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Closing the Fiscal Gap: From Albany to City Hall

Carol Kellermann Former President, Citizens Budget Commission
E. J. McMahon Senior Fellow and Founder, Empire Center
Michael Hendrix Director, State and Local Policy, Manhattan Institute
Mon, Jan 25, 2021 EVENTCAST

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Closing the Fiscal Gap: From Albany to City Hall

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Forum

Closing the Fiscal Gap: From Albany to City Hall

Carol Kellermann Former President, Citizens Budget Commission
E. J. McMahon Senior Fellow and Founder, Empire Center Michael Hendrix Director, State and Local Policy, Manhattan Institute EVENTCAST 01:00pm—02:00pm
Monday January 25
Monday January 25 2021
PAST EVENT Monday January 25 2021

While New York City is dealing with budget woes amidst a worsening pandemic and shaky economy, New York State is facing its own fiscal crunch as the 2021 legislative session begins in Albany. In October, it was reported that the state, its local governments and major public authorities including the MTA were facing combined revenue shortfalls of $59 billion through 2022, compared to their pre-pandemic forecasts. Gov. Andrew Cuomo has promised steep cuts and higher taxes if Congress does not provide additional fiscal aid. So far, while New York still awaits federal action and has postponed any major fiscal moves, it is unclear how long the state, as well as authorities and local jurisdictions, can wait. What are the fiscal challenges facing Gov. Cuomo and the legislature this year, and what are we seeing so far in their responses? What consequences will Albany's decisions have for New York City and its recovery? Is there a way out of New York's fiscal crunch?

Event Transcript

Michael Hendrix:

Good afternoon, and welcome to the Manhattan Institute's event on closing the fiscal gap from Albany to city hall. I'm Michael Hendrix, director of state and local policy here at MI, it's good to be with you. While New York City is dealing with its own budget woes, New York state is also facing a fiscal crunch as it enters the 2021 legislative session up in Albany. Last October, we learned that state and local governments, as well as major public authorities, like the MTA, faced combined revenue shortfalls reaching some $59 billion through 2022, at least compared to pre pandemic. I mean, that's just an astonishing number. It's part of the reason why we're here and we're still waiting to see how New York will cover this shortfall.

Michael Hendrix:

So to help us understand this Empire State crunch, we're honored to host E.J. McMahon, a senior fellow and founder of the Empire Center up in Albany and Carol Kellermann. Most recently, the president of the Citizens Budget Committee and a longtime New Yorker who has been everything from the CEO of the September 11 Fund, to chief of staff for Senator Chuck Schumer. Thank you both for joining us and also a note to our participants and attendees. For all of you watching us, please enter your questions in the Q&A feature here in Zoom. You should see it on your screen and I'll incorporate your questions into our discussion.

Michael Hendrix:

All right. So E.J., let's start with you. You've been following Governor Cuomo's state of the state address and the annual budget roll out.

E.J. McMahon:

Right.

Michael Hendrix:

What are you seeing about the state of the state's finances?

E.J. McMahon:

I was thinking about how to answer this most easily and then decided, it's easiest for me to describe what the state of the state's finances is not. The day after the governor proposed his budget last week, the headline in the New York Times story, on the online story, I think in the print edition too was, Cuomo offers doomsday proposal to attack a possible $15 billion deficit. Now that was the headline pretty much everywhere. I'm not picking on the Times. I'm using the times as the most read example. Cuomo did not offer a doomsday proposal and there is no $15 billion deficit. What you're hearing is a triumph of sort of self-serving narrative and political spin. Paradoxically, there is a serious situation that grows more and more serious and challenging the longer into the future you go, beyond this coming year.

E.J. McMahon:

In the short term, there is not as much as a problem as the governor paints, but basically what's happened is the following. As everybody knows, the pandemic hits, normal economic and social life has shut down. And there is a pronounced drop in economic activity and in actual and projected revenues. New York was in a better position than most states to deal with this because New York has this unusual fiscal year that begins, New York state begins April 1st. Only state in the country that begins April 1st, all but a couple of others being on July 1st, as does New York City's fiscal year. So if, you're able to do a new budget, knowing that you are in a collapsing economy, one might think that would mean that you would do a budget that begins to adapt to that.

E.J. McMahon:

We did not do that. Basically, the budget for fiscal 21, which is going to end on March 31st, which was adopted last April 1st with the pandemic raging out of control. Actually, spent somewhat more than the prior year, somewhat more in state money than the prior year's budget. About a $101 billion state operating funds. The budget the governor just proposed for fiscal year 21, spends a little bit more than the current year's budget, about a billion and a half dollars more. And that amount assumes that the state receives in addition to its own revenues, some three billion dollars a year in each of the next two years in federal funding from the Biden stimulus bill, which is probably a conservative projection.

E.J. McMahon:

So where do all these bad numbers come from? Basically, the governor for the better part of the past year has been greatly inflating the size of the state's fiscal need in order to maximize his ask of Washington for federal aid. There was and is a problem, but it's not of the dimensions or even of the nature that the governor portrays. So this has hopelessly confused the situation in some ways. The headline items out of the budget, the governor proposes that he has proposed a tax increase of a billion and a half dollars in the first instance, to be raised from a surcharge on high earning New Yorkers. On those earning five million dollars or more for brackets topping out at a bracket of a $100 million.

