The Fading Lessons of New York’s Fiscal Crisis

On the afternoon of May 2, 1975, the heads of three major New York commercial banks sat down with Governor Hugh Carey at his midtown Manhattan office. The meeting was brief and the bankers got quickly to the point, informing the governor that they would no longer underwrite the City of New York’s notes and bonds.

After months of well-publicized warnings and mounting panic in city hall, the message came as no surprise—but it was a watershed, all the same. Buried in debt and committed to spending far more than its revenue base could support, the nation’s largest and wealthiest city was going broke.

In the months that followed Carey’s meeting, New York’s municipal government repeatedly came to the brink of default and bankruptcy. Yet as dark as the outlook seemed in 1975, and as grim as it would appear over the next few years, the city’s financial recovery was well under way by the early 1980s, thanks to a combination of budgetary retrenchment, state aid, federal loans, and accounting reforms. The inflationary surge of the late 1970s, which shrank debt obligations while swelling tax revenues, also contributed, as did, starting in the early 1980s, a long Wall Street boom.

When New York finally emerged from state financial control in 1986, an official city history of the period cited “a change of attitude, both within city government and in the city at large . . . a general recognition that government has its limits, and that we must make choices that are not always easy or simple . . . [and that] we must live within our means, and we must adjust our estimate of those means to allow the city to compete successfully in an ever-competitive world economy.”

Fifty years later, however, the sense of limits that the crisis instilled has faded. Steeped in postmodern progressivism and Modern Monetary Theory, today’s New York politicians and activists are more likely to champion a revisionist view: that the 1975 fiscal crisis precipitated a wrong turn toward “austerity” that should never be repeated.

New York City’s 1975 brush with insolvency was rooted in the 1930s New Deal idealism of Fiorello La Guardia, nourished by Robert Wagner’s empowerment of municipal labor unions in the 1950s and early 1960s, and brought to fruition with the Great Society’s expansive urban agenda, which Mayor John Lindsay embraced. City spending had outpaced even strong revenue growth during the postwar boom stretching throughout the 1960s, and it kept growing even after population and jobs starting declining in the early 1970s. The trend couldn’t go on indefinitely. The “stagflation” recession finally pushed New York’s finances over the edge.

Even a cursory look back at New York’s budgetary practices in the decade leading up to the fiscal crisis reveals mind-boggling fiscal abuses. Year after year, a succession of mayors deliberately spent more than the city could afford, usually under the assumption that additional state or federal aid would materialize to fill the gap. If that didn’t happen, they would borrow to make up the difference. None of this unfolded in secret, and—given the city’s subservience to Albany—the worst of it had to be enabled by a state government engaged in its own lavish overspending and taxing.

The city was on the road to virtual bankruptcy no later than May 1965, when Robert F. Wagner Jr. made what would turn out to be the final budget presentation of his three mayoral terms. Wagner took office in the mid-1950s; between 1957 and 1962, he issued a series of executive orders granting collective bargaining rights to city employee unions, fueling a steady rise in compensation costs. In the first three years of his third term, Wagner boosted spending by 30 percent. For the fiscal year that would end in June 1966, Wagner sought his biggest budget increase yet—roughly a half billion dollars, or nearly 15 percent—more than five times the inflation rate. Projected city revenue growth would cover only half the increase.

“I do not propose to permit our fiscal problems to set the limits of our commitments to meet the essential needs of the people of this city,” Wagner declared. To close the gap, he sought state legislative permission to issue $256 million in bonds. He described this as a “borrow now, repay later” strategy, linked to a proposed increase in the state constitutional cap on city property taxes (which never happened).

The legislature approved Wagner’s borrowing, but even that fix didn’t last long. Six months later, a front-page New York Times story reported that the city faced “one of the gravest financial crises in its history.” It quoted mayor-elect John V. Lindsay, who predicted, “I’ll be acting as a receiver in bankruptcy when I take over at City Hall.”

Lindsay had no sooner taken office in January 1966 when he was confronted with a 12-day subway strike that would establish another pattern: an initially tough mayoral bargaining stance that gave way to a costly new pay deal. By June, the state legislature and Governor Nelson Rockefeller had signed off on new and higher city taxes, including New York’s first local resident income tax as well as a commuter tax, along with broader business taxes. It was easily the biggest package of tax hikes that New York City had ever seen—but it wouldn’t be the last.

Revenues in Lindsay’s first term rose aggressively; spending rose even faster. The largest share went to employee compensation, but the social-services budget also shot up as the welfare caseload exploded, from 459,000 when Lindsay took office to more than 1 million by the start of his second term in January 1969. By national standards, New York City had to shoulder an extra-large share of welfare and Medicaid costs not covered by federal aid, but the added expense didn’t deter Lindsay’s expansion of the programs. Thirty years earlier, the Big Apple was an enthusiastic partner in Franklin D. Roosevelt’s New Deal; under Wagner and then Lindsay, it was equally committed to building Lyndon Johnson’s Great Society, picking up the slack when federal aid began to dry up in the early 1970s.

