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lapping city, county, and district government. The basis of assessment varies drastically in different municipalities. Notice should also have been taken of the fact that New York City's tax collection record is good. As of April 30, 1967, only 1.2 percent of the taxes levied for the last 5 completed fiscal years had not been collected.

"The city of New York, relative to its governmental responsibilities, has the tightest tax limit of any community in the State. This is one of the basic reasons for recurring operating budget problems, but it does not affect debt service, which is outside the limit."

The statement of the bond rating service:

"Excessive and inequitable taxation of business is an important factor in the migration of many city businesses to the suburbs."

Commissioner Goodman's reply:

"This statement overlooks Mayor Lindsay's major tax reform which substituted a business net income tax for the long-criticized gross receipts tax in July, 1966. This reform was widely hailed by business leaders. In its reference to the migration of many city businesses to the suburbs, the rating service failed to take into account that between 1947 and 1965, 662 million square feet (182 buildings) of office space were built in New York City. This is the equivalent of 31 Empire State Buildings and exceeded the amount of the rentable space built in the rest of the United States during the same period. It failed to take into account the projection reported by the First National City Bank that over 80 million square feet will have been built between 1947 and 1970, roughly equalling all of the city's pre-War rental office space. Nowhere does the rating service report the consensus of leading real estate firms that demand for space in New York City is greater now than ever before. Prime office space is at a premium, and according to projected building plans, it will be a long time before this need for space will be reduced. In 1967, there is a 98 percent occupancy rate, the highest in history (for office space). Forty-eight million square feet of office space are on the drawing boards for the next 5 years. 6,800,000 square feet were rented in 1966. As the First National City Bank pointed out, growth is not the only yardstick for measuring performance of an economy. It is also important to examine degree of stability in face of cyclical swings affecting the nation as a whole. The New York region shows relative stability. In years when the Nation's employment went down-1954, 1958, and 1961-employment in the New York region was less adversely affected than in the rest of the Nation. Durable goods manufacturing which generally fluctuate cyclically, accounts for a significantly smaller share in the region than the nation as a whole. Many of New York City's activities, such as apparel manufacturing, are consumer oriented and less sensitive to cycles than business investment or defense spending. Employment in New York City's central administrative offices is more cyclically stable than jobs on the assembly line. In 1963, there were approximately 213,000 commercial firms in New York City and in 1966, approximately 225,000 firms, an increase of 12,000.

"In short, the rating service overlooks that New York City is the headquarters for the Nation's business, the major focal point for national and international trade, the Nation's primary money and capital market, the center of its mass communications and advertising, the fashion center of the United States, and the leading city in arts, entertainment, and culture.

"Of the top 100 industrial companies in the United States, 89 have headquarters or branches in New York City."

The statement of the bond rating service:

"Compounding the cost-revenue squeeze is the city's proclivity toward providing both free and subsidized services. Subsidies dissipate the city's limited revenues. The principle that users pay for the benefits that they receive is a widely accepted one. Yet, each year the city allocates millions of dollars to education systems. Maintenance of obsolete plant is, in the long run, far costlier consumers, city water is unmetered, and retailed at flat rates."

Commissioner Goodman's reply:

"The subway fare has been raised over the years from 5¢ to 20¢, water frontage rates were doubled, and the mayor announced his intention to institute universal water metering as soon as it was technologically feasible to do so." The statement of the bond rating service:

66* ** the city fails to spend enough to remedy the serious deficiencies in the regular and special education programs."

Commissioner Goodman's reply:

"Ten years ago in fiscal 1956-57, the city's education budget was $457 million. In the current fiscal year, 1966-67, the city's education budget is $1,131 million.

In the executive budget for 1967-68, the mayor allocated $1,219 million for the city's public school system. This is more than 20 percent of the total budget. Overall, public school enrollment is not increasing substantially, but in the executive budget for 1967-68, there has been a sizable increase of $88 million over the current year in the proposed allocation to the Board of Education. For 1967-68 executive budget for the Board of Higher Education provided $144 million, an increase of $25 million over 1966-67.

"The rating service also fails to mention that there will be a significant change in the source of revenues devoted to public education. The State legislature has enacted into law a city-proposed measure which changes the formula under which State aid is given to local school boards, bringing New York City much closer to a per capita parity with other localities in the State. This increased aid is contingent on the development by the City of a plan for decentralizing the citywide school system. It treats New York City as five separate school districts instead of one. It has major long-range implications."

The statement of the bond rating service:

"City planning tends to be short-term. The city's record of budgeting dollars rather than fundamental planning is only too evident in the transportation and education systems. Maintenance of obsolete plant is, in the long run, far costlier than constructing new facilities, notwithstanding ever-increasing construction costs."

