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New York City's Fiscal Crisis: What's Next?

Nicole Gelinas Senior Fellow, MI and Contributing Editor, City Journal
Eric Kober Adjunct Fellow, MI
E. J. McMahon Research Director, Empire Center; Adjunct Fellow, MI
Michael Hendrix Director of State and Local Policy, MI
Wed, May 20, 2020

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New York City's Fiscal Crisis: What's Next?

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As major parts of New York City’s economy remain in lockdown, the city is bracing for its deepest downturn since the Great Depression. The city's comptroller anticipates more than 900,000 New Yorkers losing their jobs this quarter and an unprecedented decline in tax revenue.

New York entered this downturn from a position of financial vulnerability, having missed opportunities to slow spending and build reserves. Today, City Hall needs to do more to control spending in light of fiscal reality. It is likely that the city is in for lean times, even with additional federal aid.

On May 20, Manhattan Institute scholars hosted a virtual discussion on how to save the city’s budget, prioritize core services, and restore growth to the Big Apple.

Event Transcript

Michael Hendrix:

Welcome to the Manhattan Institute's discussion on New York City's Fiscal Crisis. I'm Michael Hendrix, director of state and local policy here at MI, and we're grateful to be joined by you and some of MI's leading experts on the city and its finances. The city is in its deepest downturn since the great depression. Hundreds of thousands of New Yorkers are out of jobs, businesses are shuttered, and the city faces unprecedented declines in tax revenue.

Michael Hendrix:

Just this week, the city's independent budget office projected a tax revenue shortfall of $9.5 billion over the next two fiscal years in New York City, much greater than the administration's anticipated shortfall. Well, New York entered this downturn having been able to avoid making a lot of tough choices. There's little avoiding tough fiscal straits for the foreseeable future. So, today we're going to ask just what is the city's fiscal state and how does the state impact the city? What is the federal role and where are we going to go from here and where do we want to go from here?

Michael Hendrix:

To answer these questions and your questions, we have a stellar lineup. After I introduce them, we'll dive right in. Enter your questions throughout our program on our Slido platform and I'll either route them into our discussion or save them for Q and A at the end. So, today we're joined by Nicole Gelinas, senior fellow at the Manhattan Institute and a contributing editor at City Journal.

Michael Hendrix:

Eric Kober, an adjunct fellow at MI who retired in 2017 as director of housing, economic and infrastructure planning at the Department of City Planning. And EJ McMahon, founder and research director of the Empire Center in Albany and an adjunct fellow here at MI. Thank you all for joining.

Michael Hendrix:

Now, Eric, you recently authored a brief on Mayor de Blasio's latest proposed budget and you said that, "Even with additional federal aid, the city is in for a period of austerity." Why is that?

Eric Kober:

Well, for a couple of reasons. First of all, we don't know how bad this economy is going to get, but it could be quite bad. And the mayor's executive budget by the consensus of many organizations, and you talked about IBO, but others have also chimed in saying that the revenue estimates that the mayor came out with are probably higher than the worst case scenario that the city faces.

Eric Kober:

So, the city really doesn't know how bad it's going to get. At the same time, while federal aid is certainly appropriate, the federal government has a history of stabilizing local economies in times of fiscal shocks. We don't know how much money we're going to get from the federal government. And the structure of the federal government is really biased against large and relatively affluent states like New York. It's biased towards small states.

Eric Kober:

And so, if New York were to get a share of the total pie that's in proportion even to its population, that would be a considerable achievement. And that allocation, whatever it ultimately ends up being, has to be shared not only with the city, but the state and other municipalities in the state and other entities, other governmental entities.

Eric Kober:

And given all this uncertainty, I think it's a very safe assumption or reasonable assumption that the city is not going to be made fully whole and that it needs to plan for a much less favorable scenario than is currently planning for.

Michael Hendrix:

Nicole, I'm wondering if you could expand on Eric's thoughts here. You've written that the mayor has, "Shown no indication that he understands the fiscal severity that the city is facing." And you've also said that the MTA is, I believe the quote was, "Begging and borrowing to stay alive." Why is the city and its subway struggling now?

Nicole Gelinas:

Yes. Thank you Michael and thank you to Eric and EJ, my fellow co-panelists. I think the mayor is not being conservative enough when it comes to estimating these revenue shortfalls. If we went back to last November, the last budget updates that was put out before the virus started to first affect our Chinese tourists to the U.S and then obviously spread much beyond that, the city was expecting to take in about $66 billion in tax revenues for the upcoming fiscal year, which starts in a few weeks on July 1st.

Nicole Gelinas:

Of those tax revenues, about half comes from the property tax, the other half comes from personal income, business income, sales, biggest of those is the personal income tax. So, if you're looking at $66 billion of tax revenues that were supposed to come in, and we're basically missing a quarter of economic activity, it is more prudent to think that we're going to lose at least 20% of our fiscal year tax revenues. So, that would bring you closer to $14 billion in lost tax revenue just for one fiscal year.