E.J. McMahon:

By the way, we have no idea how many New Yorkers even earned taxable income of a $100 million, it may be a dozen, it may be a 100, we don't know. This was seen as a big difference, it was also framed in most news story and as described by the governor as sort of a contingency that he would not push, if the Feds give us $15 billion, which is his magic number. Now in fact, he's proposed it, it's in one of his budget bills, it's a budget proposal. He has put it on the table. And something like that in fact will happen because the legislature is itching to do it. Otherwise, the budget actually includes with the help of an enormous influx of federal aid in December, a record school aid increase of $2 billion, plus, which is 7.1%.

E.J. McMahon:

A continuing increase of nearly five percent in Medicaid, also with the help of federal aid and no severe cuts, actually in anything. That's assuming a very small amount of federal aid. If he gets $15 billion, we'll have an enormous budget increase and still a tax increase. That's the actual facts of the situation. So it's kind of confusing, but in the short term, there really is not a big budget problem. Mainly because federal aid has helped to paper it over. When you get beyond next fiscal a year and into the following fiscal year, a problem begins to develop and mushroom because federal aid will disappear. And then the question is, does the economy rebound quickly to where it was? And to close it off, just for starters, the governor's budget projects that employment in New York will not recover to 2019 levels until 2025. And that's just employment, he's forecasting, not personal income or GDP.

E.J. McMahon:

So there is a serious situation in the midterm and longterm. The situation in the short term is not what you've been reading about, if you've been reading about it in the papers. And again, I'm not blaming the media so much as I'm sort of backhandedly congratulating the governor for selling a narrative to the media in a confusing situation. So that's where we are right now.

Michael Hendrix:

Just really quickly. Why do you think the governor is selling that narrative?

E.J. McMahon:

He's selling that narrative because he apparently is convinced that the worst he makes it look, the more he can ring out of Congress. Now, it's interesting. He started talking this way over the summer when the president was still Donald Trump and Congress was still controlled by Republicans. And at that point, it was partly serving the political purposes of beating up on a Republican administration and a Republican Senate majority for not responding to a crisis in New York that the governor blamed on the Trump administration. Interestingly, after the election, after it's clear Biden has won, and then even after the Georgia Senate races, when it was clear, the Senate would be in fact, also democratic. And thus the majority leader would be new York's own Chuck Schumer.

E.J. McMahon:

The governor continued his very, bellicose tone and all but table thumping demands for $15 billion, we are owed that much. He just seems to be convinced that this is the way to make sure that he gets something close to $15 billion, which again, I don't want bore anybody or torture anybody with the details, that's not a real number. That is kind of an invented number, it's concocted based on other numbers, but it's basically, he wants to get as much as he can while the federal government is basically printing money and oblivious to deficits and giving out money to states and localities, he wants to maximize it. And it's as simple as that.

Michael Hendrix:

I mean, as a negotiating tactic it certainly seems to make sense, whether it makes sense for the longterm structural challenges of the state is something else and we'll get to that. And Carol, we'll also get to you. E.J., one other quick follow-up though, you've written on how there's sort of a tale of two addresses. One is Governor Cuomo's at the beginning of his time in office. And the other is a state of the state now, that these are two different visions. Tell us a little bit more about that because that's kind of interesting.

E.J. McMahon:

Well remember, Governor Cuomo is elected governor in 2010, where we're barely beginning to recover from the Great Recession, which triggered a severe fiscal crisis in New York. Twelve years ago, this month, actually David Patterson was hoping to get a bailout from the federal government, which he received in the initial Obama stimulus bill, and over three fiscal years ending with Governor Cuomo's first year in office, the state got $10 billion from the federal government. The problem was that as he took office, the state had this huge cliff, big problem because the federal aid was going away. The thrust of the governor's message to New Yorkers and to the legislature when he first took office was, "We have a problem, we have to fix this." And he very boldly went after closing a $10 billion budget hole without significant tax increases initially. With among other things, a big school aid cut and a large adjustment in Medicaid expenditures and generally support for a lot of other measures that were designed as he put it, to avoid having us continue to be what he called, the tax capital of the United States.

E.J. McMahon:

His message was, centrist leaning toward fiscally conservative in his first term. And it was all about how we had to pull ourselves up from our bootstraps and get more competitive. Now, here we are, 11 years later, 10 years later from when his first budget was presented and he has been really aggressively blaming every problem we have on the federal government. He's blaming it on Trump personally, and on Washington collectively and Republicans and the man. So it's a big turn about, it's all about blame.

Michael Hendrix:

So Carol coming to you, you've heard what E.J. just said. You've been following Governor Cuomo and what he's been rolling out. What are the implications of what Governor Cuomo is proposing and the state of the state for New York City?

Carol Kellermann:

Before I get to that, I would like to just respond to something that E.J. has said. I agree completely with his summary of the proposed executive budget by the governor and that this isn't really a $15 billion problem and that he is positing that he must get this money to avoid taxes. But my alternative explanation for why he's doing that, is not to try to get as much money from the federal government as he can. Of course, that's something that's important to do, but I don't think this is a very successful negotiating tactic. He doesn't need to persuade the New York delegation.

E.J. McMahon:

Right.