Commissioner Goodman's reply:

"This statement ignores the proposed reorganization program of the Lindsay administration through which long-range planning will be effected by 10 administrations instead of the presently existing 49 widely dispersed city Departments. Also, the Bureau of the Budget is engaged in an improvement of the budget process, moving toward the planning-programming-budgeting system now being introduced in the Federal Government. In addition, the City Planning Commission is committed to completing the city's comprehensive plan in fiscal 1967-68. The mayor has assigned this project the highest priority. "The comment on obsolete plant overlooks the fact that replacement of such plant is the principal reason the city undertakes $500 million per year of longterm borrowing. Such borrowing is for capital expenditures and will go to modernize the city's plant. Also ignored is the fact that more than 60 percent of New York's bonds have been issued to construct partly or fully selfsustaining improvements such as parking facilities, water and sewer plants, and waterfront enterprises."

The statement of the bond rating service:

"In recent years, not only have capital outlays from current financing been virtually nonexistent, but a substantial volume of current expenses has been wrongfully defined as capital outlays. Moreover, bonding financed the 1965 expense budget deficit."

Commissioner Goodman's reply:

"One of the cardinal fiscal tenets of the Lindsay administration has been the dismissal of borrow-now, pay-later philosophy. Apparently the rating service blames the present administration for the $256 million borrow-now, pay-later 5-year serial indebtedness incurred by its predecessor to meet current operating expenses. It overlooks the fact that to avoid the recurrence of such an unsound approach, the current administration instituted a job freeze which has saved $53 million to date and put an end to a 20-year practice of financing budget overruns with emergency budget notes. Such notes were reduced from an all-time high of $68.8 million on June 30, 1965 to $21 million on June 30, 1966."

The statement of the bond rating service:

"In recent years partially due to the city's fairly rapid bond retirement policy, annual debt servce charges have been inordinately high."

Commissioner Goodman's reply:

"There has been a long-term trend downward in the percentage which debt service bears to the total budget. The share of the budget devoted to debt service is down from 13.6 percent in 1966-67 to 12.5 percent in 1967-68. Debt service in 1956-57 was 16.7 percent. With regard to the city's rapid bond retirement policy, this is an asset rather than a liability in evaluating the city's credit. New York's present debt structure is heavily weighted in the short end to the point that more than 50 percent is scheduled for repayment by 1975. It is true that a slight lengthening of the average maturity of debt to a mere 15 years average life would result in substantial savings in the current expense budget, but this would

result in higher total future interest costs. More than 8 percent of New York's funded debt outstanding as of July 1, 1965 was paid out by June 30, 1966. This suggests an unusual ability to meet debt requirements even if economic conditions in the future warrant expenditure cutbacks."

The statement of the bond rating service:

"The fiscal legacy inherited by the Nation's older population centersgovernmental expenses that are rising far faster than income--is accentuated in New York City, which recently has dramatized its plight by resorting to the avails of eight of the monthly State-run lotteries."

Commissioner Goodman's reply:

"This places undue emphasis on the proceeds of State lotteries. Men may differ philosophically on the appropriateness of utilizing the proceeds of lotteries for education, but in the case of New York, the total contribution in the prospective 1967-68 budget is an estimated $55 million, just a fraction over 1 percent of the total budget of $5,185.5 million. Why this utilization of the lottery is thought to be such a dramatic indication of New York's plight is difficult to understand in the light of the excellent overall growth and increasingly broad base of the city's revenue system. The table below shows the changes that have occurred in 1965-66, 1966-67 (estimated) and 1967-68 (estimated). Each component of the city's revenue system has grown except 'other funds,' which in 1965-66 were made up chiefly of borrowed funds.

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"The rating service overlooks not only the expanding broader-based revenue system but the most fundamental revenue point of all, the relationship of the city's total general revenues to its debt service. Although such a relationship is normally associated with a limited group of revenue bonds, we think it appropriate in view of the unusual protection afforded to New York City bondholders under the New York State constitution to review the history of New York City debt service coverage from 1929 to the present. At the depth of the depression in 1932, when debt service totalled $201 million, city revenues aggregated $611 million. The coverage ratio was then 3.04. This was the low point for the entire 39-year period. The long-term trend in this ratio has been generally upward. In 1966-67, the coverage ratio was 4.70, and we envisage a ratio of approximately 4.89 in fiscal 1967-68."

The statement of the bond rating service:

"Far more disturbing from the aspect of credit implications, and more difficult to resolve, is the continuing exodus of the educated middle class. Implicit in this trend is the potential loss of an electorate with a desire for efficient, conservative, sophisticated government."

