Author: Larry Littlefield

The propaganda is coming fast and thick as the New York State legislature meets to consider a school property tax growth cap for the portion of New York State outside of New York City. The New York State Untied Teachers and the Working Families Party claim that restricting the increase in taxes to 20% more than the inflation rate, unless local residents vote to increase taxes more, would devastate upstate and suburban schools. And some state legislators from New York City have claimed that if tax increases were limited elsewhere, the state would have “no choice” but to cut education funding for New York City, or raise taxes on city residents, to make up the difference.

For thirty years, during which time Governor Paterson’s generation and those before have dominated the state legislature and much else, they have continually voted themselves an irrevocably good deal every time the economy was up and money was rolling in. And then imposed “shared sacrifice” on younger generations and those without connections every time the economy was down and money was scarce. From public debt to the infrastructure to the environment to seniors who pay no tax while young people with the same income are taxed double, the story has been the same. And in public service, as I wrote here, public employee unions have pursued, and the state legislature has passed (generally without a single ‘no’ vote), ever richer pensions after ever shorter careers every time the economy was up. And claimed the time spent living in leisure off other people would cost nothing. In reality, this has been balanced by lower pay and benefits for future public employees every time the economy was down, part of a pattern of younger generations (except for the very rich) being worse off economically in every way ever since 1973. In exchange, the unions have told their members they have the right to do a worse job, since they were underpaid.

Several months ago, the man who claimed that on day one everything would change had a chance to veto a bill that simultaneously allowed NYC teachers with seniority to walk out the door at age 55 and live off others for the rest of their lives, and cut the take-home pay of future teachers significantly. The usual. Eliot Spitzer signed it, a couple of weeks before it was revealed he was screwing the young literally as well as figuratively. Now Governor Paterson faces the same choice between fairness and privilege.

Readers may recall my alarm that the city and state pension funds were moving into “alternative investments” such as hedge funds right when those funds were likely to tank. Many don’t hedge at all; they just leverage investments with debt, meaning a small loss in reality is a 100 percent lost for investors, with the possibility of similar gains if things go well, and massive fees in either case. A knowledgeable person told me it was no problem, because legally pension funds may only invest a few percent in such risky investments.

But now I read that the state pension funds already have received permission from the state legislature to increase the share in alternative investments fromo 15 percent to 25 percent, and State Comptroller DiNapoli, undoubtedly encouraged by Wall Street, is asking the legislature to remove any limits at all. The reason — the pension funds don’t have enough money to pay the promised benefits, so they have to take more risks to increase the rate of return.

Like most of the frequent posters here on Room Eight, I’m more interested in writing about the facts that aren’t generally made available and telling the stories that no one is willing to tell, rather than merely commenting on what is already being reported by others. I assume that anyone who actually reads my essays is also well read in what is being reported by the mainstream media, and is more interested in their own interpretation of those reports than mine. But today’s news has a number of items that I can’t resist calling further attention to.

The Wall Street Journal, in a front page article, reports something I have alluded to but do not have the facts to tabulate — that top executives are paying each other more and more money in pension income, copying the raid on the future perpetuated by public employee unions and state legislatures, to avoid taxes, disguise their outsized pay and, in the end, siphon off all the money from their companies. The New York Post reports a State Comptroller finding that “New York is wasting tens of millions of dollars annually by paying the medical expenses of thousands of former residents who have long since moved out of state, an explosive new audit has found.” That’s their interpretation. I’d bet they weren’t state residents to begin with. And according to Reuters, compensation experts expect Wall Street bonuses to fall by 30% to 40%. The special session of the New York State Legislature called by Governor Paterson is based on the disastrous consequences of a 20% decline. I expect 50%-plus, so with this report, we’re getting closer.

As I have described in as many ways as I can, an inevitably rising share of public spending will be going to debts run up by past generations, rich pension and other retiree benefits for those cashing in and moving out, workers with seniority who are no longer required to work, and those in places like New York’s suburbs and upstate New York who need a “job” to be able to live the way they “deserve.” At the federal level, thoughtful people of all political views understand that the “debt” implied by having younger generations provided with the same health care and Social Security benefits that older generations have handed themselves is so high that it can ever be paid — the financial debts are on top of that. If you live in New York State, the situation is actually much worse, because it is necessary to anticipate future increases in benefits for those with deals on top of those that have already occurred. At the same time, more and more potential tax revenues are lost to special tax deals and breaks, and as a result of similar self-dealing and future-selling in the private and personal sectors, people are about to get a whole lot worse off, reducing tax revenues overall. Actual public services, benefits, and infrastructure will be crushed between these two pincers.