Nicole Gelinas:

I think we could even lose $20 billion in lost tax revenue. The MTA has this much worse because half of their budget comes from fares and tolls. The other half comes from tax subsidies. Their fare and toll revenue on the subway and on the commuter rail system has gone down to being non-existent. On the bridges and tunnels, which historically subsidized the mass transit system, traffic has been down more than 60%, so those revenues have just fallen off as well.

Nicole Gelinas:

I don't think it harms us if we err on the side of saying, "Tax revenues are going to fall further than they actually fall," and then we would be left with a positive surprise. But the city is certainly not doing that. You don't see that from the city council and the budget hearings that the city council held all week. Very little atmosphere in those city council hearings of a real crisis in pushing the agency heads to really look for every last dollar or even frankly every first dollar that they can cut out of the budget before having to go and affect frontline services.

Michael Hendrix:

That's fascinating. EJ, what are you seeing up in Albany? And what might that mean for the city's fiscal picture?

EJ McMahon:

What we're seeing in Albany is a bad outlook and otherwise fiscal paralysis. This is about as bad a financial outlook as the state has ever had, at least since they began keeping the books in the current fashion 30 or 40 years ago. What's really surprising about this is that New York State has the earliest fiscal year start of any state. Our fiscal year is peculiar, it begins April 1st. The vast majority of states start on July 1st, so they haven't gotten their new fiscal year yet.

EJ McMahon:

New York was ahead of the curve when it came to understanding that it had to make budget adjustments to reflect the impact of the pandemic. Unfortunately, as well into the crisis as March 1st, which was following the week that the stock market first had its major drop and correction in the space of a week due to pandemic fears, the state actually not only didn't do anything, but Governor Cuomo's budget director, and the financial committee chairs, and the legislature reached agreement that there would be 700 million more in revenue than they had originally projected.

EJ McMahon:

That was a preposterous on its face at the time. The governor basically avoided the subject of budgetary impacts as the crisis got worse and intensified. Then as we got down to the final stretch before the adoption of the budget by the legislature, April 1st and 2nd, basically quick deals were cut to basically pass the budget the governor had proposed at the beginning of the year with no significant cuts. All they did was forego a proposed school aid increase. Basically the rest of the budget is what the governor proposed in January. And the governor proclaimed, you can't spend what you don't have while announcing a passage of a budget that spends about $10 billion we don't have.

EJ McMahon:

And since then, our governor has talked frequently of having to cut the budget by very large amounts unless he gets a large bailout from the federal government. But he has not actually done that and we're now almost two months into a fiscal year in which, again, the budget on paper in front of us would spend more money than the state has. And that's just the start. The state has a very bad fiscal outlook. And oh, by the way, the budget the state passed on April 2nd when we were well into the pandemic and the economic impact of the pandemic shifts $367 million in cost to the city.

EJ McMahon:

So, not only it doesn't help the city, it actually hurts the city and as well as the counties. So, I would say we haven't gotten off on the right foot by any stretch.

Michael Hendrix:

EJ, I want to get back to this question of federal support for New York, but Nicole is New York City going to need a bailout? I mean, there's a lot that we certainly don't know about future revenues if we're honest, but it honestly looks bad.

Nicole Gelinas:

Yeah. It's certainly not realistic to expect a state or a major city to go through three months of cessation of economic activity and not get some help from the national government, which of course can borrow more cheaply and readily for operating expenses than we can do, and generally for good reason. But, so yes, we should get some federal aid above and beyond the one and a half billion for New York City that was put into the CARES Act.

Nicole Gelinas:

I think the city is going about this the wrong way. Rather than just asking for vague open-ended bailout, it should be preparing a menu of essential service, this year's operating costs to provide those essential services, and then go to the government and ask for those specific budget items, not including the long-term pension and the long-term healthcare benefit cost of those services.

Nicole Gelinas:

And we have to keep in mind, the city didn't enter this crisis from a very good position. Now, of course, having already stipulated that no city could have been ready for this crisis, the city wasn't even ready for a much smaller crisis. I mean, you're looking at a city with about a hundred billion dollar annual budget now creeping up towards that number. Two thirds of that is funded by city taxes and the rest comes from federal and state taxpayers.

Nicole Gelinas:

But we came into this with only $2 billion in reserve set aside. So, you had 2% of reserves at the end of one of the biggest economic booms over 10 years that the city had ever seen. So, if you want to be the progressive government that holds your workforce as harmless as possible and that continues to provide services even through a mild recession, then you would have needed to put away a much more aggressive reserve fund. It would not have been unreasonable for us to have stowed up 10, $15 billion. And that would have gotten us through the first phase of the first fiscal year of this crisis.

