NYC and NY State Fiscal Problems

A Reuters story on Tuesday by Joan Gralla reports that New York City fears return to 1970s. The fear then was that the City couldn't get out from under its heavy load of short-term debt. In fact the City recovered as soon as the economy came back.

The more serious problem today is NY State's fiscal stress. Back in the 1970s NY State was not in such trouble, and it was able to bail the City out in conjunction with support from Sen. Richard Lugar (R-IN) to provide federal guarantees to the pension funds to buy the City's bonds (his help in getting these guarantees has never been properly acknowledged by the City).

Gov. David Paterson is now raising many taxes and cutting aid to local governments. The problems this creates for NYC are tacked on top of the City's own loss of tax revenue and rising requirements from the NYC employee pension funds for money to make up for their losses when an 8 percent annual return has been built into their actuarial assumptions. In addition, the volume of new tax abatements to spur development has contractually reduced the City's ability to raise taxes on some new developments. Gralla says:

While many U.S. cities worry that their economies are deteriorating to the level of the 1930s Great Depression, New York City fears reliving a more recent decade that features strongly in city lore.

But the better comparison is with 1989-1992. Gov. Paterson’s array of tax increases is reminiscent of the 22 forms of NYC tax increases during these recession years. The large number of increases, and the nuisance nature of some of them, were the subject of many news stories at the time.

A major advantage that NYC has over the state today is that property tax revenues are more stable than other taxes during an economic decline because NYC's assessed values are averaged over five years. NYC's property tax revenues continue to rise for a couple of years into a recession even though market values of property are falling. Property owners may sell and move away, but the property continues to be paid by the new owner.

All the taxes can be avoided by moving completely out of NYC. Charles Tiebout introduced the concept of “foot voting” or “voting with feet”. IU would argue that it's more serious when businesses leave town than when individuals arbitrage among residential options based on differences in property taxes.

The two explanations I have heard most widely regarding the exodus of businesses in 1989-1992 are (1) high crime rates and (2) higher taxes on incomes and businesses. It would have been better, in retrospect, to have increased NYC property tax rates more during those years to avoid increasing other taxes and to beef up spending on the police earlier than the City did. NY State doesn't have a property tax to rely on, although I am advised by a former employee of the Assembly Ways and Means Committee that NY State used to have a statewide property tax and there would be no constitutional problem with reintroducing it.

PORT AUTHORITY | Chris Ward Speaks Out

Chris Ward, 53, addressed a breakfast group this morning sponsored by the New York Law School and the Murray Goodgold Foundation. Governor David Paterson appointed Ward Executive Director of the Port Authority of New York & New Jersey earlier this year.

Ward served at the Port Authority under Governor Pataki and was then tapped by Mayor Bloomberg to head up the Department of Environment Protection, where his work was generally praised.

He left the City to work for a private company and then became managing director of the General Contractors Association. His appointment by Gov. Paterson to his $286,702/year Port Authority job is considered nonpolitical.

Ward's talk is focused around four questions: (1) What will the urban machine be that drives jobs and wealth creation in the NYC area over the next 30 years? (2) How does the development of port facilities help? (3) How will a regional rail system help? (4) How will the airport system help?

His biggest eye-opener upon taking the job, he says, is that "$29 billion doesn't buy you very much." The Port Authority must therefore prioritize. He is also looking to the Federal Government to support rail freight projects as they have supported passenger travel via the highway system and Amtrak.

He argues, switching the usual project ownerships, that New Jersey's planning for the ARC tunnel will rejuvenate the NYC railyards, while bringing rail freight access to NYC will help take many trucks off New Jersey's highways.


Ward credits Congressman Jerry Nadler for asking good questions about rail freight in the Congress. Nadler, who is in the audience, in turn praises Ward for the direction he is taking the Port Authority.

With a few pointed words, Ward takes issue with the Bush 43 Administration for understaffing the FAA and trying to promote market-based auction systems instead of addressing the capacity problems of airports in the NYC area and elsewhere. "We need a GPS-based system. The market is not going to solve the airport congestion problem."

In a movie released three weeks ago, I.O.U.S.A., I watched several New Yorkers (Doug Durst, Pete Peterson, David Walker and Robert Rubin) take issue with the string of federal budget deficits under Bush 43, after a sring of budget surpluses during the Clinton years. To my mind the doubling of the official federal debt (in round numbers, from $5 trillion to $10 trillion) is only part of the tragedy.

The two other big parts of the debt tragedy are (1) we borrowed the money overseas, avoiding debate at home about the war and putting power in the hands of our creditors, and (2) how little we have to show for the money we have borrowed.

Think what we could have got for $1 trillion of transportation infrastructure for U.S. ports, airports and rail. Look, as Ward tells us we should, what Dubai is buying now in international connectivity. Compare what we got in Iraq for $1 trillion and many thousands of lost lives.

NYC BUDGET | Cuts to Meet Emergency

In connection with the fiscal emergency announcement by NY State Governor David Paterson, who has called for a $600 million cut in State spending, the following article from ten months ago is worth resurrecting. It is reprinted in full from the NY Sun.

NY State's budget problems are especially acute because the State does not receive property-tax revenues, which act as a fiscal stabilizer for the City. However, NYC will be affected by NY State budget cuts and by the shortfall in investment returns for the NYC pension funds below the required return of 8 percent – which means another hit to the City's budget because the City makes up the shortfall.

City Council To Oppose Any Midyear Budget Cuts
By GRACE RAUH, Staff Reporter of the Sun October 29, 2007

If Mayor Bloomberg proposes midyear budget cuts to soften the blow of lower than expected tax revenues, he may face stiff opposition in the City Council. The chair of the council's Finance Committee, David Weprin, said yesterday that he would object to layoffs or midyear cuts now, but he added that individual agencies should always be looking for ways to be more efficient. "I think we should be looking at ways to save money, but I don't think we should be looking at any kind of panic scenarios," he said. "At this point, I would just sit back and just look for savings, but not look for any midyear budget cuts of layoffs." In September, Mr. Bloomberg sent a memo to top city officials saying the city's budget director, Mark Page, would be in charge of closely scrutinizing all future hires to ensure that the only positions filled were those deemed "critically necessary." The mayor noted that the city's economy depends on the profitability and success of Wall Street and said "recent events in the financial markets are, therefore, a subject of deep concern."

A report in the New York Post yesterday, citing an unnamed source, said Mr. Bloomberg is instructing city agencies to list potential budget cuts and that a public announcement is expected this week.

On Friday, Mr. Page reported to the state's Financial Control Board that tax revenues for the current fiscal year and future ones are less than had been anticipated in June. Tax revenues are down $238 million for the current fiscal year and predicted to be down $577 million in fiscal year 2009 and down $638 million in fiscal year 2010.

A former chief economist in the city comptroller's office until 2006, John Tepper Marlin, said that if he were at City Hall, he would act quickly to address the lower tax revenue projections by holding a press conference today to announce an official hiring freeze.

"There is absolutely no point in waiting. You want to act immediately," he said. Mr. Marlin said he agreed with Mr. Page's projections and added that if anything, "it could be worse." Unlike past mayors, Mr. Bloomberg is not afraid to deliver bad news, he said.

A spokesman for the mayor, Stuart Loeser, wrote in an e-mail message that when Mr. Bloomberg has a budget announcement to make, he will make it.

"We don't announce that we're announcing them and then announce them at a later date," he said.