Author: Larry Littlefield

Fiscal 2005 New York State public school finance data from the Fiscal Analysis and Research Unit of the New York State Department of Education is here. I’ve done some calculations that are of particular interest to me, and attached the modified spreadsheet to this post. The calculations, and the findings, are below.

It looks like the hedge fund bubble may be about to burst. With more competition in the industry spreads are shrinking, leaving many funds with no greater gross returns than on conventional mutual funds, but with far greater fees. We are heading for a housing bust, with foreclosure rates soaring as a result of exploding cost loans peddled to, among others, sub-prime borrowers. Rumor has it that in order to get higher interest rates, hedge funds were buying the most risky pieces (tranches) of groups of these loans – the piece that becomes worthless if more mortgages than expected don’t pay. Other rumors say the hedge funds were gambling on commodities, and have been caught when commodity prices suddenly dropped. Some may have been trading derivative instruments without the hassles of a formal exchange – hassles like showing you have enough money in reserve to pay off your counterparties if your bets go bad. The last firm to do this on a large scale: Enron, which would have gone down much sooner without the fraud. Far from “hedging,” that is accepting a lower return but limiting the potential for loss, most of these firms are leveraging, borrowing big so that a trend slightly in your favor yields a big payoff, but one slightly against you delivers a massive loss. It is likely that some of these firms could use a greater fool. They may have just found one.

The dominant political philosophy of New York City and State is not liberalism, conservatism, capitalism or socialism. It is feudalism, American style. Under capitalism, you get what you earn, at least in theory. Those who believe that people need an incentive to work and innovate can agree with that. Under socialism, you get what you need, at least in theory. Those who believe that we are all part of one human family can agree with that. But over time, when you have the same group of people in power, both capitalism and socialism degenerate into feudalism, under which the privileged expect to continue to get what they have been getting, and perhaps a little more, whether they need it or not, deserve it or not. For those who have real needs, and who produce real earnings, it's just tough luck. The feudalism of unearned privilege explains much about the state of the State of New York, where all past deals are set in stone, and more are added every year. The most recent case in point: the City's residential property tax system.

Recent reports highlight the low value placed on consumers of public services in New York City relative to other interests, some outside the city. The New York Post reports that statewide 94.5 percent of core classes, such as English, math and science, were taught by teachers deemed by federal requirements to be highly qualified in their subject area, compared with 87 percent in New York City. The Daily News reports class sizes as high as 46 kids per class in schools attended by poor NYC kids, with most 30 or higher according to the data they cite. Also reported by the News, fewer, less qualified police officers as a result of the 40% reduction in starting pay. The Post says that in order to offset this, the city is allowing police officers to work massive overtime, further padding their pensions. This looks like failed state and local policy, but it is actually successful state and local policy. You wouldn't know this, because the News and Post fail to identify the winners.

Katherine N. Lapp has left her job as head of the MTA, Peter Kalikow will soon depart as head of the MTA Board, and Larry Reuter is moving on as head of New York City Transit. Lots of New Yorkers are bound to say good riddance, but mass transit is something I happen to know a good deal about, and I know better. The three are blamed for rising fares, service cuts, a three-day strike, and an upcoming fiscal crisis, because they happened to be around when the bills for past shortsighted decisions came due. Meanwhile, the people who made those decisions, and those who benefited from them, fail to take responsibility for their actions. As long as the public lacks the mental ability to connect problems in the present with decisions made in the past, the political class will always be tempted to sell out the future for the present. It isn’t these “villains” I blame for the ongoing financial problems at the MTA in the face of record ridership. It is past “heroes” who are actually to blame, some of whom are running for President.

The Governor's State of the State address didn't get down to the nitty gritty, and thus far I'm disappointed. We'll see what the budget brings. It is worth noting, however, that little more than half of NYC public school students graduate from high school in four years, nearly 20 percent of city residents live in poverty, and an unusually large share of NYC adults are not in the labor force. None of this was identified as a problem for the state. The diminished circumstances of Upstate New York, meanwhile, was identified as a problem in need of assistance. In the hard choices department, what was identified was the need to cut Medicaid spending, much of which takes place in NYC. Even if in the next decade the city becomes richer and the rest of the state poorer (it could very well happen that way), city residents should not forget the attitude of the rest of the state when we were poor. We weren’t “one state” then. We should be “one state” now, but the rest of the state should not be allowed to forget 40 years of hostility. Where would the NYC schools be today if the education bond act had passed in the mid-1990s, when the rest of the state voted it down because it would have benefited the city? That bond issue was in exchange for STAR, which diverts school funding away from the city to this day.

The last paychecks of the year are in, and looking at the withholding, it appears a non-existent tax absorbed more than 3 percent of our income. The NYC local income tax. How is that tax non-existent? It is non-existent politically, when people talk about who is and who is not overtaxed, and complain about their property taxes. Last time the Independent Budget Office looked, however, the total tax burden was higher for NYC residents than for residents of the rest of the state.

We're either all in it together or we are not. That's the feeling I had as I listened to Governor Spitzer's soaring rhetoric about being "one state." For some time, as far as our state government has been concerned, whenever some people, groups, or places have had a need, we've all been in it together. And whenever other people, groups or places have had a need, they have been told to take more responsibility for themselves. The inequities have been generational, regional, and in some cases simply insiders vs. outsiders. The optimist in me wants to take Spitzer's words as a sign of future fairness, and accountability for those with better deals. The cynic see it as a call for the losers to stop pressing their claims, and accept plans that could perhaps make them a little better off — and the winners better off as well.