading on the Congress right now Just living around here and being up there, I happen to be for those programs I introduced them and then urged the Nixon administration to come up with them But I can assure you that this co-equal branch of our government right at the present time is not of the mind or the attitude to move in those directions And the president I think would be wasting a lot of the energies that are needed and necessary to get some other things through the Congress I think in the next session of the Congress, things like that may be considered After the next election, they may be considered Gov. Carey: Well, they said we wouldn’t get a federal aid education bill and the late Senator Taft introduced the first one in 1944 We passed it in 1965 It took a lot of heavy lifting Sen. Percy: Well, I introduced revenue sharing for the first time in 1957, but it didn’t pass for about 20 years Gov. Carey: Right, yes you did Sen. Javits: Well, I think as long as you’re talking about us, we better talk back Sen. Percy: What is your opinion? Sen. Javits: My opinion is with you, with the governor because I believe and I’m very favorable to President Ford as is well known I do believe that this is the kind of a battle that can only be won by persistence and you

do not, Mr. Secretary, see that on the banner of the administration that is national health insurance of some kind, and a federalization of welfare Now, the reason I say that is because neither of them is as hard as they sound, because we’re paying right now, a great part of welfare Even New York City gets 50%, so does the State Other states get up to 83%, Mississippi, for example Again, there’s argument about the formula, but that’s the situation And in the field…so that’s welfare And on National Health Insurance, I think it can be demonstrated that an intelligent plan will reduce the costs of health care to the American people when you add up Medicaid and Medicare and what the people are paying out of their own pockets and the way in which in many, many cases, they are overpaying because of the disorganization of the system Melvin: Yes Then we’ll go to you Marvin: I’m Marvin Kosters from the American Enterprise Institute And I’ve heard some discussion here about federal loan guarantees It’s often said about these guarantees that they don’t cost the government a penny I’d like to ask Governor Carey and Mr. Jones whether they cost anybody anything, and if so, how that process works? Gov. Carey: I’m glad you asked the question because that’s a fundamental difference between myself and the administration policy with regard to how to help in a condition where you need liquidity and capital Right now, for instance, on Monday morning, unless we find the money, one of the best managed, most effective housing finance agencies in the country will go into default It should not go into default The reason it would go into default is because capital markets are closed because of the New York syndrome And I’m down here today to seek some kind of a Band-Aid or a tidying over that agency to avoid a default Thirty other states have similar agencies called moral obligation borrowing agencies The guarantee of the paper of that particular agency wouldn’t cost a dime because the lock-in loan made money and it was a guarantee for the federal government So, the Secretary, with all due regard to his policy of guarantees, advantaging one and disadvantaging another will not hold water Guarantees are a successful way and effective way of putting the credit behind something which deserves a credit backup If it doesn’t deserve the credit, don’t give the guarantee If there’s a price for the guarantee to be exacted, exact the price so you make money on the guarantee, and don’t make the tax exempt with a guarantee of preferred security This is what can help But as long as there’s a closed mind against guarantees, and the idea is it’s better to loan money and impact the federal government than use the guarantee mechanism, we’re not going to get anywhere The Housing Committee under…Banking Committee under Henry Reuss put forth a program for guarantees for housing in marginal income areas, but Mr. Lynn at OMB is against it And they won’t use a law that’s on the books that will enable us to build more housing than Section 8, which Marion Barry describes as an utter failure Why can’t the guarantee mechanism which is in FHA, veterans mortgages, EXIM bank, all of these things working effectively in the Lock-in loan be used to help in what is clearly a liquidity problem in the entire United States Sen. Javits: I want equal time for Mr. Jones, on that You’re filibustering, you outta be on the Senate Gov. Carey: Right now, local and state governments have gone into deficit across this country $7.9 billion New York is not the only one in trouble Sen. Javits: Cut in on him and give him the facts Gov. Carey: So I say use the guarantee mechanism You’ll make some money for the federal government, you’ll cure the liquidity crisis, and you will really get something moving in this country Melvin: Secretary Jones, go on Secretary Jones: Yeah There are limited areas where the loan guarantee programs can help, such as in the SBA and SBIC examples In case of housing, in 1974, we put $20 billion to $22 billion into the mortgage markets I’m not sure we added $1 of mortgage money to those markets Now, I’ll let Senator Percy go from that point Sen. Percy: I’ve never heard such discussion I’m very sorry that