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What the State Budget Means for the City


Sen. Eric Schneiderman of Manhattan could have been celebrating on Monday. The budget deal reached over the weekend included two major policy victories for him: reform of the Rockefeller drug laws and the income tax increase on high-income earners, both of which he had been pushing for. But Schneiderman was subdued. "This is not a good news budget," he said. "Frankly, it is amazing there isn't more pain for my district than what we have in the budget now."

That might be the major story of this year's budget process: major cuts proposed by Gov. David Paterson -- hailed as fiscally responsible by some and bemoaned as draconian cuts to important programs by others -- were largely restored.

In fact, this year's $131 billion budget is $10 billion more than the budget Paterson proposed in December. It increases state spending by about 8 percent and includes $170 million worth of member items. This means that many of the cuts slated for New York City -- including ones that Mayor Michael Bloomberg said would have forced the layoff of thousands of public school teachers -- have been restored.

Observers attribute the relatively lavish spending to the influence of Assembly Speaker Sheldon Silver of Manhattan's Lower East Side, who wields far more influence and experience than Paterson or Senate Majority Leader Malcolm Smith. Silver bucked the push for fiscal restraint and pushed ahead with a budget much bigger than Paterson's proposed plan.

 

New Taxes and Fees

So, how painful will the state budget be for New Yorkers? It depends on who you ask.

Outside the Senate chambers on Monday, lobbyists remained perched and alert, ready to seize the ear of any legislator. They complained about taxes and fees contained in the budget and how they will hurt business.

The budget includes an estimated $8 billion worth of new or increased taxes and fees, among them an income tax increase on those making $200,000 or more a year. There will be a new surcharge on cell phones, an increased fee on some forms of driver's licenses, a higher cost to renew commercial driver's licenses, higher registration fees for some vehicles, and increased surcharges on gas and electric companies. Stores that sell cigarettes will have to pay the state anywhere between $500 and $1,000, and taxes on beer, wine, cell phones and some insurance policies will also rise.

One lobbyist desperately explained to a legislator how a new tax on alcohol almost certainly would limit the beer selection available in New York and damage small breweries. Some legislators gave the impression that there was still time to make changes. Even on Monday, with the budget seemingly finalized, Sen. Ruben Diaz of the Bronx made it clear that he was still pushing for changes. "We're still working on it," he said referring to the budget. "The people of my district should be very happy with me," he concluded beaming a grand smile.

Observers have wondered if Diaz or one of his fellow members of the dissident Democratic gang of three might vote against the budget and send the Democrats back to the drawing board. But the sense is that the Democrats are unified.

"Absolutely, said Sen. Neil Breslin of Albany when asked if he expected the budget to pass without resistance from fellow Democrats. Schneiderman responded similarly.

General Funding

A major victory for the city was the restoration of $328 million of Aid and Incentives for Municipalities funding to New York City. Paterson had proposed entirely eliminating New York's payment while keeping funding for other cities flat. Now New York City, along with the state's other cities, will have AIM funding restored to 2008-2009 budget levels. Bloomberg had said that he might have been forced to go ahead with major layoffs of city workers if all the cuts facing New York had been enacted.

Education

The mayor had railed against proposed cuts to education funding and threatened that the cuts could lead to the layoff of some 14,000 teachers.

However, thanks to federal stimulus funds, the majority of education cuts have been restored, and earlier this week Bloomberg announced that he would likely not be forced to make the layoffs but might have to trim some non-teacher positions.

Geri Palast of the Campaign for Fiscal Equity said the budget "basically restores major cuts to the funding levels." Foundation aid for operating expenses will stay the same as it was in last year's budget. Increases in payments that were scheduled to be made to in-need school districts thanks to the Campaign for Fiscal Equity lawsuit will be put off for two years. The full payments that were expected to be made in four years will now be spread out over seven years, meaning that the full implementation won't be achieved until the 2013-2014 budget year.

The money had been intended to bolster school districts that had not received adequate funding and to help improve standards, including the quality of teachers. Those improvements will now be delayed for years. "All the things that had been laid out for the CFE money are now off the table," Palast said.

