The City of New York expects to end the current fiscal year with a $4 billion surplus. That means that a few years ago, the city took in about $4 billion more than it spent. Under the current four-year plan, the city will have balanced budgets in Fiscal 2008 and Fiscal 2009, and then Mayor Bloomberg and Speaker Quinn will depart. Does that mean the City of New York plans to spend what it takes in during the next two years? No. The City is planning to run a deficit for the next two years, spending more than it takes in while drawing down the $4 billion. As a result, catastrophic tax increases and service cuts are baked right into the plan, but not for two years. And, to make matters worse the State of New York, seeing that $4 billion sitting there and plans to hand it out inside New York City like it is free, has decided to spend half of it itself — outside New York City — by shifting state money to the city’s disadvantage. And Bloomberg and Quinn, by proposing all kind of goodies, are egging them on.
The Mayor is probably banking on making a pessimistic forecast of future revenues, and having “unexpected” revenue growth bail the city out. But the Mayor’s forecast of revenues in FY 2008 and FY 2009 may not be so pessimistic. City and State revenues have been fattened by record Wall Street profits and bonuses, but these can evaporate quickly if the financial markets turn, as they did after 2000. The financial sector has become a historically-outsized part of the economy, and captured a historically-outsized share of total profits and stock market capitalization. A correction is in order. I expect rising mortgage defaults, first in the “sub-prime” category and then elsewhere, to cut into financial profits, and to push the stock market down for a while — wiping out income taxes on capital gains. It could be far worse, and will be far worse in other parts of the United States, but we will get some spillback. The residential real estate frenzy is likely to end here, too.
Then there is the impact of increasingly risky investments on pension funds, and the need to make up losses. Speaking of what is likely to happen to Collateralized Debt Obligations based on the absurd mortgages written in the last few years, one CEO told Bloomberg (the company, not the Mayor) that putting such loans in CDOs is like “burying toxic waste.” And who is buying the toxic waste, to get a slightly higher return if the CDOs don’t lose value? “The Dallas Police and Fire Pension Fund invested in its first CDO about two years ago to boost returns, according to Richard Tettament, administrator of the $3.2 billion fund. ‘We were beefing up our risk and we were hoping for a greater return,’ Tettament said in an interview from his Dallas office. ‘We have an unfunded liability to pay off.’” Without raising taxes, I might add. Kind of like going to Atlantic City to get out of debt. So how many of these instruments have our public pension funds bought? No, I don’t think Bloomberg’s financial projections for FY2008 and FY 2009 are too gloomy, though the revenue decline might happen a year later in FY2009 and FY2010 instead.
It is apparently unwise in the “passive aggressive state,” where other parts of the state create their own problems and demand that New York City sacrifice to solve them (which is what New York City tried to do without much success in the 1960s and 1970s), to have a pile of cash lying around in open view. No doubt Governor Spitzer is directing much of the fiscal pain, and few of the benefits, to New York City on the grounds that since it is doing well it doesn’t need the money. When the recession comes, New York City needs to be in no better fiscal shape than other parts of the state. Otherwise, it will be disproportionably sacrificed yet again.
And this time, city politicians cannot agree to have the city be “assisted” by having the state allow it to borrow more money, while other parts of the state get additional assistance in cash, as it was after 9/11. The City borrowed $3 billion for operating expenses in its wake. Bloomberg used the last $1.5 billion of that debt to postpone tax increases and service cuts by just six months, until after Governor Pataki and the state legislature were re-elected after having done just about nothing to help the city in its moment of need. In exchange for that act of political friendship, the Mayor later received…absolutely nothing. This time let the fiscal crisis hit, and any tax increases and service reductions be imposed, while the state legislature is up for re-election in 2008. Or even this year.
The Mayor and City Council need to make the surplus go away now, by paying off $3 billion in debt. The other $1 billion can be used to better fund the pension fund or retiree benefits, or to pay for capital expenditures — some of which are little more than maintenance and ought to be considered operating expenditures anyway — in cash.
Politicians should not be allowed to spend more money than they take in, and declare the budget “balanced” because there is a cash reserve that is being drawn down — all while the total level of debt is going up. Former Mayor Giulani declared a $2 billion surplus every year for five years, but when he left office there wasn’t $10 billion in the bank — just a huge pile of debt and pension IOUs. The reason — massive “election year” handouts of all kind to make the former Mayor and City Council speaker look good for runs for higher office. Bloomberg inherited that mess. Do Mayor Bloomberg and Speaker Quinn really insist on repeating it? It’s right there in the four-year plan!
But in the passive-aggressive state they’ll never get that far. Even more irresponsible local governments elsewhere and health care institutions keep hiring, putting a gun to their own heads and going to Albany to take the money first.