How Did New York City Government Recover from the 1970s Fiscal Crisis?

The legend has it that New York City avoided bankruptcy, and recovered to become the thriving city it was until recently, because all of its interest groups got together and agreed to “shared sacrifice.”  The public employee unions agreed to contract givebacks, and having their pension funds invested in the city’s bonds.  The banks agreed to roll over the city’s debts.  The rest of New York State, under the leadership of Governor Hugh Carey, agreed to shift resources to NYC.  And the federal government, after initially telling New York City to “Go to Hell,” finally decided it had sacrificed enough and agreed to a bailout.  These powerful players made the sacrifices, and ordinary New Yorkers reaped the benefits.

I’m here to tell you that the legend is a lie, a politically convenient lie.  The people negotiating in the room deferred and lent a little, but gave back nothing.  The ordinary New Yorkers outside the room then made all the sacrifices required to pay back every dime, and then some, in higher taxes and collapsing public services.  The poor were left to suffer and die unaided, with the Bag Ladies dying in the street, the schools collapsed, the infrastructure deteriorated, the police allowed city residents to be victimized by crime on a large scale, and the streets and parks filled with garbage. Property in large areas of the city was abandoned, and life expectancy fell.

Decades later, some city services hadn’t fully recovered. The beneficiaries, relocating to the suburbs, a few enclaves within the city, or retired to Florida, and the better off, were mostly unaffected.

In reality New York City recovered because things happened that those negotiating over its corpse could not have expected.  This post will explain, and use data to show, that high inflation was real reason New York City recovered from the 1970s fiscal crisis.

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The Bureau of Economic Analysis on State and Local Government Pension Funding

A couple of years ago, I did an analysis of government finances data from the U.S. Census Bureau over the decades, to measure the extent to which each state’s future had been sold out with regard to (among other things) underfunded public employee pensions.

The worst off state when I did this analysis for FY 2012 was Rhode Island, where FY benefit payments equaled 13.3% of pension assets that year. In FY 2016 that had increased to an even worse 13.6% in Rhode Island, but that state was nonetheless only the second worst off state.  The worst off state in FY 2016 was New Jersey, where pension benefit payments equaled 13.8% of pension fund assets in FY 2016, up from just 11.8% in FY 2012. New Jersey only had enough pension fund assets to pay for 7.2 years of benefits.  The third worst off was Kentucky, with benefit payments equal to 13.5% of pension fund assets, followed by Alaska at 13.4%, Pennsylvania at 12.2%, Illinois at 11.8%, Connecticut at 11.7%, South Carolina at 10.8%, Massachusetts at 10.5%, and Michigan at 10.4%…For the City of New York pension funds, soaring taxpayer contributions and another stock market bubble increased pension fund assets to the point where benefit payments were 9.1% of assets in FY 2016, up from 8.8% in 2015 but down from 11.8% in 2009.  That is still less than half the assets those pension funds required.

At the time I speculated that a more sophisticated analysis, one that took into account that fact that states with rapid population growth might have relatively few retired public employees from a less populated past, but could still be underfunding the pensions that the large number of public employees on the job today were currently earning, might be heading down the same road that has caused pension crises in the states listed above.

The more sophisticated analysis has arrived, from the U.S. Bureau of Economic Analysis.  And it in fact shows massive public employee pension underfunding not only in the states generally associated with bad fiscal practices, but across the board.

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Big Government? Where it is By State

As the future of later born Americans continues to get cashed in to benefit Generation Greed, the executive/financial class, and the political/union class, with no commentary or acknowledgment in this phony, tribalist political campaign, there isn’t much left to say that I didn’t say four years ago.  The “revolutionary” Donald Trump kept things going in the same direction, but an accelerated pace, with more tax cuts for the rich, more debt, more benefits for his generation, and an ever-diminished future for those coming later.  This followed the Obama Administration, perhaps the most conservative (with regard to the original meaning – trying to keep things the same) since Hoover in the face of an economic and social collapse. The system was preserved, so the winners on the inside were protected.  The average life expectancy of those born after 1957 fell.

