In many respects, New York City looks economically and fiscally as strong as it’s ever been.

But it’s still worth recalling that, 40 years ago this week, things were very different.

By the spring of 1975, after a decade of mounting deficit spending financed by short-term borrowing, savvy investors and government insiders were aware that serious trouble was brewing for city finances.

The bad news burst into broad public consciousness on April 2, when Standard & Poor’s announced that it had suspended the city’s investment-grade “A” bond rating.

For a municipal government that needed to borrow billions of dollars every spring just to stay a step ahead of its bills, the announcement was the equivalent of a five-alarm fire.

Mayor Abe Beame immediately denounced the rating agency’s action as “wrong.”

In fact, S&P was well behind the curve — trailing the sentiments of its own customers, who were no longer willing to lend the city a dime.

Within weeks, New York was all but flat broke.

The city avoided a formal bankruptcy filing only through the leadership of Gov. Hugh Carey, who used the credible threat of bankruptcy to wring the aid he needed out of a reluctant Legislature in Albany, while also wringing concessions out of unions and bondholders.

Carey created the state Municipal Assistance Corporation to refinance $6 billion in city debt. He placed New York’s finances in virtual receivership, shifting oversight of the city budget from the mayor to a state Financial Control Board chaired by the governor himself.

Along the way, he worked out a deal for federal loan guarantees (that famous “Ford to City: Drop Dead” headline in the Daily News was both unfair and ultimately ­inaccurate, Carey would later point out).

In subsequent years, the story of the city’s near-death experience and subsequent recovery has given rise to a few myths — none more stubborn than the notion that municipal unions willingly sacrificed to help the city through the fiscal crisis.

In reality, there were sacrifices, but they weren’t entirely willing — or enduring.

Some 60,000 city jobs were eliminated, but this was accomplished mostly through attrition or a transfer to state payrolls rather than layoffs.

Workers took what amounted to a small pay cut as a result of a bump in their pension contributions, but the pensions themselves remained untouched.

And while cost-of-living pay raises were deferred, base wages ultimately rebounded in inflation-adjusted dollars.

And by the mid-1980s, the city’s employee headcount was back to near record levels.

Taxpayers weren’t so lucky: City sales- and income-tax rate hikes never returned to their pre-1976 levels. The unions remained a powerful political force.

The New York of the 1970s was losing jobs and people by the hundreds of thousands. Close to a million city residents were on welfare.

The crime rate was sky high. And, for a time, the severe cuts needed to balance the city’s budget seemed to make it all worse.

Forty years later, the city’s population, employment base and credit rating are all at historic highs. Crime and welfare dependency are both well below the levels of 1975.

But it would be a mistake to think that the fiscal crisis is irrelevant. While the budgeting and accounting reforms imposed on the city during the crisis were tremendous improvements, they do not guarantee that New York will never go broke again — only that it will not go broke in the same way.

For the most part, New York City did not emerge from the fiscal crisis with a leaner, more efficient, more competitive municipal government.

The impact of the crisis was mainly temporary — not transformational. Given its history, New York needs to be especially careful to avoid backsliding into risky practices on the assumption that it will never face tough times again.

For that reason, Mayor de Blasio’s willingness to stretch retroactive teacher pay hikes into future budgets is a troubling step in the wrong direction.

So is his decision to end the “program to eliminate the gap,” or PEG, a healthy exercise in agency belt-tightening that dates back to the Koch era.

Meanwhile, the debts of the crisis linger. In 2003, Mayor Michael Bloomberg persuaded the Legislature to refinance the remaining $2.6 billion in MAC debt obligations by creating yet another “public benefit corporation” to issue a new generation of bonds.

Those bonds would be backed by state sales-tax revenue. (The plan survived both a veto and a court challenge by Gov. George Pataki.)

So, the next time you make a taxable purchase in New York, you might think of it as doing your own little bit to balance the New York City budget — Abe Beame’s budget, that is.

About the Author

E.J. McMahon

Edmund J. McMahon is Empire Center's founder and a senior fellow.

Read more by E.J. McMahon

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