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New York Post

 

Courting Disaster: How City, State May Bungle Budget Crisis

July 30, 2008

By Nicole Gelinas

AS New York's all-important financial industry faces what could be years of lower profits and fewer jobs, the city and state face multibillion-dollar deficits—and the temptation to fix their problems by turning a crisis into a disaster. Tax hikes and harsh cuts to core services like public safety are the wrong medicine.

Consider: City spending is now set to rise more than 20 percent over the next three years, while revenues will grow by just 13 percent. That means a $5 billion-plus deficit (more than 11 percent of tax-funded spending) in two years' time.

And that's a rosy scenario, based on the city comptroller's prediction of low growth this year and next, but then a quick (if weak) recovery. If things don't turn out so great, revenues could actually shrink—as they often did in the '70s and again in 1990 and 2002.

At the state level, Gov. Paterson predicts a nearly $8 billion deficit in two years (following a $6 billion-plus gap next year)—smaller in percentage terms than the city's, but still grave.

Things look worse than some experts thought just a few months ago. The city's pension costs could be $100 million higher than expected next year: Taxpayers will likely have to make up for negative returns on the city's pension funds.

The Wall Street slowdown hits New York so hard partly because the state and city depend so much on taxing top incomes: A few bad years for the rich is disastrous for the place they live.

Two years ago, the top 1 percent of taxpayers paid nearly 48 percent of the city's personal-income taxes, up from 34 percent two decades ago, reports the city Independent Budget Office. (The state is also dangerously dependent on the rich.)

It could be disastrous if city and state leaders bet that this Wall Street downturn is another blip, rather than a long readjustment—and prove to be wrong.

For a quarter-century, New York has stuck to one playbook whenever Wall Street hit one of its periodic downturns: Jack up taxes to make up for lower tax revenues, cut spending a bit and wait for the industry to come roaring back.

This time around, tax hikes could be calamitous—because Wall Street may not come roaring back as it has before. Look back to the '60s—when New York last raised taxes while its major industry, then manufacturing, was shrinking.

In 1965, Mayor John Lindsay enacted the city's first personal-income taxes, as well as new business taxes in 1966. The city went on to lose half of its 1 million manufacturing jobs by 1975. It also lost many corporate headquarters (and their legions of well-paid employees): By the end of the '70s, half the city's 140 Fortune 500 firms had fled.

New York didn't anticipate this change or understand it as it was happening. Well into the '70s, the city thought it could keep taxing and spending because the future had to mirror the "Soaring '60s."

Nor did city leaders realize how quickly quality of life could deteriorate (or how quickly middle-class folks would flee): As they focused on social spending rather than vital services like policing, murders shot up from 645 in 1965 to 1,146 in 1970.

The meltdown finally came in the the spring of '75, when Gotham wrestled with a budget deficit that equaled 14 percent of its expected spending—and creditors cut the city off. Forced to beg for cash from the state and federal governments, the city gutted trash pickup and policing, murders climbed to 1,500 a year—and more residents left.

Today's New York likes to think of itself as far superior. But once again, on the brink of what may be a major economic upheaval, it risks continuing to act with complacency even as rhetoric heats up.

While the city cut expected spending this year, the cuts were modest—far less than the 6 percent Mayor Bloomberg had called for. And the mayor and the City Council spent the spring bickering over tiny cuts to education, rather than looking closely at a scary long-term picture.

This year's small cuts hit almost every department, police to homeless services. But this strategy can't carry the city through a protracted downturn: Vital services can't withstand deep cuts.

The city must not alienate the middle class—it has to protect the Police Department and keep streets clean and libraries open. One worrisome sign: In May, Bloomberg delayed the hiring of 1,000 new police officers for more than a year, even as New Yorkers are becoming wary of crime again.

Another of this year's fixes that can't be repeated: The mayor cut 20 percent from the capital budget, which funds physical infrastructure. But failing to fix infrastructure is no way to save money: Waiting will worsen the decay, and mean more expenses later.

Where should we cut?

* Education is an inevitable place to start: That's where the money is.

* Within the capital budget, the city should kill its spending on economic-development and affordable-housing subsidies, and protect funds for things like roads and transit.

* New York pols have to stop regarding the operating and capital budgets as unrelated. Cutting 10 percent of Medicaid's $6 billion-a-year take would go a long way toward cutting the deficit and upgrading the city's roads and subways.

* In the end, we can't fix the city's budget without addressing the half that the mayor has called "uncontrollable": pensions and benefits for city workers, plus debt costs. Their growth will be responsible for three-fourths of the deficit in three years' time.

Bloomberg (and his successor) must use fiscal stress in bargaining for changes in city contracts—and Paterson and the Legislature have a duty to back them up. The city can't let other unions get the big raises the police got through arbitration—because they don't need them, as the cops did, for staff retention.

One opportunity is the city's contract with 100,000-plus nonuniformed workers, which expired this spring. New York should negotiate with the union, DC37, and Albany to let new employees accept a pension plan in which the city contributes to workers' private accounts—rather than guaranteeing a pension for life. The Independent Budget Office puts the budget savings from that at nearly $100 million a year within half a decade.

Requiring these workers to pay 10 percent of their health-insurance premiums would save half a billion more. Extending the city work week from 35 and 37 hours to 40 would net another half-billion—all savings the city will dearly need if Wall Street doesn't roar back.

As Gov. Paterson said last night, New York can't follow a strategy of waiting for things to fix themselves, as they generally have in the past. The city doesn't have to default on its bonds to run into serious problems. Sacrificing quality of life through poorly managed budget cuts so that it can pay those bonds would do as much damage.

The risk is hard to quantify—but real.

Original Source: http://www.nypost.com/seven/07302008/postopinion/opedcolumnists/courting_disaster_122189.htm

 

 
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