In 1971, Lindsay won Albany’s approval for another round of tax increases, raising the city’s personal income-tax rate by 75 percent. He added another percentage point to the sales tax and expanded the business tax. In Albany, the state was raising the same taxes, compounding their impact on a weakening economy. By 1975, the combined state and city income-tax rate had reached nearly 19 percent; neighboring New Jersey and Connecticut still imposed no taxes at all on wage income.

Between fiscal 1970 and 1975, city tax receipts rose 54 percent (12 percent in real terms). But the added revenue wasn’t nearly enough to keep up with city spending, which had expanded by 80 percent (28 percent in real terms) in the same period. Amid all the spending and taxing, the city was on its way to an epic loss of 570,000 payroll jobs between 1969 and 1977. The city population was shrinking by a similar amount, falling to levels unseen since the late 1930s.

Lindsay was succeeded in 1974 by Abraham Beame, who had been city comptroller in Wagner’s last term and returned to the office in 1970. Beame regularly second-guessed Lindsay’s budget numbers but never fundamentally rejected the “borrow now, repay later” strategy.

Once Beame took office, the city found itself trapped in an economic and fiscal doom loop. The inflation flare-up of the early 1970s, temporarily quelled by federal price controls, was worsened by the Arab oil embargo of 1973, triggering a global recession and a stock-market collapse. Financial institutions sharply reduced their investments in tax-exempt municipal debt and demanded higher interest rates to loan to New York.

Meantime, seven-term Brooklyn congressman Hugh Carey won the November 1974 gubernatorial election, returning control of the state’s executive branch to Democrats for the first time in 16 years. As with the 1973 mayoral race, the looming financial crisis at the state and city levels barely drew a mention during the campaign. Carey, however, made it a principal focus of his first message to the legislature in 1975. “In the very simplest of terms, this government and we as a people have been living far beyond our means,” the new governor observed. And he memorably warned: “Now the times of plenty, the days of wine and roses, are over.”

Following his May meeting with the bankers, Carey oversaw a fiscal rescue that hinged on the creation of a new entity, the Municipal Assistance Corporation (MAC), to refinance the city’s debts with bonds backed by an added percentage point on sales taxes. In September 1975, MAC’s creditworthiness got a boost from the creation of the state Emergency Financial Control Board, chaired by the governor and dominated by his appointees. The board’s “control” of the city budget was vested in its ultimate power to set limits on borrowing and spending—the kind of limits that Wagner had renounced.

Throughout the summer of 1975, Carey and city officials made repeated trips to Washington to plead for federal aid, but the Republican administration of President Gerald Ford resisted calls for a bailout—which, as House Majority Leader Thomas “Tip” O’Neill conceded at the time, would have failed to win approval even from a lopsidedly Democratic Congress. The entreaties culminated in the famous Daily News headline, “Ford to City: Drop Dead,” on October 31, 1975. Ford hadn’t actually used the phrase or anything like it. He had given a speech firmly rejecting federal loan guarantees for the city but offering a federal bankruptcy-law amendment tailored to New York City’s circumstances.

The Daily News headline created the sense of urgency that Carey needed to push for a unilateral reduction in city subsidies of employee pension contributions, a package of state tax increases, and, to buy more time, a clearly unconstitutional (and thus temporary) “moratorium” on city bond payments. Within four weeks of the “Drop Dead” speech, Ford had agreed to provide the city with three years’ worth of seasonal loans totaling $2.3 billion, which was just enough.

Beame’s initial rounds of layoffs in early summer 1975 prompted raucous labor protest demonstrations that stand among the enduring images of the fiscal crisis. But while New Yorkers endured years of real and visible cuts in city services, the municipal workforce took only a temporary hit. Base pay was never cut, and longevity raises and cost-of-living increases continued. While the city cut 60,000 positions from its enormous payroll, the reduction was accomplished mostly through attrition and a permanent shift of some jobs to the state ledger. After a two-year base-pay freeze, unions negotiated for raises again starting in 1978. Over the next four years, salaries and wages in the city budget grew by a compounded rate of 26 percent.

By the end of the decade, the city economy had begun a turnaround. Carey sharply reduced state income taxes, and President Ronald Reagan’s federal tax cuts, starting in 1981, freed up more private capital, fueling one of the strongest bull markets in Wall Street history.

Mayor Edward Koch, who took office in 1978, spent much of his first term engaged in a tug-of-war with unions; but as the economy improved, fiscal pressures eased. The city produced its first truly balanced budget in 1981, a year ahead of the mandated schedule. Koch ultimately added 57,000 full-time positions to Gotham’s payroll, more than offsetting the job cuts instituted during the crisis. Between 1980 and 1989, the city budget nearly doubled, increasing almost as rapidly as it had in the 1960s.

By 1990, when David Dinkins succeeded Koch, the size and cost of municipal government was as big as it had ever been. Dinkins took office just in time to face a recession that was mild by national standards but severe in the New York metro area. Nonetheless, he soon signed a generous new teachers’ contract that further strained city finances and prompted Governor Mario Cuomo to warn that he might invoke a renewed period of state control.

