LAST Wednesday, Mayor Bloomberg announced a higher-than-he-expected $4 billion deficit by the middle of next year and proposed new taxes and budget cuts. Meanwhile, though, the mayor has continued to unnecessarily increase spending even as revenues fall.
On Monday, Bloomberg had announced a two-year labor pact with District Council 37, the city’s largest public-sector union. The deal, which runs retroactively from last March through March 2010, allows for 4 percent annual compounded raises for DC-37’s 100,000-plus employees – mostly civilians working desk jobs in city agencies or support jobs in education and health care.
The DC-37 deal alone will cost $370 million over those two years – but the added costs will exist in future budgets, too.
At first glance, the contract may seem unobjectionable. Inflation has run higher than 4 percent in recent months. The contract doesn’t offer new pension or health-benefit giveaways.
But inflation could be far lower than 4 percent next year. Energy and other commodities costs have plummeted in the last two months. Rents are sure to fall as fewer jobs attract fewer newcomers to the city and as investors in the boroughs and in surrounding suburbs put properties up for lease. If prices fall or don’t rise much during the second year of the DC-37 contract, the deal Bloomberg just signed will look worse and worse for city taxpayers.
Conversely, if we do see massive inflation, DC-37 simply will hold out for compensation for that cost in its next contract, meaning that the mayor has taken an unnecessary, asymmetrical risk.
And it’s not as if the mayor needs to take this risk to keep good workers from seeking jobs elsewhere. Despite his comments Wednesday that “you’re not going to attract good people, you’re not going to keep good people unless you . . . pay your workforce more,” the dismal reality is that few rational people will want to try their luck in the labor market anytime soon. If you have a steady job, you’ll be inclined to stay put, 4 percent raise or not.
Worse, though, the mayor is committing to ever-higher fixed costs even as we’ll see a deflation in our tax revenues. With the financial industry so decimated that huge portions of it have gone bankrupt or fallen into government hands, the mayor’s revised tax-revenue projections – a 7 percent decline this year and a 1.6 decline the year after that – likely are still too optimistic.
Consider that New York gets one-third of its tax revenues from personal-income and business-income taxes. On the individual side, 36 percent of all personal income earned in the city – wages, salaries and bonuses – comes from the financial and property-sales industries. On the business side, finance and real-estate companies were respon- sible for more than a third of such revenues. Even property taxes, both residential and commercial, depend on high values propped up by now vanished Wall Street profits and bonuses.
Consider further that in the first nine months of 2008, overall US-based securities underwriting was down 58 percent. It’s hard to exaggerate the gravity of that number. Between 2000 and 2002, such underwriting fell by just 4 percent. Between 1987 and 1988, underwriting fell by 10 percent and continued to fall by 18 percent and 1 percent, respectively, over the following two years. We’ve never seen numbers like these – which makes it imprudent to sign anything that permanently increases spending. (To cheer the reader further, these numbers don’t even include the month of October, likely the worst.)
But the biggest problem with Bloomberg’s deal is that the mayor did not ask for even modest money-saving reforms in return. One such reform would be to ask employees to pay 10 percent toward their own health-insurance premiums. As the Independent Budget Office has reported, requiring that all 560,000 city employees and retirees pick up this cost would save New York taxpayers $400 million the first year and a half-billion annually a few years out.
Politically, DC-37 is the best union on which the city could test support for such an idea. Unlike police officers and firefighters, DC-37 workers aren’t risking their lives any more than most of us do at our jobs. So it would be easier for taxpayers to wonder why DC-37 workers shouldn’t pay any of their own health-insurance costs – and thus presumably easier for Bloomberg to garner public support for concessions.
Achieving such concessions would take time and would be politically tough, sure. But there was no hurry to sign a contract last week, since labor unions have a long history of working under the terms of expired contracts.
Without such concessions, the mayor’s plan seems to be to cut public-services spending, raise taxes and hope that Wall Street recovers quickly and that revenues return to bubble-era records in just 2 1/2 years or so.
But the mayor himself notes that Wall Street firms have taken such huge losses that even when surviving firms do return to profitability, many won’t be paying taxes for at least three years – because they can offset future taxes against those losses.
What’s more, “uncontrollable” spending – those health-care costs for city workers, plus Medicaid, debt service and pension costs – already consumes more than half of the city-funded budget, having grown precipitously in recent years.
In two years’ time, if revenues aren’t gushing again and if we haven’t started to modestly control these “uncontrollable” costs, the administration in power would have no choice but to cut public services by 20 percent or more – not calmly and rationally but likely with bondholders breathing down our necks. It’s too big of a risk for New York to take.
Adapted from city-journal.org.