Nicole Gelinas:

But we had very little, I mean, we're already dipping into long-term funds that we set aside for future retiree health benefits. That's already a hundred billion dollar unfunded liability. So, New York in some ways, although this crisis is obviously certainly not its fault, it is suffering already from wanting to be the progressive government, but not wanting to pay for that progressive government and not being able to afford to pay for that progressive government even before the pandemic hit us.

Michael Hendrix:

EJ, it seems like there's a similar situation or some parallel here with Albany and a mismatch between resources and vision. I believe Governor Cuomo is asking for $60 billion in federal aid for New York. Should he get it? And if so, are there strings attached?

EJ McMahon:

No. There's no number big enough that the governor is unwilling to exaggerate it further, I think. There's a bit of gamesmanship in that figure, $60 billion plus. He doesn't need by any stretch $60 billion. Current budget hole is at worst 10. And actually he would be more than happy to get 7 or 8 billion from the federal government on a stop-gap basis now would make it unnecessary for him to do any serious cuts in the current year.

EJ McMahon:

The biggest problem is that contrast to any previous fiscal crisis in the last 40 or 50 years, this one is based not partly on very large spending trends, but on the fact that the state is projecting, unrealistically, that its tax receipts are dropping by 7 or $8 billion in the current year, and that total tax receipts won't recover to last year's level for four more years till 2024.

EJ McMahon:

That means that your resources have been knocked down several pegs in terms of what they can support and spending is on a trend to go far beyond that. And so, if the federal government gives the state funding sufficient to avoid any cuts for any period of time, even for two or three years as it did in 2009, the experience here in New York indicates there will be very little fiscal discipline on the state level until they're absolutely forced to confront a scarifying cliff that they're about to fall off when federal aid finally dries up.

EJ McMahon:

Right now, again, to repeat, we're two months into the fiscal year almost and actually the governor has not really made anything in way of real cuts. The main thing he's done is he has withheld indefinitely a few hundred million dollars in state revenue sharing aid to cities, mostly smaller cities around the state, which are the most fiscally vulnerable right now and which are going to have huge cashflow problems as a result.

EJ McMahon:

So, I would say that there have to be conditions tied to any federal aid to make sure that the state doesn't just continue business as usual, or as the governor himself put it in one of his recent briefings, he wants to be able to do what he normally does, or he was complaining that he can't do what he normally does. And unfortunately what he normally does, while not excessive by New York historic standards, is $10 billion or more than we can afford right now, much less in the future.

Michael Hendrix:

Eric, I wonder, if we're saying we can't necessarily afford business as usual, how should we be adjusting here? I want to bring in some of the questions from the audience. I see a question from Alan. "Does COVID provide an opportunity for the city to roll back some of its spendthrift provisions such as in head count or overpayment on employee compensation?" Sam is asking, "Should New York City politicians be using furloughs as a tool with the expanded federal safety net instead of keeping workers on the payroll?" What are some of our options here to reflect it's not business as usual?

Eric Kober:

Well, one option that the mayor has embraced is a hiring freeze, which is to say that the city is not filling vacant positions at the moment. And that does result in some cost savings in the current fiscal year and the next fiscal year if those positions aren't filled. Beyond that, there are many things that the city can do and has done in the past that helps it control the costs of its personnel, which are the largest portion of city expenditures, a freeze on salary increases, for example, is one thing. An early retirement program in which older employees are encouraged to take retirement through some kind of financial incentive.

Eric Kober:

Again, if those positions are not refilled, the city then can save money. Beyond that, there is the issue of simply reducing the head count through furloughs, which are temporary, or through layoffs, which are permanent. And many observers of the city have copied that on the fact that despite technological advancement that has led to higher productivity in the private sector that the city keeps adding people and that its head count has got up steadily over last couple of decades.

Eric Kober:

What happened during the Bloomberg administration is that, during the good times and the early part of the two thousands, head count went up dramatically then it fell quite significantly after the great recession in 2008. De Blasio administration has not only restored the cuts that Bloomberg made, but added staff on top of that.

Eric Kober:

So, the ideal way that this would be done is through considered productivity improvements in which the city would use technology and better work practices to reduce the number of people it needs to perform the same level of services. What has frequently happened in the past is that the city gets itself into such a deep hole that cuts are made kind of willy-nilly and just people are laid off on a basis of just 5% of each agency or some similar formulaic method. And it started a wave that actually harmed services for a time. And that may well happen again as we get further into this crisis.

Michael Hendrix:

Eric, I think you're making a point too that Nicole, you've made that we seem to be cutting the very things that make New York City livable. And that we often have some of the greatest control over, our parks, pools, beaches, not really rolling out open streets as much, while still paying billions in union back pay or barely touching projects. So, expand on how we should be reorienting New York City fiscally.

Nicole Gelinas:

Yeah, we need to be doing triage. Right now about half a million people generally on the higher income side have fled the city at least temporarily. We don't want to give them more reasons not to come back. So, things like the public park, the public beaches, open streets so people can bike to work, should they choose to go back to work in a Manhattan office. All of these things are part of the essential services.

