#909 1975 · United Federation of Teachers (Albert Shanker) · Municipal finance
New York ran out of cash and found its buyer in the pension fund of the union it fought
the problem
New York City was hours from default with no bank willing to buy its bonds, and no way to force a lender
background
By the fall of 1975 New York City's finances had collapsed to the point that commercial banks, burned by prior municipal debt, refused to buy any more city bonds, and a newly created Municipal Assistance Corporation had already sold what the market would absorb of untested MAC bonds meant to refinance the city's short-term debt. With the city's cash literally running out and federal aid still uncertain, the state's rescue plan needed one more large buyer willing to take on securities no ordinary investor wanted, or the city would miss payroll and default within days.
The city had spent the crisis locked in an adversarial relationship with its public-sector unions over layoffs, wage freezes and program cuts, making organized labor the least likely source of a bailout in the conventional telling — a union's job is to fight management, not bankroll it. Albert Shanker's United Federation of Teachers had itself voted against buying the bonds only days earlier, citing exactly the risk any prudent investor would flag.
what everyone would do
The standard playbook for a city facing default was to keep courting commercial banks and federal aid while cutting services and jobs to shrink the deficit, a path that had already failed to produce a buyer for the last tranche of bonds the rescue plan needed.
what they saw
Negotiators saw the UFT pension fund wasn't just an asset holder — its solvency and every member's job were downstream of the city surviving, unlike any bank that could just walk away.
the move
State and city leaders convinced Shanker that a city default would devastate the same members and schools the union existed to protect — the Teachers' Retirement System's own pension solvency and every teacher's job were downstream of the city surviving. On the day the city's cash ran out, Shanker reversed the union's position and committed the Teachers' Retirement System trustees to buy $150 million of the untested Municipal Assistance Corporation bonds, closing the financing gap.
why it works
A commercial bank that refused the bonds only forfeited a marginal investment opportunity, but the Teachers' Retirement System's beneficiaries would lose their jobs, their pensions' funding base, and their students' schools if the city defaulted regardless of whether the fund bought the bonds — so for the union, refusing to buy didn't avoid the risk, it just left the risk unhedged. That asymmetry meant the union had a rational reason banks didn't share to accept bond risk a normal investor would decline, once the alternative of default was made concrete enough to see.
the payoff
Shanker committed the fund to $150 million in untested bonds as cash ran out; the city avoided default and the bonds turned a solid profit.
where it breaks
The move requires the stakeholder being asked to already have capital under its control — an idle pension fund, not one it must first raise — and a genuinely tighter link between the borrower's survival and that stakeholder's own future than any outside investor has. If the union's or fund's fiduciaries can plausibly protect their beneficiaries just as well through default (severance, transferred pensions, alternative employment), the leverage disappears, and forcing the decision under acute time pressure, as happened here, risks members later feeling their retirement security was used as a hostage.
what came after
Shanker's decision is credited by his own union and by historians of the crisis as the deciding factor that kept New York City solvent through the fall of 1975, and it stands as a rare case of a labor union becoming its adversary's largest emergency creditor because its members' own long-term interest ran through the city's survival.
references
- [1]Back from the Brink: How the UFT Saved New York from BankruptcyUnited Federation of Teachers, 2015uft.org
- [2]Albert ShankerUnited Federation of Teachers, 2015uft.org