Carol Kellermann:

They should try to get money for the state and the city, they already want to do that. They've been trying to do that. In fact, the more he makes this into a New York problem, I think the more challenging it is at the federal level, because we're into the blue state, red state, and why should we bail out states that spend too much money? I don't think that's what it's about, I think the difference between the way he behaved at the beginning of his term as E.J. described. And now, is that the politics of New York have changed. He's close to a reelection. He does not have a Republican state Senate that will stop the Assembly from doing things that he agrees shouldn't be done. And he's in a situation now where the legislature is determined to raise taxes on high-income individuals and [inaudible 00:13:31] tax et cetera, regardless of what the budget deficit is or is not. And he doesn't want to be blamed by the centrists and the fiscal conservatives and the business community that have regarded him as a good leader.

Carol Kellermann:

So he knows a tax is coming, and therefore he wants it to be blamed on Washington. Let's set a huge amount, which we will not get, say that we had to raise the taxes because we didn't get it. Instead of ... The legislature is veto proof now. So he's picked one of them, the high income earners tax, which as E.J. says. He puts in amount, $1.5 billion. We don't really know what we would get from this tax because we don't know how many people are in these income levels. And we don't know how many people will avoid the tax. So I think that's really what this state budget is about is, I must find a way to rationalize why I've even proposed such a thing.

Carol Kellermann:

And you'll note, in the budget presentation, which Rob Mujica did, he spent more time arguing about why it's not a good idea to raise taxes on high-income people. Showed how 50% of the income taxes paid by two percent and then said, "But we're proposing this." So that's what I think is going on. Now, the irony is, that part of the budget could have very ...

PART 1 OF 4 ENDS [00:15:04]

Carol Kellermann:

Is that that part of the budget could have very bad implications for New York City, because if the legislature does pass a personal income tax increase, I think it pretty much takes the idea of raising taxes off the table for New York City. We will be the highest combined bracket in the country, as the governor keeps pointing out. New York City will not have the ability to even think about raising their personal income tax if the state legislature does that. That, I think, is the biggest risk that the state budget, whatever amount it is now, poses to the city.

Carol Kellermann:

If you go through his 200 pages of budget proposals, there are reductions proposed from New York City. You have to really dig to find them. They're very here and there. There's probably somewhere between 200 and 300 million dollars of little odds and ends. I'm not saying they're not significant, they add up to 200 or 300 million dollars.

Carol Kellermann:

There are things like intercepting money to pay for the distress provider pool and Medicaid. There are a lot of things like that, but it may well be that it's expected that they will all be put back in by the legislature. You take them out knowing that the legislature is going to put them back in. They're there, and then you also have other risks like health and hospitals. Their budget doesn't come out at the same time. We don't know how much money health and hospitals may lose because they're not doing other treatments. That is the same problem being faced by all the hospitals in New York. This mayor feels a special obligation to fund the gap in health and hospitals. There may be some pressure about the MTA if they don't get all the money they need. We've already committed in New York City to pay for low-income fairs. There may be some pressure to keep the MTA going because it's important to the economy.

Carol Kellermann:

There are other things, but I think the biggest risks are school aid, which we're getting a huge increase in this budget, but if the budget really does have to be cut back, that could affect New York City. 40% of the district, the Department of Education budget comes from state school aid. But I think the bigger risk is this tax policy implication that you really could tie the hands of New York City if the economy does not come back the way everyone is projecting as quickly.

Carol Kellermann:

The other thing that New York risks is the property tax, and the loss of property tax and transaction tax revenue, which is not as much of a risk for the state, but it's what New York City depends on. It is the biggest tax that New York City gets. It's not the income tax, it's property. If commercial property doesn't come back and the values start to go down and people aren't paying their rent and property owners start to go into arrears and don't pay their property taxes, then New York City could have a deficit bigger than what it's projecting and will not have the ability to make it up from other taxes when the state has raised their taxes.

Michael Hendrix:

I want to talk about that longterm picture. By the way, it's also important to point out for what you just said in property taxes. The property taxes account for a lot more of the revenue than New York City receives than, say, income tax. Right?

Carol Kellermann:

Absolutely.

Michael Hendrix:

It's a big share of receipts.

Carol Kellermann:

It is the biggest.

Michael Hendrix:

You suggested that if New York state squeezed the wealthy further, that that would in some way prevent or stall New York City from realistically doing the same. But are any of these attempts to squeeze the wealthy realistic? What exactly would stop, say, a highly progressive mayor of New York City in the future saying, "Well, I don't care that New York state just squeezed the wealthy further. I'm going to keep doing it, and so what if they leave?"

Carol Kellermann:

It's the so what if they leave. If you are the mayor of New York City, you look at things a little differently than when you are campaigning, and you're looking at how much... As I said, 40% of the personal income tax revenue comes from 1% of the payers, and over 50% comes from 2% of the payers. It's the second largest. You're right. Property tax is more important, but that's affected too. If you have people starting to leave and they take their business with them, New York City doesn't have a non-resident earnings tax the way that the state does. You start to look at the numbers and your finance director comes in and projects you're going to lose money, you're not going to be able to pay for your services, so you're not quite as anxious to do it and we're already going to be at almost 15% if the governor's proposed top level tax comes through, and you won't know that you shouldn't have done it until it's too late, because you'll see at the end of that year that your tax revenue has gone down.

