Netzer Claims N.Y. Default Would Hit Cities, States Hard

Cities and states across the nation will suffer a reduced capacity to raise money for their short-term operating expenses if the federal government refuses to provide a loan guarantee to New York City, a Municipal Assistance Corporation official said here yesterday.

Dick Netzer, a member of board of directors of MAC, and dean of New York University's graduate school of public administration, told a standing-room only audience in Emerson Hall that failure to provide such a loan guarantee "would convert state and municipal bonds into assets with a real degree of risk," causing many "risk-averters" to leave the bond market, depressing bond sales.

For those bonds that are sold, he said, state and local governments would have to pay higher interest rates to compensate for the greater risk to investors, thus reducing their revenue bases.

On the other hand, Netzer said the direct cost to the U.S. Treasury of providing a loan guarantee would be fairly small. "Mostly, federal intervention would serve to boost confidence in the city's municipal bonds," he explained. "After all, it is one place where repayment of creditors can be assured."

Rejected Notion

Netzer rejected the notion that the banking systems would collapse if New York City defaults. "Arthur Burns will take care of the commercial banks," he said.

But federal aid could "conceivably come too late," Netzer said. The Proxmire-Stevenson bill, which would guarantee the city's loan, was approved yesterday by the House Banking Committee and is now awaiting consideration by the full House.

Netzer said the end result of such legislation remains "very questionable" because of the many pre-conditions that are expected to be attached to the loan guarantee.

Higher Taxes, Lower Returns

"Not only will the state have to pass taxes to cover half of the city's estimated deficit--present holders of outstanding debts must agree to roll over to long-term obligations payable at lower interest rates, and unions must agree to reforms leading to lower pension costs," Netzer said.

Netzer said he believes, however, that there is room for substantial cuts in the city's budget and that the impetus for making difficult budget choices may come from "tough" restrictions accompanying the loan guarantee.