Palast said the CFE plans to send a letter to U.S. Secretary of Education Arne Duncan alerting him that the state has misused stimulus funds. For years, she said, the state has denied students in neglected schools the chance for a proper education, and no time should be lost in repairing that failure, especially since the federal stimulus package provides the state with money to fund education.

"I think Albany sadly has some of the wrong priorities," said Palast.

Health Care

The federal stimulus package also provides funds for Medicaid, the health program for low-income people. Earlier this month, however, Paterson announced that he is using some of that money to avoid enacting some of the unpopular nuisance taxes he had proposed last fall.

The budget leaves hospitals burdened with $306 million of the cuts, nursing homes facing $225 million and home care funds down by $68 million. The budget does go ahead with a plan to reform Medicaid reimbursement to hospitals.

Healthcare advocates have vehemently insisted that Paterson's plan to reduce Medicaid reimbursement for hospital while increasing payments for primary care will harm hospitals in New York City's struggling neighborhoods. They say that Paterson's plan would place a particular burden on hospitals that serve the underprivileged. Apparently legislators listened as they provided relief for hospitals with the highest percentages of Medicaid patients.

Despite that, the changes will severely damage hospitals that don't serve the highest thresholds of Medicaid patients, but still serve a large Medicaid community, according to William Van Slyke of the Healthcare Association of New York. Van Slyke said hospitals have yet to deal with the financial turmoil caused by last year's budget cuts. Some, he said, have been forced to make layoffs while others close. As a result, he said, New Yorkers are already seeing a slowdown in care and longer waits for appointments for standard procedures.

At the same time, Van Slyke says the budget takes away money that teaching hospitals use to fund graduate student training programs. He said that will mean hospitals will either be understaffed or forced to pay more doctors. That, he said, could actually increase costs since physicians command higher salaries than doctors in training. In addition, taking away funding for teaching hospitals will compound a physician shortage that already exists in many areas around the state, according to Van Slyke.

The budget also includes a gross receipts tax on hospitals that Van Slyke says will cost New York hospitals around $64 million.

"People are going to start wondering about these reforms when their standard of service goes down and hospitals start to close," said Van Slyke.

The Environment

A number of the features of the budget pleased environmental advocates, including a measure to place a 5-cent deposit on bottled water.

Environmentalists also were pleased to discover that the budget restores $45 million in cuts Paterson had proposed to make to the Environmental Protection Fund. Funding for that is now $222 million -- $17 million more than proposed in Paterson's budget. And instead of funding it with unclaimed bottle deposits as Paterson had proposed, the budget sustains the real estate transfer tax as the EPF's main funding source.

A number of New York City projects have relied on the fund for support including the Brooklyn Waterfront Greenway, Hudson River Park and the Harlem River Greenway.

Sharing the Pork

As for the $170 million worth of member items in the budget, Democratic senators have said privately that the money will help make up for the years that Republicans "starved" Democratic districts. One member pointed to his allocations to food pantries and homeless shelters in his district as something he felt good about. He noted that other leaders should have shown a little more tact in their choice of items, citing the $10,000 earmark one member requested for a Little League. Organizations all over the five boroughs -- tennis clubs, music organizations, afterschool programs and schools -- earned earmark attention from lawmakers.

One of the other notorious features of this year's budget -- the absolute secrecy of the negotiation process -- also is attributed to Silver. The speaker ensured the budget process took place exclusively behind closed doors and without public input. He even did away with the conference committees that were required by the 2007 budget reform act he himself once trumpeted as representing major progress.

Schneiderman said he is not at all proud of the process. "It would have been better to have more transparency, but we are trying to dig ourselves out of a hole we didn't dig," he said. When asked if he thought it was necessary to sacrifice transparency to secure drug law reform and the income tax increase, he shook his head vehemently, saying "One does not excuse the other."