Nicole Gelinas:

And yes, how do we pay for those things in addition to paying for basic police, fire, sanitation and everything else? Yes, we need to do furloughs to save cash right now. We have tens of thousands of people who serve school lunch, who cook the school lunch, who helped schoolchildren cross the street, who inspect restaurants. All of these things are important, but right now they can't do these jobs.

Nicole Gelinas:

They can be transferred onto the federal safety net, most of them to absolutely no financial harm. The city can continue to pay health benefits. You buy yourself six months of cost-savings across tens of thousands of the jobs that hopefully gives you the money to hire these people back in the fall or in the spring. But if not, it also gives you the cash to make sure that layoffs in the future don't have to be as dire as they otherwise would be.

Nicole Gelinas:

So, that's something that the city should have been doing in March, should have done at minimum in April, but not brought up, again, at the city council hearings. A wage freeze, as both EJ and Eric have suggested, is critical. No public sector employee should expect a private sector tax base that has now lost more than 900,000 jobs in New York City to support wage increases for the public sector workforce. But not only just not wage increases, the city continues to budget for a 1% raise across the workforce that it hasn't yet contractually signed.

Nicole Gelinas:

Come three years from now, that's going to cost us an extra $2 billion a year, but the city is still budgeting for that. At minimum, that should be zeroed out. A one and a half billion dollar payment that the city has to make in back pay for teachers this October, that should be canceled. You can say, "Well, you can't cancel it. You agreed to it." That is where you also use the tool of layoffs and furloughs.

Nicole Gelinas:

If teachers and other civilian workers don't agree to give back that back payment pay for work done in 2008, then you have unfortunately a worst fiscal situation when you are going to have more crowded classrooms, less assistance for teachers and so forth. But there's a lot the city can do without having to go threaten to lay off cops as the mayor has already done.

Nicole Gelinas:

2000 new educational administrative workers that de Blasio has hired. Go through every single one of those jobs in the back office, is that job necessary now? Now, of course, any budget-cutting is basically sending someone out to a job market that is non-existent. But again, that is something the city should have thought of during the good times. It cannot hold the city workforce harmless with an evaporating tax base. It will make it worse in the long run for these workers as well.

Michael Hendrix:

Now, I want us to touch on spending on capital projects. There's a lot of questions we're getting from the audience on that, but Anita is asking here, "Can this stressful fiscal time be used to renegotiate costly public sector contracts?" I want to turn to you EJ. What do you think about that question? But especially with the point to clarify that the city has some of its hands tied by state law on what it can do with personnel management. Isn't that right?

EJ McMahon:

Yeah. You can't overemphasize the extent to which the city is subject to state law on this. And without help in the form of statutory permission from the governor and the legislature, the city is really in a very difficult position. Even if you, for a moment, assume that you had a city administration that was willing to aggressively seek to maximize savings from the city workforce to freeze wages and to make other changes to improve efficiency and even to do some furloughing. All of those things arguably would require statutory forbearance from Albany because all of those things are ultimately subject to a state collective bargaining law.

EJ McMahon:

The good news is, there's a precedent because the 1975 Financial Emergency Acts, which created the control board, New York State Financial Control Board, during the city's fiscal crisis then, had sweeping language declaring a fiscal emergency and creating the groundwork for the control board to freeze the pay of city workers at that time.

EJ McMahon:

And that statutory approach then and subsequently as applied in the case of other distressed municipalities around the state periodically has withstood challenges repeatedly from public employee unions, both in the state's highest court and subsequently in federal courts. So, there is a way to do this. It should be starting already. Unfortunately, you hear no hint or even a hint of a hint from the governor, much less the legislature, of any serious intention to do anything about any of this.

EJ McMahon:

And by the way, the city is not requesting this. The main thing the city council is hammering the legislature for on background right now is the ability to do more short-term borrowing to cover their cashflow problem due to the change in tax filing deadlines. It's difficult, again, to overemphasize just how frozen everything is.

EJ McMahon:

We could possibly be facing a worst situation at every level of government, especially municipal governments, city government in New York City, municipal governments elsewhere in the State of New York. And essentially, no steps are being taken to deal with this. The legislature is not in session. When it has "sessions" virtually, it does them online.

EJ McMahon:

The current majorities in the legislature have no inclination, it appears, based on what they say, to begin addressing these problems other than griping that the governor has too much power, which he's not using right now. We're basically wasting valuable time. And again, a pay freeze just to start with is a way to preserve public services. You don't have to reduce staff as much if you don't have to give raises to everybody working for the city, and for that matter, for the state and every other level of government in New York.

EJ McMahon:

We estimated it would be more than $700 million conservatively in the next city budget just for city employees, not counting the MTA or the health and hospitals corporation. So, these are essential steps that need to happen. The city can't possibly balance its budget without help from the state. And I don't mean a handout of money from the state. I mean flexibility that requires a state law for the city to manage in strenuous circumstances and to make changes, personnel changes, and changes in the deployment of workers and in what they're paid so as to try to deal with the so-called new normal. We're not seeing that now. And that should be really very troubling.

