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In 1975, New York City had a severe fiscal crisis wherein it had $14 billion of debt, of which $6 billion was short-term debt. The city ran out of money in its budget, and had an operating deficit of more than $600 million, with some estimates placing the deficit at $2.2 billion. The city had a credit rating that excluded it from the credit markets.

The crisis was part of the 1973–75 recession. It was rooted in the large era of municipal borrowing during the 1960s. By the mid-1970s, New York City's government had large deficits. Despite large cutbacks to public services and en-masse firings of municipal employees, the city could not pay off the debts it had accrued, and almost defaulted by October 1975. A Municipal Assistance Corporation, and later a Emergency Financial Control Board, were formed to deal with the crisis. By 1976, the city had paid off its short-term debt, and the crisis was considered resolved by the early 1980s.

Background
The city started running an operating deficit in 1961 under the tenure of Mayor Robert F. Wagner Jr.. In response to strike actions by municipal employees, Wagner tried to appease them and salvage his own political reputation by spending funds at the expense of the municipal budget. Simultaneously, property taxes were lowered due to rent control laws, which caused municipal funds to be depleted faster than the property taxes could replenish the fund. In 1965, the city elected John Lindsay as mayor, and he proceeded to borrow on a large scale in order to improve city services. State aid, federal aid, and predictions of high tax revenues concealed the borrowing. US economic stagnation in the 1970s hit New York City particularly hard, amplified by a large movement of middle-class residents to the suburbs, which drained the city of tax revenue.

Start of crisis
By April 1975, during the term of Mayor Abraham Beame, New York City faced a serious fiscal crisis, and for the first time in its history, the city ran out of money. The city could not pay for normal operating expenses, was unable to borrow more, and faced the prospect of defaulting on its obligations and declaring bankruptcy. The city admitted an operating deficit of at least $600 million, though the actual total city debt was more than $11 billion and the city was unable to borrow money from the credit markets. The New York State Labor Department projected that by the end of the decade, 313,000 jobs would have been eliminated from the city's economy.

There were numerous reasons for the crisis, including overly optimistic forecasts of revenues, underfunding of pensions, use of capital expenditures for operating costs, and poor budgetary and accounting practices. The city government was reluctant to confront municipal labor unions; an announced "hiring freeze" was followed by an increase in city payrolls of 13,000 people in one quarter, and an announced layoff of eight thousand workers resulted in only 436 employees leaving the city government.

Municipal Assistance Corporation
State Governor Hugh Carey proposed lending money to New York City on the condition that the city's financial operations were placed under state control. The first solution proposed was the Municipal Assistance Corporation, which tried to pool the city's money and refinance its heavy debts. It was established on June 10, 1975, with Felix Rohatyn as chairman, and a board of nine prominent citizens. In the meanwhile, the crisis continued to worsen, with the admitted city deficit reaching $750 million; municipal bonds could be sold only at a significant loss to the underwriters.

The MAC insisted that the city make major reforms, including a wage freeze, a major layoff, a subway fare hike, and charging tuition at the City University of New York. The New York State Legislature supported the MAC by passing a law converting the city sales tax and stock transfer tax into state taxes, which when collected were then used as security for the MAC bonds. The State of New York also passed a state law that created an Emergency Financial Control Board to monitor the city's finances, required the city to balance its budget within three years, and required the city to follow accepted accounting practices. But even with all of these measures, the value of the MAC bonds dropped in price, and the city struggled to find the money to pay its employees and stay in operation. The MAC sold off $10 billion in bonds.

Emergency Financial Control Board
The MAC failed to achieve results quickly and the state came up with a much more drastic solution: the Emergency Financial Control Board (EFCB). It was a state agency, and city officials had only two votes on the seven-member board. The EFCB took full control of the city's budget. It made drastic cuts in municipal services and spending, cut city employment, froze salaries and raised bus and subway fares. The level of welfare spending was cut. Some hospitals were closed as were some branch libraries and fire stations. The labor unions helped out, by allocating much of their pension funds to the purchase of city bonds—putting the pensions at risk if bankruptcy took place.

The city was ordered to institute budget cuts totaling $200 million by October 15, 1975, and the MAC had to redeem $453 million in short-term debt securities two days later. On October 16, a day before the deadline, Beame ordered that funds for the under-construction Jacob K. Javits Convention Center, a major redevelopment project in western Midtown Manhattan, be frozen. Funds for other major projects such as schools were also frozen, and 125 bureaucrats were ordered to auction their city-owned cars. As a last-ditch effort, the MAC asked the city's teachers' union to provide a $150 million loan from its pension fund to the city's securities in order for the city to meet its borrowing obligations until the next month. The pension fund's trustees convened a meeting that lasted until midnight, but could not agree to loan the $150 million. However, they did agree to another meeting with the mayor at 7 a.m. on October 17, the next day,

A statement by Mayor Beame was drafted and ready to be released at 4 p.m. "I have been advised by the comptroller that the City of New York has insufficient cash on hand to meet debt obligations due today," the statement said. "This constitutes the default that we have struggled to avoid." The Beame statement was never distributed because at 2:07 p.m. on that day, Albert Shanker, the teachers' union president, finally furnished $150 million from the union's pension fund to buy Municipal Assistance Corporation bonds.

Congressional intervention
Two weeks later, President Gerald R. Ford angered New Yorkers by refusing to grant the city a bailout. Ford later signed the New York City Seasonal Financing Act of 1975, a Congressional bill that extended $2.3 billion worth of federal loans to the city for three years; the loans were repaid with interest. In return, Congress ordered the city to increase charges for city services, to cancel a wage increase for city employees and to drastically reduce the number of people in its workforce. Rohatyn and the MAC directors persuaded the banks to defer the maturity of the bonds they held and to accept less interest. They also persuaded the city and state employee pension funds to buy MAC bonds to pay off the city's debts. The city government cut its number of employees by 40,000, deferred wage increases already agreed in contracts and kept them below the level of inflation.

End of crisis
A fiscal conservative, Democrat Ed Koch, was elected as mayor in 1977. He had also run on an anti-crime platform following that year's blackout, winning much of the vote from minorities and liberals. By 1977–78, New York City had eliminated its short-term debt. By 1985, the City no longer needed the support of the Municipal Assistance Corporation, and it voted itself out of existence.