Carol Kellermann:

I think a mayor, the next mayor, not this mayor who won't be there to see what happens, is going to be more hesitant than it might seem to do these things, because it will affect all the revenue, it will affect the bank tax revenue, the corporate tax revenue, the unincorporated business tax. Everything it depends on, to some extent, a very small group. What is it E.J.? I think it's 30,000 people, 30,000 taxpayers, and we need them.

Michael Hendrix:

They've shown themselves during this pandemic to be highly mobile.

E.J. McMahon:

It's interesting. If I could make a point on part of that, about how mobile they are. Many of the cities best-known really wealthy people have gone to second homes that are in New York state for one thing. Others have gone out of state. Obviously, these people have always been very mobile. There's an added dimension to this that nobody advocating for higher taxes ever mentions. Except the governor mentions it constantly, but again, sort of misleading because he applies it to the middle class.

E.J. McMahon:

Essentially, the Federal Government has, for the time being, at least ended the state and local tax deduction. It's capped at $10,000. The average really high earner, multimillionaire earner, $10,000 is nothing. They pay hundreds of thousands or millions in state taxes. There essentially is no longer a deduction. On a marginal basis, the way our rates have fluctuated over the last 50 or 60 years in which the city itself has had an income tax as well as a state.

E.J. McMahon:

At one point, the combined New York City and New York state income tax in the early '70s was nearly 19%. 19%. However, that was during an era when the federal rate was 70%. You do the math and it was fully deductible. The effective rate was it was like five percent or so back then. All throughout history during the last 50 years of fluctuation in federal and state and city rates, the effective rate net of deductability of being in New York City, let's take New York City as the peak rate, it was effectively has ranged between six and maybe at most eight percent. Six to eight. Well, it's now almost 13, right now. This bill would drive it up closer to 15 that the governor has proposed. As you do the math, that's an order of magnitude beyond where it's ever been before. That means the difference between being in New York City and being in a no tax state like Florida is 15%. That's pretty big, especially since clearly the Biden administration, unless there's an enormous red wave in the next biannual election, they are going to enact a very significant increase in federal taxes on the same people.

E.J. McMahon:

I would point out with regard to the city's own tax, I agree with almost everything Carol just said. I agree with everything Carol just said. I just would point out in addition, the city has no control over its own taxes, except for the property tax. It doesn't even control the structure of the property tax. It basically controls the levy of the property tax. But if the city wants to increase its own income tax, it has to get the state legislature to do it. De Blasio himself, for I think the political reason that Carol mentioned as much as anything, he urged a state income tax increase, oddly rather than requesting a city. In fact, all through his tenure, starting when he ran for mayor and first took office, De Blasio has consistently urged higher state income taxes, which seems to be in part his way of not wanting to stand out compared to the suburbs. He has done that despite the fact that, as Carol notes, the city has the most to lose from having a high combined income tax rate.

E.J. McMahon:

It's a really odd period, but if you get back to the spending, and this is something that the city did not experience as keenly because Bloomberg, A, I think Bloomberg had better managed the entry and exit from the recession. But secondly, the economic recovery from the great recession in New York City was very robust, very robust. It was nothing like what we have reason to expect now.

E.J. McMahon:

The state, 10 years ago, when you get a lot of federal aid, when you get as we got then, $10 billion in the space of two and a half years, and then it disappears virtually overnight. In this case, just in time for Cuomo to take office initially, that's like the cartoon. Remember in the Road Runner cartoons, Wile E. Coyote would run off a cliff and be running straight across nothing for a while and suddenly realize that there was nothing underneath him? Basically, the more federal aid you get, the longer you are allowed to keep spending at a level you can't afford until you discover that there's nothing there anymore.

E.J. McMahon:

In fact, when Cuomo demands the $15 billion, and I agree with your political analysis, Carol, in part of why he's doing it that way, but he wants to get that money and spend it, but the more of it that he spends the bigger a problem he's going to have when it disappears, because absolutely no one expects the Federal Government to permanently underwrite the gap between our pre and post pandemic revenues. That's the ultimate problem at the end of a fairly short rainbow here.

Carol Kellermann:

That's-

Michael Hendrix:

Yeah, I think... Oh, sorry. Go ahead, Carol.

Carol Kellermann:

No, go ahead. Go ahead.

Michael Hendrix:

I was just going to say, you may quibble the details, but what I'm hearing is that the state and local level muddled through, sometimes quite remarkably muddled through, but that does not negate the longterm challenges in terms of spending, and to a degree in terms of revenue, those longterm challenges also include whether or not the governor or the mayor want to increase revenue. The options are limited, potentially the costs are high, and whatever support the Federal Government provides could carry some poise and chalice. It could be that it provides some aid but also becomes a form of bailout when it papers over long running challenges that New York had and that no leader, whether the governor or mayor, is taking as an opportunity to buy time for reform. Is that basically fair? Carol, I'm willing to turn over to you if you have a response.

Carol Kellermann:

Yes. Yes, that is fair. It is. We definitely need federal aid. The economy stopped. In this situation, New York City I think is likely to lag other places, because the things that stopped are the things that make New York attractive: tourism, retail, the restaurant business, which, by the way, are reasons why people could leave, might leave more permanently now than in the past when people would say, "Oh, you don't leave for tax reasons. If you have that much money, you want to be part of this vibrant city." Well, those things that make the city vibrant are the things that are the most troubled now because people weren't going out and aren't supposed to go out even now, and so they have other reasons. Plus, they see that you can work remotely and be effective. There are other non-tax, non-mathematical reasons why staying away and happening to also save a lot of tax dollars is more likely now. We need a bridge for some of that, but it is allowing the city and the state to kick the can down the road, which is what people want to do in general and avoid even longer and more easily the underlying structural problems.