At this point, it’s all about keeping the privileges for your interests while using tribalism to shift the blame.  Since federal elections are decided by state, however, it might be illuminating to show which states had the “biggest government” in 2018, according to data provided by the Bureau of Economic Analysis.  It was the very states where a majority of the people will say they are against big government.  They are actually in favor of big government for themselves, against having to pay for it, and against any services and benefits for anyone else, particularly the later-born generations who will be left with their debts.

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Census Bureau Education Finances Data: The FY 2018 Data for New York City is Wrong

In the past few years I’ve come across multiple instances when federal data on City of New York expenditures, and only City of New York expenditures, has been incorrect.   Always in a way that make it seem as if those expenditures are lower, public employment per 100,000 people lower, and NYC public workers less well paid than they actually are.  The data affected has been the public employee pension data aggregated by the Census Bureau, population data at the Bureau of Economic Analysis, and state and local government earnings data aggregated by the BEA.  At the local level some key information has been eliminated altogether, notably the “full agency cost” table.   I’ve been following the data for decades, and haven’t seen much like it.

Given that I’ve just completed a comprehensive analysis of state and local government finances based largely on the 2017 Census of Governments, I hadn’t planned to re-doing an analysis of education finances for FY 2018. But I decided to check to see if something funky happened to those numbers as well.  It has.  According to data reported to the Census Bureau, the wages and salaries of NYC elementary and secondary school workers were $373 million lower in FY 2018 than they had been in FY 2017, with a reduction of $205.6 million for instructional workers.  I checked around to see if there was something that could explain this. Here is what I found.

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The Coronavirus and Commercial Real Estate: In the Long Run Neither is the Real Threat to New York

The debt-driven U.S. economy was heading for a crash before the coronavirus even hit.   And in some metro areas, including New York, the excess concentration of economic activity during the past decade had sent the cost of commercial and residential real estate to unaffordable and unsustainable highs.  Moreover, the wealthiest generations in U.S. history are now over age 62, with later-born generations much poorer – and facing large costs from the past as well.  And now a once in a century pandemic has accelerated an economic and social crisis that was always in the cards.  None of this, obviously, is good.

With regard to commercial real estate, however, a market adjustment that some might see as a calamity is actually part of the solution. Lower housing prices would allow later-born generations to pay less for housing, offsetting some of their other disadvantages.  Lower residential rents might cause apartments to go through bankruptcy, foreclosure and workout, eventually causing existing asset holders to take losses on mortgage-backed securities.  But the lower building prices would allow future landlords to charge less and still make money, in turn allowing tenants to live better on their lower incomes.  Lower commercial rents could also cause the value of commercial mortgage-backed securities to fall.  But they would also make it easier to open a business, even if it doesn’t produce a high level of revenue per square foot right off the bat.  A market adjustment on the price and property value side, and private sector creativity, could forestall damage on the occupancy side, allowing buildings – and the communities they are located in — to be re-occupied and maintained, and the economy to re-boot.

And yet there is the possibility that things will turn out much worse for many parts of the country, including New York City.  I would divide the real threats into three categories: federal, state and local.

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The Coronavirus and Commercial Real Estate: Can Urban Retail and Shopping Centers be Re-Occupied Yet Again?

Compared with other types of commercial real estate, brick and mortar retail had been in crisis for years even before the coronavirus hit.   The average compensation of most U.S. workers has been falling for decades, offset by rising public and private debt, and after 2008 consumer spending finally began to follow, as those debts no longer covered the difference.   Dollar stores became one of the few sources of retail growth.  Then e-commerce started taking a rising share of whatever consumer buying power was left.  But even before that suburban and Sunbelt America, built after WWII, were thought to be “overstored” as a result of decades of local zoning policies that favored commercial tax “ratables” that provide property and sales tax revenues, but sought to exclude multifamily housing that might attract less-well-off people, whose local service needs exceeded the local taxes they paid.

How much could US retail shrink? And where?

The national average is about 46 square feet of retail space per capita, with most metropolitan areas having between 40 and 55 square feet per capita…By global standards, the U.S. has much more space devoted to retailing than anyone else: comparable estimates for other countries include: 23 square feet per capita in the United Kingdom, 13 square feet per capita in Canada, and 6.5 square feet per capita in Australia. If the experience of these countries is any indication, it’s a good bet that there’s lots there’s still lots of room for downsizing in the U.S. retail sector.