Michael Hendrix:

EJ, just a quick question, and this is also from the audience. Have reported tensions between the mayor and governor in any ways deepened this fiscal crisis, do you think?

EJ McMahon:

Well, there's no question that they have not helped. The tensions between Governor Cuomo and Mayor de Blasio have not helped the city, or for that matter, in the longer run, the state, I would argue, for years now. In this situation, I think it makes a bad situation worse. Now, there's a history of tension to some degree or another between mayors and governors in New York.

EJ McMahon:

Under Governors Pataki and Mayor Giuliani, it was largely a creative tension, although it was real. I think right now it's going to make the situation harder. Again, as I said, in recent budgets, Governor Cuomo has seldom resisted an opportunity to nickel-and-dime the city in ways that just gets dings in on the city budget, which he continued to claim publicly has lots of money and can afford anything he throws at them.

EJ McMahon:

In the current budget, in this pandemic, the state shift to $357 million in costs to the city. Now, whether one makes a case for it one way or the other, if the federal government had done that to New York State, you would never be hearing the end of it from the governor. And again, in a way that has no financial impact on the state. And I'm not talking about money, but the state needs to create statutory flexibility for the city of New York, for all other local governments, and last but not least, for itself to manage in this situation. And it's not doing so. There's not a spirit of cooperation.

EJ McMahon:

In fact, if you listen to or you subject yourself to the governor's daily briefings or read the transcripts of those briefings, you will search in vain for any indication that the governor actually has any specific concern about the physical condition or outlook for New York City or any other local governments in New York State. In fact, he tends to claim that the state is the entity that funds everything. He said more than once and repeatedly in the last two weeks, "I pay for police, I pay for hospitals," et cetera. First person singular often.

EJ McMahon:

Well, the State of New York has no direct role in funding local police. It has a revenue sharing program that if you counted every penny as being related somehow to local police, it would be like maybe 30% of the cops outside New York City. He basically is concerned and focus entirely on the state budget. The relationship with the city has not been good. And it does not bode well for the outlook, I would say, in the near future.

Michael Hendrix:

Yeah. I believe Eric, you wrote in your recent issue brief that the governor, as EJ was saying, can impose special oversight powers over the city's budget. That decision, I believe, normally comes in and around July. We should also have a New York City budget decision in June. What should we be watching here with both next month and in July with these kinds of decisions?

Eric Kober:

Well, what's going to happen next is that the city council has to adopt the budget, which is for the next city fiscal year, which begins on July 1st, and that is fiscal year 2021. And that budget has to be balanced, as the fiscal year 2020 budget, which is now wrapping up, also has to be balanced by state law.

Eric Kober:

And it has to be balanced by what are known as generally accepted accounting principles, which is to say that the city can't do the kinds of shell games that the state does in which it balances its budget just by postponing cutting the checks on some of its bills to the following fiscal year. It really has to use what's called accrual account in which to recognize expenses at the time they were incurred. And so, that puts more of a burden on the city to keep its house in order.

Eric Kober:

So, the city has to balance the budget. If the city either fails to balance the 2020 budget or adopts a budget for fiscal 2021 that's not in balance, then a process can be triggered at the state level. And it's actually the legislature, not the governor, who pulls the trigger. The financial control board, which is a state body which was first set up in the 1975 fiscal crisis and continues to exist in a dormant state, the financial control board can determined that the city has failed to balance its budget and ask the legislature to reimpose the special powers that it had in the 1970s, which include the ability to deny spending that's already been approved by the mayor and the city council in order to keep the budget balanced.

Eric Kober:

And my own take on this is that, the club or the financial patrol board really exists to make sure that the city balances its budget and that it would be just an unbearable humiliation for both the mayor and the city council to have an unelected state board take over the city's finances. So, in all likelihood, they will enact the balanced budget next month. But how they balance the budget is important.

Eric Kober:

If they balance the budget by trading reserves, including the, as Nicole was talking about, the reserve for a post-employment health benefits that the city has set aside and they do other one time savings that aren't recurring in future years, then they might, at a technical basis, be able to say they passed the balanced budget for fiscal '21, but they're storing up an enormous deficit in the following fiscal year, which begins in the middle of next year. And in which many economic observers believe that the city's economy will not have fully recovered from the current recession. And city revenues will continue to be quite depressed.

Eric Kober:

And at that point where you have a trading of reserves and at the same time continue to press revenues, the city really has to face it and then you get the hacking away at the budget that results in really damaging layoffs. And so, what we need to watch out for is, first of all, will they enact a balanced budget, the mayor and the council? And as I said, I think they will, but how they do it is also very important.

Michael Hendrix:

Yeah. In terms of how they do it, Eric, I want to stay on you for a moment. You've, I believe, written on a "tale of two recession" budgets between this mayor and Mayor Bloomberg in the last recession. Is there a model there from the last recession that we could learn from about how to be better placed for the future?

