A war horse of a past fiscal crisis
Richard Ravitch, who helped New York state and city survive the fiscal crisis of the 1970s, breathed fire on bond market participants attending their annual industry get-together in New York City today.
Ravitch is now working with Paul Volcker on a project that’s funded by private interests with the aim of ascertaining the sustainability of state and local government revenues. It is an effort to identify key issues for municipal government funding and avert the same type of fiscal crisis that New York City faced in the 1970s when it nearly went bankrupt. He said for municipal governments to continue funding their capital needs, the municipal bond market must remain strong and investors must continue to have confidence in bond issuers. Transparency was critical to continue building investor confidence.
Ravitch said he was appalled in 1975 when he began to assist with the fiscal crisis in which the New York state government sold off $20 billion of assets to gain one-shot revenue enhancers. The state was treating the proceeds of these sales as revenues and they had no strategy to actually balance their budgets. Public officials had no willingness to raise taxes or cut expenses. As for advice for muniland’s current predicament, Ravitch said that like the governments of the 1970s we must recognize we have made fiscal commitments that are not sustainable without serious changes.
When New York City was near default in 1975, what saved the city was the willingness of the financial community to postpone repayment of debt. Albany passed a moratorium on the repayment of interest on debt which the banks supported. At the time banks held about half of the municipal bonds of the city and they agreed to this postpone repayment. This gave the city the space to issue new bonds and clean up accounting practices which had obscured the true level of fiscal collapse.
Ravitch said that it took a few years to convert New York City to GAAP accounting, a system which reflected the true picture of future liabilities. They diverted tax revenues that were meant to go to bondholders and pledged them to new bondholders. Some underwriters of these bonds were furious and knew that they could have securities-law liabilities for not disclosing to investors the true extent of New York City’s municipal stress. They agreed to payment deferment because they knew the alternative was the city’s bankruptcy.
Ravitch believes that underwriters have a responsibility to get states to change their budget practices and create more transparency. And if issuers do not improve, their bank underwriters should defer lending more money to a municipality. This hasn’t happened because some are not eager to change things and some people may not want additional transparency as they may think some things are better left in the dark .
Ravitch finished by stating that accretion of debt at all levels of government is not sustainable. But he is not a believer in the apocalypse. He cited an example of the New York State Thruway Authority, which finances roads and bridges and which couldn’t get a credit rating two years ago because they didn’t have enough revenues. The state legislature then diverted income tax revenues to make payments on Thruway bonds. He believes that everyone should insist that our political system give us more data to understand these practices. In closing he said, “there aint enough money for everyone to get what they were promised.”
The war horse was sharing lessons from the past fiscal crisis. Was anyone listening? Will anyone learn from the challenges that were barely overcome? I hope so.