Has Andrew Cuomo Stopped The Pataki Local Government Boom?

One of the ironies of recent history is that although politicians from the rest of the New York State routinely accused New York City of draining their communities through wasteful government spending and a welfare culture, a charge dating back to the administration of Mayor Lindsay and the annual tin cup pilgrimage to Albany, the reality has been nearly the reverse.  During the Pataki Administration and after, in fact, local government employment in the rest of the state soared.  Even as the independent economic base of Upstate New York, Long Island and the Lower Hudson Valley – in manufacturing, corporate headquarters and high tech companies such as IBM and Grumman, withered away.   During the darkest days of the New York City economy, someone like Bella Abzug might have suggested making up for lost private sector jobs by just giving people more government jobs, so they could have unlimited health insurance and early retirement pensions, and making someone else pay for it.  But the rest of New York State has seemingly tried to actually pull that off, burdening the remaining private sector employers there, New York City, and – through debts and deferred pension costs – the future.

This trend was relentless and seemed to go on and on regardless of economic cycles.  Starting in 2009, however, it shuddered to a halt and began to reverse.  Have the policies of Governor Andrew Cuomo stopped the trend?  Has the burden on the private sector in the rest of the state reached breaking point?  Or have the costs from the past finally caught up with the local government growth machine?  I’m not sure, but I can show the history.

While other data sources provide more detail with regard to different types of local government employment, annual average the Current Employment Survey of business establishments – recently rebenchmarked and released on an annual average basis for 2012 – provides a good summary.   And that data is in the attached spreadsheet, with a series of charts in tabs along the bottom.

CES New York 2012

The first chart, “Local Government Employment,” shows the change in the number of local government jobs over the years.  The data show that from 1990 to 2009, despite significant population growth, New York City’s local government employment fell by 10,500, with a gain of 11,000 for the city’s public schools more than offset by a decrease of 21,500 for other agencies.  (Note that this does not include government contractors, who do not count as local government employees, and the city’s contract budget has expanded during the Bloomberg Administration).

In the rest of the state, on the other hand, local government employment soared by 127,400.  One key to this increase was former Governor George Pataki’s STAR program, which directed more state money to public schools in the rest of state the more they spent.  Public school employment in the rest of New York State surged by 77,500 from 1990 to 2009.  But other local government employment increased by 49,900 in the rest of the state during this period.  (Note that the figures for New York City include New York City Transit, but the figures for the rest of the state do not include transit agencies operating there, which are instead counted as state government.)  This huge surge in local government employment took place despite relatively stagnant population and employment elsewhere in New York State.

The picture changes from 2009 to 2012, as the city and state recovered from the Great Recession.  New York City’s local government employment fell again, by 12,700 overall, 3,300 for the public schools, and 9,400 for other agencies.  The key factor here is the retroactive pension increases passed by the state legislature from the late 1990s on, which drastically increased spending on the retired leaving less money to pay for those still working despite higher taxes.  Although New York City teachers received greater pension increases than other city employees, other city agencies lost proportionately more employees.

The big change in recent years is in the rest of the state.  From 2009 to 2012 local government employment there fell by 36,500 in total, 20,300 for the public schools, and 16,200 for all other local government workers.  This decrease hardly reverses the binge of the previous 20 years.  Local government employment in the rest of New York State is still 90,900 higher than it had been in 1990.  But nonetheless, this is a significant reversal.

Putting the changes in an index, with 1990 set at 100 for each data item, shows the changes over time more clearly.  The “Local Government Index” chart does so clearly.

The chart shows that employment in the New York City public schools plunged from 1990 to 1996, a time of soaring enrollment as the “baby boom echo” generation flooded in to the schools.  At the state level the Pataki Administration slashed New York City’s share of state school aid to favor the high spending districts elsewhere in the state, while at the local level the Giuliani Administration responded to a fiscal crisis by de-funding those agencies he was not directly responsible for, the Board of Education and the MTA.

Employment in the city’s schools recovered as the economy boomed and money became available, although a large share of the new hires were uncertified and many of the others, if they were not incompetent, moved on to better funded schools elsewhere once they learned the job.  Employment in the city schools leveled off after 1999 as enrollment began to fall, and then started falling after 2009 – despite rising spending — following the 2008 political deal to allow teachers to retire years earlier than they had been promised.

Although the public schools in the rest of the state had been both highly staffed (particularly with non-teachers) and well regarded back in 1990, their employment soared during the rising enrollment period of the 1990s.  Employment had not fallen very much previously despite the enrollment declines of the “baby bust” era; class sizes were reduced and non-teaching positions were added instead.  When enrollment rose again, instead of increasing class sizes and eliminating non-teaching positions, additional employees were hired.  But the hiring binge kept going, albeit at a slower rate, right through the year 2009, even as enrollment growth leveled off.

A significant employment drop has followed, even though the state has deferred some of the cost of statewide pension increases in 2000 into the future, rather than asking local governments to pay for it, and even though pension increases are exempt from Governor Andrew Cuomo’s property tax cap.