Eric Kober:

Ah, well, there's a model. Certainly the model it's not unique to the Mayor Bloomberg in the last recession, but he did follow it. The idea is to base your proposed, what's called a gap program, a program to eliminate the budget gap, base your program of budget savings and revenue increases if they're realistic, and probably we're not very realistic in this context. But base that on a worst case scenario, which you hope would happen.

Eric Kober:

And the current city comptroller, Scott Stringer, suggested in his comments on the executive budget that the recurring savings that the agencies achieve in the next fiscal year, in subsequent fiscal years should be in the range of 4% of the base coming into the next fiscal year of what the agency spending was in the current year.

Eric Kober:

And Bloomberg's cuts in 2000, and I worked close to that, they were around 3.8%. But de Blasio's proposed cuts at his executive budget, his proposed budget were much smaller on a percentage basis, and particularly in terms of recurring savings. Because many of the savings he's proposing only occur in one fiscal year.

Eric Kober:

So, there is a playbook. The playbook which many people are suggesting is to achieve sizable recurring savings in the next fiscal year. As I said, Stringer has suggested 4%, the Daily News Editorial suggested 4 to 5%. It is a much larger number, and make sure that you do it in a way that carries over into future years by, for example, reducing the payroll significantly.

Eric Kober:

And if things don't turn out to be quite so bad, then what will happen is that the city at the end of, for example, fiscal year 2021, would have a surplus. And that surplus can be used in fiscal year 2022 to restore some of the cuts to meet needs that have emerged unexpectedly. But you're in a much better situation when you're being very conservative with your projection and you're rolling a surplus than you are when you bet the house on things not being quite as bad as many people are saying they're going to be.

Michael Hendrix:

All right. I wonder too about long-term spending, Nicole. We're getting questions from the audience about long-term capital spending, not just for the city but for other entities like the Port Authority. Johnny from our audience was asking about new jails, borough-based jails, which I know you, Nicole, have written on. Billions anticipated in spending there.

Michael Hendrix:

Michael is also asking about continued airport spending versus the kind of demand that the MTA is getting for spending on transit, rail, buses, things like that. Nicole, what should we be doing about that long-term capital spending to keep in mind the kind of new fiscal environment that we're in?

Nicole Gelinas:

Yeah. There's no way we're going to spend $9 billion to build four high rise jails in four separate dense neighborhoods of the city. For one thing, these neighborhoods don't need the destabilization of the jail construction and the jail presence. Again, people don't need one more reason to give up on the city right now. Do we need new jails? Yes, but we can rebuild new jails on Rikers Island, transfer people and close existing jails as we open up new jails. And that'll save you at least 20% of the cost in building on one site with bridge transportation to the island rather than having to stage four separate construction sites in four populated residential neighborhoods. I mean, that was a bad idea last year and it's a worse idea this year.

Nicole Gelinas:

The short story of the Port Authority is they make tremendous profits at airports and toll roads and tunnels. They use those profits to subsidize the bus terminal and the path system. So, to save operating money, the first thing you do is just close two of the airports. I mean, traffic is down 85 to 95%. You can close Newark and LaGuardia, consolidate all passenger traffic at JFK.

Nicole Gelinas:

And you suggest this to the Port Authority and they say, "Well, we would have to ask the FAA so we can't do it." Well, ask the FAA. I mean, the worst thing that they could say is no, but that is an example of nimble, flexible decision-making that would save you a few hundred million dollars right now that you're going to need back later.

Nicole Gelinas:

Longer term spending, if we go ahead to fiscal year '22, '23, '24, since Eric gave the optimistic case that we end up with a surplus next year, and I'm not disagreeing with Eric because none of us knows what's going to happen. But to give a counterpoint, I will give the pessimistic case.

Nicole Gelinas:

This is a discontinuous event. If you look at the last 50 years and ignore little recessions, even the 2008 recession, even ignore the fiscal crisis of the 1970s for a few minutes, the city's economic development policy for the past 50 years has had two components. You cram a lot of people into office buildings in Midtown. We got all of the Sixth Avenue buildings, all of the Park Avenue buildings, Madison Avenue, we've continued to build large buildings on Madison Avenue. So, cram daytime workers into tall office buildings.

Nicole Gelinas:

So, we did that starting in the late sixties. It was in the 1969 master plan and it basically worked. I mean, give the Lindsey administration some visionary credit. The other part of that is over the next decade, starting in the late seventies and through the eighties, you rebuilt the transit system so you could get those people back and forth to offices.

Nicole Gelinas:

So, we solved the problem of middle-class flight to the suburbs in bringing them back during the day. So, every single day, before Coronavirus, you move 4 million people onto the Island of Manhattan in the morning, you cram them into office towers. And at the end of the day, you move 4 million people off the Island of Manhattan. Most of the people, almost all of them, take mass transportation to Manhattan.

