Wednesday, October 14, 2009

The Cupboard Is Bare

Which Candidate
Can Best Handle
Fiscal Shortfall?

By Henry J. Stern
October 13, 2009

The mayoral election is just three weeks away. Except for the ads on television, it is the quietest in many years

There is no intense ideological devotion to either candidate. Mayor Bloomberg is viewed as slightly left of center. Comptroller Thompson talks left, but what he would do or could afford to do if he is elected is another matter. There are few issues remaining which can be resolved by a stroke of the Mayor’s pen at a bill signing in City Hall. Most of the controversies the city will face during the continuing financial crisis will concern how to raise money to pay city employees, whose wages and pensions are well over 50 per cent of the municipal budget.

There are two basic ways to reduce labor costs. One is to lay off employees, and the other is to reduce wages through furloughs, givebacks or wage deferral. None of those solutions is acceptable to labor unions. Members do not pay dues to lose money or jobs. But if a choice must be made, many unions will favor layoffs.

The arithmetic is simple: They would rather have ninety happy members than one hundred unhappy ones. The missing ten will not be around to vote in union elections. The problem there is that layoffs lead to reduced services and increase unemployment.

An existential problem is the lack of money with which to pay bills. As Mr. Micawber said in David Copperfield: “Annual income twenty pounds, annual expenditure nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pound ought and six, result misery.”

In the June 22 Times, Michael Barbaro wrote: “Since Mr. Bloomberg took office [in January 2002], city contributions to the pension system have jumped nearly five-fold, to $6.3 billion, from $1.4 billion, and they now account for one out of every ten dollars in the City’s budget.”

There are several reasons for this rapid rise in pension expenditures, and fiscal problems related to it. First, wages have increased, and pensions are based on wages, including overtime in the employees last year. Union rules and work practices jack up salaries for employees about to retire in some agencies. Salaries rose by about 4 per cent per year in the last cycle of agreements, due to a policy adopted before the recession. This pace has outstripped the growth of the city’s Consumer Price Index.

Second, over the years, particularly in even numbered years, the Legislature has adopted and the Governor has signed numerous pension sweeteners, most over the city’s vehement objections. This enables the incumbents of both parties to receive union endorsements at no cost to themselves or the State. The city is obliged to pay the bill for the legislators’ re-election insurance policies. This is a bipartisan vice, Republicans in power being as hungry as Democrats.

Third, municipal pensions are computed on the basis of defined benefits, not defined contributions. If the stock market, in which pension funds are invested, rises as it had for many years, the city contribution shrinks. When the market falls, as it did from October 2007 to March 2009, by which time the Dow had lost more than half its value, the City is called on to make up the loss. The recent recovery has been helpful, but there is far to go.

Fourth, a falling stock market leads to unemployment in finance and in related sectors of the economy, shrinking demand for office space which leads to a decline in value of real estate, and a near-halt to new residential and commercial construction. Construction mortgages and refinancing of projects become unavailable, and some buildings go into foreclosure, and construction workers lose their jobs. All these economic setbacks reduce the income, sales and property taxes paid to the City of New York.

It appears that the January budget will contain substantial cutbacks, no matter who is elected in November. Mayor Bloomberg is more fiscally conservative than Comptroller Thompson, who is also the candidate of the Working Families Party. It was the financial crisis that the Mayor says compelled him to change his mind and seek a third term, so far the City has done far better than the State in meeting the challenge. Bloomberg set aside billions in reserves in good times which have helped cushion the blow when the wind changed. The City’s fiscal problems, however, remain quite serious. On the other hand, the State of New York spent every dollar it could find or borrow, and then relied on one-shots. The State is now in a far deeper hole than the City.

Last year the worst was averted by the Federal stimulus package. Intended to create new jobs, the stimulus was subjected to fiscal alchemy and used to save existing jobs. We did not get much in public works, the money going to public servants. We wonder what will be done this year to deal with the problem. Unemployment is now 9.8 per cent, which is the highest since July 1983, and it is still rising, according to the Bureau of Labor Statistics. That does not count the people who left the work force because they were discouraged that they would ever find a job. As a consequence, homelessness is again on the rise, despite the city’s best efforts.

One aspect of choosing a Mayor is determining which candidate will have the greater degree of independence, and which is more likely to be influenced by the interests that elected him. In past years, Mayors were controlled by political machines, led by the five county leaders. Their power has diminished substantially, except for judicial selection, where they are the kingmakers for theoretically elective offices. It is the city’s labor leaders, particularly the heads of public employee unions, whose influence has grown. The rise of the Working Families Party has professionalized labor participation in Democratic Party primaries. It will be fascinating to see their effect on the new City Council, almost all of which has already effectively been elected in the primary, many to their third term over strong WFP objections (as well as ours).

P.S.: The Mayoral debate, to be held Tuesday evening, October 13, at 7 p.m., will be available on demand at It is particularly recommended for insomniacs.

StarQuest #606 10.13.2009 1039wds

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