Carol Kellermann:

In terms of New York City Government, the next mayor is going to have to deal with them, and you have to deal with labor, something that the governor did, also, in his first term, was call in the labor unions and say, "You got to start paying for some of your own healthcare and we have to have a wage freeze." Close to an election, doesn't want to do that, doesn't want to rationalize school aid because that's very important to the teachers. The mayor is going to have to deal with, in the long run, to get the budget on a better trajectory that doesn't just keep raising head count and spending on health insurance and retiree health insurance every year, deal with these labor problems and...

Carol Kellermann:

... every year, deal with these labor problems, and they'll just get worse, because there will be a cliff when the federal aid shuts off. As EJ said, or as you said, they're not going to just subsidize state and local governments indefinitely. So, this is enabling avoidance.

E.J. McMahon:

Yes.

Michael Hendrix:

Let's talk about policy changes to fix that long-term picture. We'll get to the spending cuts and the reforms on that side in just a moment, but we do have a question from the audience. And please everyone watching, send in your questions. Tim Ferguson is asking about legalized gambling. We've seen legalized gambling floated as a potential revenue source. At the state level and even at the local level, we see candidates like Andrew Yang, proposing a casino for Governor's Island. What do you make of proposals like legalized gambling and others that try to avoid, let's say, if we're treating these proposals generously, they're trying to avoid the challenges that we just described in taxing income or taxing other forms of wealth directly, considering how much they already pay. What do you make of these ideas, legalized gambling and others like that? EJ?

E.J. McMahon:

Since a referendum six or seven years ago, we have legalized gambling. We have legalized casino gambling in New York. Sports betting is what's been proposed by the governor. Legalizing sports betting. The big undone piece of casino gambling in New York is a full-blown casino in New York City. Yang has talked, without knowing that it's illegal, talked about doing such a thing on Governor's Island.

E.J. McMahon:

In the vast scheme of things, gambling delivers diminishing returns and relative peanuts in the context of the state and even city budgets. Gambling was not a game changer. The governor's own budget division when they propose the referendum, again, back in, I'm drawing a blank, five or six years ago, they had their own analysis that showed it's not a game changer. You now have saturated the Northeastern and Eastern United States economy with casino gambling. Of course, it wasn't the panacea for Atlantic City or Jersey either. But that's not a game changer, nor is, for instance, another issue, is legalizing marijuana.

E.J. McMahon:

By the way, the governor's proposal to legalize marijuana, for the purposes of taxing it, is significantly more complicated and bigger than the one he issued two years ago. Which he now says could raise over 300 million a year within four years, which is twice as much as his previous proposal would have raised. I won't get into the incredibly complicated details of that, which comprises about three quarters of an inch of the budget bill. It's extremely complicated. But all of that, by the way, with all the societal implications of it, in both cases, in the case of marijuana, optimistically to yield $350 million a year. Now, to be sure, 350 million here, 350 million there, if you're talking real money after a while, but still, again, they're not game changers.

E.J. McMahon:

The state has, I think, a structural gap now in the neighborhood of at least $8 billion to $10 billion. The city's got a structural gap almost as large. I would ... Carol, would you say six to eight, maybe their structural recurring gap?

Carol Kellermann:

A little lower than that. Maybe five. Four or five.

E.J. McMahon:

Maybe five. But that's pretty big. It's billions. It's not easy to think of a way to ... there's no small revenue short of some hopelessly disruptive income tax or business tax increase that comes up with money in those amounts. At the end of the day, you have to address spending, and here's the remarkable thing. Here we are, sitting here talking about this. We're now approaching the one year anniversary of this whole crisis when it began. When we knew that it had clobbered the economy, and pretty much could foresee as how bad it would be economically. What has the state and city done to rear in and restrain spending and spending growth? The answer, practically nothing. Practically nothing

Michael Hendrix:

So what do you make ... And Carol, I do want to get to you. EJ, what do you make of proposals ... David from the audience asked this question. To borrow more at the state and maybe even the city level, interest rates are so low, it's practically free money. Why not do that?

E.J. McMahon:

Well, first of all, deficit borrowing is another way of putting off the inevitable. It's another way of raising money that you can't afford to spend and putting off the day of reckoning, number one. Deficit borrowing is always a terrible idea. In the city's case, it's like mentioning rope in the house of a man who's hanged himself, because that's how the city almost went bankrupt in the past, was in borrowing it's way over a longer period of time, deeper into a hole.

E.J. McMahon:

I would also, to those who argue that, well, let's borrow, their interest rates are low. It doesn't matter how low the interest rates are. If you borrow, you have to repay it and you need to have revenue to repay the principle. And you've got an economy whose outlook is very uncertain. There's a debate, in New York city in particular, a debate is, you've heard this once, you've heard it a million times, everybody discusses it with friends and colleagues. Will the city come back? And the answer invariably, I think most of us would [inaudible 00:35:50], of course it's going to come back. It's not going to stay dark and semi-deserted.

E.J. McMahon:

That's not the actual question. In terms of the context we're talking is, will the tax base come back? The answer to that is almost certainly in doubt. Surely for much of the coming decade. Whether the tax space gets back to where it was at the end of 2019, that's very much in doubt.