Facing a large budget gap on taking office in 1994, Mayor Rudolph Giuliani negotiated five-year labor contracts that had no base-salary increases in their first two years but that were backloaded with pay hikes that wound up roughly equaling the actual cost-of-living increases over the five-year period. Benefit costs rose higher than projected, and the city workforce kept expanding through the late 1990s.

Giuliani’s greatest success was reducing the welfare rolls, from a peak of 1.2 million in 1995 to 425,000 by the time he left office in 2001. He left in place a welfare-to-work infrastructure that would further shrink the caseload to 346,000 under his successor, Michael Bloomberg. His last financial plan, adopted just two months before September 11, 2001, contained what amounted to a $2 billion operating deficit, covered with surplus funds from prior years. Whoever succeeded Giuliani was destined to inherit an unbalanced budget; the terrorist attack on the World Trade Center blew the hole about 50 percent bigger.

Within days of 9/11, the legislature approved a $2.5 billion expansion of New York City’s borrowing limit on an emergency basis to cover what were expected to be massive cleanup and reconstruction costs. But the federal government wound up covering it all with an enormous 9/11 aid package of its own. Nonetheless, the city under Mayor Bloomberg went ahead and tapped $2.1 billion in “recovery bonds” to help balance its 2003 budget.

In the wake of the 9/11 shock, the city’s fiscal monitors understandably chose to overlook the resurgent (and technically illegal) “borrow now, repay later” strategy, but the precedent would come back to haunt New York less than 20 years later, when Mayor Bill de Blasio sought state approval for up to $7 billion in deficit borrowing to cover revenue and spending impacts of the Covid-19 pandemic. Governor Andrew Cuomo deflected that request, which, within a year, had proved unnecessary, thanks to a massive injection of federal pandemic aid and the revenues generated by an unexpected stock-market boom.

By the time de Blasio left office at the end of 2021, the city budget had soared beyond $100 billion, and the workforce hit a record 325,000 employees. His successor, Eric Adams, inherited a reserve cushion most recently estimated at $8.5 billion—but the city’s operating surplus as a percentage of revenues has dipped to its lowest level since 2014. Through early 2025, New York City had spent $7 billion on housing and other services for illegal migrants, and while border crossings slowed to a trickle with the reelection of President Donald Trump, the city’s projected migrant costs will remain in the billions over the next few years.

To an extent that his annual budgets seek to obfuscate, Adams has overseen a resurgence of the welfare headcount—up from 384,000 when he took office, to 588,000, the highest level in 25 years, as of January of this year. Over Adams’s objection, the city council approved a massive expansion of a housing-voucher program, the cost of which has risen nearly $1 billion since 2020 and keeps going up. The council also supports a continuing expansion of education and child-care spending that had been temporarily funded with federal pandemic aid. Adams’s FY 2026 preliminary budget forecasts gaps approaching $15 billion in the fiscal years 2027 through 2029, but the city’s independent fiscal monitors all cited worrisome downside risks of even bigger gaps opening sooner.

In addition to the usual macroeconomic uncertainties, New York City will likely have to absorb the brunt of any forthcoming changes to federal aid formulas. Any significant slowdown in Medicaid spending will easily cost billions, pressuring the state and city to make up the difference.

When Congress renews the 2017 federal tax law this year, it will likely raise the $10,000 cap on state and local tax (SALT) deductions, but not by nearly enough to offset the growing burden on millionaire earners who shoulder nearly half the city’s income-tax burden and who now pay effective net-of-deductibility local rates more than double those in force during the 1970s fiscal crisis.

Even without that added pressure, Robert Wagner’s “borrow now, repay later” mentality lives on in Adams’s proposal (quietly backed by major unions) to underfund the city’s required pension contributions over the next six years by pushing billions in higher contributions into the early 2040s. When this pension scheme found no immediate sponsors in the state legislature, Governor Kathy Hochul obligingly tacked it onto her own proposed state budget—like a fresh gift basket of wine and roses.

Could New York City ever go broke again? The answer is no—or at least, not in the same way as it did in the 1970s, because of financial guardrails set up by the reforms of that era. The prosperity that lifted New York out of virtual bankruptcy, however, also seeded new versions of the political impulses that gave rise to the crisis in the first place. The elected officials who nowadays dominate city hall and Albany exude a sense of fiscal entitlement and economic invulnerability, an aversion to any suggestion of limits on government ambitions, strikingly reminiscent of the Wagner and Lindsay eras. The city’s sprawling network of tax-subsidized nonprofits—a political force that didn’t exist a half-century ago—lobbies relentlessly for higher spending while serving as an organizational network for progressive activists and politicians. Nearly one-quarter of New York’s private-sector employment—twice the share of 30 years ago—is now concentrated in the publicly subsidized health-care and social-assistance sector, which accounts for all the city’s post-pandemic job growth. The municipal labor unions are as powerful as ever, if not more so.

In short, New York City is poised for another epic fiscal fall. A moderately severe recession is all it would take to push it over the edge. This time, the climb back to fiscal stability could be considerably more difficult.

Top Photo: New York mayor Abe Beame in 1975, the year of the city’s infamous fiscal crisis (Keith Torrie/NY Daily News/Getty Images)