New York City’s Fiscal Crisis of 1975 and the Film “Drop Dead City”

By Jonathan Woolley Copyright © 2025 All rights reserved by the author

View from the Empire State Building observation deck, New York City, August 1975. Courtesy of Wikipedia.

Municipal bankruptcies are, thankfully, few and far between. Allowing one to happen rarely happens overnight (although conceivably it could). Rather, it usually represents a combination of declining tax revenues, declines in other sources of municipal revenue, and insufficient reductions – or even increases – in municipal government spending over a period of several or more years. And the results can be messy.   Huge reductions in the provision of city services, the renegotiating (or outright defaulting) on pension obligations, and the sale of prized city assets (parks, publicly-owned art, buildings, or vehicles used to provide key city services, etc.) are examples of what may have to be done in order to make the municipal government less in hock to its creditors. And while municipal governments do have one advantage over private corporations or non-profit entities – they have a tax base they can draw upon – that advantage may not be as useful as they wish. Taxpayers can move out of the jurisdiction, or not have sufficient income or assets for the level of taxation necessary to remediate the problem.  Not to mention that bankruptcy and/or debt relief payments may divert funds from more necessary long-term projects, such as key infrastructure improvements or needed educational system restructurings.

But even if a municipal government manages to avoid bankruptcy, merely coming close to it is bad enough. It will still require a (often massive) reduction in municipal spending, and typically either heavy oversight of or a partial takeover of financial duties by the state government^[1]. The result is likely to be widespread groaning among many people. With spending cuts, the performance of municipal services is likely to decline – if the services do not disappear altogether – and workforce reductions may result. And of course, workforce reductions are likely to have a ripple economic effect, less spending at local businesses (which now have less revenue to be taxed) and lower residential income taxes (assuming the workers live within the municipality that employs them). Not to mention that a community with a heavy debt load (in terms of its local government) will be less attractive to those wishing to relocate from other places, who will now have to fear paying higher taxes for years to come (so property values, and thus the value of their equity, may be diminished). Tiebout’s Public Choice theory of government, which postulates that those who prize equity values and/or lower taxes will be more likely to choose to live elsewhere (“If consumer-voters are fully mobile, the appropriate local governments, whose revenue-expenditure patterns are set, are adopted by the consumer-voters”^[2]), will play out in reality, meaning that it will become even harder to raise the necessary revenue to improve the municipality’s finances, even with a state government takeover.

New York City faced such a potentially bleak picture in the 1970s. After a number of years of relatively heavy municipal spending, while a number of middle-class residents were enticed to relocate to the suburbs, things came to a head during the mayoralty of Abraham Beame in 1975. The city government, unable to cover its expenses through taxes and user fees alone, had resorted to issuing bonds to cover the difference. Yet, at the same time, the city government, thanks to bad – or at least sloppy – accounting practices, had been understating its deficit. When a new comptroller’s audit and account reconciliation identified this – and showed the city’s actual liabilities were far higher than anyone had ever imagined – banks, which had hitherto been eager handlers of city debt instruments, became antsy and stopped loaning (the city wanted to back the loans with anticipated revenues that were undefined) without stern conditions that were politically unacceptable.

With a huge deficit, a lack of eager lenders, and payments on preexisting bonds coming due, the city (led by the Mayor and the Comptroller) had no choice but to scrounge around for every dollar they could. Large numbers of city employees were laid off – including policemen and firefighters (surprisingly, considering the city was experiencing a rise in both violent confrontations and arson at the time) – capital projects were suspended, unions were asked to make concessions, students were asked to pay for their education (higher education in city-run institutions had previously been fully subsidized), and appeals were made to state and federal politicians.