Michael Hendrix:

Carol what's your take on this? Sorry to interrupt EJ.

E.J. McMahon:

No. Go ahead.

Michael Hendrix:

Carol, what's your take on this?

Carol Kellermann:

Hard to find anything here, Michael, where we disagree. I think EJ's right about these wishful thinking about gambling and marijuana, that somehow those things will generate revenue and we won't have to do anything difficult. They won't. You could generate the same amount of revenue that you'll get, best case scenario from gambling and marijuana, by canceling the film tax credit. There you've saved almost $500 million. So they're not a solution. And, you'd have to really do some sort of serious structural tax increases to generate large amounts of money, and nobody wants to do it. But I think the legislature is feeling that that's what they're going to do. I completely agree that borrowing.

Carol Kellermann:

It's been reassuring that the mayor has dropped that idea recently. He started out the beginning of COVID saying, "Oh, we're going to have to borrow $5 billion." And he got tremendous pushback about it. So he's not talking about doing that anymore. I think that the legislature assuring him, we're not going to approve borrowing, but don't worry, we're going to increase taxes to the extent that you will continue to get pass-through revenue that you can use for your schools and for your health care funding, I think has reassured him. It's not really being considered.

Carol Kellermann:

It is a good argument though, on the capital side, that we shouldn't cut capital spending now, because the interest costs are not high. And neither the governor nor the mayor is proposing to be particularly cautious about capital spending. They may be overdoing it a bit, but they're also saving a lot of money on debt service. The mayor always announces he's doing cost savings and he's saving $2.2 million between '20 and '22. And a great deal of it is simply improved debt service. So it's useful, but it's not a reason to start borrowing for operating costs.

Michael Hendrix:

Let's talk about that spending side. Carol, talk about the city, but also the state, to the degree that you'd like, but if the revenue options are not great or involve great sums, what are options on belt-tightening? It seems like the conversation is maybe very different from how it was in the 1970s or '80s. Admittedly, slightly before my time, but in reading about that history then, there just doesn't seem to be that consensus now for how to go about belt tightening or even where there could be. And it seems like the challenge is whether in labor negotiations or committed obligations, it just seems like our options are few, but they do exist, right?

Carol Kellermann:

Yes. Well, at the city level, there are lots of things that people have talked about repeatedly, but that are hard and that make someone unhappy. The public sector unions in New York City are very, very influential. And now, the argument keeps being made, you shouldn't hurt them because you're hurting middle-class people in a time when there is a lot of struggle. They're not like undocumented restaurant workers who are not getting the benefit of any of these government programs. I don't think they're in the same category, but it's not only very generous healthcare benefits in a time when everyone else is paying increasing co-pays and deductibles, the city pays employees Medicare premiums, nobody else does that. So there are ways to get savings. We could consolidate all of their union welfare funds and save hundreds of billions of dollars. There are a lot of things that are not new, but that no one has wanted to take on.

Carol Kellermann:

It's not just basic benefits. It's also that the way that services are delivered largely requires the consent of the public employee unions to change. So for example, you could save money in sanitation, if you made the routes longer to account for the fact that people are not generating as much trash and the routes could be more effective. You can't just change routes of sanitation in New York City. You have to get agreement. And the whole way you would save money is to have less routes and less drivers. One driver trucks with plastic dumpsters that automatically download into the truck. You can't just do that. So there are management initiatives. People have been trying to close firehouses for decades, because we don't have fires anymore. It's great news. We have health emergencies. We need medical tech, not firehouses. Can't do it.

Carol Kellermann:

This is really the challenge for the future, if the tax base doesn't come back right away. And if the whole ... I think I agree with EJ, New York will come back, but it will be different. It will be different. Something is going to have to change about Midtown Manhattan. You're going to have to tackle, the next mayor is going to have to tackle these management issues, which will put the growth of spending on a slower trajectory. There isn't a sense of everyone has to come together to solve these problems at this time.

Michael Hendrix:

That's a key message. New York City will come back, but it will be different. It's not like it's not known what our options are on the spending side.

E.J. McMahon:

That's correct. Absolutely.

Michael Hendrix:

They're known, they're just difficult, or considered to be too difficult. \.

E.J. McMahon:

Right. Yes. If I can make a point about that. In the past, and of course, the last time serious steps were taken or at least attempted to ring significant recurring savings out of the city workforce, with partial success, to an extent it wasn't lasting, but real if partial success, was in the fiscal crisis when the city was essentially bankrupt. Okay? Now, the reason that was possible, even what was accomplished then, to the extent it was accomplished, it required leverage. A mayor cannot ... Carol has mentioned things and all of the ... just the top of the list of all the things that are known that are out there. You can save money by doing XYZ and you have to get the unions to agree to them. Now, the short answer is, unions, no matter what the rhetoric is or what you hear, or the myth from history or anything, unions do not exist to make concessions. They will not make concessions. They're not going to look forward and say, "I see you're threatened, let us step forward and offer ..."

