Expert offers some advice to California

By Geraldine Baum

May 23, 2009 12 AM PT

NEW YORK — In 1975, New York City was teetering on the edge of bankruptcy and threatening to bring down the entire state. No state had gone bankrupt, but President Ford wanted to make New York an example to the rest of the country. His spokesman compared the city to “a wayward daughter hooked on heroin. You don’t give her $100 a day to support her habit.”

That spring, Felix Rohatyn, an investment banker, was called upon to advise Gov. Hugh Carey on New York’s finances.

Over six months, Rohatyn helped engineer a plan that enabled the city to balance its budget and regain access to the credit markets. He later served as ambassador to France under President Clinton.

Rohatyn, 80, gave an interview this week in his 27th-floor Park Avenue office, and talked about whether his experience in New York has relevance to California now.

California is in deep trouble, facing a whopping budget deficit and debt load as the economy is sinking. Did California fail to learn the lessons of New York?

I don’t know if California is on the brink of bankruptcy. But if I believe what I read . . . it’s certainly the last half of the ninth inning. I certainly don’t recall a feeling of hopelessness here as I seem to sense there is about California’s present situation. Maybe that’s because we were able to put around the table a governor, Hugh Carey, who turned out to be spectacular. . . . We also had the good luck to have a terrific leader of the Senate in Albany. He was a Republican but he signed on with Carey, who was a Democrat, to work against bankruptcy. . . .

You and Carey famously pulled stakeholders together and forced them to make sacrifices -- unions, banks, legislators, debt holders, community groups. The genius of that seemed to be the politics of getting everyone to make reciprocal concessions. Is Gov. Schwarzenegger up to that?

It’s hard to say if California’s political power structure is as resilient as ours was here in 1975. . . . Ultimately, the reason it worked here was because of the political leadership we had.

What kind of leadership are you talking about?

That spring, we were facing bond maturities that every month meant we had to make a $1-billion payment, and every maturity carried with it the penalty of bankruptcy if it was not met. We were desperately scrambling around. . . . So we said to the unions, “Look this is what we need. . . . We can’t sell these bonds to the public so we have to come to you, to your pension funds.” We went to the banks to get them to restructure their bonds. We had to negotiate with everybody. At some point, we had tried to get a loan that didn’t come through at the last minute, and it was a traumatic thing for us. We had a press conference and said we have a 50/50 chance of bankruptcy. . . . Somebody from the press tried to get the governor to blame me: “Don’t you have egg all over your face, governor?” But Carey said, “I’d rather have egg all over my face than the city all over the floor.” That was the difference. He was willing to take the heat.

Why didn’t you raise taxes?

We thought our tax level was already so high that if we pushed it anymore it would simply push the economy down. For the average political type, there wasn’t much risk if the city went into bankruptcy.

What, if any, demands should President Obama make if he decides to bail out California?

To come up with a plan that looks realistic. Which includes sacrifices from everybody. Which maintains the economic viability of the state because you can also tax yourself out of existence. Which probably puts in a control structure that oversees budgets. You just have a big economic plan that stretches out between six and 10 years that will be acceptable to the markets and not be destructive to the economy.

Sounds idyllic, but how do you come up with such a plan?

Listen, we never said: Do this or else! We only said we had to each give up something. That we’d get some money from the state. And increase some taxes. That we’d put in a tuition at the City University, which had never been done before. And we doubled the subway fare, which had never been done. Finally, in the last analysis, we reduced the work force by 60,000. But we kept saying, “This is what we’re thinking of doing, but we won’t adjust any of the others unless everybody comes along.”

How did you get the voters to accept so much pain?

It was pain or fear. New York voters were really afraid that the city would be crushed. Everybody had a feeling we were really walking into a catastrophe. . . . In fact, I would have thought the voters would revolt when we decided to double subway fares. But then they didn’t. They just wanted us to fix this thing. I mean, there was nothing more sacred than no tuition at City University. But we said, ‘We’re going to be fair.’ So we had the highest-income students pay the highest tuition. And the least able paid nothing.

Are there people in California who are up to demanding fair solutions that everyone accepts?

Oh sure. There are always good people willing to help, willing to make sacrifices.

You are rather optimistic.

What’s the alternative? Actually, my wife considers me distressingly pessimistic. But not when it comes to this city. Or California.

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