Pataki’s STAR program facilitated the hiring boom in the public schools in the rest of the state, by having the state government pay for part of it.  But it provided no such funding incentives for other local government functions, which were not relatively overstaffed in the rest of the state in the early 1990s according to other data sources.  Local government employment in the rest of New York State did not increase substantially outside the public school category during the 1990s.

That changed in the 2000s, as “other” local government employment soared through 2009.  There are a couple of possible explanations.  The recession that started in 2000 led to yet another big loss of well paying corporate jobs with pensions and health insurance in the downstate suburbs and Upstate New York.  Meanwhile, the 2000 pension deal meant that after only five years of work, local government workers qualified both for a small pension and, more importantly, for retiree health care.  Thus anyone a politician could get on the payroll would receive a huge windfall after a very short public career, with perhaps the state government covering some of the cost at the expense of New York City.  It apparently became “everyone on the payroll and on the pension.”

As in the public schools, the increase in “other” local government employment in the rest of New York State came to a screeching halt in 2009.  Meanwhile, New York City local government employment outside the public schools fell from 1990 to 1996, but has since leveled off with some ups and downs.  All in all, in 2012 public school employment was 5.5% higher in New York City, and 19.8% higher in the rest of the state, than it had been in 1990.  Other local government employment was 9.3% lower in New York City in 2012 than it had been in 1990, but 13.1% higher in the rest of the state.

The next chart, “Index of Private Employment,” shows the size of the private sector that has been asked to support that changing level of local government employment.  To properly evaluate the tax base, one must first remove private employment in the Health Care and Social Assistance sector, since that sector is mostly funded by tax revenues directly (Medicare, Medicaid) or indirectly (health insurance “vouchers” purchased for public employees, the exclusion of employer-provided health insurance from taxable income, and other tax breaks).

That the Health Care and Social Assistance sector has been a jobs machine in New York City, with Medicaid picking up a large share of the bill, is not news.  But employment in (and government spending on) his sector has also soared in the rest of the state, and in fact in the U.S. as a whole.  While there has been plenty of talk of “reform,” there isn’t much evidence of a reversal – or even a slowdown in the growth rate.  The curve has not really been bent.

Excluding Health Care and Social Assistance, the rest of the private sector has had its ups and downs, both in New York City and the rest of the state.  New York City took a particularly huge hit in 1991, a far deeper downturn locally than the post-9/11 period or the Great Recession, but has generally had a stronger economy since the mid-1990s.  In the rest of the state, the growth of low-wage private sector jobs has nearly balanced the decline in high-wage private sector jobs, leaving private sector employment (excluding Health Care and Social Assistance) just 1.3% lower in 2012 than it had been in 1990.  In New York City, it is 5.9% higher.

One of the worst arguments made by conservatives is that while the private sector is a real economy with real value, the public sector is this parasite living off that productive host.  To reduce that argument to absurdity, this implies that the gambling, liquor, and porn industries are productive and add value, but education, health care and infrastructure are parasitic and do not.  In reality, the sectors with heavy government involvement are among the most important and valuable, with the very involvement driven by the idea that these are services no one should be without regardless of the whims of the marketplace or an individual’s ability to pay.

The better argument is that the private sector is voluntary, and those in it have to provide fair value compete for customers, but the public sector is involuntary and monopolistic.  Since people are forced to pay taxes but have no legal right to any public services of any quality in exchange, there is little to prevent providers of public services from demanding a richer and richer deal for themselves.  Even as they squeeze private sector workers harder and harder by exercising their free choice in the marketplace.  Particularly if providers of public services, public employee unions and contractors, are the only people manipulating the political process in their own unenlightened serf interest in the state legislature in Albany.

The only risk is an eventual huge public backlash.  But the expectation is that by the time the backlash arrives, the pirates will have taken their booty and retired to Florida.  All that is required is to hide the increasing raw deal for a while by borrowing or deferring pension costs to make up for it.  Future politicians and future public employees will take the blame.

Although the government as parasite argument is faulty, the relative growth of the tax base and tax-supported or subsidized employment (and retirement) is still relevant.  Particularly since the “non-profits” in the Health Care and Social Assistance sector are exempt from property taxes, and the income of retired public employees is exempt from state and local income taxes and federal payroll taxes.

The “Change In Employment 1990 to 2009” chart shows the rising burden of local government employment relative to private sector employment in the rest of New York State during those years.  In New York City, the change in public and private employment is more in balance, if one ignores the private Health Care and Social Assistance sector.

The “Change in Employment 2009 to 2012” chart shows what may be the beginnings of a turnaround.  Local government employment fell by 36,500 (5.4%) in the rest of the state during those years, and private employment outside the Health Care and Social Assistance sector increased by 72,500 (2.3%).  The scale on the two bar charts is the same, to give the right impression of the limited extent of the reversal, but it is a start on what might be a long road back to balance.