All this caused plenty of public anger. Most of it was directed at the banks – usually viewed as the larger New York City commercial banks, although it turned out, banks from all around the country were exposed to a potential city default – but some was also directed at the politicians and senior officials of various government entities (usually, the city’s government). Work slowdowns, strikes, and protests occurred, usually in protest of the job reductions. The unions were hounded and cajoled into investing their pension funds into city bonds – extremely reluctantly, in the case of the United Federation of Teachers. (This was the moment when the city came closest to default.) The state and, after much internal debate (“Ford to City: Drop Dead” was how the Daily News described one speech), the federal governments ultimately both stepped in to help out the city, albeit with terms attached: the city’s politicians had to cede fiscal control over just about everything to monitors appointed by higher levels of government. The monitoring agencies became the subject of some public anger, but in the end, the city never defaulted on its loans.

It’s questionable how much awareness of this exists among people under fifty – or even fifty-five – much less how many actually have some memory of this time. And of those that are aware, it is possible a significant portion are likely either to be connected with the city’s municipal government or in some other role (such as in the state government’s Department of Financial Services or as a political news reporter) that necessarily requires some knowledge of New York City’s finances. The latest attempt to remind the public of this crisis is “Drop Dead City”. Originally titled “Drop Dead City: New York on the Brink in 1975”, the film, released last November, was produced and directed by Peter Yost and Michael Rohatyn (the son of a chair of one of the boards that was set up to oversee the city’s finances) using the production company of Pangloss Films. It’s a good film, and well worth watching for those who want to remember the pressures that affected the city government during the financial crisis. As part of that, it also provides a good reminder of the negative aspects of living in New York City – especially the Bronx and Brooklyn – in the mid-’70s.

 The two biggest questions in any retrospective of any financial crisis are how it happened and who was responsible for it. Mayor Beame became the fall guy. This isn’t too surprising: not only was he an accountant by trade, but as mayor, he was the guy who oversaw - and was accountable to the voters for any failings of - the city administration. Mayor Beame does deserve his share of blame – he could have listened to the city comptroller, H. J. Goldin, sooner and have alerted Albany sooner – but he never had a magic wand that could have averted a serious fiscal problem in ‘75. New York in the sixties and early seventies had been a politically liberal town and had spent commensurately with that orientation, under both Democratic and Republican mayors. This wasn’t necessarily a bad thing, as the resulting policies and programs gave thousands of people greatly improved lives. But it did require sizable tax and user fee revenues to offset the heavy spending, and as both manufacturing and the middle-class residential population declined, the necessary revenues became harder to obtain. Ironically, some of these middle-class residents had done so well from city programs such as free college tuition that they could afford to move to the less costly, more bucolic suburbs and thus stop paying city taxes and contributing to the city’s economy. (The film itself concentrates solely on the year 1975 and doesn’t tell much about either the causes or the lead-up before Mayor Beame took office – Governor Rockefeller is blamed, but previous mayors are not mentioned – Lindsay is only shown briefly in one scene and is not identified).   

But while Beame may not have had a magic wand to prevent the crisis as mayor, he really became the fall guy for a different reason: as Comptroller, it was a key part of his job to keep an eye on both the books and the accounting methods the city used. Beame had served two terms as the city’s comptroller prior to being elected mayor (and had served as Budget Director before that), yet had apparently never done a thorough audit of the city’s finances. Add in that he was an accountant by trade, and this implied a potentially huge amount of negligence on his part. And that was Beame’s real problem: he should have entered his first two years in office as mayor (‘74 and '75) knowing city debt was ballooning rapidly, but apparently didn’t[3].  

And anyway, it wasn’t all the fault of anyone in the city government. As the film points out, “For every stupid borrower, there’s a stupid lender”. Banks were also at fault – they continued to lend money to the city (buying bonds) for an extended period without conducting thorough due diligence on the city’s creditworthiness. Essentially, they were gamboling not only that the city’s fiscal house was in order but also that a combination of pride and anticipated revenues would keep the city from ever defaulting. Such a policy is even more surprising since, as Gramlich notes, not only do bondholders generally dislike governments using loans to cover current account deficits, but New York City had done so for almost fifteen years[4]. Nonetheless, the gamble worked for quite a while – until well into 1975. And, as the film notes, banks had a strong profit-making motive for wanting to keep selling city bonds. But making such an assumption without doing sufficient due diligence, however understandable, was still a poor strategic decision on the part of the lenders.

