Online Extra: Big Apple Bailout: October/November 2009

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Too Big to Fail

By Arturo Perez

The last time the federal government stepped in to assist either a state or local government facing a possible bankruptcy was in 1975 when New York City was the recipient of some timely federal action that pulled the city back from the brink of default and bankruptcy.

That assistance came in the form of direct loans and long term federal loan guarantees to the city.

The city, because of a series of financial missteps, was literally running out of money by the mid-1970s. It was unable to pay for normal operating expenses and was frozen out of the credit market. The city had accumulated a significant amount of outstanding debt, much of it short-term, and also had a sizeable operating deficit that made it difficult for bond investors to consider purchasing any additional city-issued debt.

In November 1975, Congress enacted legislation that extended up to $2.3 billion in loans annually to the city under an initial three-year plan, along with loan guarantees that were intended to support the fiscally troubled city. As a condition of the federal assistance, the city imposed several budget balancing measures along with tighter auditing and oversight controls. Among the various measures imposed, the city raised fees for services and increased taxes, cut services, and eventually reduced the city's workforce by 20 percent.

Federal intervention in state or local fiscal crises is a rare event. The funding package provided in 1975 to New York City was designed in such a way to dissuade other public agencies from requesting federal assistance.

In contrast, the American Recovery and Reinvestment Act of 2009 was crafted as a broad economic stimulus effort at the state and local government levels and did not single out a particular state or local government.