E.J. McMahon:

That doesn't happen. And by the way, the history is replete with examples. If you say, "If you don't make a concession, we will lay off this many workers." Their answer is always at the end, the layoff, because a laid off worker is a former union member. It's not a voting one. A mayor has to have leverage. The leverage can only come from the state. The fiscal crisis created, by the way, a string of legal precedents that made it absolutely clear that you can without risk of violating the contractual clauses of the constitution, that you can step in, you can freeze wages, in particular, on a statutory basis on a state level. Which is what gave ... that wage freeze in the fiscal crisis was the beginning of the leverage the control board had. And after them, Ed Koch, to begin having tough negotiations with the unions. Now, ultimately if the legislature gives that leverage to a mayor, and a wage freeze alone saves hundreds of millions of dollars instantly, without doing anything but not doing a raise.

Michael Hendrix:

EJ, it's remarkable, just as a side note, to realize that until 2019, the highest paid Cuomo in New York state was not Andrew Cuomo, it was a state trooper.

PART 3 OF 4 ENDS [00:45:04]

Michael Hendrix:

... New York state was not Andrew Cuomo. It was a state trooper.

E.J. McMahon:

Yes. Yes. Yes.

Michael Hendrix:

There's a vast number of state employees who, this is not a judgment on the quality of their work, but it should just be known that there's a lot of workers at the state level, certainly at the city level, they get paid a lot of money. And so that just says wage freeze applies to a lot of very big salaries.

E.J. McMahon:

You're not going to be squeezing anybody particularly hard except the lowest rung employees, if you don't raise their pay, when they're already pretty well paid. And that's a way to get into serious talks with them on work rules, such as the ones Carol mentioned. The unions will not talk about a work rule. Their model is, "Oh, you want to go to a one-man garbage truck with the automatic lift arm? What are you going to give us?" They will use a model they call cost sharing, which actually ultimately means no savings, in effect. But that's what they exist to do. That's not because they're bad people. The union is there to keep what it's got and to get more. That's the plain reason that they exist. You have to give a mayor leverage. So, the state has to do that. And by the way, legislatures don't initiate things like that. Governors do. So the governor has to initiate. And then you need-

Michael Hendrix:

And the financial control board is a form of that leverage.

E.J. McMahon:

That's a form of that leverage. It's essentially run by the governor. And as you know, I did a paper on this for the Manhattan Suit last summer. It's basically the template. But then even if you do that, you need a mayor who is willing to basically engage in a term worth of unpleasant pitch combat with all these people. By the way, Nicole Gelinas has a good piece in The Post today about this. If you listen to the enormous horde of mayoral candidates so far in the way they talk about this, not a single one of them shows the slightest willingness to do this. And I would contrast with you, if you go on YouTube, you can see Ed Koch's campaign commercials from 1977, when he's running in a primary, democratic primary for mayor. And you know what he says? He's saying stuff like, "Hey, we don't get enough value for our money." He actually talks about how he's going to take on the city workforce.

E.J. McMahon:

There's not a hint of that. Well, city government is people, especially municipal government, is what people do and how much it costs to have them do it. The state, somewhat to a lesser extent, although the state is indirectly also people, because school aid's the biggest item in the budget, and that essentially equals teachers. You have to be able to tackle the labor relations challenge and you have to tackle it in the very first instance by squeezing. And that has to start with the governor and the legislature. There's no hint of that yet.

Michael Hendrix:

And E.J., is there any other low-hanging fruit? I think Citizens' Budget Commission mentioned, for instance, economic development spending at the state level. If you're at all familiar with Governor Cuomo's Buffalo billions and spending nearly a billion dollars on a Tesla factory that was later worth in the range of 70 to 80 million for the equipment itself, you perhaps could assume that there's some money there that we could spend more reasonably.

E.J. McMahon:

Well, the money that is spent on economic development at the state level is principally bonded capital. So what you should do is spend, at this point, none of that, and use your bonded capital capacity and resources, which are not unlimited even with low interest rates, on infrastructure priorities and on development and on capital construction and rebuilding. That actually will promote a recovery of the economy. Secondly, Carol mentioned the biggest single item bar none, the biggest single piece of corporate welfare in the budget in a net negative operating revenue sense is the film credit. We basically write ... and it's not a tax break. The tax break is the cover for $420 million in subsidy checks handed to film and TV producers every year. Now what does the governor's budget do with that? That credit is set to expire in 2025.

E.J. McMahon:

We've been spending less on it the last year because the pandemic prevented as much production, but it's already flowing again in bigger and bigger mess. What did the governor propose? He not only didn't propose curtailing it, suspending it, ending it, he proposed extending it for another year beyond its scheduled expiration date. So I mean, that's headed in exactly the wrong direction. And I think that, again, none of these things are exactly secret. And you mentioned some of the Citizen's Budget Commission ideas. They're all really good. The Independent Budget Office every year puts out budget alternatives for the city. They are tried and true no-brainer ways to save literally billions at a certain point. Although a lot of them require leverage in dealing with unions, but leverage ultimately has to start with the state, which means the governor. If you don't have a governor pushing a legislature to enact and promote serious reform and to give leverage to city officials, by the way, not just in New York City, but local officials and municipalities and school districts and counties around the state, nothing will happen. That's the problem.

Michael Hendrix:

Who should Governor Cuomo emulate here, of either other governors out there in America today, or perhaps of New York governors in the past? Is it Hugh Carey? Is it Mario Cuomo?

E.J. McMahon:

Yes. It's Hugh Carey, Hugh Carey, and Hugh Carey.

Michael Hendrix:

In that order.

