Wikipedia gives a relatively staid account here, contemporary sources, which I don't have at my fingertips, are funnier about it.

Long story short: In order to reduce the police corruption under the incredibly corrupt mayor of New York City, Fernando Wood, the New York State government abolished the existing police department, and established a new one, not under his direct control.

Fernando decided that he wasn't going to take that lying down; I suppose there was something in the air, that night. He didn't disband his police force, or turn their property over to the new police force. When there was a disagreement between him and the state authorities over who would fill the position of City Street Commissioner, there were running battles between the two police forces on the steps, and in the halls of New York's City Hall.

The fighting between the two police forces continued for months, often involving releasing the prisoners the other cops captured, until the mayor finally backed down and disbanded his police force.