Finance for the Future


New York City's future depends on maintaining its status as a financial capital. Every great 21st century city includes a financial center, because finance is the connective tissue of the global economy. Nothing can substitute for the FIRE (finance, insurance and real estate) sector as a source of high-paying jobs, tax revenues and economic output.

In the past year, New York's financial services industry has been the epicenter of a global crisis that has destroyed or diminished many of its most important financial institutions. The effects of the resulting losses on the regional economy are just starting to be felt. Economic conditions in New York will get worse before they start to get better.

Through 2008, the FIRE sector was responsible for about 25 percent of the $1 trillion economic output of the New York metropolitan region and employed one in seven New Yorkers working in the private sector. The financial services industry generated over 17 percent of city and 20 percent of state income tax revenues.

Going forward, "Wall Street" and the financial services industry generally will not look the same as they did in the past. The global economic crisis has brought a new reality with respect to investor expectations, regulation and business culture. New York needs to quickly reinvent itself as the new, more cautious, but equally creative world financial capital.

Our Reputation

Maintaining New York's status as a financial capital begins with stabilization of the national banking system. This is underway, thanks to federal rescue, stimulus and credit guarantee programs. Currently, recovery is being slowed by the negative energy going into retaliatory actions that Congress is being pressed to take against many of the nation's –- and New York's –- largest financial institutions. Hopefully, the country will move beyond anger so that rebuilding can proceed.

Other threats to New York's recovery are protectionist policies that discourage foreign investment, immigration and trade. New York leads the country in terms of the amount of foreign direct investment it has attracted. Some 15 percent of the city's economic growth in the past five years has come from foreign-owned business.

"Buy American" provisions in the federal stimulus package and threatened federal tax actions against foreign companies doing business in the U.S. will work against New York's position as a financial power and discourage foreign companies from listing on New York exchanges. Last year, two Chinese banks chose New York as their U.S. headquarters. A major component of future growth for the city will be as the Western metropolitan headquarters for financial institutions from Asia and emerging countries -– but only if the U.S. policies are conducive to foreign investment.

Staying at the Center

A prerequisite for the recovery and continued global leadership of New York's financial industry is keeping a large aggregation of top financial talent in the region. PricewaterhouseCoopers and the Partnership for New York City publish an annual comparative analysis of world cities and their attractiveness to business, called "Cities of Opportunity." The 2008 report determined that New York was still ranked first when it comes to intellectual capital, which is the single most important influence on 21st century business location decisions.

The latest edition of London's Global Financial Centers Index, published in March, indicates that New York's brand remains strong. London's survey of financial industry professionals found that those who work in New York are more confident about this city's future as a financial powerhouse than they are about any other city. The index still ranks London and New York at the top of 62 financial global centers, even though both have lost some ground in the past year.

Richard Florida, professor of business and creativity at the University of Toronto, writing in the March 2009 issue of The Atlantic argues that New York is more than likely to re-emerge from the current crisis as a financial leader because it is too far out in front of the pack for other cities to overtake. The historic strength of the city's financial sector and the sheer concentration of talent in finance and related disciplines, such as law and technology, give New York the best chance for continued dominance. Florida also concludes that New York's openness to talent and the diversity of its economy will help the city to exit from this crisis re-energized.

Headquarters: Big Apple

Another major factor in determining New York's future is the extent to which it offers a competitive environment for business, both large and small. State and city tax policies and economic development programs need to be carefully reconsidered with an eye toward recapturing jobs in support services, technology and back office operations that have been ceded to other states and countries during the past few decades. A changing cost structure in New York –- lower rents and reduced salaries -- may create opportunities to bring corporate operations back to New York City and state.

One certainty is that Washington will establish a new regulatory regime with unprecedented controls over all aspects of the industry, including sectors that have not previously been regulated. This should represent an opportunity for New York to redeploy financial talent. Sen. Charles Schumer has called for more regulatory agencies to relocate in New York so that these watchdogs are more in touch with the largest concentration of regulated institutions.

The possibility that the insurance industry will move to national charters, rather than state regulation, could also help New York. National regulation would level the playing field and attract national and global insurance headquarters to New York.