E.J. McMahon:

There's no question, Hugh Carey is the patron saint of all of this. Honestly, nobody comes close. And I mean, governors in recent American history, you might say Scott Walker in Wisconsin in terms of his dealing with the collective bargaining reforms there. He had the benefit, he had a somewhat different situation. But Hugh Carey is the hero of this type of situation. Now the problem is any governor, no matter who he or she is, how good or indifferent their record has been, what their politics are. Governor Cuomo is in his third term. He owns all this, in effect. Politicians get into their third terms and what they want to talk about in their third term is how they fixed everything.

E.J. McMahon:

One advantage Hugh Carey had, other than his own personality and his approach to issues, Hugh Carey was brand new. He took office and had no sooner taken office then there was a crisis. And his first State of the State days after taking office, he declared memorably the days of wine and roses are over, which was the beginning of the correctives of the Rockefeller era. Andrew Cuomo has now been governor for 10 years. He's on the second half of his third term and openly talking of seeking a fourth. That doesn't tend to be the point in the career at which governors, in effect, renounce a part of their past and turn over a new leaf. But frankly, to me, that's really the only chance for the right kind of thing starting to happen.

Michael Hendrix:

Carol, what's your message to the governor? And who would you tell a mayoral candidate in New York City to look to as an example?

Carol Kellermann:

Well, of course Hugh Carey is the one, but in terms of Governor Cuomo, I would just say to go back to the comparison to the great recession, that Governor Cuomo did some of this himself. He called the head of the teacher's union in, he called DC37 in when it was the beginning of his term and he was new, and said, "Guys, we've got to cut some spending here." So, he does know how to do this, and he is able to do it, but he's going into an election where you don't want to antagonize interest groups. It's different than you're starting out and you knew you were coming into a crisis and you want to show that you can resolve a crisis.

Carol Kellermann:

In terms of the mayor, in contrast, Mayor de Blasio started at the beginning of COVID to announce that he was going to get $1 billion in savings from the unions. He was going to work with them on productivity measures, and he just pushes the billion dollars into the subsequent year to reduce the deficit in his projections, but he hasn't gotten any productivity savings. And I don't think they've even tried to talk about them because no one really takes the will to do that on his part seriously. But yes, the model mayor is Ed Koch, who was a straight talking guy who came in after the crisis and he made ... There were some really tough times. There was a threatened MTA strike. The union was fined for striking. I think that times have changed and the political atmosphere in New York has changed. The coverage has changed. I think, in fairness, it's a lot more difficult to be a straight talking elected official who inflicts pain on people now.

Carol Kellermann:

So it really is going to take even more intestinal fortitude. And not only is Nicole right that nobody's talking about it, none of these mayoral candidates, but no one's asking them.

E.J. McMahon:

No.

Carol Kellermann:

The media's not asking-

E.J. McMahon:

That's right.

Carol Kellermann:

... tough questions. They're not having conversations like we're having. They're all asked the same, don't we need more affordable housing and don't we need this and that. And of course everyone says yes. So no one is asking them, how are you going to pay for these things? So they're really being let off the hook by the media and the debates that they attend, where none of the moderators ask anything difficult.

Michael Hendrix:

I would like to hear-

E.J. McMahon:

And of course-

Michael Hendrix:

Yeah. Go ahead, E.J.

E.J. McMahon:

Well, it's interesting because, and I was a reporter myself in a previous life covering a state government in the late Carey, early Cuomo era. It's interesting because the governor had now, unlike most of his tenure up until this past year, the governor is almost available on a daily basis doing COVID briefings. When the press can get a question on the budget in edgewise, invariably, and I'm not exaggerating, the first or second question always is, governor, when are you going to increase taxes? How come you won't increase taxes? That's actually the primary question he gets. So that pushes them in the wrong direction also. I totally agree with you.

E.J. McMahon:

The good news, it's gloomy, I know, but there's this piece of good news. There definitely is going to be another mayor a year from now. There is going to be a new mayor who does not own this and is in a position to strike off in a new direction. The less good, if not bad news, is that so far, none of the candidates evince or exhibit much of a Koch-like approach to these. And by the way, Koch was the best, but not alone in being willing to status ... If you look back on the debates and discussions, even in the '77 primary, with the possible partial exception of Bella Abzug, they were all talking about reform and about taking on the unions to one degree or another.

E.J. McMahon:

The question now is which new mayor will begin to grasp the nettle here, and then will he or she get help from the governor? That's the big question. But there will be a new mayor, which can only be an improvement. That's not just a castigation of Bill de Blasio, which is a whole other subject, but a first term-er and somebody brand new is in a better position to do what needs doing.

Michael Hendrix:

E.J., I appreciate your look at the bright side. And I think another point that's behind all of this is how can we return to economic growth? If we don't have a return to economic growth, we don't have the tax base, everything else becomes that much harder. And also so much really relies on leadership. And as you pointed out E.J., and I know you did too, Carol, so much just depends on the governor and what Governor Cuomo decides to do. So this is an incredibly important discussion. Thank you both for being a part of it, and thank you to our audience for tuning in and for your questions. We'll continue this conversation more. We'll especially be looking in future events at longterm, these longterm challenges as you've heard us discussing, and how we can introduce some reforms and how we can get our leaders to listen. Thank you very much for tuning in.

E.J. McMahon:

Thank you.

Carol Kellermann:

Nice to be here.

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