New York City has a rendezvous with insolvency, again.
Dec 23, 2002, Vol. 8, No. 15 • By WILLIAM TUCKER
IT WAS A JOYFUL MOMENT. In 1999 and 2000, for the first time in 50 years, New York City surpassed the rest of the nation in job growth. Silicon Alley was humming. Martha Stewart was remodeling a 1930s West Side industrial building that could lift railroad cars to the eighth floor. Mayor Giuliani was using the tax surplus to pay down old debt.
Those rosy dreams now lie beneath the ashes of the World Trade Center. More than 70,000 jobs have fled Lower Manhattan. Jersey City has become a twin skyline across the Hudson, loaded with Wall Street refugees. Electronic trading is greasing the skids. New York-based Quick and Reilly set up its e-trading operation in 1998. The company moved the division to Rhode Island in less than a year. "We always planned it for a lower-cost environment," says a company official.
Now another blow to the city. The Securities Exchange Commission is requiring financial firms to move large portions of their clearing operations out of Manhattan for security purposes. Bank of New York is shifting jobs to Florida. Morgan Stanley, once the largest tenant in the World Trade Center, is opening offices in Baltimore. Bear Stearns wants to leave just because of outlandish taxes. "Even before September 11, the high costs of doing business had been driving securities industry jobs out of New York," admitted Crain's New York Business last week.
In 1980, 40 percent of the securities industry was located in Manhattan. Today the figure is 25 percent--the lowest in history. New York's run as the undisputed financial capital of the world may be coming to an end.
Michael Bloomberg, the "conservative Republican" elected to revive the city economy, is proving more than inadequate to the job. Faced with a $1.5 billion budget gap this year and a $6 billion deficit in 2003, the mayor has quickly reverted to the tried-and-true stopgaps of the 1970s--raising taxes and borrowing money.
The stripping of New York's brief economic revival has exposed archeological layers of paleo-liberalism underneath the city's political culture. At bottom, New York hasn't changed since the 1960s, when John Lindsay created a social spending machine that almost bankrupted the city and burdened generations of taxpayers to come.
New Yorkers remain the most highly taxed people in the nation, paying 160 percent of the national average. The city has the country's highest municipal income tax, a 4.25 percent sales tax (on top of the state's 4 percent), one of the nation's highest property taxes, plus an aggravating battery of levies such as the Municipal Assistance Corporation parking tax and a "commercial property tax," which surcharges rents in Midtown and Lower Manhattan.
On top of this, New York City is also the most heavily indebted political entity in the nation, owing $43 billion--more than any state. Massachusetts residents owe $3,300 per capita. New York state (in fifth place) owes $2,000 per head. New York City owes $5,300 for every man, woman, and child in the five boroughs. By 2005, debt service will consume 20 percent of the city budget--exactly the point the federal government was at when Ross Perot began his campaign in 1991.
Because of its familiarity with the bond market, New York City has always found it easy to borrow for day-to-day expenses. In the worst days of 1974, the city government was rolling over debt from week to week, issuing "revenue anticipation notes" and "tax anticipation notes"--the equivalent of borrowing on next month's paycheck. The creation of the Municipal Assistance Corporation (Big MAC) eventually cleaned up this act, and New York now has the most sophisticated accounting system in the country.
But all this means nothing if politicians don't exercise fiscal discipline. In 1997, bumping up against the state constitution's debt limits, the Giuliani administration created the Transitional Financing Agency (TFA), yet another off-budget authority designed to circumvent the restrictions. Five years later, TFA has more debt ($8.1 billion) than all but 12 states. Last July, Mayor Bloomberg quietly employed TFA to borrow $1.5 billion to cover this year's budget gap. Moody's put a negative outlook on the state's bond rating, already below the ratings of all 50 states. If the mayor borrows again to cover next year's projected $6 billion deficit, watch for the roof to fall in.
Meanwhile, Governor George Pataki, facing his own $6 billion deficit, announced last week the state would borrow $4 billion on tobacco-settlement revenues that will be coming in over the next twenty years. In Albany they burn furniture for firewood.
Mayor Bloomberg's only other initiative has been to raise property taxes 18 percent--a request that the normally flaccid City Council processed within two days. Last time the city raised taxes, during the Dinkins administration, New York lost 300,000 jobs. This time it could be worse.