Nicole Gelinas:

If you had only a 30% drop in transit ridership on the pre-Corona numbers, you would double the number of cars in Manhattan. Manhattan would just be a standstill. So, right now both sides of this equation are broken. There's no indication that people are going to go back to office towers the way they were last year or over the winter. And there's no indication that we figured out how we're going to get them there. We don't know how we run mass transit safely in this environment.

Nicole Gelinas:

And it's not only the Coronavirus situation, does a vaccine solve this? Well, people's commutes were pretty miserable before this, because the city and state had squandered decades of boom time not building the transit infrastructure that we needed to build. I mean, a lot of people working at home in the suburbs, in the outer boroughs are saying, "I really don't want to go back to work to Manhattan five days a week."

Nicole Gelinas:

That is the underpinning of the radius of a hundred mile economy. Taking billions of dollars home from Manhattan every day is what props up Long Island real estate prices, Westchester, what contributes to outer borough activity. And so, if that is going to be broken long-term, and maybe it will, maybe it won't, but we have to consider the possibility, then we're not talking about, do we have to cut $20 billion from the budget? We're talking about rebuilding a budget from scratch and rethinking what has basically kept the city together for the past 50 years, which is essentially Manhattan creates wealth. That wealth is redistributed in massive amounts of spending throughout the region.

Nicole Gelinas:

Can we move to a different model if that model is broken? Historically, the city has changed models, but historically it takes about 20 years of pretty heavy pain before we competently switch models. And we also need a lot of luck.

Michael Hendrix:

EJ, I'm going to get to you in just a moment on long-term reform. But Eric, a question for you. If, as Nicole was saying, we're worried about people returning or not returning to Midtown or we're seeing people leaving New York City permanently or temporarily, what does that mean for tax revenues? I see that there's a question here from Christine on income taxes, but I know Eric, you're also looking at property taxes too.

Eric Kober:

Well, I think that in the long-term, New York has enduring strengths and that those enduring strengths will prevail. The city has a history of having bounced back from some pretty significant economic shocks, not only the fiscal crisis in the 1970s, but also the great depression before that.

Eric Kober:

And time after the early 1990s, where there was a steep recession after 9/11, and the great recession. So, the city has a history of bouncing back from economic shocks. The question from my perspective is really the short-term. And of course, what everybody wants to know is how short is the short-term in which we're going to experience a great deal of pain.

Eric Kober:

And the answer is that we don't know, and that we should be, first of all, as we've been talking about here, budgeting on the basis of being able to endure a multi-year period of depressed finances and then asking how do we set ourselves up for the recovery. The recovery is not going to be the same economy. The recovery economy is not going to be the same economy that we had going in earlier this year in January, say, or February.

Eric Kober:

I mean, there are certain aspects of this we understand pretty well. Terrestrial retail is going to be greatly diminished. Other industries are going to be substantially different. International tourism is probably going to be among the hardest hit industries and among the industries that will take longest to recover. Other kinds of economic activity may increase, but we need to understand how we can be competitive.

Eric Kober:

The city had a housing crisis going into this recession. It's going to alleviate itself a little bit as a consequence of fewer people moving to the city to take jobs. But we don't want to make our housing affordable by being distressed. That's not a long-term solution. The city needs to begin to solve its long-term housing problem by being more open to private investment in new housing.

Michael Hendrix:

EJ, I wonder, can we be hopeful for long-term reform in Albany or city hall?

EJ McMahon:

Do you want an honest one word answer?

Michael Hendrix:

Yes.

EJ McMahon:

No. Let me put it this way. I'm pessimistic based on what we see so far. I'm pessimistic that it's going to take an unfolding calamity that is so crystal clear that even Albany and New York City politicians understand it. By which point it'll be even harder to fix what's broken. But I would point out the following.

EJ McMahon:

I just was double checking the numbers, in fact. In 2017, the residents of New York City, and residents of New Jersey, and Connecticut who are New York State taxpayers are largely commuters, generated over half of New York State's income tax, which is its largest revenue source.

EJ McMahon:

Another statistic which you may have heard is that over 40% of the New York State income tax is paid by the highest earning 1% of taxpayers, which are generally income millionaires who are predominantly concentrated, not entirely in the New York City metro area.

EJ McMahon:

We all know what we're seeing and hearing about the temporary dislocation and relocation of New Yorkers, particularly affluent and wealthy Manhattanites and Brooklyn residents to other locations during the pandemic. We could be witnessing an unfolding irony, which is, you hear a lot of talk about the urban model and will cities survive? You could have a situation where there's such a correction in rents and real estate prices that the city's population stabilizes and does not go down.

EJ McMahon:

But if you lose enough of your most affluent and highest earning taxpayers, the governance model will be even more broken than it is right now. Because we've constructed a public finance model at the state level in New York and in New York City that is heavily dependent on very high value property and on very high earning individuals.