The actual crisis played out over a few months. The first solution, which the film gives good coverage to, was to cut spending by firing city employees and to ask state officials in Albany for a bailout. The results from the layoffs were predictable: strikes and protest rallies that just helped reinforce the city’s image as ungovernable. But escalating the issue to Albany proved to be more important – not only did Governor Carey become aware of the dire predicament, belatedly, but Albany also set up rescue mechanisms.

But even having the state set up the Municipal Assistance Corporation (and subsequently the Emergency Financial Control Board) wasn’t enough. The city still came within a few hours – well, really, a few minutes – of default. However, while cajoling the then-powerful public sector unions into aligning with the city government and, ultimately, having the bonds issued by the overseeing agencies backed by sales tax revenues was an invaluable help, federal assistance was ultimately required. This is why President Ford’s initial trepidation was so important – it took much of the Fall of ‘75 to convince him to support a federal bailout.

The film portrays Beame as not being responsible for what happened, and that’s true as mayor since he had a budget office that was initially giving him rosier-than-true information. But it can’t hide that Beame must have been under intense internal pressure during this time. He knew that, as both a former comptroller and a current mayor, he was the perfect person for everyone to blame (his hand was apparently shaking when he signed the bankruptcy petition that, in the end, was never submitted). One can sympathize with him from a political point of view: a large administrative organization that had grown used to having everybody give it money wasn’t likely to change its ways on a dime, and some of its spending was mandated by higher levels of government anyway. Not to mention that Beame, unlike many others involved, such as Felix Rohatyn, knew he would one day have to answer to the voters. But the film could have given Beame far more grief for not having done more as comptroller to prevent the situation from occurring. It also places considerable blame on previous state government officials, such as Rockefeller, without holding previous city mayors, like Lindsay, accountable. Perhaps this was because the filmmakers only concentrated on the actual events of the year 1975, rather than the lead-up to it.

Similarly, Albert Shanker, who ran the powerful schoolteachers’ union, is portrayed as agreeing to invest the teachers’ pension funds in city bonds because he didn’t want to be the guy who got blamed for the default (the bankruptcy Beame was so nervous about) that would have otherwise happened. No doubt that had a lot to do with his (and the union’s) decision. But it’s also true that, if the city had defaulted, the retired teachers – his union’s members – might have had to have accepted pennies on the dollar of their planned pension payments. A bankruptcy fiscal overseer – or possibly a judge – might have lowered the amount to be paid out due to lack of funds (of course, banks and individual bondholders might also have had to accept pennies on the dollar for their bond payments under such a scenario). The film could have mentioned this possible reason for Shanker’s decision, which no doubt came up in the union’s discussions, as well. 

Overall, though, this is a really good film about the city’s financial crisis of 1975. It gives a great feel for how bad the city was in 1975: the sense of ungovernability the city had been developing before the crisis started, which was only exacerbated by the huge financial cutbacks public services experienced during the crisis. (And that feeling continued for many years thereafter). More importantly, it also gives a great feel for the sense of crisis that city officials had throughout the year. They were in the unenviable position of being at the heart of global capitalism, surrounded by numerous corporations generating massive profits and just blocks away from Wall Street’s capital markets, with no means to raise funds or settle debts except by appealing to state and federal officials. And all the while, every time these city officials seemed to proverbially turn around, another set of bond payments came due. No wonder 1975 seemed to be a year that was seared onto the memory of every city official who was interviewed for the movie. 

Bonds, of course, are loans given under a nicer name. And maybe that’s why the city government allowed itself to get into such a messy situation: perhaps not using the word “loan” meant the debts somehow seemed less onerous, their repayment less imperative. The moral of this movie is that not doing so can have dire consequences, consequences that are difficult to rectify. The moral of the city’s fiscal crisis is that prudent public financing is the best – and safest – course of action when dealing with both handling taxpayers’ money and providing public services to taxpayers. And the state government learned another lesson: when, years later, Troy experienced financial problems, the importance of a Municipal Assistance Corporation was remembered and created to help straighten things out there, too.