Administering the complex federal programs that are intended to jumpstart the national economy requires the expertise of the private sector, which the Treasury acknowledged in its procurement procedure. Already, major New York firms are involved, including Bank of New York Mellon, Goldman Sachs, Blackrock and JP Morgan Chase.

At the other end of the spectrum, New York companies also are taking the initiative to develop innovative products tailored to the new regulatory environment. Creditex, a startup launched in 1996 with funding from the New York City Investment Fund and a consortium of New York-based financial institutions, has won federal approval to operate a clearinghouse for trading of credit default swaps. Recently acquired by Intercontinental Exchange, Creditex has over 500 employees in New York and promises future growth as part of the effort to bring transparency to derivatives markets.

Using Our Strengths

Federal stimulus and stabilization programs create opportunities for the large number of financial firms owned by minorities and women that are headquartered in New York. Helping these firms get federal contracts and subcontracts is one way to re-deploy talent from Wall Street and build a new layer of successful financial enterprise in the city.

Opportunities for public-private partnerships are another area where New York investment firms and nonprofit institutions can make a contribution. New York led the nation in establishing the financial and real estate partnerships that created the nation's affordable housing and community development movement that restored the vitality of America's urban neighborhoods. This has been recognized by the Obama administration in tapping New Yorkers for key positions in housing, the economy and urban policy. This experience should be the basis for renewing and expanding the city's community development industry, both in the banking industry and the nonprofit sector.

The underlying strengths of New York City and its institutions, its diversity and depth of talent, and its internationally respected brand all suggest that it can survive the crisis and continue to thrive as a financial center. There has been reputational damage, but that can be repaired. While the business model will be different, and the profits less aggressive, New York will remain America's gateway to the global economy and the place where the world comes to invest and raise capital.

Kathryn Wylde is the president and chief executive officer of the Partnership for New York City.

Keeping New York Afloat


Photo by Gotham Gazette

Flash-forward a decade and what do you think New York City will look like?

Will we still be the financial capital? Will tourism, retail and Wall Street be booming or wallowing in the residue of the 2008 recession? Will the city still be home to more than 8.3 million people or will New Yorkers have fled for cheaper, more vibrant settings?

The policy decisions the city makes now will determine the future we see then. We asked small businesses, officials, an economist, advocate and union representative to weigh in on what they think the city should do to revitalize our economy -- ranging from taxing the wealthy to investing in infrastructure and doling out breaks for city businesses.

Struggling Small Businesses Look for Help
by Courtney Gross and Ya-Hsuan Huang
Gotham Gazette visited parts of Brooklyn and Queens to see how small business owners were faring in this plummeting economy. Watch our audio slideshow to find out.

Using Tax Incentives Wisely in the Recession
by Bettina Damiani
Good Jobs New York's project director says the city must retool its tax incentive programs so they actually create jobs -- and good ones at that.

Cutting Back -- Except for Transit
by Nicole Gelinas
Contributing editor to City Journal, Nicole Gelinas argues the city must cut spending while investing in vital transportation infrastructure. And, she says, politicians have to stop relying on raising taxes on the rich.

Working to Recover
by Seth Pinsky
The president of the New York City Economic Development Corp., Seth Pinsky, details steps the Bloomberg administration is taking to help the economy recover, including lowering taxes for small businesses and investing in capital projects, like Willets Point.

Keeping the Middle Class
by Christine Quinn
The City Council speaker hopes the city can streamline application processes for businesses, raise taxes for the wealthy while cutting them for low-income residents and bring the biotech industry to the five boroughs.

Tax Justice in a New Economy
by Lillian Roberts
The executive director of the city's largest municipal employee union, DC 37, says no-bid contracts must go if the economy is to recover. She wants a tax on the wealthy too.

Finance for the Future
by Kathryn Wylde
While the financial sector will never be the same, the Partnership for New York City's president and chief executive officer says the city must remain the financial capital and continue to lure in corporate headquarters and foreign investment.



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