The past several months have been chaotic for most municipal economies in the nation, New York City included. And Mayor Michael Bloomberg's preliminary budget reflects this worsening economic picture. I believe the single biggest challenge facing New York City in 2008 is how to maintain current spending demands on less tax revenue - the fuel that keeps the furnace burning.
There are two issues that severely threaten our revenues, both of which I discuss often as chair of the City Council's Finance Committee. The first is the risks to Wall Street profitability, something most other cities need to worry about only tangentially. Despite starting off 2007 on a strong note - Office of Management and Budget reports that New York Stock Exchange member firms gained more than $8 billion in profits in the first two quarters - the credit crisis that developed over the summer has weakened portfolios.
New York City relies so much on Wall Street profits primarily because it greatly impacts the taxes we collect on income, including bonuses, and on employment generally.
Although bonuses are expected to remain rather steady due to strong performances in early 2007 and strength in sectors unrelated to the credit crunch, we expect an overall drop in financial sector wages. Additionally, the budget office reports that several financial firms have announced or are likely to announce layoffs and reduced staffing, leading to an expectation that financial sector employment will shrink by about 12,000.
The Housing Crunch
The second major risk to the city's revenues is the declining local real estate market. Although this past year the local housing market has been stronger than that of most cities, consumer confidence, lower overall employment and other factors have increased housing supply.
The Office of Management and Budget estimates that single-family home sales will drop about 20 percent in 2008 and that co-op and condo sales, which reached an all time high this past year, will fall measurably.
So with the decline in the city's finances, led by Wall Street instability and a worsening housing market, what can Bloomberg do to steer the city clear of the economic downturn? What wisdom can I or anyone else recommend to stem the downward slide? The answer to both questions is: not much.
A Sneeze to Turn Into A Cold
The plain truth is the city's economy is not exempt from a law of economics: For every up, there is a down. The other plain truth is that mayors have no real control over the duration of these economic cycles.
One of the few things mayors can do, and what Bloomberg is already doing, is working to limit how deeply the city feels the effects of the downturn. This is principally done by tightening spending to maintain a balanced budget. Bloomberg has reduced city spending in the current fiscal year and in the next. I'm not happy with all the cuts, and I've vowed to fight the most unpalatable ones. These include cuts made to the Runaway and Homeless Youth program, geriatric mental health and the Autism Initiative, a $1.5 million program I created last year that lends educational and emotional support to affected children.
Another of the few things mayors can do, particularly during a recession, is, of course, raise taxes to make up for revenue shortfalls. Bloomberg did this by way of raising property taxes during the 2001 recession. None of us at City Hall want to do that this time around.
It remains to be seen how much worse the economic scenario gets before this option becomes a viable idea. Just as Bloomberg has said, the next few months will shed light on the many tough decisions ahead. In the meantime, I've said often that a tax increase is on the table only as a last resort.
Not Looming, But Here
So, you'll notice I've used the "R" word. Some cities have already been claimed by recession. Many analysts say Detroit, with its rate of housing foreclosures in the double digits and its high unemployment, is already in recession. San Francisco, Cleveland, and Miami are a few others being watched closely for symptoms of acute recession. Is New York City soon to join the list? The city is in an economic downturn, to be sure, but based on the current data, I don't think we'll fall into actual recession.
We might be lucky this time. One of the many things I've advocated for at the City Council is to use our surpluses in the smartest manner possible. Pre-paying some of our obligations, including placing $2 billion aside for retiree health expenses, when we had surpluses has proved helpful to us now.
Amid the doom and gloom there are some economic bright spots for the city -- including that our tourism industry is booming. We can thank our superb attractions and the weak dollar for that. NYC & Co., the city's tourism agency, predicts that the city welcomed a record 46 million tourists, many of them international visitors, in 2007. And all signs continue to point to similar tourism rates over the next couple of years.
A strong tourism industry plays a vital role in sustaining the city through the lean times, because it keeps hotel taxes, sales taxes and employment humming. There are also some sectors of the economy that continue to grow regardless of the current economic cycle. Demand and employment in both the education sector and health services sector remains strong.
The Comptroller's Role
Is there any role to be played by the city's next comptroller in ameliorating the effects of the ongoing downturn? The office of the comptroller is involved in the issuance of General Obligation bonds, setting the terms and conditions for all debt, analyzing contracts and auditing programs and agencies, and is the investment advisor and custodian of the city's pension funds. Within each of these responsibilities and in varying degrees the comptroller can join the mayor to also limit the effects of the downturn. Scrutinizing spending is one responsibility the comptroller can implement rather swiftly. I already do that in my role as chair of the City Council's Finance Committee.
Apart from official functions of the city's comptroller, there is a more nuanced yet potent function. As the finance specialist for the city, the comptroller is in an excellent position to advocate fiscal policy that would cushion the blow of economic downturns. One such policy I've consistently called for is the creation of a Rainy Day Fund, which requires state legislation. This savings account would be funded over a period of years with budget surpluses to aid the city during lean times.
A Rainy Day Fund would not only cushion services during downturns, but, assuming it would replace the current practice of rolling prior year surpluses into the next, it would also make the city adopt a budget that more accurately reflects our current financial status. Additionally, the comptroller can use his or her position to advocate for reduced reliance on non-recurring revenues to balance the budget, something that has occurred too often and will be untenable in coming years.
The final analysis for comptroller ought not rest on what he or she can do during tough times, because the official tools at his or her disposal are very limited. Rather, the analysis ought to rest on what skills the current and future comptroller possesses in order to understand and deftly manage the effects of economic downturns. As someone who has spent more than 20 years on and off Wall Street as an expert in municipal finance and who has served as chairman of the City Council's Finance Committee, I will bring to the comptroller's office a host of related experience.
David Weprin, a Queens Democrat, has served on City Council since 2002 and chairs the Finance Committee.Â