About the author:  Jonathan Woolley is an independent analyst and researcher. He did his undergraduate studies at Manhattanville College and his graduate studies at Rutgers University. He has previously published reviews of exhibits on the history of New York City's zoning laws and the history of the Federal Reserve.

Sources:

Drop Dead City. Accessed May 28, 2025. https://www.dropdeadcitythemovie.com/.

“Drop Dead City”. IMDb. Accessed May 28, 2025. https://www.imdb.com/title/tt34279942/.

Dunstan, Roger. “Overview of New York City’s Fiscal Crisis”. California Research Bureau, California State Library (1995). https://web.archive.org/web/20110125040733/http://www.library.ca.gov/crb/95/notes/V3N1.PDF. Multiple downloads.

Gillette, Clayton P. “Can Pubic Debt Enhance Democracy?” Wm. & Mary L. Rev. 50, no. 3 (2008): 937-88.

Gramlich, Edward M. “The New York City Fiscal Crisis: What Happened and What is to be Done?” American Economic Review 66, no. 2 (May 1976): 415-29.

Helfand, Zach. “Survivors.” New Yorker, April 28, 2025. 8-9.

Hildreth, W. Bartley, and Gerald J. Miller. “Debt and the Local Economy: Problems in Benchmarking Local Government Debt Affordability.” Public Budgeting and Finance 22, no. 4 (2002): 99-113.

Honan, Katie. “How the New York City Budget Gets Made – And What Happens if It’s Late.” The City, June 23, 2023. https://www.thecity.nyc/2023/06/23/how-budget-gets-made-what-happens-if-late/.

Louis, Errol.  “Peter Yost and Michael Rohatyn: The big lessons of New York’s fiscal crisis”. Produced by New York One Spectrum News. You Decide with Errol Louis. April 24, 2025. Podcast, 27:09. https://ny1.com/nyc/all-boroughs/you-decide-with-errol-louis/2025/04/24/peter-yost-and-michael-rohatyn-the-big-lessons-of-new-yorks-fiscal-crisis.

Miller, Gerald J. “Debt Management Networks.” Public Administration Review 53, no. 1 (1993): 50-58.

Phillips-Fein, Kim. “The Legacy of the 1970s Fiscal Crisis.” The Nation, April 16, 2013. https://www.thenation.com/article/archive/legacy-1970s-fiscal-crisis/.

Robbins, Tom. “Hugh Carey, Former Gov, Knew What a Real Crisis Looked Like.” Review of The Man Who Saved New York: Hugh Carey and the Great Fiscal Crisis of 1975, by Seymour Lachman and Rob Polner. Village Voice, August 19, 2010. https://www.villagevoice.com/hugh-carey-former-gov-knew-what-a-real-crisis-looked-like/.

Rohatyn, Michael and Peter Yost, dir. Drop Dead City. 2024; New York: Pangloss Films. Multiple viewings.

Shalala, Donna E. and Carol Bellamy. "A State Saves a City: The New York Case." Duke Law Journal 1976 (1977): 1119-32. Multiple downloads. https://scholarship.law.duke.edu/cgi/viewcontent.cgi?article=2598&context=dlj.

Tiebout, Charles M. “A Pure Theory of Local Expenditures”. Journal of Political Economy 64, no. 5 (1956): 416-24.

 Bibliography:

^[1]    In some states, a county or regional level of government could also take on this task, but in New York State, it would most likely fall to the state government for constitutional reasons. Although the authorities in Albany could, theoretically, decide to delegate the task to a county or regional government, I view this outcome as unlikely.

^[2]    Charles M. Tiebout. “A Pure Theory of Local Expenditures,” Journal of Political Economy 64, no.5 (1956): 424.

^[3]    To be fair, as Comptroller Beame had had a Debt Advisory Board that hadn’t screamed about this too much, and also had to deal with a city administration that was used to using their own figures and methods.

^[4]    Edward M Gramlich.. “The New York City Fiscal Crisis: What Happened and What is to be Done?” American Economic Review 66, no.2 (May 1976): 415.