Before the virus hit the real estate industry was responding with a burst of innovation, shifting space from retail stores selling goods to service establishments selling health care, entertainment, dining, and exercise.  Along with housing, where permitted.  Then the coronavirus shut down many of these alternatives. So now what?

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The Coronavirus and Commercial Real Estate: Will New York’s Arts, Entertainment and Culture Industries Collapse, Leaving Their Venues and Hotels Abandoned?

Ever since the Port Authority of New York and New Jersey published its seminal report on the importance of arts, culture and entertainment in the New York City economy, these activities, instead of being thought of as a social benefit that affluent societies could afford, have been thought of as part of the economic base.

The same may be said of sports stadiums, convention centers and casinos elsewhere in the United States.  In fact, had I written this post a year ago, the subject might have been an art, culture and entertainment bubble in New York City, with more venues than the city’s economy and population could support.  And an eating and drinking places bubble nationwide, with Americans running up their credit cards unsustainably to eat out.

Then the coronavirus pandemic hit.  It will eventually end, but whenever and however that comes to be, travel and in-person gatherings for the purpose of arts, entertainment, culture, sports, leisure or otherwise will be among the last activities to recover.  The question is whether New York City’s arts, entertainment and culture industries will collapse entirely.  Although a retrenchment was coming in any event, I would argue that these activities will be hit less hard here than elsewhere, and NYC’s share of the national total may in fact, increase.  In part because the demand for space and place cannot be understood separately from its price.

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The Coronavirus and Commercial Real Estate: Is Office Space in Central Locations Obsolete?

Out of the blue, millions of Americans have been forced to work from home, and hundreds of thousands of employers have been forced to allow them to do so.   Somehow most have managed to pull it off, with a limited decrease in short term productivity, one of the few triumphs of American ingenuity of the coronavirus crisis.  Perhaps this moment for the internet is like the triumph of electricity, which had a limited impact on productivity, economic growth and American life for the first few decades after new applications for it were invented, and then suddenly transformed everything.

History suggests that there were also long lags before both steam power and electricity boosted productivity. Work by Paul David, an economist at Oxford University, shows that productivity growth did not accelerate until 40 years after the introduction of electric power in the early 1880s. This was partly because it took until 1920 for at least half of American industrial machinery to be powered by electricity. But firms also needed time to figure out how to reorganise their factories around electric power to reap the efficiency gains.

So what does this mean for office towers in central locations, built to allow large numbers of workers to interact in person, both within firms and between them?  That is the question that is being asked in media, academia, finance and the real estate industry.  And the answer seems to be 70 to 75 percent, but in different directions.

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The Coronavirus and Commercial Real Estate: Will Previously Booming Central Cities Be Abandoned?

The 2010s were the decade of the booming superstar cities – Manhattan and Brooklyn, San Francisco and Silicon Valley, Los Angeles, San Diego, Boston, Washington DC, Austin, Denver, Seattle, Portland, central Los Angeles, and even Miami.  With spillovers to, and rapid gentrification of, places such as Queens, Jersey City and Hoboken, and Oakland.  Even the downtowns of otherwise economically struggling older cities and metro areas, such as Chicago, Detroit, and St. Louis had a revival.

These were the places the most ambitious and creative Millennials and booming TAMI (technology, advertising, media and information) firms just had to be.  They poured in even as real estate prices soared and crowding increased.  Young working adults were forced to share apartments, and even bedrooms, with roommates, were squeezed into less and less space at work, and saw their wages fall behind the price of necessities, wiping out their discretionary income and ability to save.  Rail transit lines became crowded and started to break down, and in less transit-oriented cities such as Austin, highway traffic increased and commutes got longer.  I called this the New Urban Crisis, a while before Richard Florida published a book of the same name about the same problems.

Meanwhile, suburban corporate office campuses were abandoned, and the value of suburban housing plunged, something that was partially disguised by the fact that highly indebted aging suburbanites would not, or could not, sell at market value.

Now the coronavirus pandemic has hit, businesses have shut down, the shared amenities that make city life so appealing – the restaurants, museums, concerts and other gathering places – are also shut down.  Well off people and young workers have fled the city in droves.

Everyone is buying houses and cars and looking to move away, those who sell houses and cars are saying.   Will the cities now be abandoned?

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