WHAT if no heroes had risen above fiscal-policy-as-usual to save Gotham from its black hole during the bleak days of 1975? That's the situation New Orleans finds itself in now.
New Orleans has several competing crises â€” but its immediate fiscal crisis is easy to fix. It's been done before, right here.
"We have no revenue stream," Mayor Ray Nagin said last week as he prepared to lay off half the city's work force. New Orleans needs $20 million a month to pay its workers, but the taxpayers are gone. Just like many people, cities don't store piles of extra cash for an emergency.
New Orleans has many obstacles to recovery â€” but the city has no chance of overcoming those obstacles unless it can maintain pre-Katrina basic services over the next critical few months so that it can encourage evacuees to return, and so that it can rationally determine how to go forward with its damaged tax base.
Many cities have chronic fiscal problems, but few modern cities have ever hit the fiscal bottom of not having enough money to pay the monthly bills. While New Orleans is a poor city, it took a historic natural disaster to plunge it into a crisis so dire that it cannot meet its own payroll.
Wealthy New York is one of those cities that has hit bottom â€” and can offer lessons to New Orleans now.
Gotham, economically and fiscally, is New Orleans' polar opposite. New Orleans has long had a weak economy and thus a weak tax base, while New York draws resources from some of the richest taxpayers in the world.
But the illusion of an infinite, and infinitely wealthy, tax base can tip a city into financial crisis over decades just as efficiently as a hurricane and a weak tax base can tip a city into financial crisis within a month.
Thirty years ago, New York couldn't fund the vast welfare state that successive mayors, most notably Republican John Lindsay during the late 1960s, had carved out of the wallets of the city's wealthy and middle-class taxpayers. The city was borrowing tens of millions each month from its bankers just to pay its workers. That is a fiscal sin â€” so in 1975, bankers cast a cold eye on the city's finances and cut the city off.
Just as in New Orleans now, the time for theoretical discussions about whether New York was poorly managed, and whether it had caused its own problems in the first place, was over. The city had reached a tipping point.
Without an external savior, New York would have had to make drastic layoffs and service cuts immediately, forcing municipal strikes and forcing more fed-up middle-class taxpayers to the suburbs. So flailing Gotham reached out to the feds â€” and was rebuffed by President Ford.
New York had been warned of its unsustainable fiscal profligacy for decades before 1975, just as New Orleans had been warned to prepare for a catastrophic hurricane for decades. If any city was undeserving of a fiscal second chance, it was New York in the '70s.
But the New Yorkers who could help cared, despite elected leaders' chronic mistakes. So Democratic Gov. Hugh Carey worked with prominent private-sector bankers to cobble together a bail-out package.
Without a federal guarantee, the state had to take over Gotham's finances: Carey allowed the state to float long-term bonds to tide the city over while experts designed better fiscal-management practices for Gotham. New York is still paying off those bonds, and the city still operates under strict state oversight â€” but it was worth it. The federal government spurned New York's request for money for operational needs because New York had caused its own problems. New Orleans has caused some of its own problems. But not this one.
No city could survive a sustained evacuation of its tax base. So the feds should step in here, just as New York state did 30 years ago, and help New Orleans float federally guaranteed operational-recovery bonds so that Nagin can pay his workers over the next six months.
This will buy Nagin valuable time to consult with national fiscal experts to assess what he needs to do in the future to provide basic services to a changed city.
Does New Orleans have problems that go beyond the fiscal? Sure. But New Orleans will never have the chance to learn its lessons from Katrina if it cannot pay its bills now.
Bond investors and insurers, not just the feds, have a stake here. A recovered New Orleans, even one with a smaller tax base, could pay down its short-term recovery debt. But a broken New Orleans won't be able to pay back the debt it already has. Bond insurers who guarantee New Orleans' debt shouldn't dream of asking the feds to bail them out if that happens â€” unless they, in turn, help to convince the feds to help New Orleans now.
It took New York decades to recover from its serial mismanagement â€” not just fiscal â€” of the 1950s, '60s and '70s. But without a fiscal rescue, New York never would have had the opportunity to tackle its other pressing problems: High crime, racial tension and disappearing jobs. Mayor Giuliani would not have been able to work his magic on crime in the 1990s had a bankrupt city lost a critical mass of taxpayers after 1975.
How quickly we forget: New York would not be what it is today without smart, wealthy outsiders who were willing to break orthodoxy and give it a second fiscal chance.
New York's pre-eminent financiers â€” those who remember their own city's fiscal crisis â€” should get on the phone with their friends in Congress and the White House. New York, with its own unique fiscal history, should help the feds to help New Orleans.
A fiscally decimated New Orleans needs the second chance New York got long ago: To succeed or fail.