a member of the House Ways and Means Committee would really feel that that is true What a change you get going up to Albany, New York If I came to you and I said, I got a friend Now he’s got a very bad debt payment record He’s just on the brink of bankruptcy, but I’m gonna ask you to guarantee his loan And would you have to disclose that to a bank when you wanna borrow more money yourself? You bet you would That’s a liability, potential liability you’ve got And every time we put the guarantee of the Federal Government of the United States behind bonds for New York and New York State or City of Chicago or Illinois, you got to take into account where they’re going to be paid off Secretary Jones: Exactly Don’t give the guarantee unless there’s a clear ability for payment Sen. Percy: So, that you can’t say it doesn’t cost you a penny Potentially, it may cost you 100% of that loan potentially Secretary Jones: No, no Senator, I must disagree because the backup for the guarantee is this

Sen. Percy: Well, I just asked my good Secretary here whether or not you put the federal government’s signature without any risks incurred Secretary Jones: No, because the backup of the guarantee is if the guarantee is not repaid, you impound other federal funds to discharge the guarantee obligation You can’t oversimplify it Sen. Percy: Well, the fact is that the amount Melvin: That is the cost That is the cost, you see, there is the cost Secretary Jones: Yeah, the federal government doesn’t lose the money Melvin: And there is a cost involved I think it’s important and I’d like to hear from Mr. Jones on this Sen. Percy: The Secretary has said it works for the SBA it works for the SBIC, why wouldn’t it work in-house? Secretary Jones: In very limited ways because you’ve got leverage there, but the concept that it doesn’t cost anyone is wrong Because what happens when you have a borrower who gets the full faith and credit of the government, he borrows at a lower rate That suggests other people borrow at higher rates That’s the cost That’s the cost Sen. Percy: Mr. Jones, you charge a premium in order to equalize that and then you make the money Secretary Jones: We do? Sen. Percy: You charge a premium Secretary Jones: We don’t Sen. Percy: You did Secretary Jones: Are you saying we should? I might agree with that But if you say we do, I would disagree Sen. Percy: You’d better get together with President Ford He’s charging us a premium on the loan of the money to New York City in the amount of $2.3 billion Secretary Jones: Hopefully, a one city aberration, not a governmental program Sen. Percy: You mean it wasn’t a good idea to help New York? You better convince President Ford of that Sen. Javits: Well, the fact is, is it not that you make money The United States has made money consistently on its guaranteed program No one’s saying Sen. Percy: On a no overhead basis? Gov. Carey: On an overall basis Sen. Percy: The studnent loan program, we’re $1 billion in default, Javits A billion dollars Sen. Javits: I know, but you’ve got $100 billion in FHA upon which you’ve consistently made money for years and years That’s all the governor is saying, ensure you take prudent guarantees, but the fact is that the record of the guarantee has been that it hasn’t been an imposition on the federal budget, and indeed, it’s made a profit Now, that doesn’t mean to be improvident or to be reckless, but it’s a preferred source of financing where you’re dealing with a revenue-producing operation That’s all Secretary Jones: And I think it’s only fair to state that if the cities, the counties, and the states wanna go into a guaranteed program in the future, they’re gonna have to be willing to give up something They’re gonna have to give up tax exemption They’re gonna have to give up some of these other things They’re going to have to pay a premium for their money And it’s gonna raise costs as far as local and state government is concerned It isn’t a freebie for anybody Melvin: The program has come to an end, ladies and gentlemen Our time has run out The American Enterprise Institute has been very delighted to present this panel discussion on the financial crisis of the cities with Governor Hugh Carey, Senator Jacob Javits, Senator Charles Percy, and Assistant Secretary of the Treasury, the Honorable Mr. Jones Mr. Jones, as you know, is representing Secretary Simon on this program today because of the cabinet meeting that was called by President Ford, but we do very much appreciate their participation in this program Thank you all for participating here in the studio Sen. Javits: Mel, I learned a lot Thank you Melvin: You’re welcome Secretary Jones: Thank you Sen. Percy: Thank you Peter: This round-table discussion on the problems of rescuing financially troubled cities has brought you the opinions of four experts in the field Their views, many of them differing, should be listened to It’s the aim of AEI, the American Enterprise Institute, to illuminate issues of the day by presenting many such views in the hope that by so doing, those involved in or those who want to influence the decision-making process will benefit from such a free exchange of informed and enlightened opinion I’m Peter Hackes in Washington Announcer: Public Policy Forums is created and supplied to this station as a public service by the American Enterprise Institute, Washington, D.C For a copy of this program, write to the American Enterprise Institute at 1150 17th St. NW, Washington, D.C. 20036