Treasury Secretary W. Michael Blumenthal said yesterday that the Carter administration does not intend to let New York City fall into bankruptcy and that it is "extremely unlikely" that the city can survive in the short run without federal assistance.
In testimony before the Senate Banking Committee, Blumenthal said the administration has made no commitments to extending federal loans to New York. But he left open the possibility that it would support continued loans after the June 30, 1978 expiration of the Seasonal Financing Act. That law, which Congress passed in 1975, provided loans of up to $2.3 billion a year to the financially troubled city for three years.
But chairman William Proxmire (D-Wis.), whose committee began th first of three days of hearings on New York's financial conditions, said he is "highly skeptical" about extending the June 1978 deadline.
"I think there will be a whale of a lot of opposition to this (extending the loans) from members of Congress," Proxmire said. "The present law passed the House by only a narrow margin, and passed the Senate only after extended debate."
Proxmire said he was also troubled by New York Gov. Hugh L. Cavey's proposal to reduce New York State taxes next year, when, according to Proxmire, it should be using its resources to help out the city. Carey, who also testified before the committee yesterday, said the proposed tax cut would be the first in 57 years, and defended it on grounds that New Yorkers are the most heavily-taxed citizens in the nation.
In response to a question from Sen. Jacob K. Javits (R-N.Y.), Blumenthal said he thought it would be "against the national interest" to let New York go bankrupt.
The dangers, he said, would be that the city's economic condition would further deteriorate, the municipality would be run by a federal judge, and that the move would delay New York's reentry into the bond market. He also said it would seriously affect business and the revenue base, it would make it more difficult to collect taxes, and it would harm the financial condition of the state as well.
Blumenthal said the city has made "major progress" in improving its fiscal condition, has met every obligation it promised Congress in 1975 and has paid back on or ahead of schedule all its loans. But to get back on its feet and wipe out a projected budget deficit of at least $249 million for fiscal 1979, he said the city must achieve a "condition of truly recurring budget balance" as soon as possible. Until he receives a budget plan from Mayor-Elect Edward I. Koch, Blumenthal said he cannot say what the administration's position will be on extending the federal loans.
Proximire said the $249 million budget gap was a gross under-estimate because it does not take into account wage hikes tha municipal labor unions will demand early next year. He said the decision Tuesday by the New York City Council to raise its salary 50 per cent, from $20,000 a year to $30,000 a year, was "bad timing," because that will make it difficult for the unions to hold down their wage demands.
Gov. Carey said New York has survived and has regained its confidence but needs a guarantee that the federal government will continue to participate in the city's financing. Felix G. Royhatyn, chairman of the city's Municipal Assistance Corporation, accompanied Carey and said that simply extending the Seasonal Financing Act would leave the city in worse shape than before. He asked for a long-term, 25-year lending program by the federal government.
But Proximire replied that such a program would "remove whatever effective control the federal government would have," because it could no longer threaten to cut off the loans if the city and state were not contributing enough.
Between the 1976 fiscal year and the estimated 1978 fiscal year, the worst of the financial crunch, Proxmire said, New York state aid to the city increased by only four per cent, compared to a 28 per cent increase from the federal government. In 1976 state aid, but now it is 15 per cent lower, he said.
"It's very hard for us to understand a tax cut, Proxmire said, "while the aid to New York City is so low."
Carey replied that the anticipated surplus will be only $18 million, not a "voluminous" cut.