New York City Faces Toughest Fiscal Crisis Since the 1970s

By Jimmy Vielkind and Katie Honan

New York City faces a $9 billion deficit over the next two years, high levels of unemployment and the prospect of laying off 22,000 government workers if new revenue or savings aren't found in the coming weeks.

The growing economic crisis, brought on by the coronavirus pandemic, has alarmed New York Gov. Andrew Cuomo so much that he recently asserted greater control over a panel overseeing the finances of the nation's largest city.

Earlier this summer, Mr. Cuomo appointed three close allies to the New York State Financial Control Board. The board played a prominent role during the city's last fiscal crisis in the 1970s, when it wielded broad legal power over the city's budget and made difficult spending decisions.

Mr. Cuomo, a Democrat, has grown concerned about the direction of the city budget, state Budget Director Robert Mujica said in an interview.

The city had to cut billions to balance its latest budget, but it still has major funding challenges.

Local officials have called on Congress to approve a relief package for the city, but talks about a bill are ongoing. As a backstop, New York City Mayor Bill de Blasio asked state lawmakers for authorization to borrow up to $5 billion to fund operating costs. Democrats who control the state Senate objected, and the request hasn't been granted.

"A lot of the same things that occurred in 1975 are reoccurring," Mr. Mujica said. "And if that's the case, and the city's going to be in a level of fiscal distress, we want to know early."

The seven-member control board is chaired by the governor and consists of the mayor, the city and state comptrollers, and three "private members" appointed by the governor. One seat was vacant, and the remaining private members were appointed by former Govs. Eliot Spitzer and George Pataki. Mr. Cuomo's appointments replace the private members and fill an empty seat. These members don't have fixed terms and serve at the pleasure of the governor.

The mayor's relationship with Mr. Cuomo is contentious, as both leaders jockeyed over decisions at the start of the pandemic. But a spokesman for Mr. de Blasio, Bill Neidhardt, said the city was "not concerned" with the new appointments.

The panel was created in 1975 after years of borrowing to cover operating deficits brought New York City to the brink of bankruptcy. The board had the power to approve, reject or change the city's budget as well as labor contracts.

That period of control lasted until 1986, when the board's role shifted into one of review. Now, the board can recommend a period of control if the city's budget is more than $100 million out of balance, if it doesn't make a debt service payment on time, or if it loses access to credit markets. A control period must be approved by the state Legislature.

Mr. Cuomo named to the board Rossana Rosado, his secretary of state; former New York City Comptroller Bill Thompson, who now chairs the board of the City University of New York; and Steven M. Cohen, who served as Mr. Cuomo's top aide after he was first elected governor in 2010.

John Levin, chief executive of asset-management firm Levin Capital Strategies LP, said he was surprised that Mr. Cuomo had decided to replace him on the board. Mr. Levin, who was appointed by Mr. Pataki in 1997, said the new appointees were qualified but believed independent private members could raise important policy and accounting issues.

"I think that having people on the board who are not responsive to political constituencies has an important role," he said.

Lawrence Golub, CEO of lending firm Golub Capital, also was replaced on the board. He declined to comment through a spokeswoman.

New York City has benefited from a strong economy over the last two decades, and the board, which reviews its annual budget, has signed off each year without a problem.

By the final quarter of 2019, the city's unemployment rate was at a record low of 4%, wages and earnings were up, and economic growth surpassed that of the rest of the country, according to a report released in March by the comptroller's office.

That was upended weeks later as the city shut down to slow the spread of the virus, which ultimately killed more than 23,600 residents. The unemployment rate was nearly 20% in June.

Without financial help from the federal government, or borrowing authority, layoff notices to thousands of workers across every city agency will go out by Aug. 31, according to a mayoral spokeswoman.

"Our fiscal situation is bad now, and it probably gets worse next year," Mr. de Blasio said Thursday at his daily press briefing. "I have told all New Yorkers that we're getting to a point where we're starting to run out of options."

The forecast was far bleaker than the one he gave at the control board's Aug. 6 meeting, where he said the city's fiscal condition wasn't as bad as prior years.

"I don't want us to overstate the parallel," the Democratic mayor said.

Richard Ravitch, who as an aide to former Gov. Hugh Carey helped arrange the city's bailout in the 1970s, said the control board could be a useful tool. He recalled an instance when former Mayor Ed Koch railed against the control board's cuts on television, and then privately told him, "thank God."

"We need an institution that is, to some degree, removed from politics that elected officials can blame for cutting expenses," Mr. Ravitch said. "That's the nature of politics in a democracy."

Write to Jimmy Vielkind at [e-mail] and Katie Honan at [e-mail]

Corrections & Amplifications

This article was corrected on August 24, 2020 because the original misstated Lawrence Golub's title. He is the CEO of Golub Capital, not the president.