I remember the sense of frustration and injustice I felt back in 2000, as the dot.com bubble burst and it was clear that we were heading into a fiscal crisis. Even though certain interests had gotten far more out of New York State’s budget that was justifiable based on any fair principles during the boom, and others were permitted to put in far less in taxes, I assumed that spending in all categories and for all groups and places would suffer equal cuts, and all would be drained by equal increases in taxes. That is an easier road to take, politically, than asking those who have benefited disproportionately from government policy to sacrifice first. Taking the easy road, making the non-decision, is what our politicians do.

The reality was far worse than even I had expected. There would be no equal sacrifices, even after grandfathering existing inequities. Those who were behind would end up further behind, those who were ahead would end up further ahead. And that is exactly what I expect is about to happen again. It isn’t even worth wasting bandwidth talking about alternatives. Let’s just review what they did, and try to project what they will do, in Albany.

Each quarter I have the depressing task of writing a report on the regional economy and real estate market of Detroit, Michigan. While people elsewhere continue to debate whether or not we are in a new recession and how bad it will be, in Detroit one could argue that the old recession that began in late 2000 never ended. Detroit is paying the price for being a backward looking place where lots of people had lots of unearned advantages and sought to stop the future in order to lock them in. A center of innovation at the dawn of the automobile industry, the city and state’s key industry evolved into a Big Three oligopoly that paid big bucks to hordes of executives and provided rich pensions after short careers for unionized employees. All while producing inefficient motor vehicles that at one time, a time the Big Three have yet to live down, had lousy quality. Many of my relatives of my grandparents’ generation worked on the assembly line at the GM Fischer Body plant in Tarrytown NY, yet I may be the only member of my extended family that owns a GM automobile. All of this is a massive warning to New York City, because our financial sector, like Detroit’s automobile industry, has become increasingly concentrated in just a few companies, even as no new ones open here. Why?

With the transit calamity the greedy and needy generations in charge have left us with in the news, it is worth looking at how the MTA’s operating costs compare with those of other transit systems throughout the country. The best source for this information is the National Transit Database, which is not without its flaws. Many transit agencies have not been setting aside money for retiree health care and pensions, and that makes their costs look better. New York City Transit is forced to pay interest on debts for past capital costs as an operating expense, which makes it seem costly. Then again, some of NYCT’s operating costs have been shifted to the capital budget, so money could be borrowed to pay for them. Then there is the question of how to measure costs. The National Transit Database provides three measures — cost per vehicle hour, cost per unlinked trip, and cost per passenger mile. Cost per passenger mile favors modes set up to move at rapid speed, such as commuter rail. Cost per trip favors transit systems that are lucky enough to be located in places with high population density, like the NYC subway. The fairest measure of relative cost, if one adjusts for the carrying capacity of the vehicles, is cost per vehicle hour. A crunched down NTD table, with data for all rail and ferry systems but only bus systems in New York State, is attached.

I'll admit I'm a little busy and a little burnt, so this is just the usual blog reaction piece rather than a researched essay. I was amused to read a review of bed and breakfast inns in Brooklyn in the Daily News today. Amused because if such establishments are located in residential zoning districts, as they all appear to be, they are illegal — they violate the zoning resolution. Then again, so are tens of thousands of small businesses in New York City, often because they are located on one block of a commercial street (zoned C1) instead of the next block over (zoned C2), and a large share of the growing number of people working at home. I know this because I was once a project director for a NYC Department of City Planning research project to fix all this, that was ready to go complete with recommendations, but which the Department didn't have a political mandate to release.  The recommendation for bed and breakfast inns was…

The New York Sun is alarmed to find out that “Tax Rates For New Yorkers Would Top 50% Under Obama,” as the dramatic headline read. “The Democratic presidential candidate is proposing not only raising the federal income tax, but also adding a Social Security tax for those Americans earning more than $250,000 a year. For New Yorkers, that could mean that if the current Social Security rate is applied, the marginal tax rate, or rate on every extra dollar earned, could rise to 58%,” up from 42% for the wealthy today. That includes the 10% for New York State and New York City income taxes. Of course many wealthy executives agree to pay each other wages in the form of capital gains, even when they put no capital at risk. “Mr. Obama is proposing to raise taxes on capital gains and dividends by two-thirds, moving the rate up 10 percentage points to 25%. When New York State and City taxes are added in, the tax rate would be 33%. In comparison, the tax rate for capital gains and dividends is currently 22%.” Somehow I’m not sympathetic.