EJ McMahon:

And if you don't retain all of those people and retain the value of that property, you are in huge trouble. And by the way, I'm not even talking about capital. There are many, many fascinating discussions to be had about misplaced capital priorities. And I would say Nicole, in particular, does a great job of leading a lot of those discussions. For instance, with regard to these prisons or the MTA.

EJ McMahon:

I'm not even getting to capital because capital involves the money that politicians view as a quasi-play money because it's bonds, it's bonded capital and it involves a strong federal component. I'm talking about the operating budgets of the city and the State of New York.

EJ McMahon:

Without a commitment to reform, and I mean statutory reform driven at the state level. The city and the state, and by the way, by extension, a lot of local governments all over this state are in big trouble. Like in the City of New York, there's a very unusual governance model and situation in New York State seen nowhere else in the country.

EJ McMahon:

One way to look at New York City is that New York City is the largest regional government in the Americas. The other way to look at New York City is that New York City is one of two states located within New York State. It has a state-sized budget, it has a state-sized population, it has a state-size array of taxes and regulations. But it is ultimately a stepchild of another state, the state that it is within.

EJ McMahon:

It can't make any really important decisions, almost without exception, really significant structural decisions without permission or cooperation from the State of New York, including its own large legislative delegation in Albany. Which right now is interested primarily, if you follow their bill introductions, in competing to see who can come up with the widest array of extraordinarily high new taxes on higher earners and on wealth and who can come up with the widest array of new regulatory impositions on landlords and businesses to make sure that everybody is made whole to 100% individuals in New York for indefinitely without regard to impact on the economy.

EJ McMahon:

It's almost as if the whole group is living in Wonderland and I say that advisedly. So, I would say right now, again, what we're talking about, the seriousness of this situation is not being discussed much less addressed. And I'm talking only about the operating budget. We could talk about capital, the part that the trains you ride on, the bridges you cross, the buildings you work in and live in. That's a whole other subject all day. But this governance model is broken, absolutely broken. And it cannot be sustained. The word unsustainable as a cliche. It really is unsustainable now.

Michael Hendrix:

In our remaining five minutes here, and I'm going to start with you, EJ, I want to ask a round-robin question. I think I know the answer to this, but are you pessimistic or optimistic about our fiscal future?

EJ McMahon:

I'm pessimistic, as I just explained. I'm very pessimistic. And I'm pessimistic until I see some sign that state and city officials are willing to get serious. And by the way, when there is, when, not if, Congress passes a bill with some initial aid for the state and cities. And then if there's a democratic administration elected next year in the Democrat Senate and that Congress passes even more aid for states and cities.

EJ McMahon:

All it is, is a stop-gap that buys time and is a bridge to nowhere over the deeper chasm. We need to get serious now. And right now based on what I see and until I see something different, I'd be very pessimistic about at least the midterm near term future. Ultra-longterm I'll be hanging out there.

Michael Hendrix:

Eric, pessimistic or optimistic?

Eric Kober:

Well, probably I can't really disagree with anything that EJ is saying. Certainly we are in a very bad state and the city and the state have been badly managed and for a prolonged period of time. The only response I would make, the reason why I'm optimistic is I've seen the city recover. I've seen that electors can bring in new people who sometimes, inadvertently, and not as they had originally intended, turn out to be strong leaders who reform dysfunctional practices and stabilize public finances, at least, for a time.

Eric Kober:

And so, the history has been that we get reform both, particularly at the city, less so at the state level, but we do get reform. And that reform gets us a few years of prosperity that enables us to escape the doom loop that the city and state sometimes appear to be in.

Michael Hendrix:

Nicole?

Nicole Gelinas:

Because I agree with EJ. To replenish our population, we're going to need a massive revaluation of the property market in New York City and probably in the surrounding suburbs. And market clearing get a lot of these vacant buildings in Manhattan that were bought as investment properties, get them filled with long-term tenants. That's a big step toward building a more resilient city.

Nicole Gelinas:

But the other side of the coin of revaluing the property market is that you've got to revalue the entire city budget. And so, how do you provide the level of redistributive services across the city budget that we've grown accustomed to providing for half a century? And without a lot of pain in terms of union unrest, social unrest, a lot of people having to make painful readjustments to their way of life, I don't think anyone has answered that part.

Nicole Gelinas:

So, if people do not resume going back into an office five days a week on mass transit, we are going to have to rethink a lot of these things. And yes, we will come out of it at some point, but at some point could be a long time away.

Michael Hendrix:

And with that, thanks to you, our audience, and to our panelists. I will leave us with a final thought that, with our economy shrinking, tax revenue shrinking, and even our population shrinking over the past handful of years, the question of restoring growth to New York City seems to be a very important question for our future.

Michael Hendrix:

So, I ask you to be thinking about what is the low hanging fruit for restoring growth to New York? And we invite your input and feedback. Again, thank you for joining us at the Manhattan Institute. Stay tuned for more.

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