Commissioner Goodman's reply:

"This statement is interested in the light of the election results of November, 1965 in which the voters brought into office the first Republican-Liberal-Fusion government since the highly respected LaGuardia administration of the 1930's. The rating service fails to mention that this administratino has achieved economies totaling $100 million per year; avoided the issuance of emergency budget notes for two years in a row: advanced the first plans in several decades for a basic streamlining of the city government; undertaken a strong program of economic development with emphasis on building business and employment in the city; established a Manpower and Career Development Agency to develop job training programs and to take people off welfare relief in New York

City, instituted a personal income tax on residents and an earnings tax on nonresidents (commuters); substituted a new business net income tax for an outworn gross receipts tax; doubled water charges; and increased the transit fare."

The statement of the bond rating service:

"These trends were a long time in the making and will likely be a long time in the resolution."

Commissioner Goodman's reply:

"Although it is true that certain of the city's fiscal trends were a long time in the making, many will not be a long time in the resolution. The positive actions already enumerated speak louder than words."


(From the office of the Mayor, John V. Lindsay, City Hall, New York, N.Y.)

My fiscal advisors have suggested that New York City provide owners and distributors of its bonds with a newsletter to be issued from time to time as important developments occur. Since assuming office on January 1, 1966, this Administration has grappled with a wide variety of fiscal problems. A description of these problems and the policies devised to meet them will be the subject of this and ensuing newsletters.

I enclose my 1967-68 Budget Message. I urge you to read the first 15 pages for important general background and commend the balance of the pamphlet if you have an interest in the specifics of the city's program and in the statistics presented in the appendix.

In providing the reader with the facts necessary to judge our actions we hope that we will induce and be deserving of enhanced investor confidence in New York City bonds.



Unlimited Real Estate Taxing Power For Debt Service

Under the New York State Constitution, taxes on real estate to pay interest and principal installments on the city's debt may be levied without limit. Debt service has, therefore, consistently remained outside recurring expense budget problems because the city has the power to levy, and has levied, adequate taxes for its payment.

Legal Protection

The provision of the State Constitution in Article VIII, Section 2, providing that the chief fiscal officer of any city or other political subdivision in the State shall apply the first revenues received to debt service, is a strong protective bulwark for New York City bondholders. This enduring provision requires that New York City's funded debt shall be backed by the full faith and credit of the municipality. Thus, payment of the city's debt service is the first lien on its revenues. These revenues include the $1.66 billion real estate tax and the $1.69 billion general fund (including sales, business, personal income, utility, water, commercial rent, and a wide range of other taxes and charges). The city must pay its debt service before it meets payroll or any other expense. The taxpayer's obligation to pay real estate taxes to the city takes precedence over the obligation to pay debt service on the many billions of dollars of private mortgages held by banks, insurance companies, and other institutional investors.

Debt Service Coverage

It is perhaps unusual to speak of debt service in relation to a city's gross revenues, a measure which is traditionally associated with a limited group of revenue bonds. Nevertheless we think it appropriate, in view of the unusual protection afforded to New York City bondholders under the New York State Constitution, to present a chart below indicating the history of New York City's debt service coverage from 1929 to the present. At the depths of the depression in 1932, when debt service totalled $201 million, city revenues aggregated $611 million. The coverage ratio was then 3.04. This was the low point for the entire 39-year period. The long-term trend in this ratio has been generally upward. In 1966-67, the coverage ratio was 4.70, and we envisage a ratio of approximately 4.89 in fiscal 1967-68.

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* "Revenues available for debt service" include real estate taxes, general fund revenues, and revenues other than the preceding specifically earmarked for debt service such as certain dock, market, and parking meter revenues. +Annual debt service" includes temporary and long term debt.

New York City went on a July 1-June 30 fiscal year on July 1, 1939. Figures for the half-year January 1-June 30, 1939 have been shown at the full annual rate.

The Revenue System

Overall, the city's revenue system is growing and is becoming broader-based. The table below shows the changes that have occurred in 1965–66, 1966-67 (estimated) and 1967-68 (estimated). Each component of the city's revenue system has grown except "other funds," which in 1965–66 were made up chiefly of borrowed funds.

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Because the city real estate tax is its largest single source of revenue and the major single provider of coverage for debt service, the growth in taxable real estate valuations assumes special significance. In the fiscal year 1956-57 the full value of taxable real estate was $24.1 billion compared to a value of $44.0 billion in 1966-67. The amount of commercial office space added to Manhattan alone since World War II is greater than that of the rest of the nation put together.

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